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

All right. Good afternoon, everybody. Welcome to the Raymond James conference. We are pleased to host the management team from Acadia, Deb and David. They're having fun with their camera right now. You guys look great. Let's leave it right there. It's fine. We've had a lot of production conversations. So I think we've got it done. I'll start my video. I'm sure that's important to everybody.

So just to start with, we had to completely scrub the questions I had labored over the weekend because you guys gave us a good curveball in terms of a lot of new information. So kind of my general first question is what went into the thought process behind the 5-year goals? How much planning time went into it? What were some of your biggest considerations as you are developing the plan? And just anything you want to talk about because I do think that was a rather pleasant surprise to the market, the stock obviously reacted well to it. But just kind of what was the genesis of that? And how did it come about?

Well, I think that by selling the U.K., we really see a very compelling opportunity in the U.S. and it's an opportunity for us to pivot to the U.S. but also to focus on our growth pathways. And I think what we tried to do on the call was go through some of those, John, and our service lines. But we believe now with our increased financial flexibility that we are well positioned to take advantage of what now is really a strong demand. I think that if you look at Acadia and you think about the strengths of Acadia, we very -- we have a very diversified service line. But in addition to that, each of those service lines has growth pathways. So we started this when we did our strategic review. And we said what business, what services do we want to be in. And I think what we concluded is we were in the right service lines. And as I think about the U.S. and the demand and the profile for each of those service lines we believe that over the next 5 years, we have growth across each of the pathways. And I think what we wanted to do by going out 5 years is really show our confidence. And we have confidence in the fact that we are in the right services, we have the pathways and we know how to execute. We've done a lot over the last couple of years to really focus internally with some of the operations. But we're a growth company, and we want to return to the U.S. strong and we want to grow over those service lines. And I think that the entire team here is very energized. They're very excited to be focused on the U.S. But also -- and David can talk about it as well, it's just our financial flexibility profile has changed. And we're pleased with that because it gives us freedom to really look at what's out there. It gives us freedom for M&A at some point, if that makes sense. But what we tried to articulate on the call is just how is that going to happen and what is the projection for each of the years and just the cadence of our growth across our operations in the U.S. David, do you want to add to that?

I think you covered it.

So I think as we think about the acute line and we think about specialty, we think about CTC and also RTC, we see that across each one of those, there was strong demand before the pandemic. But I think, unfortunately, as a result of the pandemic, this has been a very difficult year for certainly everyone, but it's really a difficult year for those that already had mental health issues. And now what I think we're seeing to the research is there's another large group of the population that's going to suffer from mental health and substance use. And the opioid is exploding, the use of opioids. So we think we're well-positioned, and we wanted to make sure that everyone understood each of our service lines and how we can grow.

And Gretchen reminds me -- and I'm sorry, I'm old, but I think you guys wanted to go through some slides before I jumped in with all my wonderful questions. So why don't we pivot to what I was supposed to let you do to begin with. So thanks.

