Acadia Healthcare (ACHC) Joey A. Jacobs on Q1 2016 Results - Earnings Call Transcript

| About: Acadia Healthcare (ACHC)

Acadia Healthcare Co., Inc. (NASDAQ:ACHC)

Q1 2016 Earnings Call

April 29, 2016 9:00 am ET

Executives

Brent Turner - President

Joey A. Jacobs - Chairman & Chief Executive Officer

David M. Duckworth - Chief Financial Officer

Analysts

A. J. Rice - UBS Securities LLC

Jason Plagman - Jefferies LLC

Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc.

Paula Torch - Avondale Partners LLC

Chris Rigg - Susquehanna Financial Group LLLP

Frank Morgan - RBC Capital Markets LLC

Ana A. Gupte - Leerink Partners LLC

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Gary Lieberman - Wells Fargo Securities LLC

Charles E Haff - Craig-Hallum Capital Group LLC

Gary P. Taylor - JPMorgan Securities LLC

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

Dana R. Hambly - Stephens, Inc.

Operator

Please stand by. We are about to begin. As a reminder, this call is being recorded. Please proceed.

Brent Turner - President

Good morning. I'm Brent Turner, President of Acadia Healthcare, and I'd like to welcome you to our First 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 our 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 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 now turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

Joey A. Jacobs - Chairman & Chief Executive Officer

Good morning, and welcome to our first quarter conference call. In addition to Brent, I'm here today with Chief Financial Officer, David Duckworth and other members of our executive management team. David and I each have some brief remarks about the first quarter and our outlook for Acadia. Then, we'll open the line for your question.

As the first quarter results made clear, Acadia has continued to produce strong profitable growth through outstanding and disciplined execution of our long-term organic and acquisition growth strategies. Our revenue for the quarter increased 68.6%, and our adjusted net income from continuing operations attributable to Acadia's stockholders increased 69.1%. Our adjusted diluted EPS grew 27.9%, which includes the impact of new shares of common stock issued primarily related to acquisition.

In addition to the strength of this financial performance, the headline news for the first quarter was the acquisition of the Priory Group in the UK, which we discussed in depth in our fourth quarter conference call. We want to update you on the review of the Priory transaction by the Competition and Markets Authority or CMA. We are working through the merger review process and expect to submit our formal notification to the CMA in early May.

With an early May submission, we expect the CMA to conclude its review in late June. The Priory transaction prides as a significant tailwind and visibility into achieving continued substantial profitable growth for 2016. We completed 2015 with approximately 9,900 beds. The Priory transaction alone adds approximately 7,100 beds, and the largest acquisition we have completed. Acadia now has approximately 17,400 total beds.

Our organic growth strategy also produced excellent results for the first quarter, with consolidated same facility revenue growth of 9.2%. Much of this growth was the result of beds added to our same facility base in the last 12 months. These same facility beds were a portion of the total of 850 beds we added over the past 12 months to our existing facilities. And turning to de novo facilities, we added 330 beds during the first quarter of 2016.

In summary, we are very pleased with Acadia's performance for the first quarter. We believe strong execution of our business model has positioned us well in a nearly $50 billion industry with growing market demand and limited excess capacity. We are very diversified with regard to our business lines, our payers and our geographic footprint. We are continuing to invest in capacity to meet increasing demand organically, even as we strengthen our ability to complete these projects routinely.

In a highly-fragmented market, we also have the experience, and we believe Priory demonstrates access to capital to continue executing one of the industry's most successful records of completing and integrating acquisitions. As a result, we remain confident of our prospects for future growth in earnings and shareholder value.

Thank you for your interest in Acadia. And now, here's David Duckworth.

David M. Duckworth - Chief Financial Officer

Thanks, Joey, and good morning. Acadia's revenue for the first quarter of 2016 increased 68.6% to $616.8 million from $365.8 million for the first quarter of 2015. Adjusted income from continuing operations attributable to Acadia's stockholders was $45.8 million, up 69.1% from $27.1 million. Adjusted EPS for the first quarter of 2016 was $0.55, up 27.9% from $0.43 for the first quarter of 2015.

For the first quarter of 2016, our adjusted EPS excludes transaction-related expenses of $26.3 million and a gain on foreign currency derivatives of approximately $400,000. For the first quarter of 2015, adjusted EPS excludes transaction-related expenses of $18.4 million and a small gain on foreign currency derivatives. Weighted average diluted shares outstanding increased 33.1% for the comparable quarters, primarily due to the equity that we issued in February and May of 2015 that was principally related to acquisitions, and in January to February of 2016 related to the acquisition of Priory.

