Acadia Healthcare Company Inc

NASDAQ:ACHC

Earnings Call Transcript 2018-Q1

[Operator]

As a reminder, this call is being recorded. Please proceed.

[Brent Turner, Acadia Healthcare Co., Inc.]

Good morning. I'm Brent Turner, President of Acadia Healthcare, and I'd like to welcome you to our First Quarter 2018 Conference Call. To the extent any non-GAAP financial measures discussed in today's call, you will find a reconciliation of that measurement 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 2018 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 are hereby cautioned that these statements may be affected by important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's first 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'd like to turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Good morning and thank you for being with us today for our first 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 first quarter and our outlook for going forward in 2018. Then we'll open the line for your question.

We are pleased with our first quarter results as consolidated revenue increased 9.3% and adjusted EPS increased 13%. Our revenue growth was primarily organic, comprised of a 5.6% increase in total same-facility revenue. The 5.6% growth in same-facility revenue primarily reflected the impact of over 550 beds added to existing facilities for the 12 months ended March 31, 2018, most of which are in our same-facility base of operations.

We continue to expect to add more than 800 beds to existing and new facilities for 2018, which includes opening an 88-bed facility with our joint venture partner, Erlanger Health System, in Chattanooga, Tennessee in the second quarter. Our total same-facility revenue growth reflected a 2% increase in patient days and a 3.5% increase in revenue per patient day.

Same-facility EBITDA margin increased 30 basis points to 24.2%. U.S. same-facility revenue was up 6.1% for the quarter, consisting of a 2% increase in patient days and a 4% increase in revenue per patient day. U.S. same-facility EBITDA margin rose 30 basis points to 26.3%. UK same-facility revenue increased 4.6%, with growth of 1.9% in patient days and 2.6% in revenue per patient day. Same-facility EBITDA margin for our UK operations increased 30 basis points to 20.3%.

To summarize, our overall first quarter results were in line with our expectations. We believe we are well-positioned to continue producing meaningful organic growth as we expand bed capacity in existing and new facilities to meet increasing community demand for our behavioral health services. We will also continue to evaluate potential acquisitions, especially in acute care in comprehensive treatment centers. With strong execution of these growth strategies in a positive environment with attractive industry dynamics, we expect to achieve additional long-term growth in earnings and shareholder value.

Thanks for your time this morning and your interest in Acadia. Now, here is David Duckworth to discuss our financial results and the increased guidance in more detail.

[David M. Duckworth, Acadia Healthcare Co., Inc.]

Thanks, Joey, and good morning. The company's revenue for the first quarter of 2018 was $742.2 million, an increase of 9.3%, from $679.2 million for the first quarter of 2017. Adjusted earnings per diluted share increased 13% for the first quarter of 2018 to $0.52 from $0.46 for the first quarter of 2017.

Adjusted EPS for the latest quarter excludes a nonrecurring tax benefit of $10.5 million due to tax reform, transaction-related expenses of $4.8 million, and debt extinguishment costs of $940,000. Results for the quarter include a benefit of $0.03 per diluted share from a reduction in our tax rate to 16% from the anticipated 21% tax rate, which is primarily due to the publication and evaluation of additional tax reform rules and accounting interpretations that result in a tax rate that now reflects the benefit in a future period of interest cost disallowed in 2018.

We project an effective tax rate of approximately 16% for the remainder of 2018 which also represents the company's cash tax rate. Acadia's tax rate on adjusted income from continuing operations before income taxes was 15.9% for the first quarter of 2018 compared with 24.5% for the first quarter of 2017.

The company's consolidated adjusted EBITDA for the first quarter of 2018 was $145.7 million or 19.6% of revenue. Acadia's operating cash flows from continuing operations were $72.6 million for the first quarter of 2018, a 26.5% increase from $57.4 million for the first quarter of 2017.

Turning to our financial guidance and as announced in yesterday afternoon's news release, we have adjusted our 2018 financial guidance based on our revised tax rate estimate, and our guidance includes revenue in a range of $3.04 billion to $3.08 billion, adjusted EBITDA in a range of $637 million to $644 million, adjusted diluted EPS in the range of $2.58 to $2.62, and an exchange rate of $1.35 per British pound sterling, and a tax rate of approximately 16%.

Our financial guidance does not include the impact from any future acquisitions and transaction-related expenses. This concludes our prepared remarks this morning and thank you for being with us. I'll now ask Cynthia to open the floor for your questions.

[Operator]

We'll take our first question from Kevin Fischbeck with Bank of America.

