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

All right. I think we're ready to get going. I'm A.J. Rice, the health care service analyst at Crédit Suisse. Welcome, everyone, to our next presentation, which is Acadia Healthcare. We're very pleased to have Debbie Osteen, Chief Executive Officer of Acadia; and David Duckworth, Chief Financial Officer. Gretchen Hommrich is joining us as well. She's Director of Investor Relations. Debbie, I understand you guys were going to maybe do a few slides, and then we would jump in, if that's all right. Go ahead -- feel free to go ahead.

Okay. Great. Thank you, A.J. Well, I wanted to start by just providing some quick highlights about the company. We are the leading pure-play health care behavioral company in the U.S. and the U.K., frankly. We are well positioned geographically. We have a lot of scale in the U.S. We're in 40 states. We're also in Puerto Rico and the U.K. We have an experienced management team, which we've been building here. We have diversification of services, which I think cover the entire spectrum of behavioral health and the needs that are out there. We also have a robust pipeline for growth opportunities. I plan to talk mainly about the U.S. in our slides today, but I'd like to make just a few high-level comments about the U.K. We did relaunch our formal sales process. Our objective continues to be maximizing value for the shareholders. We believe that interest levels remain strong for the assets. And I also believe very strongly as well that we're well positioned in the U.K. to handle the needs that we think are there and are also growing due to the environment that we're all in. I'll start with Slide 5, which is really an overview of our 4 service lines, and I'll go through those quickly. Our acute is our largest service line. That is about 47% of our U.S. revenue. We are very diversified. We have 42 facilities across 20 states. And we continue to see very strong demand in the acute service line. I think part of that is there was a wider acceptance of mental illness and just stigma being reduced prior to the pandemic. And now since we've been in the middle of this crisis, we're seeing demand from that as well. Our specialty service line is 22% of our revenue. We have inpatient residential programs. They're focused on treating individuals that suffer from substance use as well as eating disorders. We also treat co-occurring, which is substance use and mental health. And oftentimes, individuals have both. Our CTC service line is 17% of our U.S. revenue. We have 134 clinics. We are the largest provider of medication-assisted treatment. Because of the impact here in the U.S. and just the crisis and the opioid crisis with 71,000 dying in 2019, this has been a very strong service line for us. We do see favorable reimbursement. There were recent changes for Medicare, which became effective in January of this year. And then Medicaid was directed -- the states were directed to expand Medicaid October 1 of this year. Our last service line is the RTC business. And this is primarily longer term residential treatment facilities for children. We've seen stability in the census there through the pandemic as well as our referral sources. Slide 6 is an overview of the 4 pathways of growth for Acadia. And the first is the fact that we have a very strong, experienced team. And I think the track record here and just the knowledge of how to grow is going to be a very positive factor as we start to see the increased demand across both the U.S. and the U.K. Our facility expansions provide the highest return. We are on track this year to add 300 beds in 2020. Our joint ventures, which we've talked about, partnering with health systems across the country. One of the positives with the joint ventures is we have an opportunity to enter a market that's attractive that we might not have with M&A. And so we've been very focused on our partnerships. We opened one in July with Tower Health. And we plan to open a new facility here in Nashville with Ascension before the end of the year. Our third growth pathway is de novo. The markets are still under-bedded, and that was before the pandemic. And so we feel that, that's an area that we still have as an opportunity. We've got a strong track record here for opening de novos. And so that's another focus area for the company. The last pathway is M&A. And I think that the industry continues to be fragmented. And I do think that as we look forward, it's going to be an area of opportunity. As we pursue the M&A transactions, we do plan to use a very disciplined capital framework as we make decisions about what makes sense for Acadia, but also what's going to benefit our shareholders. So with that, I'll turn the presentation over to David. He's going to provide a brief financial overview.

Yes. I'd like to provide just a quick overview of our financial performance and our cash flow dynamics, and I'll start with revenue. Revenue growth for the company, with the different pathways and opportunities that we just did, has consistently been in the mid-single digits. We do have a target for our U.S. business of 5% to 7% revenue growth and mid-single digits in the U.K. market as well. We have consistently seen that and expect that to continue. Margins have also been stable. We've seen, in our third quarter that we just reported, improvement in our margin. We expect that to continue and to see stable margins in both markets. Our capital expenditures have also been, from a maintenance capital perspective, consistently low and has really enhanced the cash flow dynamics of the company. Most of our capital investments are for expansion and maintenance capital tends to be 3% or less of our revenue. And so the cash flow dynamics that we have, as you can see on the bottom right, is that before expansion CapEx, we consistently see strong free cash flows that allow us to invest in the different opportunities that we have across the JV, the facility expansions and other opportunities that we have. And we expect that to continue. So with that, that's the end of our slides, A.J. We'll turn it back to you.