Acadia's tax rate on adjusted income from continuing operations before income taxes was 21.9% for the first quarter of 2016 compared with 31.5% for the first quarter last year. Acadia's same facility revenue increased 9.2% for the first quarter from the first quarter of 2015, with an 8.6% increase in patient days and a 0.5% increase in revenue per patient day. Same facility EBITDA margin was 27.1% for the latest quarter versus 26.3% for the first quarter of 2015.

Adjusted consolidated EBITDA increased 66.4% to $131 million, which was 21.2% of consolidated revenue from $78.7 million or 21.5% of consolidated revenue for the first quarter 2015. Our operating cash flow increased to $59.3 million in the first quarter from $18.1 million in the first quarter of 2015. Our adjusted operating cash flow for the quarter was $86.2 million when you adjust for the cash transaction-related expenses paid during the first quarter.

Finally, as announced in yesterday's news release, we have affirmed our established 2016 guidance, including adjusted earnings per diluted share in the range of $2.81 to $2.86, which is an increase of 26% to 28% over 2015. Our financial guidance excludes 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 Yolanda to open the floor for your questions.

Question-and-Answer Session

Operator

Certainly. We'll go first to A. J. Rice with UBS. Please, go ahead, sir.

A. J. Rice - UBS Securities LLC

Thanks. Hello, everybody. I was going to just maybe ask about the relief on the IMD exclusion that was included in the Medicaid managed care rule. Can you just tell us about how much needs to be done in terms of contracting with payers and in terms of your discussions with referral sources to get this thing in place so that you're actually deriving some benefit from it?

Joey A. Jacobs - Chairman & Chief Executive Officer

Thanks, A.J. This is Joey. We are very excited about this regulation change, and we're looking forward to July of this year when it will begin. We are probably 90% – we probably already have contracts with managed Medicaid, in probably 90% of all of our facilities with the managed Medicaid payers there. There are a few that we will be contacting or working with. So, we're already in a good position there.

We will be, over the next 60 days, redoubling our efforts to just let the referral sources know that the adult Medicaid patient can now be treated at a freestanding psych hospital, and our facilities our busy getting that done too. So, we think we're going to be in good position as of July 2016.

Our occupancies for the company right now is about 79% to 80%, so we have about 20% unused capacity. And the reason for that is that we did add 330 beds during the first quarter. So, we think we're in a good position to enter July 2016 for the IMD, and hopefully, be able to treat more the Medicaid adult patients in our facility. So, work to be done. We've already made great progress. So, we're looking forward to getting to July 2016.

A. J. Rice - UBS Securities LLC

Okay. And then maybe one follow-up. So, the merger review is going on, and you said you hope to be resolved in June. I know there're some things you've agreed not to consolidate until that review is complete, but you have a synergy target for this year. Can you tell us what can you do with Priory, and what do you have that's sort of pending until the deal gets done? And how's Priory going so far now that you have just a few months under your belt?

Joey A. Jacobs - Chairman & Chief Executive Officer

Sure. It has only been 45 days since we made that – well, a little bit more than 45 days, 45 days in this result. Our operating team was over there two weeks ago, and Priory is off to a good start. The chemistry between them and us here is very, very good. They are very eager and excited about being a part of Acadia.

We are working through the CMA process. We run the business as if we would run the business – any of our businesses within the company, and supporting them, and giving them access to capital and reviewing operations. And so, that part is business is normal. What you can't do is, we have – we can't go after the synergies until we get through this process. So, hopefully, by the end of June, we'll get through the process, and then that will be the next actionable thing we will do with this transaction.

A. J. Rice - UBS Securities LLC

Okay. Great. Thanks a lot.

Operator

We'll go next to Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

I'm hearing no response from that line. We'll go next to Brian Tanquilut with Jefferies. Please go ahead, sir.

Jason Plagman - Jefferies LLC

Hey guys this is Jason Plagman on for Brian. Just a follow-up on IMD, how are you guys thinking about how that chain affects the pace of your bed adds that you grow over the next few years, or your outlook for pace of bed adds?

Joey A. Jacobs - Chairman & Chief Executive Officer

I think you saw that with us getting 330 beds online in the first quarter. We're targeting another substantial number in the second quarter. So, we have internally been aggressive on getting these beds built and getting them online. We didn't know when the regulation was going to be effective, but we're going to have these beds online by July 2016. And so, we're in a good position once again. We're at 80% occupancy.

So, for the next several months, we can handle the additional incremental patients, and then we will see how the volume ramps up in builds. And if we need to build more beds for our facilities, we can do that. And so, we think we're in a good position about how we built our beds, gotten ready for July. And we'll build additional beds as we see the volume come to us over the last six months of this year.

Jason Plagman - Jefferies LLC

And just to follow up on that, do you think these new patients could get back to organic growth in the above double digit, kind of lift that organic growth rate back in the 10% to 12% range or even higher?