[Joanna Gajuk, Bank of America Merrill Lynch]

Good morning. This is actually Joanna Gajuk filling in for Kevin today. Thank you for taking the question. So on the UK business, which showed a nice sequential improvement, right, the volumes were up – of patient days were up 2%. So can you just flesh it out a little bit? Is it a result of the transition process that you mentioned before at NHS in terms of where patients are sent or is there something in terms of the company actions that helped kind of the sequential acceleration in volumes in the UK?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Sure. This is Joey. In the UK, our team is working very hard and the transition is still occurring and will still be occurring for several more months from moving the patients to the local area. However, we have, during the past several months, converted some of our nursing home bed facilities into more of the demand of service.

For example, our CAMHS beds in the UK, the government needed another 62 beds and we got like 57 of those beds. So, the NHS is coming to us to meet their needs and growing the census, so – and our reputation for quality in the UK. So, those factors are, once again, driving the patients or the patients are coming to us for the care, and our team is doing a good job meeting that, but the transition will still occur throughout 2018 and maybe even into 2019. But we are very pleased with what the team has done during the last two quarters and they've got a lot of activity going on for the next three quarters.

[Joanna Gajuk, Bank of America Merrill Lynch]

Great. If I may follow up on the margin in the UK, which also improved nicely year-over-year, so is it a function of that sort of strong volume or the volume improving, or something improved in terms of the labor situation in that market? Thank you.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Two things occurred there is that we did do a good job on the census there but also the team has been working very hard on agency expense there and we saw a sequential decline from 11.9% in the fourth quarter to 11.5% in the first quarter. So, it's expense management but it's also growing our patient days and those two combinations gave us the improvement in the margin.

[Joanna Gajuk, Bank of America Merrill Lynch]

Thank you.

[Operator]

And next, we'll hear from Frank Morgan with RBC Capital Markets.

[Frank George Morgan, RBC Capital Markets LLC]

Good morning. I guess just to follow-up on that question about the margins. Certainly volume seemed to improve sequentially, but I'm just curious about more detail on the margin, exactly what you can do on this better agency management. I guess if you've got the volume there you have to have them. So how do you improve agency management in a tight market and where volumes are growing? That'd be part one. And part two would just be just maybe talk about labor in the U.S. We still hear a lot of questions and concerns about the labor markets, particularly with behavioral healthcare in the U.S., what you're seeing and your thoughts on the outlook there. Thanks

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Sure. Frank, two things going on in the UK that help us is first is that we have made progress on setting up our own temporary bank of employees, that if you need to fill a spot inside the system inside UK, we have a call-in center where we pool the people that are available so we can fill them with our own employees versus going to outside agency.

And then also, many of our facilities had a contract with a local agency to meet their needs. We're consolidating that and going through a rebidding process on where the amount we paid for the PRN employees from the agency is going to be reduced. So those two things are what's driving the improvement that we saw in the first quarter. And so our team is doing a great job working on that over there.

And then in the U.S. the labor market is tight as everybody knows, but it's not keeping us from building our facilities and finding the staff to open our beds and to grow our beds. So there is pressure there but our teams here in the U.S. are doing a great job of managing through that. But there are isolated markets where it's tougher than other ones but we're working through that here in the U.S. and feel good about where we're at today and the beds that we're building, and that we'll be able to get them open.

[Frank George Morgan, RBC Capital Markets LLC]

Got you. And just one final and I'll hop. It looks like this – maybe turnaround's not the right word, but definitely it looks like we're in the perhaps an inflection point in the UK, I'm just curious, would you agree with that assessment? And really what kind of timeframe do you think it will take to get that business optimized back to where you would like it to be? Thanks.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Okay. I think, Frank, we have put – the team over there has put together two good quarters, and in the first quarter of this year, you continue to see the improvement. As we've stated before, it's a process and we want to take another step forward in the second quarter. It will take the remainder of the year, I believe, to continue to work on blocking and tackling and getting the agency expense even lower. We're shooting to have total labor costs there under 64% by the end of the year. And so that's a good goal for us. And Trevor and the team over there are working very hard towards that.

So, we've taken a couple of small steps, there's more steps to do before we're really running. But we, senior management at the company, are pleased with what is happening in the UK and what our management team there is doing.

