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Acadia Healthcare Company, Inc. (NASDAQ:ACHC)

Bank of America Merrill Lynch Healthcare Conference Transcript

May 14, 2013 11:00 AM ET

Executives

Joey Jacobs - Chairman and CEO

Brent Turner - President

Analysts

Steve Baxter - Bank of America Merrill Lynch

Steve Baxter - Bank of America Merrill Lynch

Hey. Good morning, everyone and welcome to our Annual Healthcare Conference. I’m Steve Baxter. I’m the Senior Analyst on Kevin Fischbeck’s team. With us today is Acadia Healthcare. They are the leading operator of inpatient psychiatric facilities, residential treatment centers, group homes, and substance abuse facilities in the United States. With us today from the company are Joey Jacobs, Chairman and CEO; and Brent Turner, President.

And with that, I’m going to turn over to the company.

Joey Jacobs

Thank you, Steve, and good morning to everyone. And we have 29 minutes and 12 seconds to go. And it’s important for Bank of America that to have us presenting first, because you don’t get the best first. So it’s okay to take early flight home. So it is a pleasure to be with you today and absolutely, do your due diligence homework here because we will be talking about the company and I personally like to brag upon what the team has done and what we've been able to do in the last couple of years. So please make sure you do your homework.

Also we will be using some non-GAAP financial measurements. So once again, please do your due diligence on the company and I will begin.

During the presentation today, we’ll be talking about these topics. We are pure play behavioral health. We have and are reconsolidating the market. The industry trends, Brent will be going over those, they are very, very strong for us.

Having the same team that we had at PSI at this company, the track record of growing the company, delivering its earnings is there, best team in the business. The diversification of our revenue since we joined the company has been tremendous and you'll see that in a moment in couple of slides and the performance that we’ve been putting up, I think is just terrific, a lot of hard work by lot of people out in the field, so let’s begin.

First is just an overview of the company itself. Acadia was actually started in 2005, but we joined the company in February 2011. We sold psychiatric solutions November 15, 2010, on November the 16th for the Chicago to be in meeting about taking Acadia as a platform company and continuing the consolidation of the industry.

And obviously, the key to this was bringing five members, senior management members from PSI over also back in Franklin, Tennessee our corporate office. We are probably 75% plus former company executives from our Director of Human Resources to our team to accounting those areas. We’ve been able to draw on the great team that we had at the previous company.

Got off to the roaring start, once we joined the company we acquired YFCS in April and then after that continued the acquisitions and mergers. We got to public market. The acquisition of PHC, changed the name to Acadia Healthcare and that got us to the public market. And then since then we acquired three facilities from Haven Behavioral Healthcare. This tremendous facility is doing very well for us.

A shining star that year was the Timberline Knolls facility that we bought up in the Chicago area and did we follow that up with a tremendous facility in Fort Myers, Florida, Park Royal, this absolutely a fantastic facility.

We have bought two transactions at December of last year, AmiCare and BCA, off to good start with those facilities and we continued that this year buying Greenleaf, January 1st not-for-profit and then following that up with Delta Medical which was an ESOP based in Memphis, Tennessee and it’s a -- I just talked to the folks this morning and the sense there is doing extremely well and we’re very proud of what’s happening there.

In May, we completed the United Medical deal. We like Puerto Rico. We like San Juan Capestrano. It’s going to be tremendous facility for us and then we also get Tampa, brand new facility in Tampa, Florida.

So we end the year, acquire -- we brought about $470 million of revenues. We are now in a run rate of over right at $650 million less 12 months and adjusted EBITDA of $131 million.

Map, just great locations, great cities, we are the dominant provider there. Key takeaway from the circle is that, we are now 60% acute bed, acute psychiatric hospital beds, 40% residential. So those are some benchmarks we had set for the company and actually we’re probably a year ahead of month of on where we would be in the diversification of the beds.

Little bit better illustration of how we’ve taken and diversified the company of beds. We are now at about 3,700 beds with 60% of those being acute. We now have 45 facilities, great revenue, earnings, margin improvement comparing those two periods together is terrific, payor mix more diverse, Medicaid as an exposure to us, it’s now close to 50% and remember that’s coming to us from about 27, 29 days. So it’s very, very diverse for us. So, once again great payor mix for the company.