All right. Well, I was trying to cover John some of those slides, just -- but I'll -- so I'll go through quickly what we wanted to illustrate. If you go to Slide 2, that is the safe harbor language, which we'll move on from. As I mentioned just now, we have a big profile across the U.S. We -- I see us as the leading pure-play behavioral health company. Obviously, we want to be the leading behavioral health care provider in the U.S. And I think we're well positioned to be in that spot. We do have 227 facilities and they're spread across the U.S. We have just under 10,000 beds. Okay, now we're back. We treat approximately 70,000 patients a day. And I've already talked about our 4 service lines, which are the 44 acute facilities, 37 specialty, we have 131 CTC and 12 RTC. As we look at just the services and the programs that we offer, we cover children, we cover adolescents, adults and seniors. And the inpatient acute care is really for those that are a threat to themselves or others. The inpatient residential program is focused on treating patients for substance use and eating disorders. We have other programs as well that combined substance use and mental health. We also have outpatient programs that provide medication assisted treatment, CTCs and then we have longer-term residential treatment for children and adolescents, which is our RTC service line. I mentioned earlier, we are well positioned with these service lines to really not only manage through the pandemic but also to move forward as a company. And as we have the opportunity with our financial flexibility, we think we have a compelling opportunity in each of these lines. As I'll -- we'll move to the next slide, which is Slide 5. We are unique. And I think that what we tried to do in our call, which we were discussing, John, is really talk about what makes us unique. And we do have strong diversification across our service lines, our payers, our geographies. And that's illustrated on the slide. If you look in the upper left, that's talking about our service offerings. And then if you look across the right, we do have diversification and geography. We don't have any state that accounts for more than 12% of our revenue. And we also don't have a facility that accounts for more than 3%. So we do have a lot of diversification. Medicaid is our -- is about 50% as a payer. And it's also very diversified. So this Medicaid is across 46 states and also in Puerto Rico. There's a number of managed care organizations, as I think everyone is familiar with behavioral in the industry, they manage for Medicaid and for the states. Our commercial is 28%, which you can see on the slide. And then our Medicare is 16%. And that has increased compared to 2019. And the primary reason for that is our expanded coverage for our MAT services at our CTC locations. And that began in January of 2020, and the CTC division has seen their Medicare increase as a result. Our self-pay is low, it's 6%. And that's actually declined since 2020. And that's really due to a shift in our Medicare from self-pay. So self-pay has dropped as our Medicare has gone up. I'm going to turn now to Slide 6. And we're just trying to illustrate, I think, the demand that we see that's here now but also what we see coming. I think it's not -- I don't think anyone is questioning just the impact that COVID had on many individuals across the country. It's really even more pronounced, as I mentioned earlier, for those that struggle with mental illness and with substance use issues. There is a McKinsey report illustrated on the slide here. They project that approximately 35 million Americans are expected to experience behavioral health conditions post pandemic. These are a new group of individuals that did not have mental health issues prior to the pandemic. Also, there is a report from the Census Bureau. And I think what they have found is that 1/3 of American adults report either symptoms of depression or anxiety. And that's triple the rate that was reported in 2019. I think what we have to keep in mind is that prior to the pandemic, there was 1 in 5 American adults that suffered from a mental health condition. So if you take these numbers and you look at the substance use. Prior to the pandemic, there were 20 million that suffered from substance use. This is expected to increase as well from the pandemic. The other thing that we've been seeing a lot about lately is the impact on children and adolescents. The pandemic is impacting their mental health. So it's not just adults, but it's also children and adolescents. And I think that as we look back at past pandemics and the research that's been done around those, I think that what we've seen and what we believe is that the effects of this are going to remain into the future. They will not go away when the pandemic ends. And we believe that the demand that we see now will continue because this has been such a traumatic event, and there's a real connection between traumatic events, which we've just gone through, and mental health and substance use issues. So as we look at our pathways, which I mentioned when we were talking earlier, we have, I think, some good pathways for growth. We have our joint ventures, we have our facility expansions, we have wholly owned de novos And we have M&A as well as extending our continuum. So I'll go through those just for a minute. Facility expansions are our best return. And I think that there, what we're doing is capturing demand from our existing markets, and they bring that case to us. And so as they see demand, we look at adding beds. We leverage the existing cost structure. We're able to increase our margins and profitability. And so based on demand we see and the case from our markets, we expect to add 300 beds this year. Our second pathway, which is joint ventures, is partnering with health systems across the country. And we do have a solid pipeline there. And it's not gone away. In fact, it's actually accelerated, and we expect that 2022 will be a very strong year. We are looking at between 4 to 5 facilities that we'll be adding with our partners. And that's actually the strongest year that we've had as a company. If you take the third pathway of de novos, there are probably -- there are over 100. And I think that, that number is probably low of markets in the U.S. that are under-bedded and they don't have resources for inpatient care. So that's an area of opportunity for us. We're going to add one facility this year, and we're adding 11 CTC de novos this year. The fourth pathway is M&A. We talked about our financial flexibility earlier. And I think that this will give us the optionality if we see opportunity. And I think that we think there's a good pipeline for M&A, but we're going to be disciplined. And we're going to utilize our capital allocation framework that we built here. And we're going to use that discipline. But we see opportunities for tuck-in M&A as well as platform opportunities, which again we think that we have good visibility around and we will plan to explore those. The final pathway, which I'll mention, is just extending our continuum of care. Telehealth, I think, is one positive that's come out of the pandemic. It's changed, I think, the view of not only our consumers but also physicians who are willing to use telehealth. We see that as a way to use our platforms that we have, and we increased those during COVID, to care not only for patients that might be leaving our facilities but also an extension in new and existing markets that we're not in right now with telehealth. I think we also see it as a way to assist with physician coverage, which again this is about access and making sure we give people an opportunity to be assessed timely and if they need our services, too, to be able to avail themselves of that. And telehealth is a vehicle. And we also have used it with our partners in the ERs and others that use this as a way to make sure that patients are assessed, that they are designated for the right level of care, and we plan to expand that in the future. The last opportunity for extending the continuum is really through our outpatient programs. We do have an effort and a focus around adding partial, around adding IOP, which is the shorter 3-hour services. And I think that we have many facilities within the company that still have not built out the continuum. So that's a focus. We did focus on that in 2020, and that will be a future focus as well. And then as I, in my remarks, and let David speak about our results, I want to mention our marketing strategy. I think that we do have strength in the company around our marketing. We have a diversified strategy. We have a strong platform that has allowed us to have visibility as we've gone through this last year, which was very difficult for our team. We were able to make changes. We had data available. We were able to change as we needed to change. We were able to refocus our marketing. But at the same time, we were able to maintain consistent contact with our referrals. And I think as we went through the year that, that's made a difference in our volume. It's made a difference in the patients we've been able to take care of, which is really the most important part of what we do, and that is connecting professionals with patients and their loved ones and our services, which we want to make sure are the highest quality that we can offer. And I think our outcome measures, which we implemented in 2020, are going to not only be a way to measure that but also a way to make sure we keep improving what we do. So I'll turn the presentation now over to David. And thank you, John, for letting me go through the slides. I appreciate it.

