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

All right. I want to thank everyone for joining us today. It's my pleasure to introduce Acadia Healthcare. Acadia is the largest pure-play provider of behavioral health services in the U.S. and the U.K. Presenting today, we have Debbie Osteen, the CEO; and David Duckworth, the CFO. Gretchen Hommrich from Investor Relations is also on the line as well. And so with that, I'm going to just kind of jump into Q&A.

And I want to start off by going through -- on the Q1 call, you noted that volumes were beginning to stabilize at the end of April. Can you give some color on where volumes are and how you're seeing it progress in May, I guess, both in the U.S. and in the U.K.?

Well, Kevin, we ended April seeing improvement from midmonth, which we mentioned on our call, and the positive trend has continued into May. We -- it's a little early to make conclusive comments about the trends, but we're really focused on mitigating the impact, and that's continued here with the team. I think there has been continued stability in our U.K. census, which they're awaiting the gradual reopening of the U.K., which there was an address on Sunday about that. But we are seeing continued stability, really, across all of our service lines here in the U.S. Our RTC and CTC really had very minimal impact on volumes. Our acute and specialty, as I mentioned just a minute ago, have continued to see improvement.

And I guess, when you think about the kind of pace and return of volumes throughout the year, do you have a view about when things kind of get back to normal?

Well, I think it's a little difficult right now because we are in a number of states, and we're really monitoring each one of them as they ease the stay-at-home orders, which did have an impact on the business. We have been working closely with the ERs, which is another key referral source for us. And we do expect a surge after the pandemic. We have been reaching out to them, and I think we have seen some signs that as states have begun to reopen, that we've begun to see more volume from that referral source. We're also continuing to grow our telehealth initiatives, which, again, I think, will just be facilitating our ability to maintain contact as the states come back online. And we have a strategic plan in place for the volume. We have a plan for how we're going to bring our clinical FTEs back as census returns. But I do think that demand is going to be strong. We've seen signs. And really, I think, through all of our service lines, that there's going to be a greater need for mental health through recovery from this pandemic, from the crisis. And so while it's hard to really estimate exactly the pace of that, we're encouraged by the signs we've seen so far in April and then into May.

All right. That's helpful. I guess -- yes, my guess is that the RTC business is holding up well for the same reason that the U.K. business is holding up well because the length of stay is longer. Is that the right way to think about that? I mean -- or does that business -- and do you think that these businesses come under more pressure as time goes on as you need to kind of backfill admissions?

No. I think that the RTC business has been stable. One factor is the length of stay. But I think we've also -- we work very closely with the referral sources, many of which are out of state. And we've been able to facilitate transportation for those patients despite some of the restrictions. So we have been getting admissions. And again, I think the volume has been pretty stable in that business. And we don't really see a reason for that not to continue now that states are really opening up some of the restrictions around travel.

Okay. I guess UHS' behavioral business is not 100% direct comp to your psych business. But obviously, directionally, we would expect the trends to be consistent. They obviously were looking for a lot bigger declines in volumes than what you were seeing, minus 25%. Is there -- I don't know, is there any color or reason to believe that why your business would be more resilient than theirs?

Well, I'm not exactly clear on the 25% metrics that they use. But I do think there are a lot of differences between the 2 companies. We have a diversification of our service lines different from UHS, and we're in different markets. We share some that are similar. And then I think our referral base is very broad and diverse. So in this crisis, we maintained contact with those referral sources. I can't really speak for what they did or didn't do, but we did, very early on, put in procedures around infection control with the really focus on making sure that our employees felt safe but also our patients. And so I think as we acted quickly to look at the decline in volume, we were able to make shifts in what we were doing and how we were conducting our referral contacts very quickly. We have a sales and marketing platform here, which is unique. And what it does is really give us very real-time data so that we can shift as necessary. And that's what the team did. We also expanded very quickly our telehealth as we saw the favorable changes in reimbursement and some of the regulatory changes. So we started with 36 facilities using telehealth. And within a very short period, we had almost 100 using that. And that's really related to just the team working with a sense of urgency. So we utilized that as a mechanism to connect our patients. We did assessments through telehealth. And then the other thing I'll just say is we tried to problem solve. We met twice a day. We looked at any obstacles around admissions. We looked at problem solving in each of the facilities. There were certainly hotspots around the country. But I really give the team credit. And I do think also our business lines and service lines are different and unique from UHS.