Just a little bit more drilldown on the recent acquisitions that we made. On December 31, we acquired AmiCare, 330 licensed beds, great facility. We paid $113 million for $62 million of revenue. With all the facilities have the ability to grow, it is accretive to earnings and we closed that at the end of the December of last year.

The BCA, won’t needing to diversify the company and liquidate the company and we were there in a position with our balance sheet to make this happen, nearly 300 beds again that we acquired, $63 million of revenue were in Ohio, Michigan and Texas. Just good base for us, we know those markets, once again good facility for us.

Why did we do it? With those two transactions, we get eight facilities, improves our acute mix, these were well-run facilities. One was family owned, one was the investor owned, and they were well-run facilities.

Ability to grow the margins, grow the revenues, grow patient days there, will help takes us to our 21st state. The capital of these fiscal plans were in good condition, so there is not a lot of capital need for these facilities other than to grow. So we’re very pleased with all of these transactions.

Greenleaf and Delta, we pick up nearly another 300 beds here of that asset Georgia Greenleaf. We’re already getting ready of our first deal in there to expand that facility. Delta Medical, we are already expanding into unused beds at that facility. So just great margins, great opportunities for us, with this felt right and it going to be a great transaction for us. We pick up about $51 million plus in revenue with purchase price of $30 million, so great deal.

Most recent the United Medical deal that we did of May 1st and one in Tampa; Tampa is a brand new facility. It’s unbelievable. It will be -- we’ll finish construction in the third quarter. We’ll probably open it up some time at the end of the third quarter, fourth quarter, great market, shortage of beds there. We like that. We like the one in San Juan.

The hospital in San Juan has 100 beds filling in there. We’re already putting in plans to build 40 more additional beds at the existing facility and may go build another 60-bed hospital somewhere else on the island, so just great opportunity there for us.

So once again Steve Davidson has done a terrific job going out and finding acquisitions for us to grow the company. And then our internal team headed up by Ron Fincher, our Chief Operating Officer, has done a terrific job of growing the company, growing its earnings, improving its margins.

And the best thing is of those 3,700 beds that we have out there, we’re taking care of well over 3,000 patients a day and touching a lot of lives, those at the patient level in it with their families, so a lot of good has been done by all our employees in the field.

So, I’ll now turn it over to Brent and he will take us through the rest of presentation.

Brent Turner

Looking next at some of the industry characteristics of our business, we’re most normally compared to the medical-surgical hospital companies, which as we all know a great industry. We -- the behavioral -- inpatient behavioral health has a few characteristics that we think are actually very, very attractive in comparison to the med-surg hospitals.

First of all is, our business is all is predominantly inpatients. If someone is in need of an acute psychiatric stay, there is really no outpatient alterative. So we don’t have a lot of pressure for outpatient competition. It’s severe life or death type of needs for our inpatient facility.

So we know our operations are there for the inpatient delivery of care both on the acute side, as well as the residential side, make the stay for the industry 10 days generally on the acute side and then for the residential treatment patients that adolescent that needs an extended experience 180 to something in the 270 days. So somewhere generally six months to nine months is going to be the length of stay there.

I mentioned the inpatient, because of the focus and the lack of outpatient alternatives, there is not a lot of pressure on our business for things going away from our normal service delivery.

The reimbursement for psychiatric facility is very simple. We get paid per diem rates for our patients across all payers. So the patient stay six days, at six days times the contracted rate. We don’t have a huge exposure to any significant cost beyond because it’s per day, so our bad debt as an industry tends to be 3% or less.

And we’re also less likely to have to worry about somebody coming back and collecting those moneys for lack of service through any kind of audit in arrears because the patient is there, we are treating them, we get per diem payment, we do not have the DRG complexities, the up code opportunities to charge for more services that are being provided because again it’s per day stay.

And then lastly, the margins are very attractive in this business, the acute margins in the 20% to 40% range and the RTC margins in the 15% to 25% range. What I would say here is that while the margins have a tendency to be attractive, sometimes we take it for granted that it takes a lot of blocking and tackling to get the utilization up to a level that support those margins.

