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

Good afternoon, everyone. I'm Frank Morgan with RBC Equity Research and Health Services and Managed Care. Our next fireside chat is with Acadia Healthcare Company. With us today, we have CEO, Debbie Osteen; CFO, David Duckworth; and from IR, we have Gretchen Hommrich. So thank you all for being here with us today.

Thank you.

I guess we'll start out. Obviously, we're just coming very recently out of earnings season, but just curious what you've been seeing in the last couple of weeks since your conference call, your earnings conference call, do you see -- any updates, is there any visibility improving there? And certainly with shelter-at-home orders expiring in some states, what are you seeing in terms of an uptick in admissions in the -- from the ER setting?

Well, I'll start, Frank, with the U.S., and I think that we are continuing to see positive signs. Our volumes stabilized and they're showing signs of improvement. And just as a reminder, in the month of April, our same-facility patient days declined 7% compared to last year. And then in the first 2 weeks of May, our same-facility patient days have declined about 2.5% compared to last year. So we see that as an improvement, obviously. And we're seeing that improvement in the acute and specialty service line. We're monitoring every state and we're looking at each one of them as they do ease the stay-at-home orders. But we started to see more volume coming to us from our ER referrals as well as other referral sources, professionals. We didn't see a lot of impact on our RTC and the CTC methadone, Suboxone business during the height of the pandemic, and we've actually seen some increase in the CTC methadone. But we've been pleased to see that the acute and specialty are improving. And that's been pretty steady as each week goes by, which there's been a lot of focus with maintaining close contact with our referral sources, the ERs virtually and through some of the telehealth. But I think that we are watching each state because each one is different, as you know. And as we see those stay-at-home orders lifted and we see other restrictions lifted, I think we've seen a corresponding impact positively on the volume. If we go to the U.K. -- go ahead, Frank.

No, no, go ahead.

If we go to the U.K., our volumes have been stable, and we have less impact there on our volumes because we do have the longer length of stay service lines. We have certain services there, though, that are acute, our medical services that are shorter length of stay. And I think that impact was 5% decline same-store in April, and that's continued into the first 2 weeks of May. The U.K., as a country, has been a little later to open. And so we believe that as the stay-at-home orders are lifted in the U.K., that the commissioning process will return to normal. We believe we'll see an increase in demand. The NHS there has asked us to prepare a capacity plan for that. And I think they anticipate that as things reopen that there will be demand really across all the service lines at Priory. And I believe that will happen as the stay-at-home orders are lifted there.

Got you. I guess staying on that subject, and you sort of touched on this a little bit. But in terms of just impact from a potential recession, obviously, with these unemployment numbers that you're seeing today, a lot of worry about the economy and the recession and the lack of growth. But can you remind us maybe from a historical basis, when you think about potential shifts in patient mix as a result of the economy weakening, any thoughts around kind of what we should expect this time around? We had a lot of those patients potentially losing employee-sponsored coverage.

Sure. I mean, our experience and -- my experience here and there are several others that experienced the last recession. I think mental health has -- was very resilient through the last recession, I think, certainly less impacted than med/surg facilities. And as I think back, the occupancy volumes and payer mix were pretty stable during the previous recession. I think this one might be a little different in that we have had Medicaid expansion. And I think that's offered now in many of our states for Acadia. But then also, I think that with the pandemic, we've seen really the most vulnerable population bearing the brunt of the pandemic. So as I spoke a minute ago, the demand, I believe, is going to be much greater as we go through this. I think that on the acute service line, I think the demand is going to continue. We are very diversified from a referral source basis in the acute area. So I think that, that should help us weather a recession if it happens. And I think that we should come out of it with a, I think, not much change in payer mix. Certainly, we don't have all the visibility of that right now, but we believe the demand is going to continue in CTC and methadone. We've already seen that happen. And I think that just the support from our states and Medicaid payments that have been put in place for methadone, I don't believe those are going to be interrupted because I think that, again, states are focused on how do they meet the demand. And I think we're going to see that increase in that area as well. And then our other service line, which is specialty. I think we're very diversified in our offerings. We're very diversified even from a geography point of view as we look across the states. So I think the fact that our services aren't elective and I think the fact that they're not discretionary will put us in a different position as we look at a recession. And then at Acadia, just our diversification of payers and services, I think, position us well to -- if that happens, which it does look likely that it will. We feel like we're in a good position to, I think, come out of a situation none of us would have planned on, but certainly stronger and in a good position as a company.

