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

Hey, good morning. Welcome to the Jefferies 2020 Global Healthcare Conference. I'm Brian Tanquilut. I'm the health care services analyst here at Jefferies. Our next presenter is Acadia Healthcare. They are the second largest operator of behavioral health facilities in the U.S. And they're the largest operator of behavioral health facilities in the U.K. Joining us today are the company's Chief Executive Officer, Debbie Osteen; and the company's Chief Financial Officer, David Duckworth. Before we begin, I would like to read the company's forward-looking statements. I want to provide just a brief disclosure before we kick off. During the call, Acadia will be making forward-looking statements and statements about their expectations. Please refer to the risk factors and other disclosures provided regarding forward-looking statements in their press release as well as their SEC filings. So with that, Debbie, first, I want to thank you for doing this. David, thanks for doing this. I know you guys are busy and obviously lots of stuff going on, so we really appreciate you being on the call today.

I guess I'll start off for Debbie or David. What did you -- as I think about COVID, I'll just ask, what have you seen in terms of the impact of COVID in your business? And what parts of your business had the most disruption? Or anything you can share with us in terms of recovery and normalization that you're seeing?

Well, good morning, Brian. We continue to see positive signs that our volumes are stabilizing and showing signs of improvement. I think the team here has worked very hard to try and mitigate as much as possible the impact of the pandemic. We started seeing the impact in late March. And as just a reminder, in the month of April, our same-facility patient days declined by 7% compared to last year. For the month of May, our same-facility patient days increased slightly to about 1% compared to last year. And then over the month, we've started to see each week sequential improvement. The acute and specialty service lines, I think, had the most disruption, and that was related to the stay-at-home orders, which resulted in a drop in ER volumes and travel, which impacted some of the specialty programs. But we're continuing to see stabilization there and also improvement. And each state is different. So as they are opening, we're watching that very closely. But I think overall, those 2 business lines probably had the most disruption. RTC and CTC continued to be fairly stable through the end of March, into April and also into May. We are very focused right now on just trying to use our real-time data, which we have a good structure here for that. And so what we've been doing is trying to maintain close contact with our referral sources as well as virtual contact. We've continued to use that through May. I think looking at the U.K., it's a little bit of a different story because of just, I think, the countries do differ in that the U.K. is opening a little slower than the U.S. If you look at volumes in May in the U.K., they are down about 5%, which is consistent with April. But I think that what we've seen already is as their stay-at-home process opens back up and, frankly, the commissioning process, which the most important factor to us, as those begin to reopen, we're starting to see improved volume. We had more impact in our shorter length of stay program, which was the acute health care service line. And I think as the restrictions are lifted, we expect to see improvement. But also, we've been told by NHS that we may see a surge in demand there. So we're prepared for that. But it's been a little different story in the U.K. than it has been the U.S., where, frankly, at the end of May, I think we're pleased to see that we're at least even with where we were last year.

I really appreciate it, Debbie. I guess as I think about it, were you surprised that you saw that drag on the acute business? Because obviously, you're one of the few companies that saw fairly minimal impact from COVID through all this across the health care sector. But was that a surprise that acute took a hit as well?

Well, I do think that this is a different situation than we've seen in the past with other -- certainly the economic decline that we saw several years ago. I do think there was a factor here of fear. And as the states were -- and media both were sending out messages that individuals needed to stay at home, I think the impact of that was not just on the individual but the family. And so in our business, with mental health, the family plays a role in individuals seeking help. So I was a little surprised that they, I guess, were not as apt to go to an ER. But then as I look back at it, I think it impacted other specialty areas that I wouldn't have thought would be. But the ER is not -- we're very diversified in our referral sources, but ERs play a role. And I think that was where we saw most of that disruption in the acute service line.

No. That makes a lot of sense. So I guess as I think about it, before COVID happened, Acadia seemed to have been at a very good, pretty solid growth trajectory for the year. So how are you thinking about growth now once we normalize on the COVID front? And then I guess as I think about your different service lines, where is the most growth coming from? And then -- sorry, I'm layering out a few questions here. But for David, you're obviously pulling back on CapEx a little for 2020. Do you think that has a downstream impact in your growth outlook for '21 and beyond?

