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

Great. I want to thank everyone for joining us at the BofA Virtual Healthcare Conference. It's my pleasure to be introducing Acadia Healthcare. Acadia is one of the largest providers of behavioral health, substance abuse, addiction services in the country. With me today we have Debbie Osteen, the CEO and David Duckworth, who's the CFO. So I think we're going to jump right into questions.

I guess just starting off with where we've been starting up almost all of these conversations. COVID, obviously, has had some impact to utilization over the past year. It seems like behavioral, largely -- for at least your business anyway, largely been holding up well. But talk a little bit about how you're seeing demand coming back this year and where we are versus the baseline across the different business lines?

Sure. Well, I think we started seeing really our business return to normal levels in the middle of the summer, June of last year. And I think part of that, Kevin, is related to the fact that we don't really have discretionary services. Our patients are in a crisis, and when they seek care through a referral source or ER, what we tried to do last year and also this year is make sure we can accommodate them. And as we looked at the third and fourth quarter of last year, we had very strong acute volume. We had very stable RTC and CTC volume, which is our methadone business, the only service line that we saw some impact, I guess, more impact from COVID was in the specialty area. And I think that was related to the reluctance to travel. So as we entered into 2021, the first part of January, we did have some COVID resurgence in a few of our markets. February, we had some weather events, but nothing that was material. But as we started to see the middle of February into March, we were very pleased with just the progression of volumes, really, across all of the service lines. In specialty, I've started to see more out-of-state referrals come in, which we were very pleased because I think patients started to say, "I'm willing to get on a plane, I'm willing to come in and travel." And we do have a very wide focus for those programs. In the -- at the end of the first quarter, we actually saw the highest levels that we've seen in just out-of-state referrals since the first part of January of 2020. That has continued into the second quarter, and we are seeing, actually, record census for the company, and that's based on the fact that we've been adding beds, as you know, and then also our JVs are ramping up nicely. So just from a volume perspective, we think we've seen a lot of stability, but then also growth across the specialty service line.

Okay. That's great. And I guess when we think about that, I guess, other companies in the space have not been able to grow as quickly. I guess one of the things that Dave mentioned as a gating factor to their being able to treat those patients, is just a lack of, really, the staff. So how are you dealing with labor issues during COVID?

Well, we are located in 40 states, so there's always isolated challenges. But overall, we haven't seen a big change in our labor pool. We've been able to accommodate the patients that want to come in to the facilities. Part of that, I think, is based on the fact that, first of all, we don't share all markets with our competitors. And I think you're speaking about UHS. We do have different service lines. But even those that we share, I think we tried to be very proactive about how we deal with labor. And I think I'll give credit to the staff here. We have a centralized recruiting function that supports the facilities. We also have a very robust focus on retention out in the field. And so I won't say that we haven't had incidences where had to deal with COVID and staffing off, but they've returned once they recover. And I think what I've been pleased about is that as our volumes have really ramped up, we've had the staff to take care of them. If we don't see that we have staff that we'll use overtime, we use agency. But I will say that our agency is actually down a little bit over last year. So we've been able to be very stable in that area based on all the efforts of the team here.

Okay. And how would you characterize kind of the labor, the wage growth right now?

Yes. I think, Kevin, it depends on the market. We certainly want to be competitive across all the markets we're in. That is part of our overall strategy around recruiting and retention. It's been very stable. I think we would say it depends on the market. There's markets that we want to be more proactive and address through a pay increase. But overall, I think it's in the 2% to 3% range. We have a focus, certainly, on the clinical categories that can be more competitive, more so than the more general administrative categories of our employees, but it's been very stable, and it's been in that range on average.

I'll just say also, Kevin, that we watch the trends carefully. So if we see that we're starting to have more of a need for RNs and other job categories. We have a team here that works with the facilities to review to see if we are maintaining competitive wages. And then we're not hesitating to do what we need to do in the markets. And there have been pressures over the last year. I think all of the companies have talked about that. But overall, we've been able to accommodate the census that we have and also demand that we have.