[Operator]

And next we'll hear from Brian Tanquilut with Jefferies

[Brian Gil Tanquilut, Jefferies LLC]

Hey. Good morning, guys. Brent or Joey, just wanted to hear your thoughts on same-store volume growth and what your outlook is going forward, especially if you look at kind of like the LTM or last 18-month bed adds and what you have in the pipeline. Like how should we be thinking about, especially the U.S., volume growth on the same-store side?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

My expectation is that volume growth will continue to be positive and quite frankly, I expect it to be higher than 2%. We have a handful of facilities that are in the same-store group that have some issues that we're working through, and Ron Fincher and the division president are working through those issues. So, I would expect during the last half of this year that many of those issues will be resolved and that growth above 2% will occur for the U.S. same-store facilities.

Now also, we are carrying four de novo projects on the in-patient side and about six projects on the CTC side. So, there is a lot of new development going on, de novo development going on inside the company and we're carrying those beginning losses in our operations. And we expect them also to start in the last two quarters to be positive to us. So, right now, we feel good, but we want the 2% to be higher, but we have a few issues that operations is working on.

[Brian Gil Tanquilut, Jefferies LLC]

No, I appreciate that, Joey. And then, my last question, as I look at your U.S. revenue per patient day at 4%, do you think that's sustainable and then what are the drivers of that? Is there anything to call out that's different from this quarter?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

I think revenue increases from pricing can be in that 3% to 4% range. We got off to a great start. There were several states that gave us good Medicaid increases and we've had some success on the commercial side. And so we expect – or hope those continue. And we have hired a new person to head up our Managed Care Contracting department, who helps the local facilities with their negotiations. So, we think the resources we're spending there are going to come back to us in better rate increases for our facilities.

So, cautiously optimistic here, but we're off to a great start, and there have been several states give us good raises on the Medicaid population.

[Brian Gil Tanquilut, Jefferies LLC]

I appreciate that. Thanks, guys.

[Operator]

And next, we'll hear from John Ransom with Raymond James.

[John W. Ransom, Raymond James & Associates, Inc.]

Hey. Good morning. A couple for me here. Last quarter, you talked about the agency labor percentage having fallen about 60 bps, and for the quarter. it fell about 50 bps. So, is that flattening out, or do you think you can continue to make progress in the UK agency labor metric?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

By the end of the year, John, we expect it to be at 64% of our revenue. Right now, I think it's about 65%.

[John W. Ransom, Raymond James & Associates, Inc.]

Okay. So, no change there.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Total labor cost.

[John W. Ransom, Raymond James & Associates, Inc.]

And the agency labor is – so is it (00:19:15)

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

It's inside that. And yeah, it's inside that and it's at 11.5% for the first quarter. And we...

[John W. Ransom, Raymond James & Associates, Inc.]

Yeah.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

...we're very optimistic that it will get into the 10s. There's an outside chance by the fourth quarter, if we've executed really well, we might even get back to single digit. But we're so much better than the industry over there than NHS and the other competitors but we do expect more improvement there.

[John W. Ransom, Raymond James & Associates, Inc.]

Okay. In the U.S., you've talked about adding 800 beds. How much of that is at existing facilities versus de novos?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

I'm looking at our man, David, right now.

[David M. Duckworth, Acadia Healthcare Co., Inc.]

John, we do have with the four new facilities that we plan to open this year, those bring over 300 beds to the company. And so, the rest of those would be to our existing facilities.

[John W. Ransom, Raymond James & Associates, Inc.]

And how would you – I mean, just in broad terms, you're going to have an EBITDA loss on your de novos and you'll have an EBITDA pickup on the new beds. I mean, is the overall addition to EBITDA positive or how do we think about that, because it takes you a while to fill the new beds...

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Yes.

[John W. Ransom, Raymond James & Associates, Inc.]

...and – how do we think about the overall EBITDA effect of that? Sorry.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

The total joint ventures and de novos by the fourth quarter of this year is positive. So, we would be covering all the expenses for that group of de novos and be positive EBITDA to the company.

[John W. Ransom, Raymond James & Associates, Inc.]

All righty. And then my last one is there was a lot of chatter in the middle of the quarter about this – and I think I'll get this right – but the NHS, the proposal to pretty dramatically increase the wage scale especially at the unskilled level. So, what's your thought about, A, do you think that will happen; B, when will we know; and, C, what's the knock-on effect; and I guess, D, do you think there'll be some offsetting rates, or is this just the downstream costs you're going to have to absorb in 2019?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

John, you know I went to Middle Tennessee State and we don't get below A. So...

[John W. Ransom, Raymond James & Associates, Inc.]