That's great. So I appreciate that rundown. I think there's a couple of questions that are follow-on from that. When you're talking about a 5% to 7% revenue growth target, is that sort of consistent across the different lines of business, acute, specialty, CTC, RTC? And then we always try to break that down between pricing and volume assumptions. How would you break that down, your latest thinking on that?

Sure. In terms of breaking out the 5% to 7% U.S. revenue growth just by volume and pricing first, volume is 3% to 4%. And we saw 4.2%. So it's a kind of high end, slightly above that range for the third quarter. But 3% to 4% is our normal expectation for volume growth. And then 2% to 3% is what we typically see and expect to see going forward on the pricing side. And as we think about it by service line, the pricing component of that tends to be pretty similar across service lines, but the volume growth has been more in the acute. Most of our new facilities and joint ventures have been in the acute service line. And then even the bed additions to existing facilities have been more heavily weighted towards the acute service line. And that's a function of the demand and the opportunities that we see in our existing markets and in new markets. And so because of that, acute does tend to have a higher overall revenue growth. But the CTC, RTC and specialty volumes do grow as well, just not at the same pace as acute.

Right. And when you think about those pricing parameters, low single digits, you've got, obviously, diversified payer mix there. I know when we talk about acute hospitals, there's a blend of commercials running faster than that. Others are running slower. Is that the same dynamic for you or is it more across your payer mix as the rate increases are pretty similar that you're looking close to that corporate average?

It does depend on a number of factors, including the market and the specific states and markets and the payers that we're working with. We do tend to see pretty steady rate increases across our different payer categories. So it can depend on the market. Commercial sometimes can be slightly ahead of Medicare and Medicaid payers. But we've seen stable increases even from the Medicaid and Medicare has been very stable over the last few years. So commercial in some years can have higher pricing increases. But overall, we do see a pretty tight range of rates. Commercial, for us, is ahead of Medicare and Medicaid is slightly behind the Medicare rates, but it is a very tight margin for our business. And we expect that to continue, but it can depend on the market.

And I'll just say, A.J., that when we have a very specialized program, and I mentioned the co-occurring in substance use and mental health, and it's very specialized. We do see higher rates because our payers are asking for those programs, and they're willing to pay more for those programs because they're more intense from a staffing perspective, but also we're taking care of some of the more acute patients for them.

Right. And I know because of the nature of some of the programs you provide, a little more skewed towards state-based programs. We read about some of the states at least having budgetary issues. Are you seeing any change there? It might be you're considered more of a protected class by the states. But what are you seeing in your discussions with them?

Yes. We do have state payers for all, certainly for the CTC business line as well as acute and probably more for RTC than specialty. But generally, we haven't really had any states reducing rates. There was a reduction in Nevada where we have one facility, but the behavioral was exempt from that cut. And I think that gives us some comfort. It's one state, but it also, I think, sends to us a message that they understand they need mental health and the importance of that right now, especially. But also, I think just in the past, there's really a scarcity of resources. And so we're not seeing that pressure right now at this point.

Right. And as you mentioned, the volumes in the latest quarter, 4.2% increase. Obviously, that's strong. It's at the high end or a little above even your targeted growth number. How would you put that in perspective given all that we're seeing on the pandemic, some pressure on volume? You think you're just back to normal pretty much? Or how would you describe what you're seeing on the volume front?

Well, I'll mention October, but I'll also just say that in the third quarter and really in June, we started to see more normal referral trends. We track very closely where we get our business. And our ER referrals have returned to normal. In fact, in some markets, it's actually a little bit above what we had seen in the past. I think that just generally, as we look across the service lines, all of them have started to be actually not just back to where we were pre-COVID but actually above pre-COVID. And in October, I mentioned on our call that we hit the highest census in the history of Acadia. We've been adding beds and other things to get to that point, but we've been encouraged by the trends we've seen over this past month in October, and they're still strong. Specialty is starting to -- we're starting to see more travel for patients, which was an issue during, I think, the height of the pandemic. But we do have markets that have seen resurgence. There are what we call hotspots, where you start to see more COVID. We've managed through that, A.J., and I think the team has done an outstanding job. Their focus, making sure patients can get into the facilities. We're not putting up barriers. But then if we do determine there's an issue with a patient that develops COVID, we have very robust procedures to isolate them. They're staying in treatment. And through October, it has not been a barrier to us. And in fact, the volume has continued to increase over prior year.