Joey A. Jacobs - Chairman & Chief Executive Officer

Well, when you look at the U.S. same facility, we did 9.9%. That's pretty damn good. And so, I am just very pleased with what Ron Fincher and his team are doing. And once again, we're going to be in the high single digits. And could you have a quarter where it might be in double digits, sure, though we're not planning on that. We're just planning on similar results as what we had in the first quarter this year.

Jason Plagman - Jefferies LLC

Okay. That's helpful. And then one other quick follow-up – or a different topic. On M&A, how should we be thinking about the pipeline in the U.S. and the pace in sequencing of how deals might come in over the next 12 months or so?

Joey A. Jacobs - Chairman & Chief Executive Officer

The pipeline is very busy. We will make single-facility transactions, acquisitions throughout the remainder of this year. We are focused on the U.S. markets and have lots of opportunities there. And Steve Davidson is very busy, and he's keeping me very busy on the road going out and looking at acquisitions. So, the pipeline looks good. And we will make some seamless acquisitions throughout the remainder of this year.

Jason Plagman - Jefferies LLC

Great. Thanks, guys.

Operator

We'll take our next question from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc.

Hey, guys. Sorry, about that, technical difficulties on my side.

Joey A. Jacobs - Chairman & Chief Executive Officer

Kevin, you only get one question because you dropped off.

Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc.

I don't know if you could count that. I guess, one of your biggest competitors was talking about how there were shortages of psychiatrists and other clinical staff. It doesn't seem like you're seeing it, but just want to get your sense of that and to the extent that there are markets where that's an issue. How do you manage that for addition of IMD, excluding going away and the potential demand that's going to maybe put pressure on the labor supply?

Joey A. Jacobs - Chairman & Chief Executive Officer

We think we're in a very good position with our psychiatrist. Once again, Ron Fincher was ahead of this curve. And we've already had a physician recruitment department. But probably 24 months ago, we made a substantial investment in that department, and they've been very, very successful. So, right now, we're not seeing that impact to our patient day growth. We grew 8% here in the U.S. in the first quarter. So, always – you can always use more psychiatrists, but Ron has a plan to recruit those, and right now, it's not hurting us.

Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc.

Yeah. And I guess you mentioned that on the contracting side, you're 90% of the way kind of there, but you have to talk to the referral sources, just to get them to understand that you can take these patients. I guess a lot of these referral sources have built out beds and capacity (17:31) because they basically had to because there's no other place for them. In these conversations with referral sources, how willing do they appear to be to kind of just let that business move out? And how – or conversely, how ingrained is that as part of their business, and do they want to keep it?

Joey A. Jacobs - Chairman & Chief Executive Officer

It's not ingrained at all, and quite frankly, med/surg hospitals do not like having psychiatric services in their facilities. They're more high-tech oriented, procedure-oriented, which is great. That's what they do the best.

And as we see with our joint venture opportunities, more and more of these large not-for-profit systems, quite frankly, want to get out of it and give it to us and just take a minority position in our facility, so they have access to the care. So, there's roughly, I think, last time I look, I think there's 1,200 units inside 5,000 med/surg hospitals. And that's declined from 1,500 when PPS was entered into.

So, we still think more will close. There will be a few that we'll add but the med/surg hospitals, once again, their procedure, high-tech oriented. And they just want access to the service. We are opening up our joint venture in the med/surg market. It opens up in May. So, that one will be coming online. So, we were partnering there with the big Baptist Health System. And so we're very – we do not see that as an issue.

Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc.

Okay. Then maybe just last question about that. I mean, these conversations, you've often heard companies do joint ventures and things like that with non-profits, and it often takes a year or two to kind of get that. The hospitals are going to decide, okay, this is what we want to do, we do want to partner, this is where we're going. I mean, is that the way to think about this, the benefit from IMD? Does it take that long to kind of get the hospital to change, or do you think it will be something faster than that?

Joey A. Jacobs - Chairman & Chief Executive Officer

I think that's about right. I think what you'll see is we've built up our inventory, and I think starting in 2017, you could see us do four to six a year because of the activity we have on the top line. And we're close to announcing another one in the next 30 days. So, we have a lot of activity. We – Steve and I are going, making a trip next week to a large system that called us and said, hey, we want you to come down and talk about doing it for us. So, the word's getting out there that we do this. And so, we're getting inbound calls from the systems.

Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc.

All right. Great. Thanks.

Operator

We'll take our next question from Paula Torch with Avondale Partners. Please, go ahead.

Paula Torch - Avondale Partners LLC

Thank you. Good morning. So, on the same IMD subject, how should we think about the exclusion opportunity on the substance abuse side? Just wondering maybe how many of your CRC facilities right now could take managed Medicaid patients, or do you think you'd be acquiring or building out more beds specific to that population? And then just as a follow-up to that, what's the sort of the CTC opportunity, and does this change the potential there as well?

