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Acadia Healthcare (NASDAQ:ACHC)

Q2 2013 Earnings Call

July 31, 2013 9:00 am ET

Executives

William Brent Turner - President

Joey A. Jacobs - Chairman and Chief Executive Officer

David M. Duckworth - Chief Financial Officer, Chief Accounting Officer and Controller

Analysts

John W. Ransom - Raymond James & Associates, Inc., Research Division

Dana Hambly - Stephens Inc., Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Brian Tanquilut - Jefferies LLC, Research Division

Stephen Baxter

Dana Nentin

Operator

This call is being recorded. Mr. Turner, please go ahead.

William Brent Turner

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

To the extent any non-GAAP financial measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by following the Investor Relations link to Press Releases and viewing yesterday's news release. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2013 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's second quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Now at this time, for opening remarks, I would like to turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

Joey A. Jacobs

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

For the second quarter of 2013, Acadia produced another very strong performance with revenues increasing more than 75% compared with the second quarter last year. This growth included double-digit growth in same facility revenues of 11.2%. Same facility patient days increased 8.2% and the revenue for patient day rose 2.7%, which is the best rate we've experienced since Acadia began publicly reporting our results. The same facility revenue growth generated significant operating leverage in our same facility base, driving a 280 basis point increase in same facility EBITDA margin to 27.5%.

Our adjusted consolidated EBITDA margin increased 60 basis points, which contributed to adjusted net income more than doubling for the quarter to $13.1 million. As a result, our adjusted income from continuing operations per diluted share grew 44% for the quarter, even with a 37% increase in shares outstanding from our equity offerings. Our revenue growth primarily reflected 14 facility acquisitions over the past 12 months ended June 30, 2013, which added another 1,200 beds. These facilities include the 4 we have acquired thus far in 2013 with approximately 475 beds. In late June, we announced our fifth expected acquisition for the year, which is an 85-bed facility scheduled for closing on August 1. Our pipeline of potential acquisitions is strong, and we expect additional acquisition announcements in the second half of 2013.

Our revenue growth also reflected approximately 310 beds that we added to existing facilities for the latest 12 months. We also opened a 60-bed de novo facility in the second quarter. As we've discussed before, we [indiscernible] beds during 2013 with the goal of making sure our facilities do not have to turn away any patients because of lack of capacity. To achieve this goal, we plan to add beds equal to approximately 5% of our total life in beds every year. To the first half of 2013, we added 212 beds, including 147 in the second quarter.

We are pleased with the momentum of our operation and as we ended the second half of 2013. Our industry dynamics are attractive, and we are executing a proven business model with a very experienced management team. While we see ample opportunity to drive long-term growth in earnings and shareholder value, we've clearly recognized that our long-term success lies in providing our patients and their families with the highest quality of care. We are confident of the high-quality standards practices by the health care professionals in each of our facilities, and we are proud to be associated with such skilled and dedicated men and women.

Thank you again for being with us today. And now here's David Duckworth to discuss our numbers.

David M. Duckworth

Thanks, Joey, and good morning. Acadia's second quarter revenue increased 76.6% to $177.5 million from $100.5 million for the second quarter of 2012. Adjusted income from continuing operations increased 101.1% to $13.1 million from $6.5 million for the second quarter of last year, and our adjusted income from continuing operations per diluted share grew 44.4% to $0.26 per diluted share. Our adjusted results exclude transaction-related expenses of $1.4 million for the second quarter of 2013 and approximately $700,000 for the second quarter of 2012. Acadia's weighted-average shares outstanding increased 37% on a comparable quarter basis after common stock offerings in May and December last year.

The company's same facility revenue grew 11.2% for the second quarter with an 8.2% increase in patient days and a 2.7% increase in revenue per patient day. Same facility EBITDA rose to 27.5% of same facility revenue, up 280 basis points from the second quarter of 2012. Adjusted consolidated EBITDA increased 81.9% for the comparable quarters to $37.1 million, which was 20.9% of revenue compared to 20.3% of revenue for the second quarter last year.

As detailed in our news release, we have increased the lower end of our 2013 guidance for adjusted earnings per diluted share to a range of $1.01 to $1.03 compared with adjusted earnings per diluted share of $0.66 for 2012. Our financial guidance excludes transaction-related expenses, debt extinguishment costs and the impact from any future acquisitions.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take your first question from John Ransom from Raymond James.

