AAC Holdings, Inc.'s (AAC) CEO Michael Cartwright on Q4 2018 Results - Earnings Call Transcript

Apr. 16, 2019 1:27 PM ETAAC Holdings, Inc. (AACH)
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AAC Holdings, Inc. (AAC) Q4 2018 Earnings Conference Call April 16, 2019 10:00 AM ET

Company Participants

Andrew McWilliams - Chief Financial Officer

Michael Cartwright - Chief Executive Officer

Conference Call Participants

Andrew Cooper - Raymond James

Mike Petusky - Barrington Research

Operator

Good day, and welcome to the American Addiction Centers' Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Andrew McWilliams, Chief Financial Officer. Please go ahead.

Andrew McWilliams

Good morning, and welcome to our earnings conference call for the full year and the fourth quarter of 2018. I'm Andrew McWilliams, Chief Financial Officer of AAC Holdings.

To the extent any non-GAAP financial measure is used in today's call, you'll 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 this morning'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 AAC's expected annual performance for 2019. For this purpose, any statements made during this call that are not statements of historical facts 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 AAC's filings with the Securities and Exchange Commission and in the Company's fourth quarter 2018 earnings 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. I would now like to turn the call over to our Chairman and Chief Executive Officer, Michael Cartwright.

Michael Cartwright

Thank you, Andrew, and good morning, everyone. On today's call, I'll be discussing our recent operational highlights before turning the call over to Andrew, to walk through our financial results. We will then open up to your questions.

I think everybody is aware that we faced a series of headwinds starting in August that impacted our results for the back half of 2018 and caused declines in admission and census, which impacted revenue. In response to the weakness we saw at the end of 2018, we acted quickly to address the near-term weakness. First, we executed several initiatives in sales and marketing, which included leadership enhancements and organizational improvements.

We then took measures to implement a series of cost savings initiatives, including corporate expenses. These actions included the consolidation of our Las Vegas and Southern California markets, the sale of our accounts and operations in Louisiana, consolidation of our lab operations and corresponding reductions in our corporate expenses.

Our cost saving initiatives will result in approximately $30 million of annualized cost savings that will benefit 2019 operating margins. Finally, we took steps to improve our liquidity and flexibility, recently closing in early March a $30 million incremental term loan that provided us with additional liquidity moving into 2019. We have also announced that we've begun an evaluation of strategic alternatives for our real estate portfolio.

Our real estate portfolio consist of attractive treatment facilities that provide a compelling set of real estate that could generate significant additional value. Though we're still early in the process, our goal is to leverage the portfolio to improve the balance sheet and enhance shareholder value. These strategic alternatives could include further sale lease backs of individual facilities or larger portions of our real estate portfolio.

Though we still have a lot of work to do, the actions we took in the fourth quarter of 2018 and the first quarter of 2019 have begun to generate positive momentum in 2019. Overall, I'm pleased with the progress we are making in 2019 with our inpatient census improving by 26% at March 31, 2019, compared to December 31, 2018.

And I am confident in our plan and momentum as we move into 2019. I will now turn the call over to Andrew to discuss our financial results.

Andrew McWilliams

Thank you, Michael. Before I dive into our financial results, I want to expand on several changes that Michael discussed that are expected to possibly impact our results moving forward. As Michael noted, in early March, we closed on an incremental $30 million term loan with our existing lenders, and we also amended our senior credit facility to provide increased flexibility related to financial covenants, most notably our senior secured leverage ratio. We also implemented a series of cost savings initiatives in late 2018 and in the first quarter of 2019 that were fully completed inside the first quarter of 2019. These cost savings will result in $30 million of annualized cost savings.

I'd also like to quickly note a couple of changes that impact how we report results. First, the impact of revenue recognition changes associated with FASB Topic 606. We adopted this change on January 1, 2018, and this affected our first, second, third and fourth quarter results. Under ASC 606, provision for doubtful accounts, which was historically reported as an operating expense, is now reported as a direct reduction to our revenue. This change in presentation reduced revenues and operating expenses by the same amount. It did not have an impact on net income, cash flow or earnings per share.