When you’re operating on a fixed cost basis and only receive per diem payments, that utilization rate, the occupancy rate drops. Those margins are hard to hold. So it’s not just a nice payor rate but it’s a lot of efficiency in the operations there. As far as the total spend in the areas that we concentrate, you see on the top right graph, the acute and Substance Abuse facilities over the last five years, about a 3% compound annual growth rate. And in this, the bottom slide is one where a lot of people will probably be surprised.

In our residential treatment facilities, the youth behavioral market, you see a compound annual growth rate of over 2%. So many times, people want to say the residential business is a bad business. It’s a Medicaid business. It’s an absolutely critical business. If you’re closed to the patients that have this need, there is no other alternative.

And that’s why even during times of 2008, 2009 and 2010, when states were going through tremendous budget pressures, the demand is the demand and they have to take care of these children. And so that’s why you continue to see the increasing spend there because of the growth in that population.

As far as legislatively, we have enjoyed as an industry some very favorable things occur. First and foremost was the Mental Health Parity that passed back in 2008. That legislation is still -- we're still seeing the benefit of Mental Health Parity. One of the ways we’re still seeing it is that when healthcare reform was passed, requirement was that Mental Health Parity be embedded into healthcare reform. And I’ll get to that in a moment but even on, just from the traditional insurance front, the final regulations are being worked on. We’re currently operating under interim final regs.

But you’re seeing a lot of positive actions here. And basically Mental Health Parity doesn't mandate coverage but what it says is if an insurance company provides behavioral health coverage in addition to the physical health insurance, they have to be compatible. The history lesson here is 20 years ago when the behavioral industry went through some changes, payors tightened down and they probably should've backed in.

But as we move forward 20 years, there wasn’t a lot of improvement. And so traditional patients 10 years ago going to a behavioral facility had a higher financial burden and tougher access than you would, if you want to get your knee replaced. And as I mentioned before, behavioral health has a very much life and death. There is not a lot of optionality to it.

So Mental Health Parity basically says make these fair, make them accessible at the same level. And there's been -- there is a lot of support for that implementation. As we move forward into healthcare reform and it’s hard to believe but it is upon us, right 2014. It’s going to be here in just a little over six months.

Originally, as a company and really for our industry, we felt like healthcare reform was going to be generally neutral to slightly positive because we don't have that huge -- to set pressure on with the bad debt, the uncompensated care. However, as the regulations come out, the essential health benefits very favorable for behavioral health and access to care, we do think it’s a slightly more positive than we had believed before.

And it’s primarily around the expanded Medicaid population. The individuals, who because of their income level, will now have eligibility for Medicaid coverage, it is apparent that those individuals are going to have access to get treated and be compensated in freestanding behavioral facilities.

As many of you know, the traditional Medicaid population, the 19 to 64-year-old adults, freestanding inpatient facilities have not historically been able to get compensated for that patient. We don't believe we’re going to be in the in the short-term under reform. So the is really no change there. But the expanded population, it does appear that population is going to be eligible for reimbursement which would be a good thing. And then obviously you have the small employer and the other is going on to the exchanges with the essential health benefits being required, that population 50 and under employers who probably historically did not have behavioral health coverage in their plan will now have access to that.

So that’s the uptick in the outlook there around reform. We do as an industry have a demonstration project going on. It’s about one year in place, started last spring. It’s a three-year project with CMS, 11 states plus Washington DC. And the purpose of this project is to get the traditional Medicaid patient coverage in a freestanding facility but as you know, our government likes to be able to validate that there is no increased costs in doing this.

And so we’re going through this demonstration project. And we do believe at some point this will be remedied because if that Medicaid patient goes through a medical surgical hospital and receives the treatment for their psychiatric issues, there's reimbursement that follows them. So it’s just absolutely -- it’s a legacy rule that goes back to the 60s which made sense back then when we had a lot of institutionalization of Medicaid patients in the states but fast forward 50 years, there has been a lot of change. And so we think that demonstration project will result in some favorable movement there but it will be over the next few years.