John W. Ransom - Raymond James & Associates, Inc., Research Division

As you look into your markets, a couple of questions. Are you seeing any change at all in the competitive dynamic from the acutes?

Joey A. Jacobs

John, this is Joey. No, not really. That has not made its way to our operations review monthly or to our executive teams on Monday morning for an acute care hospital is -- med/surg hospitals doing something that would impact our operation.

John W. Ransom - Raymond James & Associates, Inc., Research Division

And kind of keeping on the acute theme, how does your pipeline look? Maybe not tomorrow. But if you had to look out 3 to 5 years, do you think the not-for-profit joint ventures are going to be a material driver to your pipeline over time?

Joey A. Jacobs

It will be significant. Does that translate into the material? A specific year, it could be a material. But over time, it would be a significant opportunity and contribution to the company in growing our beds, revenues and earnings in partnering with the not-for-profit systems.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Thirdly, you've certainly gotten to your same-store margin much more quickly than we had hoped, which is great. How much more room do you see in same-store margin? And how much room do you see for bed additions on a same-store basis?

Joey A. Jacobs

We see -- there is a little bit more -- there's probably a little bit more margin improvement there. But as you can see, we're really concentrating on the facilities that are not in the same-store facilities to bring them up to the 27.5%. That's the real driver for us. As far as bed additions, it appears once again that 2014 that we will add right at 300 beds, I'm estimating, to our facilities. And most of those beds will be going inside same-store facilities. So that opportunity is not diminishing. And once again next year's, right now, looking at just some of the numbers, I think we'll build close to 300 beds next year for our same-store facilities.

John W. Ransom - Raymond James & Associates, Inc., Research Division

And are you getting any entrées from payers to look at risk contracts, or is it still 100% fee for service on the payer side?

Joey A. Jacobs

It's less than 3 would be someone coming to us thinking about taking risk. We do take a little risk already in the Las Vegas market through our acquisition, our merger with Pioneer. So we have a few lives out there that we manage already, and we're very comfortable with how we do it there. So we're in a position that if another market, say, back on the East Coast or somewhere wanted to try, we would go through that process. I think primarily, John, we will still be an outsourced service and paid per diem for our services.

John W. Ransom - Raymond James & Associates, Inc., Research Division

And my last question. Just a sentimental about my hometown in Tampa. Can you give us an update on what's going on there?

Joey A. Jacobs

It's absolutely a beautiful facility. Right now, we have the complement [ph] to be online in this fourth quarter of this year, and we're just wrapping up the construction and beginning the process of getting expected. We already have a CEO hired for that facility, and he's been down there for probably the last 60 days. So John, things are looking well there, and Jim Harris, who's our CEO there, is doing a great job getting us ready to open up in the fourth quarter.

Operator

We'll move next to Dana Hambly from Stephens.

Dana Hambly - Stephens Inc., Research Division

Joey, I think you answered it already, but let me just ask. You said the focus on the nonsame-store portfolio, I think had margins kind of the low-20% range. There's nothing in that portfolio that would maybe prohibit it from getting to the 27%, 27.5% range?

Joey A. Jacobs

Right now, we do not see that. We think that these facilities have the same characteristics as the same-store facilities, and our expectations are to continue to work with those facilities, implementing growth, expense plans to increase their margin. So we have all expectations that the facilities that are not on the same store will achieve the same-store facility margins.

Dana Hambly - Stephens Inc., Research Division

Okay. Is there any -- is that an 18-month to 24-month time frame?

Joey A. Jacobs

Yes, that's probably a 18, 24 month time frame is what we would be expecting.

Dana Hambly - Stephens Inc., Research Division

Secondly, the same-store pricing, up sequentially pretty good, close to 3%. I understand that you probably got a little benefit in a few of your bigger Medicaid states. Is that something we should expect to see going forward, kind of somewhere in the 2% to 3% range and your comfort on that?

Joey A. Jacobs

No, no, no. I don't think so. I think, every now and then, we will have one of those months where it'll be that. But I think more in the 2% range. The 1% to 2% range is our outlook now. There are some on our payer mix. I don't know if you know this, but we did drop below 50% of our payers now are from Medicaid. So we have an opportunity to do a little bit better, I think. So they're probably in the 1%, 2%, maybe slightly over 2%. Medicare, as you know, is going to give us a 2.3% increase October 1. So that would be positive for us, especially now that our Medicare business is right at 20%.