Finally, as noted in our annual report, in the Form 10-K filed on Monday and in this morning's earnings release, we determined in consultation with our auditors that adjustments to certain of our previously issued annual and interim financial statements were necessary. These adjustments related to estimates of accounts receivable, provision for doubtful accounts and revenue as well as the related income tax effects.

Our previously issued annual financial statements for 2017 and 2016 and the unaudited financial statements for the quarters ended September 30, 2018 and 2017, June 30, 2018 and 2017, and March 31, 2018 and 2017, were restated in our 2018 annual report to properly recollect these corrections. These adjustments had no impact on net operating cash flows.

Also, these adjustments did not relate to the change in estimate made during the third quarter of 2018 regarding the estimate of the collectability of accounts receivables, specifically relating to accounts where we received a partial payment from a commercial insurance company and we continue to pursue additional collections for the balance that we estimate remains outstanding that we refer to as partial payment accounts receivable.

I'll now turn to our financial results. For the year, total revenue increased $4.1 million to $295.8 million compared to $291.7 million in the prior year on a comparable accounting basis. The increase in revenue was primarily related to the acquisition of AdCare on March 1, 2018, that's partially offset by the declines in admissions and census during the back half of 2018, as Michael discussed earlier.

Inpatient treatment facility revenue increased 2% to $236 million compared with $230 million in the prior year on a comparable accounting basis. Outpatient and sober living facility revenue increased 20% to $34 million compared with $29 million in the prior year on a comparable accounting basis. The increase in outpatient and sober living facility revenue was primarily related to the acquisition of AdCare on March 1, 2018.

Client-related diagnostic services revenue was down 38% on a year-over-year basis. And adjusted EBITDA decreased 65% to $24 million, while adjusted net loss available to AAC common stockholders decreased to $25.6 million or $1.06 per diluted common share. As Michael mentioned, we have taken measures to increase cost efficiencies and reduced corporate expenses leading to $30 million in annualized expense savings that will possibly impact our 2019 results.

AAC’s balance sheet reflect the cash and cash equivalents of $5.4 million, net property and equipment of $166.9 million and total debt of $319.2 million. On March 8, we closed on a $30 million incremental term loan with our existing lenders that provided the company with additional liquidity. Cash flows used in operations totaled $29 million for the year compared with cash flows provided by operations of $19 million in the prior year.

For the fourth quarter of 2018, total revenue decreased 27% to $57 million compared with $78 million in the fourth quarter of 2017 on a comparable accounting basis. Inpatient treatment facility revenue decreased 30% to $47 million in the fourth quarter of 2018 compared with $67 million in the fourth quarter of 2017 on a comparable accounting basis. Outpatient and sober living facility revenue decreased 35% to $6 million in the fourth quarter of 2018 compared with $9 million in the fourth quarter of 2017.

And client-related diagnostic services revenue was $2 million for the fourth quarter of 2018 compared with $340,000 in the fourth quarter of 2017 on a comparable accounting basis. Adjusted EBITDA was a loss of $12.4 million for the quarter and adjusted loss per diluted share was $0.85 for the fourth quarter of 2018. The primary driver of the negative operating results was the decrease in revenue caused by the decrease in admissions and census in the back half of 2018.

Turning now to our outlook for the year of 2019. We expect revenues to be in the range of $290 million to $310 million. Our projections assume inpatient treatment facility revenue of $240 million to $245 million, outpatient and sober living facility revenue of approximately $30 million to $35 million and client-related diagnostic services revenue of $10 million to $15 million and non-client-related revenue of approximately $10 million to $15 million.

We expect adjusted EBITDA to be in the range of $45 million to $55 million. This assumes diluted weighted average common shares outstanding of 25 million for the year. We are pleased with the momentum we are seeing in early 2019 in terms of admissions and census, which gives us confidence in our annual guidance. Given where we started in 2019 and the fact that the first quarter of 2019 didn’t realize a full quarter benefits of the cost savings initiatives, the first quarter of 2019, while improving significantly from the fourth quarter, will be soft but building significant momentum into the second quarter.

