Acadia Healthcare Company, Inc. (ACHC) Earnings Call Transcript & Summary

Good afternoon, everyone. We're in the home stretch of the Tuesday of the 41st Annual Raymond James Conference. Thanks for hanging in, everybody. We've got the -- it's been an interesting year. I think the -- after a management regime change about a year ago, it feels like things are a little bit of planning. And now we're kind of into more information and execution. So we think the story is starting to get interesting. I would say the company's earnings report last week, the feedback would have been that the headline numbers were in line, but probably tilted a little more towards the U.K. than the U.S. and kind of good news/bad news. If you're selling in the U.K., you get a better price for that EBITDA. But I think probably the U.S. numbers were just a little bit behind what people were thinking. But we think after kind of a sideways period, it looks like the earnings growth should start to pick up back half of this year into next year. And the stock's trading at, we think, under some of the parts value. We got a $40 target. So with that, I'll turn it over to Deb. Thanks.

Okay. Thank you. All right. Well, I'm going to start with a few investor highlights. I think most of you are probably already familiar with Acadia Healthcare. So I'm just going to hit some high points. But I think -- I've been with the company, as John said, a little bit over a year. And I think that one of the things that I've been really convinced of -- and I don't know why this is moving back and forth. I guess I'll move it over there. One of the things that I've really been convinced of is just the fact that Acadia is well positioned to be the leader and to be the leading -- not only pure-play but also a leading provider in health care for behavioral health. I think we have had strong performance. We have strong cash flow dynamics. And we have the geographic scale, which I think positions us well. We're in 40 states and -- as well as Puerto Rico. And as everyone knows, we are also in the U.K. We have a good platform of diversified services. And as I look at those services, I see a nice way to grow across all of them. I think that we are a little unusual as a company in behavioral. We have various service lines, which I'll talk about in a minute. And I think that what that really does is it allows us to look at growth potential, not only in the acute area, but also across all the other lines. We do have stable payer relationships. And I think that has made a difference. I think that's why our revenue and our net revenue continues to be at a good level. And then we have a good team, and I'll talk a little bit about the team at the end. But we have a team that has executed not only on growth strategies, but also around performance improvement. And I think that that has positioned us well. We also have a strong operations team that are actually at the facility level and above the facility level, which I think is driving our results. If you look at just the company itself, we have 585 facilities, which includes the U.K. We have 18 -- over 18,000 beds. But I think one of the important things here is just we have the platform. We have the platform that will enable us to look at really the needs, as I see, and I've been in the industry for quite a while. I think that our service lines complement well what I see the needs out in the various markets and communities that we're in. We do have -- we treat more than 75,000 patients every day. And we have, as I mentioned, 18 -- over 18,000 beds. We have 4 major service lines, and I'm going to start with an overview of each one of those. And I think that -- I think the one thing I want to leave you with is we have near-term and long-term opportunity to grow. If you look at the acute business, it's 46% of our revenue. And I think that that level of care is stabilizing patients. We have had a very stable length of stay in our acute business, about 9 days, and that really has not changed over the last 4 years. We are geographically very diverse across our acute service line. We're in 42 facilities in 20 states, including Puerto Rico. One of the things that I think is important for an investor to look at is just what is the demand in this area. And I'm sometimes asked, is that -- does that seem to be declining? Is it increasing? And I think that it's actually increasing. So we're now in a market for acute that has an estimated 11.4 million adults that have a serious mental illness. And what I think more interesting is 2 out of 5 adults perceived an unmet need. So we do still have an unmet need. We also I think, have seen a reduction in our stigma. We have wider recognition for mental health. And I think, along with that, has come increased funding through legislative activities, not just at the federal level but also within our states. One of the things and some of the business line highlights here is we do have consistent high quality across our acute service line. We have been able to grow through bed expansion, de novo and -- as well as our partnerships. And I think we've also been able to grow through acquisitions. There is a broad base of referrals, which I think protects us. We're not dependent on any one particular referral source in the acute service line. The specialty business overview. We have 23% of our revenue here. And these are inpatient and residential programs that are focused on treating patients that have either substance use disorder or an eating disorder. And we have, in this area, a very strong and diverse position. I think again, our facilities are very geographically diverse. We have 40 facilities in 14 states. And one thing that I think makes this a very attractive area is we do have a favorable payer mix in the specialty area. The 62% of our reimbursement comes from commercial. And I