Dana Hambly - Stephens Inc., Research Division

Was that 2.3% a little bit better than you were expecting?

Joey A. Jacobs

Yes, it is. It is.

Dana Hambly - Stephens Inc., Research Division

Okay, great. Last one for me. Just on the interest expense is a little bit higher than what I was looking for. Is there anything in there? Is that a pretty good run rate going forward?

David M. Duckworth

Yes, Dana, this is David. We did see a full quarter impact from the March financing transactions that we completed, and so that second quarter number would be our expectation for the rest of the year.

Operator

Moving next to Whit Mayo from Robert Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Joey, is there anything going on with the adult Medicaid demo project, or any of the waiver plans with any of your states? I just was curious if you're seeing any of those patients and/or dollars flow to you at this point.

William Brent Turner

Whit, this is Brent. We only -- I think we only have 1 state that is participating in that demonstration project. So we haven't got a lot -- we don't have a lot of data there. Industry update there is a project is going very well as scheduled. The CMS will report out annually to Congress on just the impact of each of the 3 years of the program. We -- there's not been a -- we're not aware of any new states having a received waivers in a while, so that's not something that we're anticipating happening. I think from our standpoint, we're going to have to see the impact of the demonstration project, and then we think there'll been be some movement at its conclusion. It's moving just like we expected.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Yes. That makes sense. I'm just curious if, at this point, you've actually signed any exchange contracts, or maybe just can you update us on the conversations that are occurring in your markets with payers that may give you a glimpse into what the benefits and the rates look like with those plans?

Joey A. Jacobs

We just had some preliminary conversations concerning the exchanges. Two of the largest payers in the country. we've had a little bit more conversation with them. But once again, there's a lot of scrambling going on, and they know they're very satisfied with our relationships. So I don't think we'll be excluded. I just think that we were not on the top of the list to be talked to yet. But we do have some conversations with some of the more major players, major exchanges that might be set up.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. And maybe just another one. In the past, you guys have historically pointed towards some, I guess, unique seasonality with RTC and the kids in the summer months. Just anything to call out as we look at our model for the third quarter.

Joey A. Jacobs

Well, I think there's a little seasonality in the third quarter, not material. But I think if you just look at the balance of the earnings for what embedded in our full year guidance, there would be a little step. The fourth quarter will be a little stronger than the third quarter just based on the seasonality of the third quarter and the impact of additional beds continuing to come online and be filled.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

But no reason to think that sequentially things will -- your EBITDA earnings would be lower in the third and the second. I don't know if that's too much specificity or detail.

Joey A. Jacobs

That's a little bit too much specificity. But obviously, we're expecting to have a good third quarter.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Yes. Okay. And just one last one, Joey. You mentioned the payment update, the 2% update from Medicare next year. Just any other additional thoughts with regards to some of the language in there about refining the payment system next year. Just any thoughts would be helpful.

Joey A. Jacobs

Sure. Those were the same things that they put out the year before. They're looking at the data. Quite frankly, I see no changes next year. They're going to be very, very busy getting ready for 2015 for what they've delayed, plus what goes into the Affordable Care Act starting 2014. There's a lot of other things that's going to be going on in DC versus trying to refine, I think, our system. So there will be some work on it, but I don't expect any changes there next year.

Operator

Your next question will come from Brian Tanquilut from Jefferies.

Brian Tanquilut - Jefferies LLC, Research Division

First question for you, Joey, just on that last comment on Medicaid -- or Medicare rates. And I think I know the answer to this, but do you mind just giving us your views on Medicaid rates going forward based on what you're seeing for next year, meaning the next fiscal year.

Joey A. Jacobs

Ultimately, Medicaid rates has the potential to be 0 to 1%, somewhere in that area. There would be a couple of states that will give us a little bit more. Right now, I've not had any -- no one from operations has come to me talking about a Medicaid cut anywhere. So we're keeping our fingers crossed. State budgets are in pretty good shape. Remember, our Medicaid is child and adolescent services. So those are pretty tough to cut. And so if we can get a small increase there, we'll be pleased.

Brian Tanquilut - Jefferies LLC, Research Division

Got it. And then you mentioned that you did a de novo this quarter. Obviously, not something that we've seen you do a lot of. Is that something that we should expect going forward, or is this a one-off situation where you, going forward, is still adding beds existing facilities?