I had a few Cs at Presbyterian College. So, I think got one up on you.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Okay. I even I forgot what the question was. It was so long and complicated. What was it, Gretchen?

[Gretchen Hommrich, Acadia Healthcare Co., Inc.]

(00:21:56)

[John W. Ransom, Raymond James & Associates, Inc.]

Oh, it's the (00:21:56)

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

NHS payment. (00:21:57) Okay. First...

[John W. Ransom, Raymond James & Associates, Inc.]

(00:21:57) labor...

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Okay.

[John W. Ransom, Raymond James & Associates, Inc.]

The labor proposal.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Yes. Here's we go.

[John W. Ransom, Raymond James & Associates, Inc.]

All right.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

It's not final. There's still discussion going on. My best guess – this is just me – my best guess, it probably gets done by July 1. Now we, Acadia, are in a better position. We have always paid a little bit more than what was mandated or required by the NHS or the government and that Trevor and Nigel and the operations team there is already working on this and how to offset any impact it might have on us.

So I expect not to have to talk about this as an issue this year, that we have things we can do and where we're positioned. But the NHS will finally get it settled with that union and there will be some wage increases, but it's put out over several years. So we were with our team last week and so the information I'm giving you is 10 days old. And so we're in a better position operationally than the other providers in the UK.

[John W. Ransom, Raymond James & Associates, Inc.]

Okay. that's it for me. Thanks.

[Operator]

And next we'll hear from Ana Gupte from Leerink Partners.

[Ana A. Gupte, Leerink Partners LLC]

Yeah. Hi, good morning. Thanks for taking the questions. The question was about the difference in the Final Rate Notice from February to April, it should look quite significantly good. Can you tell us what your thoughts are around the margins that you would target then into 2018 and into 2019, and the progression back to the 4.5% to 5%? Do you think that might accelerate or might you again just funnel that back into investments and the like?

[Brent Turner, Acadia Healthcare Co., Inc.]

Ana, this is Brent. When you mentioned the rate, help us with what your reference point was on driving that. We just didn't follow the rate commentary. (00:24:28-00:24:36) Ana?

Operator, we may have lost her. Let's go to the next question.

[Operator]

Okay, our next question comes from Brian Tanquilut with Jefferies.

[Brian Gil Tanquilut, Jefferies LLC]

Hey. Yeah. Just a follow up to John's question earlier. So assuming that the NHS negotiation results in an increase in minimum wages for nurses, if you balance out the adjustments that you're making to try to reduce step staffing or agency labor, I mean should we be thinking that your overall nurse wages in the UK will have to go down as you succeed in doing that?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

I think what you should expect from us is that by the fourth quarter, the UK operations, no matter what happens concerning the salary wages and whatever, that our goal of being at 64% by the fourth quarter is still good, is still valid. I'm not going to be changing that number. We knew about those factors when we set the 64% goal for the end of the year. So something extraordinary would have to occur to make us even think about changing that goal. And right now, we feel like we're on our way to making that 64%.

[Brian Gil Tanquilut, Jefferies LLC]

No, that's awesome, Joey. Last question from me, we haven't really seen much M&A activity, but obviously you've been very active on the JV front. So should we be thinking of it as a slight pivot in strategy where the JVs are obviously higher ROIC and that's where capital focus is right now, instead of pursuing the platform acquisition types of deals?

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

You're going to see us continue to build our own beds through the joint ventures, and I think in the last six months of this year you will see an acquisition.

[Brian Gil Tanquilut, Jefferies LLC]

All right. Got it. Thanks, guys.

[Operator]

And it appears there are no further question at this time. Mr. Jacobs, I'd like to turn the conference back to you for any additional or closing remarks.

[Joey A. Jacobs, Acadia Healthcare Co., Inc.]

Thank you very much, operator. To all the folks listening in out there in our facilities, thank you for taking care of our patients. There's not an Acadia if we don't take care of our patients everyday and focus on quality and address – and help on the opiate addiction throughout the country here in the U.S.

To our teams, the UK team, guys, you all, everybody, I enjoyed my visit over there recently and being with our employees there and our team there, and thank you for all you did. You had a great first quarter.

For here back in the U.S., to Peter and Richard and Dwight, thank you all very much for running your divisions and delivering the results. And please, as you all talk to the field and talk to the CEOs and the nurses and the medical directors, please make sure you thank them for me. And first quarter's behind us, let's get to second quarter and we'll go from there. And thank you very much for your questions and interest in Acadia today.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you all for your participation. You may now disconnect.