Okay. That's definitely helpful. I guess one of the impacts from COVID is going to be the recession that it's causing as we reacted to it. How do you think about Acadia's ability to grow through a recession? How do you think about the impact on volumes and payer mix? And then are there any offsets on the cost side?

Kevin, the experience that we've seen collectively as a management team across companies in this industry has been that mental health is very resilient in a recession, that the demand and the volumes continue. And so we don't see an impact overall from a volume perspective. And as we mentioned, we're very pleased with the service lines that we have, the diversification there. And even from a payer mix perspective, as you think about a recession, we do think we have a very stable, diversified mix of payers. I think that the reimbursement for our industry is very straightforward, very appropriate and have stable rates for our diversified payer mix. From a labor perspective, as we think about a recession, I think it's probably too early to predict how this one plays out. The team here has done just a great job focusing on recruiting and retention, and it really hasn't been an obstacle to our volumes or a challenge for us other than in certain markets. So we may see some positive signs from a labor perspective that further strengthen, I think, an already good result that we have as a company just being able to staff our facilities.

Okay. And is that both the same in the U.K. and the U.S.?

Yes, it is. I think from a U.K. perspective, they have seen positive signs from a recruiting and a retention perspective. And it has been just a gradual improvement that we've seen in the labor market in the U.K., and we were seeing that pre-COVID. And I think emerging from this, we're continuing to see some positive signs there. The workers in the U.K. have done just a great job coming back and returning from some of the temporary challenges in late March and April. And so being able to retain those employees has been key, and we're also seeing positive signs there on the recruiting front.

I think, Kevin, that the employees there that work with Priory -- at Priory, they really want stability right now. And I think there's a lot of disruption there, as you can imagine, similar to the U.S. But I think they're reluctant to leave their current positions. And we've done a number of things, as David mentioned, prior to this, to really try and promote retention and focus on keeping our good people. So I think it's -- we've been able to see the result of that, and it's actually gotten even better during the last couple of months during the crisis.

All right. Great. And when we think about the long-term growth of Acadia, let's say, we get past where COVID is right now, we get back to a point of normalcy, I mean, what do you think the normal growth rate investors should expect Acadia to be able to drive over a 3-year, 5-year time horizon?

We continue to expect the same targets that we've established before for our U.S. and our U.K. business. That's a 5% to 7% organic revenue growth target for the U.S. business and a mid-single-digit target for the U.K. business. We do feel like with the demand, along with the capacity that we have and the new beds that we're bringing online, we continue to feel like those are the appropriate targets for the company.

And then, can you just break that out by volume versus rate?

Yes. The -- our outlook really hasn't changed there. Volume is the key driver of our revenue growth. And in the U.S., accounts for about 3% to 4%, with pricing accounting for the other 2% to 3% of the revenue growth.

And we've been talking about the U.K. business. It does sound like you're going to be keeping it for a while. But can you give an update on the sale process, kind of how far along you got before COVID disrupted things, and what do you think a reasonable time frame for a potential sale would be?

Yes. We continue to monitor what's happening in the market, and there are early signs of some reopening in the U.K., which will help us, but we're waiting on more clarity there. The interest from the buyers, we believe, remains strong, and we're progressing pre-COVID with the process and believe that we will be able to resume, but the process is temporarily suspended, just based on the conditions in the market. We are optimistic that we will be able to resume, and we will see the market allow for that in terms of being able to resume the diligence and site visits and things like that, that we were really in the stage of doing and then also looking at just the debt market supporting an acquisition transaction. We -- at this point, we do not have a time line that we're prepared to really announce, but we're paying very close attention to the market conditions there and how it impacts the sale process.

And so of those 2 dynamics, I guess, which is the more important, the physical ability to get back into the facilities and kind of do that hands-on due diligence? Or is it the credit markets that you're kind of waiting for before you think a transaction is going to happen?