Got you. And I guess, flipping over to the cost side -- I mean, obviously, with the slowdown in the economy, a recent surge in the unemployment, do you anticipate any easing of labor pressure or labor market pressures that -- over the next year?

Well, I think, Frank, as we think about the U.S. business, I think we haven't had any significant challenges in terms of shortages or staffing our facilities even during a period where we have seen growth in our volumes. We've been able to continue to add capacity and grow and really not have a labor shortage that's been challenging from a volume perspective. But we do think there's incremental positives in the U.S. with the labor market that we could see where there is more retention as people are attracted to our industry and stability that we see. And then recruiting should also improve. So we see some incremental opportunities in the U.S. And in the U.K., which has been a more challenging labor market for us, I think we've already seen real stability there and some gradual improvement based on some initiatives that have been put in place around recruiting and retention. And I think early indications over the last several weeks and months in the U.K. is that, that should continue. And more people are looking for stable employment, and we should realize some benefit of that, both from recruiting and retaining the employees that we already have. So I think it's a positive and probably more positive for our U.S. -- our U.K. business.

And I'll just say, Frank, I think looking back, I think that as the unemployment rate went up during the last recession, I think we also saw a corresponding decline in our turnover rates as some of the RNs and even mental health workers made a decision to stay in place with a stable employer. But also, I think, delayed retirement in some instances, their husband or wife may have lost employment. So I think that weighed on some of the professionals. So while I think that we have not been impacted by that here at Acadia, it certainly will give us opportunity to access perhaps a greater number of workers in -- not just in the RN category, but also mental health professionals that might have gone to work in other industries. We train them when we bring them here to work with patients, but they have choices. So I think that would be, I guess, a positive that could come out of a situation where the unemployment goes up.

Got you. And as we think about COVID here in the states, and I suppose it would apply in the U.K. as well. In the event of 2.0 COVID in the fall or winter, what learnings have you had to date? And how do you think it would play out in terms of -- in future episodes?

Well, I think this is unlike anything anyone has experienced before. And I think that we've been learning about the effects of the pandemic real-time. And as we went into this, we didn't know what it would look like. But I do think now we do have the benefit of experience. And I think somewhat of a playbook, I think we know better what we can control. And I think our facilities know better what to expect from this. We responded, I believe, and I'm very proud of the team here and their -- they had a sense of urgency, and I think they developed plans. But we also know what worked and what didn't. And so I believe as we -- if it should happen and there should be a resurgence in the fall, we have a foundation now. We always had a focus on infection control. But I believe we've taken that to a new level and also with the PPE, and we have a protocol, and we've set up processes around visibility for that. So we would certainly utilize that if this happens again. And then just again, the touchpoints for our referral sources and also the patients, some of those we will keep in place whether there is a resurgence or not, just giving them access through telehealth, talking with referral sources virtually rather than always face-to-face. So those are some of the things I think that we learned through this. We'll keep some of them, but also, we will be able to utilize them if this happens in a later period.

Got you. And certainly, when we think about the CARES Act, you obviously received some proceeds, I believe, really both from what I'll call advanced payments or loans but also just straight up grant. So there has been a debate. It seems like it's more within the sub -- the post-acute side, not so much on the actual acute care side, about retaining those bonus payments and/or -- not bonuses, but grants and the ability to attest and to audit meeting the need standard. So maybe you can give us a little more color there on kind of where you're falling out on that. Do you have any concerns or is it pretty much black and white to you?

Well, we did receive $20 million relating to the allocation of the $175 billion fund, and only a portion of that allocation has been made at this point. But our share that we received for our acute facilities was $20 million. And we are evaluating the criteria going through the attestation process related to that, but certainly believe that based on the lost revenue that we've seen, the direct costs that we've seen at our facilities related to the supplies and the staffing and other costs, we think we'll keep substantially all of that. We are still going through the process. And we -- looking at that for each of our facilities, certainly they were impacted in different ways, but think that substantially all of that money will be retained.