Joey A. Jacobs - Chairman & Chief Executive Officer

Okay. The first one, the CTC does not change the opportunity there. The opportunity there was already great to begin with, so it doesn't impact really the CTC part. The – on our recovery division for substance abuse, it varies. Most of our business – we're not in the Medicaid adult business, but we do have a few states where we are dominant in that business, and we are building more beds for them and expanding our services for them. So, where we have a presence and are taking care of that population, we are expanding. And then, on the other ones, if the CEO came to us and said there's an opportunity here, we would look at it. And absolutely, we have the capital to do that. But right now, we have a few states where we're, I would say, dominant in that business. So, we will continue to support them and expand their services.

Paula Torch - Avondale Partners LLC

Okay. And then, if we could stay on the recovery division for one more second, just wondering what the occupancy rate is there for those particular beds. I know that it's been improving. And wonder, you talked previously about additional synergies in 2016, and just would like you to remind us of what that number is.

Joey A. Jacobs - Chairman & Chief Executive Officer

Okay. On the occupancy, I do not have the individual occupancy by product line with me, Paula. So, I can't give you that number. I will say this, that one of our facilities, it's been since 2010, since they've had a quarter as good as the one they had in the first quarter of 2016. So, it's been six years. So, our – Joe Procopio and what he's doing in that division is working. And so, I don't have the occupancy here with me, but we are filling up the beds, and have good results there. And as far as the other, Brent?

Brent Turner - President

Yes. So, this is Brent. On the synergies related to the CRC transaction, as you might recall, we had indicated that our expectation was to get $10 million of synergy benefit in the first year, ramping up to a total of $15 million by the end of the second year. And we were on pace with the first year and absolutely on pace to realize that by the end of the second year in total. So, very consistent execution from the integration of the business as we had expected a year-and-a-half ago when we made that acquisition.

Paula Torch - Avondale Partners LLC

Okay. Great. And then just one last one for me on the UK business. I know that you're still ramping a number of de novos that you've been investing in and acquisitions that you've made in the UK. So, just curious where we are in the cycle, and when do you expect those investments to be accretive, as I believe it takes a little bit longer for those to ramp? So, just wondering where we are on that. Thank you.

Joey A. Jacobs - Chairman & Chief Executive Officer

Well, the de novos, we're hopeful to have them breaking even in the first 12 months and then the accretion starts thereafter, and we're ramping them up, and get them closer to the margin for our same facility. So, that's what's going on, and that's what the expectation is in the UK. And we have invested money there to expand their facilities and contend to meet the continuum of care over there. And both teams, whether it's PiC or Priory, are working very hard on filling the beds and growing consensus (24:46).

Paula Torch - Avondale Partners LLC

Okay. Thank you.

Operator

We'll take our next question from Chris Rigg with Susquehanna Financial Group. Please go ahead.

Chris Rigg - Susquehanna Financial Group LLLP

Hi. Good morning, guys. Just wanted to come back to IMD real quickly. Obviously, we've got the Medicaid managed care component to it. I was wondering if you guys have done any work to sort of figure out the population that's still in fee-for-service versus what's in managed care. And really asking, do you still need legislation to really see a massive increase, or is this good enough just on the Medicaid managed care side? Thanks.

Joey A. Jacobs - Chairman & Chief Executive Officer

The country needs the IMD to go away, so that more – for that 25% that's out there in the traditional Medicaid product, that they could come to a freestanding hospital. And, we're – we – I was in Washington D.C. two weeks ago working on this issue, and we're not getting any pushback from Washington on this issue. But is – as you know, it's an election year, and it's a little tougher now. And so, we need that and the country needs that.

We will get a benefit from this Medicaid change in the regulations for the managed Medicaid, and that is a good thing, a good step. But, obviously, if you can get the other 25%, roughly, being able to come to us, that would be significant, so we want that also. This is what we do, this is all we do, and those patients really need access to other providers and especially the freestanding providers.

Chris Rigg - Susquehanna Financial Group LLLP

Great. And then just on the Priory synergies, can you give us just an update in terms of what's in 2016 versus what's expected to roll into 2017?

Joey A. Jacobs - Chairman & Chief Executive Officer

I won't give you any specific numbers. We have said that there's – we think there's $20 million out there. We will try to get it as quickly as possible and do the right thing. So – but it would – I think as we stated when we did the Priory transaction, we've given ourselves two years to get that done. I think it will be faster than that. But once again, we've got to get it through the CMA process and get that behind us before we can really work on this issue.

Chris Rigg - Susquehanna Financial Group LLLP

Okay. Great. Thanks a lot.

Operator

Our next question will come from Frank Morgan with Royal Bank of Canada Capital Markets. Please go ahead.