Yes. And it seems like there's a lot of demand drivers right now to your various businesses. But it's kind of hard to get a good sense if COVID keeps moving things around. Do you feel like you're gaining market share in your markets? Or do you believe that you're generally growing in line with the demand of your services?

I think it's probably a combination of both. I think we are seeing increased demand. We have been adding beds. And as I mentioned earlier, we've been -- we've opened a JV recently in the summer, and that actually ramped faster than we would have expected. And I think that's based on demand. But it's also an example where I do think we took share from others. We've built a brand new facility. We are in a market that was under-bedded. And so if I think about the company in general, I think that while we don't have as much data around that as, perhaps a MedSurge, operators have -- we do believe that with our occupancy being as high as it is that we have taken some share in markets where we overlap. But generally, demand is strong as well. So I think those 2 factors together have really created our picture of volume increases, and it's really across all the service lines.

Okay. And you guys exited the U.K. business and have used that cash to de-lever and just to kind of refocused on the U.S. business. And when you did, you outlined the outlook for how fast you think the U.S. is going to be able to grow. And I think that the growth outlook is actually a couple of percentage points higher, I think it's a 10% target. It became a couple of percent points higher if we just go back and look at the U.S. segment growth over the last, say, 5 years. I guess, a, is that right? And then, b, what was driving that kind of improved growth outlook going forward?

Well, I think that observation is consistent with what we see in our data. And I think as we look back at that period of time, that was prior to a number of the initiatives that we've put in place. Some of those are around how we just manage the business, how we manage and align our costs with our volumes and many of the other tools that we have in place around our volumes and our marketing strategy. And not only that, the last 2 years, we have really gone into detail around our service lines, how we want to grow and develop a very good framework, we think, for how we grow across bed expansions in our existing facilities, the acceleration of the joint venture opportunity as well as how we look at under-bedded markets for more de novo opportunities. So I think with the operational focus around our volumes and our cost management as well as the growth initiatives that we have in place, those are the drivers of the 10% growth in EBITDA that we're expecting. Obviously, the demand that we see across our service lines is a key part of that. But having the capacity that we're adding, as well as the tools and the discipline operationally and around our cost management, those are the drivers of our 10% target that we articulated in February.

And I think, Kevin, we feel pretty confident in that target, and a lot of that is due, as David mentioned, to just the visibility. We have over bed expansions and our plans around those expansions as well as the pipeline for JVs and our de novos that we believe make sense because of the under-bedded markets that are still out and pretty prevalent across the country. So as we look at all of that, plus the internal improvements, we feel like we have a good target set, and we have plans to execute around those clients.

I don't know if it's possible to kind of break out that 10% and drill a bit more detail. I mean like how much of that would be kind of what you might think of kind of same-store growth? I mean including bed additions, it's probably hard to break out bed addition separately, like same-store growth versus de novo that you're doing on your own versus joint ventures that you're doing versus maybe just cost leverage and margin expansion, maybe like just rough buckets to kind of think about that.

Yes. I think that there's many different ways that we like to dissect it on our end. And so the way you're talking about it, just existing facility growth versus new facility growth, with the expansions and the bed additions that we see across our service lines, we do think that more than half of that 10%, probably in the 6% range, is our existing facilities. Because there, we do have a bed expansion number that has always been a good opportunity for the company, but continues to be a great opportunity for us. We're in many markets, and so we're really capturing opportunities across the service lines and across those markets. And then the remainder would be new facilities, which would include joint ventures and de novos and then the CTC de novos that we've talked about as a growing opportunity. So volume is a big part of that, but just continuing the cost management initiatives and being able to leverage as we grow our volume, leverage the efficiencies that we see from that incremental volume, that's certainly part of the 10% growth, and we expect margin to -- improvement to exist because of those efficiencies.