Interesting. When you think about your acute behavioral business, traditionally, I think you said about 15% is sort of adolescents. Clearly, there's a lot of schools that are still virtual, still remote. Has that volume, since those people are not being assessed at school by a counselor, is that volume coming to you in another way, do you perceive? Or is that a volume that may come back as we reopen more and more schools?

Well, we're in 40 states. So each state is a little different. And even here in this market, the schools have been opened and they've closed just depending on the COVID situation. But we're about 10% actually as a percent of the U.S. revenue for adolescent, and it's 10% of the acute revenue. I think what we've tried to do because we do know that the adolescent and even the young adults have been impacted quite dramatically by the pandemic. And there's a lot of research out about the age group of adolescents. The suicide attempts are dramatically up. So what we've done is we've been very proactive in trying to reach other referral points like mental health professionals. ERs are sending adolescent to us. So sequentially, we have seen improvement. It started out lower in the early part of the summer. But as we've gone into the fall, we are seeing more of the adolescent business, but we also know that the schools are key. And so as they do open, we think that will actually add to the volume that we're seeing.

Okay. I mean we do hear a lot about these pressure points on mental health from the COVID crisis. And I don't know whether that would be across the board in the types of patients you see or maybe focused on depression, severe depression, suicide and so forth as opposed to schizophrenia or something. But are you seeing a shift in the types of patients on these volume trends that suggest it is direct fallout from the COVID crisis? Have you been able to assess that?

It's difficult to discern as patients come to us what has caused them to come because before the pandemic we had very strong volume, 1 in 5 Americans had a mental illness. So we know that's already a constant. But I think, A.J., as we see what's coming in now, we do know our acute service line is seeing very robust volume, which means that they are those that are not necessarily coming for substance use, at least to the acute, but are coming for, as you mentioned, depression and anxiety. But there are criteria to get into an acute facility. They're meeting that with being a danger to themselves or others. So that's been a common and it's really before pandemic. But now that, that's happened, I think I would say it's just more of the volume of those individuals that might have had a predisposition before COVID and the crisis. And now because of that are seeking help. I do think it's probably a situation that will continue. And some of the studies that have been done around other pandemics in the past, SARS, really demonstrate that it's not a short-term situation. It is lasting because basically, these individuals are experiencing trauma and the pandemic itself has caused trauma.

Interesting. Okay. And do you know from those prior experiences sort of when you see -- so the condition might persist with people that have the issue, but is there a lag effect on people coming down with diagnosis that are relevant to you as we walk through something like this? Do you see it sort of real-time or is there sort of a lag effect on it some time?

I think there's both. I think we're seeing it real-time with our volumes where they are. But I do know that just reading through some of the research and looking back at some of, as I said, the other pandemic, there is a lag effect. And there are people that I think are coping right now, and there's probably still -- and I don't know and I can't size it, but I do think there still is some fear about seeking help and going out. And so if you look forward and say -- and hopefully, as we get some of the things in place like the vaccine, I do think that if someone's in the middle of trauma, sometimes that can be delayed. And it can be a situation where they're coping the best they can now. But as they're able to seek help, I do think that we're going to see both immediate and long term.

When we talk about the building blocks to your growth, you've got obviously the 300 beds in the U.S. that you're adding in the acute side. Do you think -- and I'll be talking to you about U.K. in a minute, but when you complete that sale, do you think that pace will step up on the bed additions as you free up some capital? Or is that sort of a comfortable number that we'll maintain that type of bed additions going forward?

I don't think we're constrained right now with capital for our bed additions. I mean, certainly, we would have options for other growth pathways, like M&A and larger M&A. But I think right now, really, the key indicator is just the facilities as they reach certain occupancy levels, there's a process sometimes with CON and other things. So we might see that increase somewhat, but I think right now the pace is really driven by the facilities. They bring the business case. And then we are adding beds. And I think, again, back to just looking at the highest census for the company, we are filling those beds, which just shows that the demand is there and that the business case was solid for the expansion. Do you want to add anything, David?

Yes. I do think the 300 beds is what we typically add for our existing facilities. We do have another 200-plus beds for joint ventures and de novo facilities. And we do see a growing opportunity there. So that could accelerate as we move forward. We have a strong pipeline that we think supports a higher level of bed additions through that pathway over the next several years.