And from an accounting standpoint, we seem to be getting a mixed message here. How do you view the accounting for that when you -- how do you recognize it or how will you plan to recognize it?

What I'm hearing is that it should be a second quarter recognition reported as some type of revenue line item, but we'll see. We're going through that evaluation now.

Got you. But still money in the bank, right?

That's right. And there's certainly other positives that weren't as P&L-related, but $100 million of total second quarter cash positives for the business. And some of it is what you mentioned will be repaid, more temporary items, but certainly various positives as part of the CARES Act.

Got you. And I just want to go back, Debbie, you touched on this, on the telehealth side. How important do you really think telehealth will be in your business over the longer term? And I guess you touched on maybe ER, but maybe give us a little more color about where you're using it the most? And where do you see the areas that it could be expanded the most in the future? And how will that really change your -- is it more of a cost item or is it ability to capture the admission? What's the strategy?

Well, I think that there's been a lot of discussion over the last few years about telehealth. And I think this has been the first time we've actually seen a change in the payment. And with the payment that is the same as an in-person visit being done virtually, I think, has been very positive. We've seen the regulations relaxed. But what the way I look at this is telehealth is an expansion of our services. It's not going to be a replacement. I think that we will use telehealth for patient engagement. I think that will be important. And I think more patients will be comfortable perhaps with that since we've been through the last few months, but we expanded our capabilities pretty quickly. We went from 36 facilities to 100 in a very short period. And I think we plan to keep that in place. And our thoughts are to use it for our partial and our IOP programs. We'll also be using it for assessment if a patient would prefer to access care that way instead of going to an ER or even a physician's practice. But I think what I see is as an adjunct to what we do, it's another point of access. I think it's a good way to stay connected. And then when I talked earlier, I mentioned the referrals, I think we've been able to reach more of our referrals, professionals through the virtual webinars and other things, which we will continue because I think it's been a good way to reach a larger number of them at a point in time, and I think it's been positive. We've also used it for visitation for patients that could not come to the facilities. And we may have markets, and I think we do, where patients can't travel long distances. So if the regulations that are in place now stay there and reimbursement stays in place, I think that we will see this as a way to expand. Blue Cross Blue Shield in Tennessee has already said it's going to be permanent. So we hope that other states will see it the same way. And I think it will just be a good way to serve our patients.

That's very encouraging. That was actually going to be my next question it was the odds for making this permanent. And maybe talk a little bit just about the actual reimbursement itself that you get for a -- sort of a televisit?

Well, it's -- so the reimbursement that we would get for an IOP visit or a partial, it's based on hours of patient contact. And the way that the telehealth has been set up is if you are engaging that patient through telehealth and you have a professional and they're qualified to offer that service through telehealth, then you are paid the same amount as if that person was actually on-site in a program, and that has been used for individuals as well as groups. And we've also seen it used on the CTC side with the therapeutic component that we offer. When we provide medication, we also provide therapy. And they've been able to use that as a mechanism to engage patients that aren't able to travel into the clinic. And the reimbursement, again, is similar to what they would get if they were on site.

Got you. Obviously, a lot of uncertainty with this revamp through COVID, but maybe for just a few minutes, we can chat on the balance sheet. And David, just curious about sort of your comfort level with where you are. Obviously, you were expecting to have a divestiture probably wrapping up pretty soon, I don't think you've got on original time frame but -- or maybe by the end of the summer. But maybe give us an update, I guess, on that. When do you expect to really ramp up again the process of divesting U.K.? And then how do you think about your leverage and covenants in the meantime?