Joey A. Jacobs

Primarily, we'll be adding beds to existing facilities, but you will see us do a couple of more de novo projects. So whether we do 1 or 2 a year, I think that's possible going forward. But primarily, our expansions will be through acquisitions and through adding beds to existing facilities.

Brian Tanquilut - Jefferies LLC, Research Division

Joey, to that point, you guys early on set out a $1 billion revenue run rate target for end of 2014, and this might be too early to ask. But I know your guys are busy on the development side, so how should we think about the business beyond 2014 on the M&A front?

Joey A. Jacobs

Well, I think it's going to look a lot like it has the last couple of years. And we're now over -- if you take our revenue for the second quarter and annualize it, we're now over $700-plus million run rate. So the $800 million by the end of the year and $1 billion by the end of next of year I think is very doable for us. Three years from 2014, hopefully, we're approaching $2 billion at that time. So I think those opportunities are out there.

Brian Tanquilut - Jefferies LLC, Research Division

Got it. And then last one for David. The other operating expense line had a notable increase during the quarter. Is there anything that you can point to on that one, David?

David M. Duckworth

There's really nothing individually significant there. I will say that just our acquisitions that we closed at the end of 2012 and during the first part of 2013 have increased that line item some. But there's really nothing unusual that's driving that other than acquisitions.

Operator

Kevin Fischbeck from Bank of America Merrill lynch has your next question.

Stephen Baxter

This is Steve on for Kevin. We saw another slight uptick in the debt expense in the quarter. I was wondering if there's anything that you wanted to highlight there. if you could help us understand that a little bit better.

Joey A. Jacobs

It is just our large acquisition that we made in the Memphis market that came online, I think, in the first [ph] quarter of this year, and we have a full quarter in the second quarter. And once you back that out, the bad debt trends are similar to what they've always been. And so that's a project we're working on there. but it's not on -- it was not unexpected, and we knew that was part of the profile of this facility when we are acquired it. So that uptick really is attributable to our Memphis facility.

Stephen Baxter

So is it more like the 2.7% in the first quarter, or more like the 1% to 2% kind of at the end of last year?

Joey A. Jacobs

It's more like the -- it's like 2.2%, 2.3%, I think is what we were running without this facility.

Operator

Dana Nentin from Deutsche Bank.

Dana Nentin

Just wanted to see if you could update us on your progress with the Delta Medical Center acquisition. And I guess, how many more of the 243 beds or so are now in operation since you acquired them?

Joey A. Jacobs

Well, we're doing well there. The management team from Delta was up last week giving us an update, and we feel good about what Bill Patterson and his team is doing in Memphis. And so they're making a lot of progress. And so we expect great things from this facility in 2014, and they're positioning themselves well. I think we brought online another 30 beds -- approximately 30 beds online in service for that facility since we have acquired it. So I think more than 200 beds are in service now at that facility, and we've got plans for new additional beds to be used. So we're pleased with the progress there and very focused. And Bill and his team are working very, very hard, and we're very proud of that facility. And we think, in 2014, it will be a shining star for us.

Dana Nentin

Okay, great. And what are you seeing in the M&A environment as it relates to multi-facility chains? And are you seeing any of these types of opportunities in your pipeline now?

Joey A. Jacobs

Some of those opportunities are in our pipeline, and we know where the multi-facility chains are. And we have Steve Davidson, our Chief Development Officer, has a great relationship with all of those companies and he keeps in touch with them on a regular basis. And there will be opportunities in the next couple of years for some of those to join the Acadia family. And so we have active discussions going on with the multi-facility opportunities.

Dana Nentin

Okay, great. And then one just housekeeping item. Can you give us the number of same facility licensed beds at the end of the quarter?

David M. Duckworth

Yes. At the end of the quarter, we had same facility beds of just over 2,400.

Operator

With no further questions in the queue, Mr. Jacobs, I'd like to turn the conference back over to you for any closing remarks.

Joey A. Jacobs

Well, everybody, thank you very much. Thanks, everyone, for your questions today and your interest. I just want to give one shout out to Carol Huhillman [ph], our CEO of our Albuquerque facility. I was out there visiting with that team a couple of weeks ago, and I'm very proud of what they're doing there. And we have great expansion opportunities, plans there for Carol and her team in that facility and that area. So Carol [ph], thanks for the great job you're doing. Thanks for having an interest in Acadia, and we'll see you at the next call.

Operator

And that does conclude today's teleconference. We thank you all for your participation.

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