think unlike other providers that might be in this space, we only have 5% of our U.S. revenue that is out of network. The remaining part of our revenue is in network and has been for some time. So we're not in a transition period. We've already gone through the transition, and I think that we're positioned well. We're not as exposed as other companies. This is another market that I think is growing. We have -- the estimates are 1 in 3 -- or 1 in 13 adults. There's about 21.2 million people that need substance abuse care. And again, I think the positive here is that coverage is being driven to meet that demand in the substance use area. Our facilities are highly specialized. I think we can set ourselves apart from other providers. We do have a national clinical referral network as well as a centralized call center that does drive business into our specialty facilities. And that is a really proprietary platform that is not duplicated by other providers out there in the specialty area. We do see the potential to expand in outpatient services in the specialty space, also through telehealth and treatment for co-occurring, which is taking a patient that might have a substance use issue, but also has a mental health issue at the same time. Our CTC line of business is about 17% of our revenue, and that is combining behavioral therapy with medication to treat substance use. You can see on the slide that there are about -- okay. Well, I'm flunking slides, but I'll keep going. I'm not sure what happened there. You're thinking -- no, I know where I am. Okay. If you look at the slide, which is now correct -- I'm not sure what happened there, why we ended up at the end. There is a big need for opioid treatment. And I think as we read the newspaper, we can see that. But there's approximately 2 million people that have a need for care. One of the things that I think makes us unique is we are one of the top providers for methadone and Suboxone treatment. We have 127 locations that deliver high-quality care. One of the things I'll point out is that Medicare is now covering treatment for opioid adults. And I think that has -- will open up a new opportunity for us. We have leveraged our base of treatment. So we are opening in existing clinics additional services for Suboxone, and we've recently entered into the prison system where we are partnering with prison management companies to provide opioid care in the prisons. We plan to open 6 de novos in 2020. And again, I think this is an area where it's not as capital intensive, and we see real growth out there for meeting the needs. The RTC business overview, where about 14% of our revenues are our RTC facilities. And these are longer-term residential facilities that treat children and adolescents. There is a big need, again, in this area. There's about 4.5 million children that have a diagnosed behavioral problem. We have 12 facilities in 11 states. This is not an area where we expand to do. We plan to do a lot of expansion but our programs that we do have, have very strong relationships with the state and referral sources, and they offer very highly specialized programs. If you look at our vision for the company. I'm going to talk short term, midterm and long term. This says long term. But I do think that we've been playing out some of this over the past few years, and I will go over a little bit of how we see this playing out for the company. We do have facility expansion. Acadia has a track record for bed expansion, and we plan to continue that. We plan to continue it across our acute, our specialty, CTC and to a limited extent, the RTC service lines. We do believe that we can drive margin by our bed expansions. We think that we can leverage these bed additions, and we've shown and demonstrated the ability to do so. I think that we have a strong pipeline for bed additions. We expect to add about 300 beds, maybe a little over that, this year, and we'll do that across 9 states. I think usually, the facilities where we are adding beds, it's the business case that comes up from the facility level. They usually are running over 70% occupancy, and they may or may not be turning away patients as a result. Joint ventures are an area that we think has a lot of future growth potential. There are over 600 health systems in the country, and they are interested in partnering with experts for behavioral. And so we've had a lot of health systems coming to us. We do have a track record. We have 5 current joint venture partnerships. We have 3 that we're implementing this year, and we have over 30 projects and discussions that we are currently undergoing with various health systems in really all parts of the country. I think one of the things that our payers see when we're with an important system is that we, as a provider of mental health, are able to leverage our presence with our med/surg partner. And I think that that's something that we see as an advantage to us as we enter a market. The other advantage to the JV partnerships is we're able to go in with an important system in most cases. Usually, it's a large system. That allows us to enter a market to build beds together and obviously ramp up faster than we might if we just built a de novo. If you look at de novo area, we think it's a lot of markets, and we know it because we've looked at the facts, are underbedded for behavioral. And I think as we have looked at across the country, there are some very attractive geographies that we still think do have unmet need for behavioral. I think one of the things that Acadia has is a strong track record. We've opened 5 de novos since 2014. And I think that when we might choose to do a de novo, it would be a market where we don't think there is a dominant system that we can partner with, so we would choose to go into that market on our own. The last area which, again, Acadia has