First, on the U.K. process, it does remain suspended. And at this point, we don't have visibility on the exact time line for that. But we are encouraged. We believe the buyer interest continues to be strong and we're monitoring the market conditions there in the U.K. and looking for the point in time where the diligence can be completed, that has been impacted by the stay-at-home that's in place in the U.K. And we really need for the buyers to be able to visit the facilities, reengage with the team. And then also the debt markets, which I think are in a better place now, but we want to make sure that we have visibility around an acquisition, financing happening in the U.K. or another market. And so we're monitoring that closely. In terms of the balance sheet, we did have a covenant amendment in April. That was positive for the company in terms of the near-term flexibility as we just move through the year. And we're thinking about other balance sheet items as well, separate from the potential U.K. sale, thinking about refinancing some of our near-term maturities. And so we're looking at that in the near term. But certainly, very positive in terms of our cash position right now. Payers have been very supportive. Receivables continue to be positive this quarter. The CARES Act money has been positive for us as we think about planning for the remainder of the year. And we do have a lot of discretion with our -- not only our cost structure and a lot of variability in our cost structure and ability to manage costs based on our volume, but also around our use of cash and our capital expenditure plan for the year. Just monitoring that very closely and have made some small adjustments in the near term to that, just to give us as much flexibility and a solid position as we can as we move through the year.

I'm curious though, I made a note to ask you a question about sort of your variable costs and your ability to -- maybe give us some examples of areas where you can really pull out cost and a lot of the variable cost to -- in light of the environment?

Well, we do have -- if you think about our cost structure, around 2/3 of it is labor-related, and most of that labor is variable in nature or at least heavily variable. And it's the staffing that we can adjust at the facility level to correspond with the volumes that we're seeing. Separate from that, we do have the other 1/3 of our cost. There's a mix of mostly fixed and also mostly variable cost and a lot of costs are somewhere in between. But a lot of marketing and travel and costs like that, similar to labor, we have discretion, and we can see a lower cost number as we see our volumes decline. Of course, we're focused now as we see volumes build on just having the right resources in place to support the volume growth. But the team just did a nice job during the last several weeks of having the tools in place, having the framework. So that starting in late March, we could adjust our costs to correspond with our volume, and most of that is through the staffing monitoring.

Got you. We're getting close to the end, but I guess we'll wrap it up here with maybe your thoughts around -- everyone's thoughts around as you look at the world today, you reassess your markets, both the U.S. and the U.K. in light of the COVID and the recovery from COVID. Is there anything that you feel like is necessary in terms of making an adjustment to your strategy, either near term or long term? And how do you -- what's your assessment of sort of the industry prospects over the next few years? And we'll end on that one.

Well, Frank, I think we don't believe that COVID has impacted our long-term view of behavioral health in the industry. I certainly think that the pandemic, I guess, if nothing else, has strengthened our view, the importance of the care that we provide. I think that we will see mental health and addiction issues. We'll experience stronger demand. I think before this happened, there was increased awareness. The stigma had been reduced. I think some feel that might even happen to even a greater degree. So as we look at the U.S., we feel like we have a good service mix through our service lines, but also just that there's going to be demand in each of those areas. And then in the U.K., I think they proved their resiliency through this -- through the mix of services. I think that they also -- there's been a lot of discussion there about the surge that can happen. There was a survey done with 1,000 U.K. residents that said their mental health had worsened. And so what we think is we have long-term growth opportunities. We're going to be thoughtful about what we do. But we believe the demand will be there. We think our service lines complement that demand. And we believe we'll play an essential role as we move forward with this, and we're ready to serve the patients, but also, I think we have the right framework in place to do so over the long term.

Got you. We actually did have one question just pop in. I'll ask that one, and then we'll wrap it on that. Were most face-to-face meetings completed between potential bidders and management team during the U.K. sale process before the process was suspended by the corona? Any thoughts there?

Well, I think that we had Phase I of our sales process, and there were a number of meetings with potential bidders, but our second phase would have included more discussion with the management team, certainly facility visits. And I think that each potential buyer would have stated their preference. And in fact, we were at that point where each one approaches it a little differently. But I think that what we -- as we go forward with the sales process, I think what I believe will be needed is clarity around the pandemic, which we'll be able to demonstrate their resilience. But then also just the retool beds coming back online, and I think that we'll see those beds and then also corresponding demand. And I think, again, as a potential buyer, those things will be important as they look at moving forward in the process. David mentioned a minute ago, we've had very strong interest during the process, and it's continued while we've been suspended.

Okay. Debbie, David, Gretchen, thank you so much for your time. This concludes our fireside chat. Have a good evening.

Thank you, Frank.

Thanks.

Okay. Bye-bye.