Kevin, I think both are probably important. But I would say that being able to finance a transaction of this size is key. We believe that as that happens, we'll be able to handle the other pieces of due diligence and really allow them to look in the data room even more than they have. But also, most of the buyers, all of them, had contact with management prior to this, but they'd like to take it to the next step. And I think what's positive is that our retooled beds have just had a very slight delay. And so those are on track. And I think that, that's a key factor in our improvement there with volume and occupancy. So as a potential buyer, I think there -- we'll be able to see those beds come back aligned. The benefit, we brought some back in April, and we will continue to bring them back until the end of the year. But that will be another, I think, factor that we can demonstrate to show really the resiliency of the business, but also the potential growth that exists to the retooled beds.

Okay. And then how do you think about what it will be with that cash when you sell the asset? Is it purely just kind of deleveraging the balance sheet? Or are there opportunities in the U.S. or some new markets to deploy that cash?

I think, Kevin, the way we think about it in the near term is certainly more focused on deleveraging and getting to a lower leverage as a company. We're looking at all options there, of course, but that, I think, will be our focus.

Okay. Perfect. And then, I guess, you had a few facilities at the end of last year that saw a disruption. And at the time, you kind of attribute it to basically 5 facilities seeing 5 different kind of items. I mean how comfortable are you? Obviously, everything has been disrupted, but you had a few months in the first quarter where things were normalized. That -- but that was, in fact, the case, that those were just kind of one-off issues, and that the core business is on track.

I mean, we feel -- we're very pleased with the progress we made prior to the crisis that happened in the middle of March. And I think that we implemented specific action plans in the fourth quarter, and the results certainly were evident in the first 2 months of the year. I think they really are very temporary. These issues were temporary. And I think that we felt, and we do feel, that the action plans addressed those issues sufficiently. And so a couple of them are specialty facilities, which drop from a national referral network. And so they have been impacted by the stay-at-home orders. But as far as our progress on our plans, what we thought would happen, we were on track for that.

Okay. And then when we think about some of the pressures on the business, Medicaid managed care, you've seen companies report length of stay pressures in the past, Medicare managed care kind of being the one of the main explanations, I guess. How do you think about where we are in that cycle of pressure on length of stay from Medicaid managed care? And how are you able to manage through that?

We really haven't seen any difference in our length of stay during this. In fact, I guess, it might be up just a little bit. But it stayed very stable here for the last several years, and we don't see that changing. We have enjoyed like a 9-day length of stay that has not changed much. We do take acute patients in, and they stay appropriate length of time. But as far as just changes in length of stay, for our Q, we really haven't seen that, and we don't expect to see that in the future.

Okay. And so one of the things that we're asking all the companies is, what do you think the long-term implications of COVID will be? Is there anything that you're doing as a company that you think you're going to end up continuing to do going forward? Or anything in how people are accessing the health care system, et cetera, that you think is going to have a long-lasting impact?

Well I think probably, the telehealth is going to be a change that's going to -- in some of the service lines, really modify how treatment is delivered. There have been a lot of discussions of telehealth over the years. And I think that now, if reimbursement is maintained at the level that it is currently, I think that we certainly see that as a modality that can be used for assessment. It can be used for visitation, which would allow people perhaps from rural areas to access their loved ones. We are using it for referral communications. So I think we'll continue that, even though we believe in the face-to-face contact. We think that's very important. But we've been doing some things with webinars that have been very well-received. We had a webinar a couple of weeks ago. One of our large specialty facilities. 2,000 participants in the webinar. We have 1 coming up where there's 1,000. So it allows us to reach out to, I think, a greater number of people. Care delivery, I think, will be an area where we would look to telehealth if we do have shortages. And as I said, we now really have equipped our facilities with telehealth, with procedures. And I think if I had to think about something that may change, it would be that area. On the other hand, it's not going to replace a secure acute inpatient setting. And so there are ways to use it, Kevin. And I think that we will continue to expand, and we really want to use it in a smart way going forward. But I also think that it's not going to be a situation where telehealth can replace acute or even specialty. But that's an area I think we'll see long term as long as we see continued cooperation with reimbursement and also the regulatory procedures that were around it. Allowing practitioners to work across state lines has really been very, very helpful. And I think that we see our -- a number of our physicians who would like to be available. So we have some -- I think, some very, very good plans around using this in the future, and that's an area that I see will be different going forward.