Well, I'll answer the first part of that, Brian. And I think we're pleased with the growth that we saw in the first 2.5 months. It was at 4%. We think this is a temporary situation. We're very confident in our long-term growth. And it's really across all of the service lines that we have. Mental health and addiction have not subsided during the crisis. Even though individuals may have kind of temporarily postponed, we believe that the growth will normalize and that we will see strong demand. I think before the COVID, there were a couple of things in play. One is there is an increased awareness of mental health. And I think that there's more acceptance, and I think more individuals are and will be seeking help. And then the other factor before this pandemic is just the reduction in stigma. And I think actually, we could see stigma reduce even further because this pandemic has really broadly impacted the population. So I think we're well positioned across all of the service lines. And I do think that if you look at acute and specialty, I think there's going to be demand. And then our CTC actually saw an increase, a slight increase in volume during all this. So going forward, I think that's going to be -- there's going to be strong volume there as well.

And Brian, our capital expenditures planned for 2020, in late March and April, we did complete a review of all of our projects, and our objective was to just enhance our cash positioning for the year. We have maintained a very positive view on the different investment opportunities we have but felt like we had some opportunities to take another look at those projects with a focus on where the projects stand, the earlier-stage projects are easier for us to manage, looking at the returns for each project and the pros and cons of a potential delay in the projects. And I do think with the $35 million adjustment that we made for the year, we were able to do so in a way that still opens a strong number of beds for 2020 and sets us up well for the projects and the beds that we expect to come online in '21 and beyond. We do expect for 2020 to still bring between 500 and 600 beds online in the U.S., and that is a strong number. That will support the revenue growth targets that we have. But I think the adjustments we made allowed us to enhance our cash position but also still not have much of an impact on our future growth outlook.

And I'll just add, Brian, that in the U.K., our retooling of beds, which we talked about last year and we also talked about in the first quarter, they are on track. We've had just a slight delay there. So that's going to bring those beds back. And I think it's going to be good timing because of what we think may occur in the U.K. with respect to demand. But it's a number of beds. We've already brought some back on in April, and that will continue through the third and fourth quarter in the U.K.

No. It makes a lot of sense. So I guess I'll piggyback off of the question and the answers that you gave. Joint ventures have started to become part of the strategy. How should we be thinking about that? Like as I think about, on one hand, you're adding beds in existing facilities, but all the new expansions, I mean, is JV the way to go? And then I guess the follow-up there would be, you've had some of these already come online and have been up for a couple of years now. What has been the experience in terms of the ramp and then the advantage of that versus a true de novo where you're building it from the ground up yourselves?

Well, I think the JVs are a strong pipeline for us. I think that we do have bed expansions which deliver a very good return, de novos. And I think there's a time and a place for JVs, and there are specific instances where a de novo might make more sense. But you asked about being surprised. I was a little surprised that our discussions through the pandemic remain so active with our potential partners, and we announced a partnership yesterday with Covenant Health. I think they are really seeing this as still an opportunity to position for growth despite what's been happening. And we have about 30 projects that we are in different stages of development. We hope to have the opportunity to announce a few more of those soon. But as I look at the strategy for JVs, I think that there are some positives where you go into a market, there's a strong local brand there. They usually have an existing patient stream. And then it really accelerates the ramp-up, and David can talk about that in a minute on how that translates, but we've been able to leverage the payer relationships that our partner has in the market. And then what it does is if you're entering a market you haven't been in, it gives you an opportunity to work with a partner that's already in that market. They have the established relationships. And so we have 5 operating right now. And you bring up a good point because we enter a market with a partner, but then what we've seen is we've had opportunity to expand even further from what we opened initially, and we've done that in several markets. We have a few right now that we are working through the process to add beds. So I think overall, I mean, we're going to have 2 open this year. One is in Reading, and that will be 144 beds which will open in the third quarter. And then the other is Saint Thomas, which is an Ascension hospital, which will open here in Nashville. So overall, there's a place for JVs. And de novos, I think, fit better if you can't identify a strong partner, but there is an underbedded situation. So we're trying to look at it and discern which makes the most sense. But I think there's a lot of potential for the partnerships in the future.