had a track record for is M&A. I think that there still is a fragmented market that is present for M&A. We, at this point, see opportunity to do some smaller acquisitions. We did 3 in 2019. But we also as we look forward, see this as an area of opportunity. I think that as we look at synergies that might take place from potential M&A, we've been able to show a track record of improvement, bringing their margins up. And the other thing that we've seen is the ability to add beds at some of the M&A that we've done in the past. And I'll show you an example of that. I think one of the key factors as we look at this year and going forward is we do want a disciplined approach to valuation. And as you can see, I mean the TrustPoint is a perfect example of an M&A. We did an acquisition in May of 2016, but then we were able to add 117 beds to that acquisition. So all of these strategies actually give us the ability to keep growing. We grow through the acquisition, we grow through a joint venture, but we also grow through adding beds at some point since the demand is so strong. As we look at our same-facility revenue growth, I think it's been a very consistent track record. And our revenue growth has averaged over 6%, and this has been over the last 4 years. We see a similar dynamic with the CTC facility growth. And I think CTC, again, is another area that there is such a strong demand, and we have a track record for opening CTC de novos, we'll continue to do that. This is just a map of where we are now and it outlines our coverage across the country in the U.S. We have many opportunities, as I said. We're talking to systems that are really throughout the U.S. and they're coming to us because of our track record. I'm not sure what just happened. Somehow, we're leaving the U.K. out. Good luck with this. The U.K., I'll be very brief. I think Priory is the leading provider in the U.K. I think that as we look at their service lines, they're very diverse as well. They cover really all of the needs that the NHS might have through health care, through education, through the adult service line, and then we also have an elderly service line. But I think one of the things we've been doing over the last couple of years is we've been trying to make sure that we're prepared. There is a transforming care agenda that has been discussed in the U.K. and that's really moving patients from a lower level of care out into the community. And as we do that, it does free up beds for us to offer more acute services. We've been doing that to what we call retooling, which we've talked a lot about on our calls and with individual investors. I think that's going to position us well. And we do have a track record around retooling, which as we look at this year, and David talks a little bit more about the year, I think we'll see that those retoolings as they come back online will have a very favorable impact on Priory's margin, and also on our volume as well as our net revenue. We did launch a strategic review in January of 2020. We have the first phase completed, and we do have multiple bidders going into the second phase. If we determine that we have a firm and a final offer that does maximize shareholder value, then we will expect to close on a transaction in the U.K. in the second or early third quarter. I think we've talked about our strategies, and I think one of the most important things is really the impact on our success that quality of care has. And I think Acadia, again, is very well positioned. We are committed to achieving the highest levels of quality throughout really all of our levels of care. We're focused on meeting and exceeding standards. We are also I think, using our data to drive our decisions. That data is being folded into our outcome studies, which demonstrate where we stand in comparison, not only to other providers, but just in the industry at large. We are expanding our outcome measure work to really capture more data around each of our service lines. And I think it goes without saying that patient experience and satisfaction are really the key elements that we're looking for. We do have a very, I think, large dedicated group that are focused on making sure our facilities are compliant and that they are providing this high-quality care. And I think that helps us. As we do look at the future growth, we've got a good foundation and platform for that. I don't know what this is doing. Okay, I'll end. And before I turn the presentation over to David, I think we have a very strong team. I mentioned that when I started. I think several team members that you see on this chart have been with Acadia since the company started. And I think that they really understand the platform that's in place for growth. They also know how integration and they have a very good template for that. So we have a group of individuals with many years of experience that have been with Acadia since it started. In addition to that, we also have new team members. And I think those team members bring some strong experience. They also bring a number of years of experience. They also I think, bring a new perspective, which I think is healthy for a company to have a new perspective. They also have had a lot of experience with growth. They've had experience with operational improvements. And so the way I look at my team is we are coming together, and I think that we are actually, I think, able to look at what are the best practices out in the industry, how can we continue to grow within Acadia, but also how can we improve the operations at the same time. I feel good about the team. I think they're outstanding. I think they're the best as I said when I started. They're the best in the industry, and I'm fortunate to have them. And I'm going to have one of them talk about our capital allocation framework. Hopefully, you'll do better than I did.