And how does the reimbursement for telehealth as it compared to a similar visit that you've been providing in a clinic or at one of your sites?

Yes. And we're -- Kevin, we're monitoring that. It is the same reimbursement, for the most part, is what we would see before this disruption. So we're evaluating that. But that is the way it has worked here recently as we've utilized telehealth more.

All right. Great. And I guess, is there a cost savings from doing that? Are you more efficient on the labor side by using telehealth? Or is it you use the same margin because you have to invest in IT and infrastructure?

It's really the same cost, for the most part, because we do have -- that labor is the same either way. The technology is not a significant additional cost. It's more about that labor component being very similar between the 2 settings.

I think with -- when you look at it with referral source contacts and you look at it with respect to how we're using with the webinars, I do think it allows you to reach a broader group of people. And certainly, there's a time element there that I think we gain by using this. It does not, as I mentioned earlier, really replace inpatient. But if we have a shortage, I think it would come in to be very critical because you might be paying a locum physician for this care. If you're able to use our own physicians -- and we have psychiatrists and others that are able to be available -- I think the cost savings of that delta would -- could be meaningful.

Yes. Interesting. And then, when we think about the growth going forward, you -- I think you guys are cutting your CapEx number by about 14% this year. I think on the call, you said that you don't think it's going to have a meaningful impact on your growth. I mean, I guess, it sounded like in one of the earlier responses, you were saying that, yes, there's strong demand, but also your bed additions are really kind of driving that growth. So why won't the reduction in CapEx impact the growth of the company?

Yes. We made an adjustment to our CapEx plan for 2020. That was $35 million of cash savings, just to enhance our cash position and our flexibility this year. And as you mentioned, that's about 14% of the plan that we had going into the year. We were focused when we looked at all of our projects just on the beds that we had coming online this year, finishing those projects and bringing those beds online. Where we really made an adjustment is just to cancel 1 small project and then also delay a few projects just by a couple of months. So we don't think those adjustments would have a material impact on our near-term or our longer-term growth, really adjusted in a way that allows us to bring on just a really strong number of beds this year. We still expect to bring 500 to 600 new beds online in the U.S. So it was done in a way to really keep that bed number strong for this year and not have an impact on our longer-term growth.

And when you think about that growth algorithm of 5% to 7% or 3% to 4% volume growth, do you need to be adding capacity of 3% to 4% every year to achieve that? Or how do you think about bed additions?

Well, there is some opportunity and some capacity that we already have, and the opportunity there does exist for us to increase our occupancy and see some volume growth that way. But over the longer term, we do think we need to be adding capacity in order to continue to grow volumes. That 500 to 600 beds would more than deliver on that 3% to 4% volume growth. And so going forward, we do think adding capacity will be important to achieving the volume growth. And we're doing that at existing facilities, bringing new beds online and also adding new facilities, either as part of a joint venture partnership or a de novo facility.

I think we also expect to see continued growth through those beds that we have built the de novos as well as our JV partnerships. So we have opportunity to grow occupancy at those facilities, in addition to just the bed adds and the new hospitals that we look at in the future. But we're pleased with how our de novos are performing even despite the crisis that has occurred.

Yes. Can you just maybe just talk about the de novos for a minute? I guess most of those are going to be in joint ventures. But can you talk about the growth in the ramp in those when you have a joint venture partner versus when you don't?

Well, we do -- we have 3 new facilities coming online this year. 2 of those are with a joint venture partner. And we have seen, given the market presence that's already there and some services that our joint venture partner may already be providing. We do expect and see a faster ramp for those facilities. We, as a company, target getting to a 50% occupancy level and being at breakeven by the end of the first year. And do think that the joint venture facilities that we opened can deliver on that target, maybe ramp up a little bit faster than 1 of our wholly owned de novos. But both can be very attractive to us, depending on the market analysis that we go through.

All right. Great. Unfortunately, I think that's all we have time for. I thank everyone for joining us, and appreciate the conversation. Hopefully, we'll be able to do this in Las Vegas next year. Thank you.

Thanks, Kevin.

Thanks, Kevin.