Okay. That's helpful. And we've talked a little bit about this JV pipeline. Can you just remind us how many of them you expect to do? And I guess, what is the benefit to you of doing the joint venture versus doing a de novo yourself? And what does the JV partner get out of it?

Well, I think as we look at JVs versus de novo, the JVs make sense when you have a market, where you have a very important system, a large system. And I think that as they approach us, what they're looking for is a partner that has a track record in behavioral health. They usually have a unit or sometimes more than one unit that they are operating. But I think that as they look ahead for the system, they're looking for a partner that can operate in a way that will keep their mission, which is very important to them in the community, but also bring expertise. And so as we look at what makes sense, if we have a market where there really isn't a dominant system or a system that we think makes sense to affiliate with and it's under-bedded then we would look at de novo, and we would put in a facility. If we're looking at a JV, the advantage of working with a partner is, first of all, they do have a market presence. We oftentimes are able to leverage their relationships with payers, and we've seen that several and many instances for our partners where they have relationships with payers that we were able to take advantage of. I think the other part of that is there is a real focus right now on mental health and physical health. And so they're looking at trying to have both and have strong offerings. And I think we come in with our track record, and we -- they check our references, they talk to our other partners and because -- as we choose each other, it's important that there's a good fit. And I believe that, that's a real exciting way to grow, frankly, through the JVs. We have several of our JVs that we've done over the years where we've done multiple expansions. So it's not always just the first hospital and the beds that are brought in. But then as those partnerships develop. And certainly, right now, with the need, we see opportunity not just to build that first hospital, but to build and expand beds on the existing campus as well as in some areas, we build other facilities.

That's great. Are the economics to you basically the same? Are the returns the same if you do in a joint venture or de novo? Or is one better than the other?

I think that they're each -- they each vary. We try and make it very individualized to our partner. And depending on what they bring to the joint venture, the beds or the land or other valuation elements, they will look different. But we do feel good about the return that's generated by those. And as I said, as we go into these markets, what we've really seen is just a real development of the business, our partners supporting us, we're working with them to help with their ERs and other elements that I think are important to them. So it's worked out not only from our partnership, but also from the financial aspect of it.

Okay. And then is there anything to think you could think about, or that we should be thinking about with the economics of the de novo -- if you're a bigger part of the business is going to be doing de novos and joint ventures. Oftentimes those come with start-up costs or investments. Is there anything we should think about as far as a drag versus that 10% type outlook over the next year or 2? Or is there enough kind of growth to overcome those start-up losses?

I think going through the new facility start-up process and incurring the losses is obviously part of that strategy. The level of start-up losses can depend on the market and how we structure a new joint venture or a de novo facility in terms of hiring the staff and how we go through the survey and the licensing process. I think we've seen that our team is very experienced and has a very strong track record in going through this start-up. And so we have seen some improvement recently in the impact of going through that process. And I do believe while we could see some growth in that start-up loss number as we look at 2022, when we talk about a greater number of new facilities coming online, it is something that we believe we can overcome. There could be a slight impact of that. We've estimated the startup losses in that first year of opening a facility at around $2 million per facility. And so we could see a slightly higher number, but we don't view that impact as being extremely material and something that we can't overcome through the other growth opportunities that we have. And we've seen recently, as I mentioned, just a very good record. Our facility that opened in the third quarter, I think, was fastest to breakeven in the company's history and was breaking even in our third quarter of operations. And so we believe, with the execution that we see and that we do have enough other opportunities to cover it, and it shouldn't be material even if it is a higher impact next year.

Okay. That's great. And then I guess another web of growth would be M&A. You guys haven't done much in the U.S. recently, but then you just did one in Q1. How do you think about deals? And I guess there are a couple of larger platform-type companies out there still that are potentially for sale. So how should we think about your appetite for an ability to do tuck-in deals versus your appetite for something larger?