Okay. Thank you, Debbie. I do want to spend a couple of slides just on our cash flows and our capital allocation framework that really ties into the service lines and the growth opportunities that Debbie mentioned in detail. So our capital allocation framework does start with strong cash flow generation for the company. We have very low maintenance capital needs in both of our U.S. and our U.K. markets, along with high EBITDA margins and a lot of other cash flow dynamics that support a strong cash flow number. About $375 million to $410 million is our expectation for operating cash flows this year in 2020. The maintenance capital that we need is about $90 million. And so we like to think of free cash flow as that cash flow after covering the maintenance of our facilities, and that is this amount of around $300 million a year. As we then think about just the best investment opportunities for that cash flow, what we've really been able to do historically is more than cover the organic growth opportunities that the company has. All of that has been able to be funded with cash flows that's generated by the business, which are reinvested into those growth opportunities. And those include, just within this organic growth investment section, the best use of our capital is where we can expand an existing facility. We have growing demand, service lines, specialization that happens within our existing facilities and markets. And being able to add a bed to an existing facility, utilize the structure that we already have built and the efficiencies from just adding a bed with that existing cost structure really makes that the most attractive use of our cash. And we've historically had around 350-bed additions a year to our existing facilities. Additionally, we talked about the de novo and the joint venture opportunities that we've had. We are also able to fund those with our cash flows. We consider those part of our organic growth investments. Although in that case, unlike an existing facility bed, sometimes we're moving into a new market as part of those de novos or joint venture partnerships. We also have -- after funding the organic growth opportunities, we do expect to have at least $50 million of other cash flow that's available for other uses. Our mandatory debt repayments would capture part of that. It's historically been around $30 million of mandatory debt repayments. But we've also been able to think about that remaining amount as, do we want to make additional debt repayments that are more optional. And we think we have a lot of flexibility and optionality among those opportunities, including just with the chance to look at M&A transactions. If it meets our profile and the way we approach an M&A transaction, we do think going forward, we have a lot of flexibility and optionality in looking across all these transactions, including M&A. And let me just spend a little more time going through detail on this, flipping to this slide 17. All of this -- all the different types of growth across service lines create strong growth in both the U.S. and the U.K. Our 2020 expectations for the company is that consolidated revenue growth would be in the range of 5.6% to 7.5%. That includes strong growth in both of our U.S. and our U.K. markets. For the U.S., we have a lot of beds that we have brought online over the last year, and another 600 beds that we see coming online in 2020. That is the driver of that revenue growth in the U.S. In the U.K., we have -- I think with a lot of the investments we've made over the course of the last year in the retooling, those beds are ready to come back online. We have a detailed time line for each of those projects. And so we do see a strong revenue growth opportunity here in 2020 as those beds come back online. We do have strong cash flow outlook. The numbers that I mentioned on the previous page represent about a 13% year-over-year growth in our cash flows. The maintenance capital of about 2.7% for the consolidated company does give us that strong $300 million a year number that we have to make investment decisions with. And we have multiple levers to then drive the future growth. We did add 585 beds in 2019 that included about 66 beds in the U.K. So the U.S. number was just over 500 beds that we added in the U.S. in 2019. That is growing as we look at 2020. We have over 600 beds that we think we'll bring online in 2020, and that includes 3 new facilities. We have 2 joint venture projects that we expect to open this year. Those have been in the works and excited to bring those facilities on this year, and we also have 1 wholly owned de novo facility in Cincinnati that we will bring on later in the year. So excited about adding these new facilities. I think we see that opportunity historically has been at that level, and we think it's a growing opportunity that we have going forward. We also -- not reflected in the bed additions, because our CTC clinics don't have inpatient beds, but we see that opportunity growing as well. We have 6 different CTC de novos that should come online in 2020. We already have a great geographic coverage, I think, over 32 different states for our CTC clinics. And 5 of those have new facilities coming online in 2020. So excited about another year of growth in the U.S. Along with the revenue growth, we have been very focused in the last year and talked about operational improvement opportunities. As part of our strategic review last year, we identified $20 million of cost savings that we thought we could achieve. We continue to be positive about all of those opportunities. We've started to implement a lot of the real changes that will drive those savings. We had a GPO change and other process implementation changes that happened in the first quarter already. So I think we're really positioned well as we look out to the remainder of 2020 to realize that $20 million of savings on a run rate basis by the end of this year. That does conclude the presentation. I just want to say thanks for your interest in Acadia. And John is not in the room.

Thank you. And you did well with this.

No. [indiscernible]

All right.

We're out of time.