Thank you, Debbie. Slide 8 does provide some highlights of the company's financial performance and cash flows. We did successfully complete the sale of our U.K. operations on January 19. We received $1.35 billion as part of that transaction and expect our leverage to now be below 3x and to have a strong balance sheet to fully execute the growth strategy that we have for our U.S. operations. We did see strong revenue growth in the fourth quarter of 2020 despite the impact from the pandemic on our business, especially early in 2020. For the fourth quarter, revenue increased 8% as compared to the fourth quarter of 2019, which includes 7.6% same-facility revenue growth. And that includes both strong volumes growing at 3.6% as well as revenue per day growth of 3.8%. We've also had a focus on cost management and cost savings throughout 2020, and we've seen the benefits from those operational improvements. In 2020, we focused on improving efficiencies throughout our operations and managing our costs throughout the pandemic. These efforts identified some cost savings that not only were helpful during 2020 but also are sustainable going forward. We also had identified initiatives in 2019 relating to procurement and other areas that were part of a strategic review that we went through in 2019. We had established a savings target for those initiatives of $20 million. And we have now achieved that savings target in the second half of 2020. Through our revenue growth, combined with these cost management initiatives, we were able to see strong EBITDA and margin improvement in the fourth quarter. And the business generates strong free cash flow. We did have a very strong year of free cash flow before expansionary CapEx in 2020 at more than $500 million for the year. And that has put us in an even stronger position than if we only had the U.K. sale transaction. Despite the challenges from COVID during 2020, we did continue to invest and expand our capacity in the U.S., and we added 460 new beds to our U.S. operations at both existing and new facilities during 2020. And we also opened 6 CTC de novo locations during the year. I'll wrap up the slides, John, with just some quick key investment highlights. As we mentioned earlier, we are the leading pure-play behavioral health care company providing high-quality care to patients across the continuum of care. We're operating in a highly attractive, growing market with significant unmet need. As we talked about earlier, we have the diversified service lines and a diversified payer mix that creates stability and also provide significant long-term growth opportunities. Post the U.K. sale, we have the focus singularly on our U.S. operations and have financial flexibility now to pursue our strategic agenda while utilizing the disciplined capital allocation framework that we have across our growth pathways. And lastly, we have a strong, experienced management team from the senior level to the facility level with a successful track record of implementing the growth strategies that we discussed while maintaining operational excellence, including managing through just all the challenges from the pandemic over the last year. And that concludes slides. I'll turn it back to you, John, to resume the questions.

Very good. Just something that this -- maybe I'm the only one who doesn't know this. But when I think about your specialty facilities, that does include, correct, the residential addiction facilities you bought from CRC years ago. Is that right?

Yes, it does.

Yes.

So in that bucket, it includes that, but it would also include a Medicaid-funded eating disorder clinic as well. So it's sort of a mix of facilities in that bucket. Is that right?

Yes. We do have a variety of inpatient specialty programs. The -- we don't exactly have the Medicaid-funded eating disorder program, but we do have Medicaid-focused programs within specialty. And specialty does also include some facilities that have a primary focus on eating disorder and other treatment. So there are a variety of programs within our specialty division and service line.