This concludes our prepared remarks for this morning’s call. I’d now like to turn the call over to the operator, who will open up the line to your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ryan Daniels of William Blair. Please go ahead.

Unidentified Analyst

Hey, guys. This is Nick, speak out in for Ryan. Thanks for taking my questions. Just to start off, can you guys go in and talk a little bit more about the marketing and sales initiatives that you guys started? What you are doing there? It looks like you’ve started to see some success early here in 2019. So if you can just kind of provide some color on those initiatives.

Michael Cartwright

Yes, I mean, I think, everybody is aware now or most folks are aware now that Google did an algorithm update and really just disrupted the entire system. I think that – look, they seem to be a lot more focused on local, which I understand. The insurance companies are a lot more focused on local as well, so is the federal government. So a lot of the ideas around localized marketing probably would be a better way to go. So we’ve looked at some of the strategies that we implore to let patients know about our facilities and we’ve just changed up strategies.

So I’m happy to go into details later, but the bottom line is we’re seeing significant improvement by changing some of those strategies and tactics, going a little bit away from the Internet, a little bit more to localized and business development. And we certainly, I think, were very, very pleased with the admission change in the first quarter. I think we’re now on a better trajectory to execute our game plan. We certainly need to bring capital in the door, which Andrew did a brilliant job in a very tough environment, which we’re really pleased with that gives us the ability to execute the rest of the year our game plan. But I hope that helps.

Unidentified Analyst

Thank you. Yes, and then – yes, go ahead, sorry.

Michael Cartwright

There’s just not one thing that we did, it’s a whole series of things that we did. Stephen Ebbett, our Chief Marketing Officer, came on board and done a phenomenal job, developing a strategy that we think is more of a winning strategy long-term with the headwinds that the entire industry is facing.

Unidentified Analyst

Great, thanks. And then kind of going on that. So it looks like this quarter your ad spending was a little over double kind of what it was last year. Can we kind of consider that's going to be the case going forward right around that $5.5 million because we're having to deal with this algorithm change, we're going to have to spend a little bit more on advertising type of thing?

Michael Cartwright

I'm not sure that's the right way to look at it. I don't know that you have to spend more on advertising if you change your strategy, you may end up spending less over time if you change your strategy. Look, business development, relationships that we built over the last 25 years that have been in the industry, so there's lots of ways to let people know about our programs, let them know the quality of the programs. I think what I'm most proud of is if you come out to one of our treatment centers, we have state-of-the-art facilities, we have highly educated staff and we use diagnostic techniques in a way now that is truly unique to how the field operates.

So I am very, very pleased with what we've built and I think the folks that will take the time and to come out and get to know us and spend time with our programs, and our clinical team that's doing such a phenomenal job that you might not have to spend as much on advertising.

Unidentified Analyst

Okay. Great. So that's kind of fourth quarter is a little bit more of an outlier as opposed to the start of kind of a continued trend?

Michael Cartwright

I think that's a good way to look at it.

Unidentified Analyst

Okay, great. All right, I'll jump back in the queue right now. Thanks guys.

Michael Cartwright

Thank you.

Operator

[Operator Instructions] Our next question will come from Andrew Cooper of Raymond James. Please go ahead.

Andrew Cooper

Thanks for the question. Just a couple on guidance, hoping to get a little bit more color in terms of – when we look at 4Q and what's some of the kind of pricing metrics in terms of revenue per visit and on the inpatient side as well, obviously some big changes, but any color you could give in terms of what the expectations are for that in 2019, if there – we're at kind of a stable point here? And the growth in inpatient is more census driven or any expectations there would be helpful?

Andrew McWilliams

Yes. As you think about really kind of building the bridge over, and I'm going to talk for a minute about year-over-year and then I'll circle back in just a second to your specific question on Q4. But if you think about the year-over-year in our guidance that we gave, you'll see quickly that if you normalize for a full year of AdCare, that revenues on a year-over-year basis are relatively stable or flat and most of the benefit that we're seeing to adjusted EBITDA in 2019 is really coming from the cost savings initiatives.