The next thing, we want to highlight is sort of a simple picture, a diagram of our strategy. We are absolutely very focused on making acquisitions and as Joey mentioned, we’ve got a great team, its development, identifying and been able to put together a deal that works for both parties.

The next thing we are merely focused on is showing organic growth because we absolutely believe there is a measurement that’s not just about topline growth and being able to buy things. But it’s showing improvement in those results and so we immediately focused on filling beds, adding programs, being better negotiators of the payor contracts, so that we can show positive same-store results that’s our scorecard. It’s not really how many acquisitions we make it, how we are doing organically. And we've done -- we've averaged about little over 8% same facility growth over the last four quarters.

The next thing, we continuously focus on inside the company is adding beds because being impatient where I suspect that we are going to be limited to how much demand we can satisfy based on our beds and we added over just under 300 beds in 2012 and we are on track to do a little over 300 beds in ’13, 65 of which came on in the first quarter, came online in the first quarter. So that’s the fuel that keeps that organic growth going because there is point where effective utilization gets capped out about, right around 90% on behavioral facility. So, we’ve got to continued to add to beds.

But most of our properties have sufficient room that would allow for that. But even if we are in a facility, as Joey mentioned like Puerto Rico where we think there is a limitation, we will just go to an off-site location and an adjunct facility. So we are not limited just even by the geographic footprint of our facilities.

As we grow this organic revenue, we are very focused on efficiency of our operations. We’re not cutting costs. We are just making sure we are as efficient as possible and when you grow that topline through more patients and increasing rates, the margins are going to improve and so we’ve shown some nice margin improvements and still think we have some room to grow there on adjusted EBITDA margins.

Joey mentioned a few of our team members. We’ve got a great team, have a lot of fun. Joey and I get the benefit of coming on and talking to investors and telling the story. But it takes a lot of work within the company. Ron Fincher is our Chief Operating Officer, has a great team under him. We have currently three divisions inside of Acadia, an operating division, which comprised of a Division President, a Division CFO, a Quality and Performance Director as well as the Business Office Director.

Given our growth now, 46 facilities with 47 coming on here in a few months. We are in the process of adding a fourth division and so we are -- our corporate support size is very conducive to our continued growth opportunities. The rest of our senior management here, David Duckworth is our CFO, Chris Howard, our Legal Counsel and Joey mentioned Steve previously. But there is a lot of experience and a lot of good work within the team and more important with the facilities. We’ve got great leadership at our facilities with administrators that are overseeing our facilities as well as the direct care staff.

Just quickly on the financials. Joey looked at it, went over few of these slides earlier. But we do have a tremendous revenue diversification and it's very much improved over the last 12 to 18 month. Joey mentioned Medicaid is down to 54%, commercial up to 22%, Medicare at 19%. These numbers will continue. The commercial and the Medicare will continue to increase, as we fill more acute beds. As you saw already, we are 60% acute, 40% residential and the Medicaid will continue to slightly decline. Generally though, this payor mix is very, very attractive to us given that that Medicaid is spread over 27 states plus Washington, D.C. Those are 28 individual payors not working as a group.

Our outlook for Medicaid has gotten more positive. Last few years, we've been neutral to slightly decline as far as our Medicaid rate outlooks. We’ve already in 2013 received an increase from one state and have opportunities for a few other states, as we moved forward to the July first fiscal year. But generally much more positive from the state revenue and tax base that we are seeing.

From a geographic standpoint, our biggest state in terms of our -- where our revenues derived from, not for Medicaid but just from our physical presence is Arkansas, that’s the only state we operate and where we have double-digit revenue. But as you know, Arkansas, we are the dominant provider there with the AmiCare acquisition. So that percentage will continue to decrease, as we add additional facilities throughout the country.

As far as our first quarter, just few quick highlights. We had tremendous growth on the topline 80% year-over-year revenue growth. Adjusted EBITDA increasing 101%, again here is that -- from the earlier diagram, grow the revenue, increase the efficiency and expand the margin. And then our earnings per share were up 75% from $0.12 up to $0.21 for the first quarter. And I think we more than doubled our share count through a couple of equity offerings in May, in December of 2012 and still show that very attractive EPS growth.