So just thinking for a minute about the residential addiction and network business, how has that specifically held up, given a somewhat weaker employment backdrop? We usually think of that one, that business, not being quite as recession-resistant. But as you are in network and some of your facilities, like Sierra Tucson, that have these great reputations, has that business maybe held up a little better than you thought? Or did it take a little bit of a ding when we had the peak of the COVID employment effect?

I think the business -- the specialty business was most impacted by just the travel and some of the originally stay-at-home orders, but then some of the states that restricted people coming in and out of the state. We really have seen a good stability in our mix in specialty. So actually, our commercial is up a little. And so rather than seeing that disrupted, I think what we did see disrupted was just the travel into some of the patients that had a wide geographic area that they pulled from. But overall, while they probably had the most impact of all of our service lines, we really continued to still, even in the height of COVID in the spring, we still got patients. We focus regionally with our marketing, so that individuals could come in by car and other ways. But it's really -- it was impacted somewhat in the fourth quarter because we saw after Thanksgiving, some of the resurgence in Arizona and California. But in the first and second month of this year, we've actually seen, John, just some very good numbers and good census back. As they managed through the COVID in the fourth quarter, we've seen the individuals now that are coming in, and they are traveling in. And so the mix has really stayed pretty stable.

You mentioned on the call that I think around 15% of your workers have been vaccinated, which is a bit lower than the 50% numbers we're hearing from the acute care. Do you have a theory as to why your number is that low? Is it just the -- is there some demographics at play? Is it geography? Or what do you think is driving that?

Well, I think the number is going to continue to increase. But as we look across the states, there has been more controlled distribution to really med/surg hospitals as a priority, which we understand. They are on the front lines. They're treating those patients. So we expect that as the distribution channels open up more that we will see a higher percent. Those that have had open distribution, where they've been provided the vaccine on-site, it's a much higher percent. We have some that are over 50%, some are as high as 70% and 80% that have actually availed themselves to the vaccine. So I think we'll be able to talk probably better about that after we see now that we have the 3 vaccines and the states really trying to make sure they're getting that out. Our workers are treating COVID. So we've certainly been advocating to get the vaccine in a timely way. But we also understand that med/surg workers are on the line and they're seeing more of that than we are as a company.

Are you still seeing quarantine issues with your labor that are material? Or is that kind of last year's story?

I think it's probably last year's story. We still have a few markets that still have some higher numbers of COVID. But we had very good processes that we employed last year to make sure that if patients did present, we were able to test them, isolate them. And if they did test positive, obviously, quarantine. But a lot of them returned to treatment and depending on the program and the facility. But I think we've started to see that decline. And we certainly did see the resurgence after middle of the fourth quarter. But as we look now, we were -- we think we're in much better shape.

And did you see -- maybe fourth quarter would be a good example. Did you see a market difference in your lockdown states' performance across the board versus, say, Florida, which was wide open?

Yes, I think it does differ in some ways for each of our service lines. For our acute service line, we have not seen a significant difference just from one market to another. I think our protocols developed early in the year and the job that our team did from the corporate level to the facility level and just developing the right policies to keep people in treatment, continue to admit the patients that need treatment. I think we saw that continue throughout the year and really allowed us to continue to provide that treatment despite potential resurgence in certain markets for acute. And really, the only impact that we have seen is what Debbie mentioned around more of our patients that travel for treatment, where there was a hot spot that a patient may have been traveling from or traveling into is where we did see some disruption in the fourth quarter. But I think the job that we've done in just managing through that at a facility level just continued throughout the year. And really, any impact there was pretty temporary and was pretty isolated to the patients traveling for certain specialty programs.

We took a real hands-on approach, John, with our facilities. And we decided early on that we know COVID, yes, it was present, and what we really wanted to do is support the facilities. And so our Corporate Medical Director, our Chief Quality and Compliance Officer, they've spent a lot of time on the phone navigating with facilities. How do we isolate? How can we make sure that we're able to accommodate those that were coming and needed care? And I know that our Medical Director had a lot of dialogue with the health departments about -- because we wanted to make sure they understood we were essential services. And I think as we communicated that, they became a partner. And in fact, they actually complemented many of our facilities on just the best practice that we employed around infection control. And that was, to me, we -- that's not something that we face every day. We obviously have infection control policies. But this level was something new. And I just think the team really did a good job here at corporate of supporting some of the facilities that had not seen these medical issues before.