Frank Morgan - RBC Capital Markets LLC

Hey, there. To follow up on this question, as we think about the balance of the year, given what's going on with the CMA review and the ramp up, is there any reason or any thoughts we should have around the cadence of guidance over the rest of the year? I know you're reaffirming your annual guidance, but is there anything as you look out at the street right now, when you look at that cadence, any inputs or suggestions you might give us there?

Joey A. Jacobs - Chairman & Chief Executive Officer

Frank, as we work through these issues, if it's appropriate to raise our guidance or revise our guidance, we're going to do that and so – and the revision to me would be to the upside. It's how I'm seeing the future. So, we just got to get through these things. We've got to get the IMD in place. We've just got to get through the CMA process and just see how the third quarter goes. And if at the end of the third quarter, if we need to raise guidance we will do that, and – but we just got to get through that quarter. But if it's positive and significantly positive, as we've done in the past, we'll raise our guidance.

Frank Morgan - RBC Capital Markets LLC

Okay. But I guess in terms of just the quarters coming up – or second, third, fourth, is there any reason why we should think about redistributing it based on your assumption?

Joey A. Jacobs - Chairman & Chief Executive Officer

No.

Frank Morgan - RBC Capital Markets LLC

Okay. All right. So, cadence is fine. Okay. And then secondly, on that IMD population, any color around what kind of rate you might get on that business compared to your other per diems, either for commercial or for Medicare? Thanks.

Joey A. Jacobs - Chairman & Chief Executive Officer

We expect the Medicaid rates to be the rates we have on our current contracts. So, we'll just have to wait and see. No one's approached us about anything different. So we think the rates that we have in our current contracts, which we think 90% of those we have covered, so we're expecting the rates to be in that ballpark.

Frank Morgan - RBC Capital Markets LLC

Okay. And then in terms of just the absolute dollar, would it be around what, say, Medicare rates are, or would it be less, more or about the same?

Joey A. Jacobs - Chairman & Chief Executive Officer

It varies. It varies by state, Frank. It varies by state. And it varies by state, and it varies by managed Medicaid plan. And, so all of our per diems are close, especially on the acute services, the acute hospitals, which this would be covering. All of our rates are very close. So, they would be similar to what we're getting for Medicare and the commercial payers.

Frank Morgan - RBC Capital Markets LLC

Got you. And then just one final question. When I look at your cash flow generation and your balance sheet, obviously, given the fact you got such a strong growth story, do you think you'll get to a point where you can basically start to sell fund growth without really having to go back and access the capital markets? And I think you said a couple of months ago at our conference that there might be another portfolio opportunity coming around next year, just any update on that? Thanks.

Joey A. Jacobs - Chairman & Chief Executive Officer

We are already at a point where we can use our revolver and our cash that we're generating to do the one-off transaction. So, we're already at that point, so – and then the large transaction that we talked about, it is going to be actionable, and so we'll just wait and see on the timing.

Frank Morgan - RBC Capital Markets LLC

Okay. Thank you.

Operator

Moving to our next caller, Ana Gupte with Leerink Partners. Please go ahead.

Ana A. Gupte - Leerink Partners LLC

Yeah. Thanks. Good morning. So, back to the UK, on the rate environment, I think you had said that there was a rate update on April 1 from the NHS. It looked like the revenue per patient, they saw some pressure. I'm just wondering how that all played out and what the rate outlook is looking like for you.

Joey A. Jacobs - Chairman & Chief Executive Officer

Okay. There's two parts to this answer. One is what you see in the stat is just the mix of the patients. And we did consciously add beds at the lower revenue per day in the continuum of care. And so, that impacted that. The rate negotiations will – are still going on. They will be effective April 1st, it is positive. And hopefully, in the next 30 days, 60 days, those negotiations will be completed. And once again, they are retro-ed back to April 1st.

Ana A. Gupte - Leerink Partners LLC

So, currently what you reported doesn't have that update? The data...

Joey A. Jacobs - Chairman & Chief Executive Officer

Right.

Ana A. Gupte - Leerink Partners LLC

Okay. On the – and just pardon me for my lack of knowledge about the regulatory environment in the UK. But to the extent that the NHS is outsourcing to private payers, do they have any influence on how the CMA would view the Priory transaction and then try to speed that up in terms of letting you integrate the acquisition?

Joey A. Jacobs - Chairman & Chief Executive Officer

Obviously, it's a government agency. And soon, they talk to each other. I don't – I think the CMA has their process and their time line and their procedures. And that's where we're at. And that's how it will go, that this is governed by the CMA time line and procedures.

Ana A. Gupte - Leerink Partners LLC

Okay. And then, the final question, what do you have in guidance as far as currency risk? And they have all this discussion about the Brexit, and what is in there?