Just a few slides here, around these various components. So you can see the trajectory of revenue over the last five quarters, the steep increase in the first quarter reflective of the AmiCare, BCA acquisitions as well as the additional 300 bed that we expanded in 2012, starting to come online.

So as we started, we are well over $600 million run rate for revenue and similarly the increase in adjusted EBITDA over each quarter last year and then ramping up to over $30 million on the quarterly basis in the first quarter. And then you see the EPS results here, so our current earnings per share guidance for the year, $1 to $1.03 inclusive of the $0.21 on adjusted basis that we did in the first quarter.

So our teams are working hard and we’ve got a lot of opportunity in front of us. But that is the end of our formal remarks. And we’ve got a few minutes maybe to address any questions that folks might have

Question-and-Answer Session

To ask a question, you can pick the mic around there. Never mind, just pick it up.

Steve Baxter - Bank of America Merrill Lynch

Hi. I will start off then. So you highlighted why your volumes were strong relative to hospitals in bed in same way reimbursement pressured on your. And also not seen as much of an outpatient’s volumes, well being, Board’s presentations pressure. How do you think it disperse? Other behavioral companies in the industry, are they large wit standard and same trends?

Joey Jacobs

Well, we are definitely performing at best in the industry. I think the industry volume growth for the industry at large is maybe 2% to 3% over the last two years. And we’ve seen from of our public competitors -- no one is generating the same organic results that we have. And this is -- we wake up every morning and we are running out of inpatient behavioral facility company and that’s what we focus on everyday and I think the results reflect that.

Steve Baxter - Bank of America Merrill Lynch

Okay. Great. Can you talk a little bit about how you drive referrals into your inpatient’s facilities? You talked us about improving management system, assume that’s one of the things that you are doing that to address on the performing facilities?

Joey Jacobs

Our number one referral base for our key facilities is the medical surgical hospitals, emergency room. There is approximately 5,000 search hospitals in a country, only about 1200 actually have fax services and many of those are just remaining Medicare patients. So the patient is in a crisis, present to the Mid-Surg mercy room and they would be referring and triaging it over to us.

Now, it’s very important for us to have good relationships with those MedSurg emergency rooms, the school systems. Anywhere for a child, adolescent adult could get into a crassest and we’ll need to access the system.

On our residential fees of our business that’s 40% of our business that is really referrals from social services department inside today. And it’s very important for us that we demonstrate to the state that we’re adding value, that we’re taking these children, these adolescent improving their lives and then when they are discharged hopefully, they are going back to a safe home environment.

We also supplement that with a national marketing referral effort whereby we have about eight individual to stay in touch with these states, these social services departments. And many times the states need help in planning a specific program for that challenge. So we can bring to the inventory of programs throughout the whole system.

So they can know where if they need -- this child needs this type of program, our referral marketing department can help place that child, that adolescent in one of our facilities. So that’s basically how the referral system work in our industry.

Steve Baxter - Bank of America Merrill Lynch

I have a question. I’d like to ask another one. I wonder, if you could talk a little bit about the deal pipeline. I know you guys recently have done some deals with the facility won’t be opened in say another couple of quarters. How do you approach doing the deal like that versus doing a deal where your acquired facility already has strong occupancy?

Joey Jacobs

This last transaction, the medical transaction, it was sold as two facilities together. So when you would buy the operating facility, they wanted to bumble the facility that they were constructing in Florida. But we did our work on the Tampa market and we think it’s a great market. So obviously, we were pleased to put that with us.

Our preference is to sign operating facilities already. But we will do, one, maybe two de novos a year in this company. We just opened up brand new facility in Atlanta, Lakeview. I think it had opened up April 1st, tremendous 100 plus bed facility there. And so it would be one, two of those a year but mainly it’s acquiring operating facilities as we were presenting this morning.

Steve Davidson is always working so. He send me another opportunity. So the pipeline is busy. We work on it all the time. So we stay busy looking at potential acquisitions for the company.

Steve Baxter - Bank of America Merrill Lynch

Okay. Well, thank you very much. I appreciate the presentation. Thank you, Joey. Thank you Brent and with that we’re wrapping up the first meeting of the day. Thank you.

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