And Brian, on the ramp of our de novos and joint ventures, there is a start-up process involved, and we usually spend the first year going through the licensing and the regulatory process. But we do have a goal and have seen a track record of achieving this goal that by the end of the first year, we would be at a break-even run rate for new facilities, whether it's de novos or joint ventures. And really, it takes until about the end of the third year for a new facility to reach the overall company's occupancy and other metrics that we have around profitability. So we think about it as about a 3-year ramp-up. And we have seen -- and Debbie mentioned this. We have seen joint ventures beat this goal because there already is a market presence for that new facility. But the end of the third year is around where we think of those facilities maturing and starting to think about a potential expansion project.

That sounds really good. So it looks like the growth outlook for Acadia is strong, right, between de novos, JVs, just organic growth in some of the specialty businesses and all the other stuff with the macro environment is for mental health. But as I think about -- as we stare down a recession heading into 2021, I mean, Debbie, you were in the industry during the last recession, what can you share with us in terms of how you think about the business and the defensive nature of it or whether or not it is defensive?

Well, I think that as I think about the industry and my experience, I think that mental health in a recession proves to be fairly resilient. And I think that if you compare that to a med/surg facility, we, I think, come through it a little bit stronger because, first of all, we don't really have an elective nature for our business. It's not discretionary. And I also think that as I look at where we are right now, there's a different environment with the Medicaid expansion that's happened since the last recession. I do think that what we're going to see from this pandemic is really the most vulnerable population has suffered probably the most than those that have mental health issues. I like the way our service is, and we are very diversified. I think our payer mix is very stable. It's also very diversified. So if I think about a prolonged recession, I think that we're in a good place to really work through that. And I think that the diversification we have is really a key factor there. We don't have a very -- we don't have a lot of self-pay. We do have a high mix of government but also in-network. Commercial as opposed to out-of-network, we still have a little bit of that but not to a great extent. The other thing, that we'll see how this works out, but I do think that this is not just an economic crisis, as we had before, and an economic recession. I think there's also a public health element. So as I think about the states, I do think that they will look, and I'm hopeful this will happen, that they'll look for other areas initially to really try and reduce their budgets because I think there's been so much focus on mental health, all of the impact through this, that I believe we will not be the first cut that will be made. And I think also, there is stimulus monies that have been talked about as kind of the next tranche. And we'll -- that's still early to know, but we've actually had states reaching out to us, being proactive in trying to make sure that our funding's in place. And I do think it's because of the essential nature of the services that we have.

That makes a lot of sense. And I guess kind of related to that, as we think about kind of like the broader impact of all this and just the mental health issues we've faced in the country, opioids, right, so as we've seen more focus on that and, obviously, Congress has thrown more money at it, have you seen any impact on that from all those efforts on your CTC business? I mean do you think longer term, that demand for methadone or Suboxone or whatever the treatment would be could taper as these efforts actually start taking fruit or bear fruit?

Well, yes, we have seen an impact and a positive impact through the focus that has been in place at the state level and federal level around that treatment. And we are in 32 states among our 134 clinics and have really collaborated with each of those states to add services and capacity to our business. And there has been an improvement in the funding and the coverage. We've seen that over the last several years around state Medicaid plans, and even this year are seeing that further enhanced. We have Medicare that began covering that treatment in January. And we'll have, at the state level, all Medicaid plans have coverage for that treatment no later than October 1. And so I think the coverage continues to improve. We have seen increased volumes there. We expect that to continue. There's still just the vast majority of patients that have that addiction that do not seek treatment. So we believe there are some very strong industry fundamentals here. It's a very -- very much an essential service for the patients that we have in treatment. And we've seen and expect to continue to see a strong demand and volume in that service line.