Joey A. Jacobs - Chairman & Chief Executive Officer

Yeah. So, we've got – we've estimated our UK business. We'll translate over $1.45 pound-to-dollar ratio. Obviously, our first quarter, the FX rate was below that, but you didn't see any material impact on our business. And as of the last week or so, the pound has strengthened. It's actually at $1.46 and some change. So, right now, our outlook is consistent. And obviously the Brexit Vote is scheduled for June 22nd or 23rd. So, a lot of the activities around that will go away once the status is known one way or the other.

Ana A. Gupte - Leerink Partners LLC

And are there any hedges to offset that?

Joey A. Jacobs - Chairman & Chief Executive Officer

Yeah. We are working on that to hedge some of the cash flow. We've got that addressed, and we'll have an update going forward. But in order to sort of take some of the noise out of that going forward, we are implementing a hedging program and certainly over a majority of the cash flows coming that we're reliant on out of the UK.

Ana A. Gupte - Leerink Partners LLC

Great. Thanks. The revenue is certainly a surprise to the upside, because it wouldn't have normally, so that's great. Appreciate it.

Joey A. Jacobs - Chairman & Chief Executive Officer

Thanks.

Operator

We'll take our next question from Whit Mayo with Robert W. Baird. Please go ahead.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Thanks. Good morning. I just wanted to focus in on the U.S. same-store patient day growth for a minute. The numbers were pretty good, up 8%. Can you give us a sense of what the trends look like between the acute business, the RTC business and the addiction business? Is any one growing faster than the other? Just some of the optics with the admissions and the patient days. It just could be a little hard for us to tell now with three or four different patients included within that segment.

Joey A. Jacobs - Chairman & Chief Executive Officer

Whit, this is Joey. If memory serves me right, the acute is – obviously, because we've got so many beds and bulk beds on the acute side, that is growing faster. The substance abuse is next, and then, the child and adolescent residential would be next. So, we're getting great growth from the acute side of the business. And that's where we spend our money, and that's where we built our beds. So, that's what's occurring.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Makes sense. And maybe just an update on Sierra Tucson, how that's performing versus internal budgets, and any way to size the contribution of that asset now?

Joey A. Jacobs - Chairman & Chief Executive Officer

Sierra Tucson is the one I referred to. They had the best quarter in six years.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

All right. I guess, I'll leave it at that. And the last one just, maybe for David, if you can chime in and maybe help us out with the share count for the second quarter, D&A, interest expense, maybe run rate for rent, anything just to help us all get on the same page would be helpful.

David M. Duckworth - Chief Financial Officer

Okay, Whit. Yeah. This is David. The first quarter, of course, reflected a partial quarter of activity around the shares that we issued during the quarter. So, we see it going to about 87.6 million shares for the remainder of the year, of which would result in about 86.8 million on average for the year.

And then, just to go through some of the other non-operating expenses that you mentioned, depreciation and amortization should be in the ballpark of $37-or-so million a quarter. Of course, that will increase as our revenue grows and as we have projects that come on line that add to that number. So, really, percentage of revenue would be the right way to model that. Interest expense, of course the first quarter, again, reflects a partial quarter of the Priory financing. But it should be about $48 million per quarter for the remainder of the year.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

And rent expense, sorry?

David M. Duckworth - Chief Financial Officer

Yeah. Rent expense, we did see that increase some from the Priory acquisition, which has about – it had about $40 million of rent expense to the business, annually. So, we should see that continue to increase to just under 3% of revenue for the remainder of the year, but then it should hold around that level.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Awesome. Thanks, man. I appreciate it.

Operator

Our next question will come from Gary Lieberman with Wells Fargo. Please, go ahead.

Gary Lieberman - Wells Fargo Securities LLC

Good morning. Thanks for taking the question. Just on the Priory and the CMA process, how has it gone versus your expectation? Have there been any surprises? And do you remain confident that you'll get full approval for it?

Joey A. Jacobs - Chairman & Chief Executive Officer

No surprises. We – it appears that the consultants and lawyers that we use work well with the CMA staff. And we are kept up to-date just about daily or once a week, and everything is tracking per their timeline in their process. So, no negative surprises. And we do expect for them to approve the transaction. And so, we're okay. Obviously, we would have liked it to have gone faster, but they have their process, and we have to live within that. So, everything is going fine.

Gary Lieberman - Wells Fargo Securities LLC

Okay. That's helpful. And then just going back to IMD, is there any way for you to help us quantify either what the eventual impact is to volumes from the initial 75% that you'll be able to address, or just to some sort of big picture numbers to help us try and quantify what the opportunity is there?