And then if you look at kind of rate per day assumptions, whether that be revenue per admission, average daily revenue or revenue per outpatient visit, on a year-over-year basis, our assumptions are that those – that there is a decrease built into our model.

Now when you look at it specifically coming off of Q4, keep in mind that census was low, admissions were low as we've talked about, that does drive down acuity levels across your system on a declining admissions basis, while generally speaking increasing admissions will increase your acuity level and hence your rate per day. So I think, year-over-year you could look at it as a rate per day coming down slightly offset by the improvements and census and occupancy coming off of Q3 and Q4 of last year, but I wouldn't run rate out Q4 because we had a really low acuity levels, which did impacted the rate per day.

Andrew Cooper

Okay. That's helpful. And then in terms of the thinking around the potential actions on the real estate portfolio, is there any sort of – I would assume the preference would be kind of one fell swoop if you could find a buyer, but any thinking around that and timing or what we should be looking for? And how you view, I think, longer term the need to own or desire to own facilities versus leasing?

Michael Cartwright

I think everybody that knows me knows that I love doing real estate. I like to design, fix it up, make sure that the customers when they come into one of our facilities, wherever it may be, an outpatient, residential, that they're truly being treated in a really great environment.

So I always like to own the real estate, but looking at our real estate portfolio and how much it's worth and looking at our cost of capital currently and our stock price, it may be a good time to do really a transaction – financing transaction is the way I look at it more so than do I believe American Addiction Centers should own its real estate going into the future. There is multiple models out there that we may go down. I think it's a little early in the conversation.

I think our focus has been on the company and the operations of the company and making sure that we have a stable operation. We faced so much headwinds in the back six months of 2018, we better make sure that we have all cylinders on point in first, second quarter, third quarter of this year. And so I think that we're realizing it. Look, we have good assets, we might do a transaction with those assets that could help reduce our cost of capital. And I think that overall would lead to a better shareholder value. That's our thoughts on the process, but we're still in the early stages of investigation looking at different options.

Andrew Cooper

That’s helpful. I’ll jump back in the queue to follow-up if anything else. Thanks.

Operator

Our next question will come from Mike Petusky of Barrington Research. Please go ahead.

Mike Petusky

Good morning. Thanks for the question. I just want to ask you guys said that you're sort of de-emphasizing the Internet in terms of marketing and emphasizing more on a localized focus. So if I'm living in a local area where I could utilize your services, what are the 2, 3, 4 primary ways that I might hear about your services? And just – I guess I'm just really asking the way you guys are you guys are going to message what you can bring to the table for a potential client? Thanks.

Michael Cartwright

I don't know if I totally understand the question and maybe you misunderstood what I said. I don't know if I'd de-emphasize the Internet, I just said there's lots of ways for customers to find your services. We, obviously, have changed leaderships in our marketing and sales team. We have a Chief Marketing Officer now that really oversees all things related to how we acquire customers and they come and find us and there's lots of strategies and tactics.

I doubt that I'm going to lay that out on the telephone, but I'm happy to look at the fact that customers are coming to us, they're finding us. We've had a 26% improvement in the first quarter from the fourth quarter. I feel like we're on the right trajectory. And I'm hoping over time we can continue to get to 85% occupied and not spend more money on advertising because I think that is the wrong approach.

Mike Petusky

Okay. All right. Thanks.

Michael Cartwright

Sure.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Michael Cartwright for any closing remarks.

Michael Cartwright

Thank you very much. I appreciate your time and patience. I know we were a little late on getting this information out and getting the information to you. We have been working our tails off, our entire management team, to do the best thing for the company and shareholders on a daily basis. It's been a very, very challenging six months for our entire team. I just want to say a very special thank you to my management team, our Board of Directors and most importantly, the front line clinical staff that on a daily basis are saving lives of people struggling with addiction. Thank you and have a good day.

Operator

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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