And Brian, we think there's also a diversification opportunity. We have begun working with prisons that are mandated to provide this treatment inside the wall. And so we have several contracts right now. We think that's a growth area for us. And not just with private providers of those services but also state prisons. And we've got an effort around that, that we are in the process of working on.

That's awesome. So I guess shifting gears a little bit, Debbie, it's hard to talk about the Acadia investment story without touching on the U.K. sale process. What can you share with us in terms of the buyer interest that you saw? Where in the process were you and -- by the time the board had decided to suspend the process? And also, is it the right view for investors to think that this is a temporary halt and that you'd likely resume the process at a later time when market conditions improve?

Well, we did decide to suspend. And when we did that, we were in the second phase of the sales process. I think the good thing here is that there was interest and very strong interest in Priory, I think, that as the next step would have been to do the confirmatory due diligence. But as our advisers, and we stay in contact with them, obviously, the interest level in Priory remains strong, and I think we view this as really a temporary halt. We expect to resume the process. What we'd like to see is visibility on the progression recovery of COVID but also a normalization of the debt market conditions in the U.K. We want to be able to see some clarity around the opportunity for the potential bidders to finance a transaction of this size as well as interested parties to meet with management. When we suspended, it was at the beginning of the pandemic, and it was starting to really spread throughout the U.K. And I think we felt like they should be focused on the -- making sure our patients were safe and our employees as well. So I think as we think about it, as I think about it, I think that this process -- and certainly, we would never ask for this, but I think Priory is going to show a lot of strength through this process. And I think that as we look at the future opportunities with retooled beds coming back online and just the potential demand, I think that as buyers see the business, we're going to show what our resilience is through the pandemic but then also the growth potential now that we have gone through this. So we see it temporary, and we'll resume it at the right time, but it is a temporary halt.

Yes. That makes a lot of sense. So I guess kind of related to that, I mean, Debbie, you and I in the past have talked about how selling the U.K. business shores up the balance sheet, reduces leverage, but also it gives you the ability to get back to M&A. So with this on hold, I mean, how are you thinking about M&A?

Well, Brian, we do see attractive opportunities across all of our growth initiatives, the facility expansions, joint ventures, de novos as well as acquisitions. We think the market is still fragmented and that there's opportunities that are there. The way we think about it is that we will pursue acquisitions that meet our criteria, and there are certainly tuck-in acquisitions that we evaluate and think that will meet our criteria that's focused on synergies that we have, new markets we want to be in, bring growth opportunities and margin enhancement opportunities to the company. So we think that there will be transactions for us to evaluate that meet that criteria. But we will be disciplined and follow the framework that we have as we think about the longer-term M&A opportunity.

And I agree with David that we think there will be some good opportunity perhaps even through this with perhaps smaller tuck-ins in some of our markets. I think that as we put in our framework last year, we're trying to make sure we maintain our discipline. The other thing, Brian, I wanted to make sure I was clear on with our stats for May, they were up 0.1%, which we think is a good number for where we came from in April, but I want to make sure that I was clear that it's 0.1% and not 1%.

Debbie, that's year-over-year 0.1% in May? Is that right?

Yes. That's correct.

Well, we're out of time. So I think I'll pass it back to you for some closing remarks if you want to say anything to the investors that are listening on the call.

Well, I thank everyone for their interest in Acadia. And I think that I've been pleased with just the work the team here has done to keep everyone safe in our facilities and try and mitigate to the best of our ability the impact of this. But I do -- I'm very optimistic about our growth prospects. I think that the effects of the pandemic are temporary, as we've shown even through May. I do also think that the behavioral health industry is resilient. And I believe that we have a very experienced team here. We've got diversified services pipeline for growth that I think is going to lead us through the future. So we're looking forward to the role we're going to play in -- as we move forward.

Awesome. Thank you so much, Debbie, thank you, David. Thank you. And Gretchen, and thanks a lot. And to everyone listening on the call, really appreciate it. Be safe.