Joey A. Jacobs - Chairman & Chief Executive Officer

Gary, I'm going to beg off on that. No, we don't know. And there's just too many moving parts to that. And you got to have the managed Medicaid penetration in the city that you're in. And there's too many moving variables. But what we will do, is after the third quarter, we will have some experience with it, and we will be able to give you our thoughts then. But right now, it would be too speculative for me to talk about the impact to this. So – but we'll have it – we'll have some information after the third quarter.

Gary Lieberman - Wells Fargo Securities LLC

Okay. Great. Thanks very much.

Operator

Our next question will come from Charles Haff with Craig-Hallum. Please go ahead.

Charles E Haff - Craig-Hallum Capital Group LLC

Hi. Thanks for taking my question. Question for you on the same-store EBITDA margin, up 80 basis points year-over-year. I saw that length of stay declined on a same-store basis. Same-store revenue per patient day went up a little bit. But in light of those two kind of lackluster factors, if you will, the same-store EBITDA margin went up very impressively. I'm just wondering, when you think about your business, if those two factors start to turn positive, how should we be thinking about same-store EBITDA margins in the future?

Joey A. Jacobs - Chairman & Chief Executive Officer

Okay. The 27.1% margin is a great margin for us, and it is 80 basis points over the first quarter of last year. Let me give you some information. This quarter last year, 39% of our patient days were acute; this year, 42% of them are acute. So, that's what causing the drop in the length of stay.

The acute length of stay did actually tick up in the first quarter, but it is lower than the average, so it brought it down. And then, on the revenue per day, we're pleased with the 50 basis points there. And that's kind of a function of the mix of patients you have for that quarter. And so – but I can talk about the length of stay. It was – it's very stable. And we just did have more acute patient days, and that's the reason for the decline.

Charles E Haff - Craig-Hallum Capital Group LLC

Okay. I mean, does it feel like you're firing on all cylinders on the same-store EBITDA margins given everything in your business, or do you think there's still potentially more improvement?

Joey A. Jacobs - Chairman & Chief Executive Officer

Obviously, when you look at total for the company, we think there's improvement, obviously. And can we move – keep moving to same-store margins and the margins that are not in the same store? I think so. But most definitely, these de novo projects that we have coming online, some of the acquisitions that we made where they have lower margins, our operations team is working very hard in improving those margins. So, there is some margin improvement, but we'll just execute and deliver the results.

Charles E Haff - Craig-Hallum Capital Group LLC

Okay. Great. Well, congratulations. Great quarter.

Joey A. Jacobs - Chairman & Chief Executive Officer

Thank you.

Operator

Next, we'll go to Gary Taylor with JPMorgan. Please, go ahead.

Gary P. Taylor - JPMorgan Securities LLC

Hey, good morning, guys.

Joey A. Jacobs - Chairman & Chief Executive Officer

Hey, Gary.

Gary P. Taylor - JPMorgan Securities LLC

A couple quick questions. One, could you just update us, at quarter end total U.S beds, total UK beds?

David M. Duckworth - Chief Financial Officer

Gary, this is David. In the U.S., at the end of the quarter, we had 17,400 beds; just over 8,000 of those were in the U.S. and almost 9,400 of those were in the UK.

Gary P. Taylor - JPMorgan Securities LLC

Okay. And then, my other question. Actually you've kind of touched on it a little bit. I wanted to look at, on the U.S., either revenues, beds or – Joey just gave days that were acute. He said 39% of days on either beds or revenues acute? Could you help me on those? On U.S....

Joey A. Jacobs - Chairman & Chief Executive Officer

Number of acute beds? We can give you, I think, the number of acute beds we have.

David M. Duckworth - Chief Financial Officer

Yes.

Joey A. Jacobs - Chairman & Chief Executive Officer

I think that they were – that's in the fineprint, but we've got it here somewhere.

David M. Duckworth - Chief Financial Officer

Yeah. Here you go, Gary. And this is just in the U.S. Of the 8,000 beds that I've just mentioned, almost 3,300 of those were acute. And I'll just keep going through the list. We have about 2,800 specialty beds, and almost 2,000 residential beds. That's how those break down.

Gary P. Taylor - JPMorgan Securities LLC

Okay. Perfect. Thank you.

David M. Duckworth - Chief Financial Officer

Thanks.

Operator

We'll go next to John Ransom with Raymond James.

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

Hi. This is an arcane question. But we had some old CBO forecast for IMD, something like $45 billion to $65 billion over 10 years. And I've been told those are both scale and maybe a bit inflated. Does anybody have any idea when they're supposed to come out with new numbers on this?

Brent Turner - President

John, this is Brent. I think as the IMD legislation continues to move through the respective houses of Congress, you're going to see an update. I don't know the exact timeframe. But the $40 billion to $60 billion over 10 years, again, everybody works hard, does their work, but there was some real flawed assumptions in that. So, our industry association and everybody's working to sort of frame that up.