David, I'll give you a chance to butter your boss up here, always take those opportunities personally, so -- and I know you'll be very tactful, but just what we hear from the company is just a much more -- you mentioned, I think you're being modest, but a refocus on operations. What specifically -- what kind of things are being done at the operational level that maybe you weren't being done in the prior regime like specifically? I get the high-level comment, but I'd love to hear like specifically what are some of the new protocols that Debbie has brought in. And feel free to tell her what a great job she's doing.

Well, I don't know how much time we have, John, but...

Oh, Lord...

No, it has been just a lot of very positive changes. And I think that's reflected in our performance. I think, number one, the team that we have throughout the company, and Debbie has brought many of those people into the company, is just doing a fantastic job. The operations, the corporate support that we have right now for our facilities has been evident as we've navigated 2020. I think just the disciplined approach for the right way to think about growth opportunities. The use of data, we've had a lot over the last 2 years of tools that have been implemented that just give us a tremendous level of visibility. And we're also using that data in just very disciplined, interesting ways to identify opportunities on the revenue side, reimbursement, cost management side. So it's a combination of having a good team, having good tools in place and then using those tools and just being very disciplined and focused. And I'll just stop there.

That was a bunch of -- that was very generous. So as an example, how many of your hospital CEOs do you think you've turned over roughly in the last couple of years? And then what -- how many new, like at the corporate level, operations folks have been brought in from other places, roughly?

I don't know that we have the hospital stat. I think there's probably between 15 and 20 positions here at the corporate level, just very key senior leadership positions across operations, marketing resources that brought just a great level of support for our facilities. So that's probably the corporate metric. There have certainly been some changes at the facility level as well, but don't think we have that data.

We -- yes, we have a lot of CEOs that have been with us for several years, and they're strong, they're experienced. We've also been able to recruit some from other companies, from our competitors. They like the energy here. They like the fact that we are focused on not just the internal, but also we have so many opportunities to grow through what we do. It's different than any other company. And it's -- I think it's been really a team approach, as David said, where we have empowered people to do what they need to do here. But also, it's our job to make sure they can do it without a lot of bureaucracy and a lot of layers. While we have that discipline, we want to make sure we still have the nimble attitude that was here when I got here. And I think we've tried to combine both to have the focus but also be able to change when we need to.

Well, it's been a remarkable change. So just drill down a little bit more, I think there was an infamous third quarter miss a few years ago, when it was learned that the company knew kind of how many heads were on the bed at a point in time but didn't really know the payer mix. And I think there was a miss because the payer mix was worse than -- and is that something that you're seeing more in real time as an example? Is that a change that, that might not have been the case a few years ago?

Well, I think if you're talking about the 5 facilities, there were different reasons for that, but...

Well, actually, this goes back -- no, this goes back probably 3 or 4 years ago.

Okay. All right.

Yes, when we heard. Well, we know many people are there. We get a -- I just pictured this fact spreadsheet with a census count. But I don't know how much more sophisticated it was in terms of like payer mix or business mix. Is that something you're seeing in real time now?

We are. We have built, I think, dashboards around not just our census, we also have visibility around our payer mix, which is important. I think we also have more visibility, and we did this in 2019. We did some benchmarking. We built dashboards around cost management and certainly staffing, which is a big cost for us. But the other thing we tried to do is really benchmark across the company. So if there were outliers that had higher cost or, for that matter, lower cost, we tried to learn from that. What are they doing that's right? Is there some reason for it to be higher? And I think that the key, which David mentioned, is using data to inform decisions and to act. And so if we see trends, we are able to try and be in front of those trends instead of waiting and finding that out too late. We did add a Group President. So we have 3 now. And I think that, that has improved just visibility and day-to-day management. And as John Hollingsworth has come on as EVP, Larry Harrod over at finance, they work very closely with the operation team. And I think what they tried to say is we want to be the best in quality and we want to also manage the parts that we can. And we do that through the visibility, and we're not going to have -- we're trying to minimize any surprises that we might have.

Okay. Well, we are at the end of our time. That was a great presentation, I think, good content. And as always, we appreciate the support for our little conference. And thanks for coming.

Well, thank you, John. We appreciate the chance to be here.

Hope to see you in person next year. Thank you.

We do, too. Thank you.

Thank you. Bye.

Bye.