And then, even when that number comes out, obviously, this regulatory shift will reduce the total impact of what that remaining CBO estimate is because that will have already been addressed through the managed Medicaid regulation adjustment. So, we think it's going to be a much more manageable number when the actual revision comes out, but no specific clarity on when that would occur.

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

And then – thanks, that's great. My other question is that one of your competitor mentioned that states, obviously, have a – they can opt in or opt out. How do you see that play out?

Brent Turner - President

Well, again, if you think about it, it's absolutely within the IMD managed Medicaid. The great news is it's in there. It's effective in 60 days. But the states have to – states have to support it. We find it hard conceptually to know that there's under – massive under our capacity, real issues with access, how – it just doesn't make sense in this environment that we wouldn't allow for the most appropriate providers to be able to treat the patients in need. So, we think that while it is not a mandate, we don't see that as a significant detriment to the implementation of this updated reg.

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

Great. And just one question for David. As we think about your second quarter EBITDA, who knows what the divestures will be, can you just give us a rough breakout, UK versus U.S. as a percent?

David M. Duckworth - Chief Financial Officer

It's roughly 50/50 going forward based on the companies that we have right now. It breaks down roughly 50/50.

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

So, I'm just curious how your tax – your effective tax rate is almost a UK tax rate, given that? And do you see any – are there any regulatory – I know the Treasury Department's getting very excited about this kind of stuff, but is there anything we need to think about relative to your tax rate going forward, or you feel pretty comfortable with that?

David M. Duckworth - Chief Financial Officer

Yeah. The tax rate is a function of the tax rules that are in place in the U.S. and in the UK. So, it's very much of a unique calculation in each of our jurisdictions of which is what gets it to the 23% expectation for the company. There are tax rules in the U.S., of course, that came out in the first quarter that do not have a significant impact on us. There's tax legislation in the UK, as well, that we pay very close attention, too. But there's nothing right now that would have a significant impact on us from a tax perspective.

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

Okay. Thanks a lot.

David M. Duckworth - Chief Financial Officer

Thanks.

Operator

We'll move next to Dana Hambly with Stephens. Please go ahead.

Dana R. Hambly - Stephens, Inc.

Hey. Thanks. Good morning. Joey, just the CTC market, you read about opioid every day now. Is this a market that the infrastructure is in place in the U.S., or is it one where we need to dedicate a lot more resources and you grow that more via de novo versus acquisition, or how do you think about that?

Joey A. Jacobs - Chairman & Chief Executive Officer

That is a combination strategy. We are aggressive on the de novos. If we can do five to 10 of those a year, that would be great for us, but we're also looking for an acquisition in this space. So, we're doing both, and you're absolutely right. It's in the daily news this issue, and we're trying to – in the markets that we're in, we're trying to make sure that we're meeting their needs. And if there needs to be a new de novo, we're doing those. So, it's a combination strategy, de novos and acquisitions.

Dana R. Hambly - Stephens, Inc.

Okay. And how quickly can (48:56) seem like there's much infrastructure there? Is it more regulatory? Is the issue with getting those open?

Joey A. Jacobs - Chairman & Chief Executive Officer

It's just getting through the regulatory process. It's less than six months. It's controlled by the regulatory process.

Dana R. Hambly - Stephens, Inc.

Okay. And then, just last one for me. On the CapEx from the quarter, I was using about $150,000 per bed and then assuming kind of 2.5% corporate CapEx. And I wasn't really getting anywhere close to $90 million in the quarter. Is there anything else driving that this quarter?

David M. Duckworth - Chief Financial Officer

Dana, this is David. Yeah, our maintenance CapEx was about 2.9% of our revenue.

Dana R. Hambly - Stephens, Inc.

Okay.

David M. Duckworth - Chief Financial Officer

We did have out of our $90 million of capital expenditures, $72 million of that relates to our expansion. We added 330 beds during the quarter. Some of that would be represented by the de novo projects. But I think the metric maybe in the ballpark of what you're looking for, if you use the $72 million of expansion CapEx and the beds that we have added during the quarter.

Dana R. Hambly - Stephens, Inc.

Okay. That's helpful. Thanks.

David M. Duckworth - Chief Financial Officer

Thanks.

Operator

And ladies and gentlemen, that will conclude our Q&A session for today. I would like to turn the call back over to Mr. Joey Jacobs for closing remarks.

Joey A. Jacobs - Chairman & Chief Executive Officer

Sure. I want to thank everyone for joining us on the call today. For our – for the team here at Acadia that are listening in. Thank you very much for all that you're doing. We're very, very proud of what you're doing on a daily basis and taking care of our patients. And once again, thank you for being a part of the family here at Acadia. And we will look forward to talking to you all on the next earnings call.

Operator

That will conclude today's conference. Thank you, all, for your participation.

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