Well, I think just historically, as you know, Acadia has had a track record of M&A. And as you say, recently, we've done some tuck-ins and Vallejo, we've just announced. But I think we're open to the market itself. We're usually informed about what's out there. And I think we know the platforms that are there. I think what we would look at as we evaluate each one of the opportunities would just be what are the metrics that we've set up for our discipline here, the capital allocation framework that we have, if it doesn't meet that framework. And then the other part of that would just be the synergies that are there, we have a great team here for integration and really being able to bring in these tuck-ins and to improve them and also to grow. And I think that, that makes the tuck-ins attractive, but we now have a lot more flexibility with our balance sheet and our leverage. And so I think we would be open to looking at what makes sense for Acadia, not just tuck-ins, but perhaps larger acquisitions. But on the other hand, we're going to be very disciplined about it, and we're going to make sure it fits what we see as a good financial picture as well as synergies and improvements that we can make.

Yes. And I guess how do you think about M&A? I think that a lot of times, we value the providers on an EBITDA basis. Today, a lot of things are going to be accretive on an EPS basis just because cost of financing is relatively low. I mean do you think about -- you talked about things being making sense financially? Are you thinking about it from an EPS basis, an EBITDA basis, an ROIC basis? How do you think about that?

All of those metrics are important to us. To your point, we don't want an opportunity to be attractive just because of the cost of debt. From our perspective, it really needs to check the box across all of those return metrics, and we certainly have the balance sheet capacity now with where our leverage is and could see the attractiveness into M&A just because of the cost of debt. But we do want to see those other strategic new markets, synergy opportunities as we evaluate an M&A opportunity.

I think Vallejo is a good example, Kevin, of just it is a smaller facility, but it is in a market where we have other hospitals. And in addition to that, we believe we can expand. So we would look at that and look at synergies, but also we would look at expansion. And that would -- as we look at where they're positioned financially, we would look not only at current, but where we can take it in the future.

Okay. And I guess, how are you thinking about leverage targets? And if some of these larger deals don't come to fruition, how do you think about share repo?

Well, we closed the first quarter for the first time, not having the U.K. business at a leverage of around 2.7% and have set our leverage target at somewhere between 3% and 4%. Obviously, we're somewhat new to being a U.S.-only company at the leverage that we're at, so we'll continue to evaluate that. And we do think that as our earnings grow and we see strong cash flows in the business, we'll see some deleveraging from that 2.7 level that we're at right now. So I think that capacity will continue. Our priority is going to be growth. We think, across the growth pathways that we have, those are the best opportunities for us right now, especially the facility expansions and the de novos and the joint ventures. We're happy that we have flexibility and a lot of options as we think about growth and other capital deployment opportunities. But right now, that's not something that we've evaluated around the share repurchasing just because of the opportunities that we have elsewhere being more attractive. But we're happy that we now have more flexibility and optionality.

I think with demand as strong as it is, and really, demand was strong before the pandemic and a lot of the metrics that you look at over -- between '18 and '19, which is suicide rates and drug overdose and, certainly, just serious mental illness. I think if you look at that and then you overlay the pandemic, we want to be prepared to meet that demand, and that's why I think we're focused on growth, making sure we have the beds in place and then also markets that are under-bedded, putting our hospitals there and making sure that we're staying ahead of the demand as much as we can.

Okay. That's helpful. I guess, are there any businesses today that are underperforming? It feels like, as you mentioned, specialties is starting to come back to normal. Are there any areas where you look at it and say, this is still not where it should be either from a growth perspective or from a margin perspective?

We've actually been fortunate to have a lot of stability across the service lines. The acute service line has been very strong. There's very strong demand there. I think we've been able to make some good operational improvements and just having visibility around cost management. I do think that with respect to RTC, very stable. But as we started this year, we did see some impact from the storms. They have -- a lot of them have a school-based business, and so you see impact when you have weather. But I can't really see a business underperforming. But I do think that specialty, as you mentioned, was one where we just at things we couldn't control, like travel. What we're happy about and what I'm pleased about is that, that is returning and is actually above the levels of before the pandemic. So I think all of our service lines are performing well, and they're going to continue to grow because as we look at even the second quarter and what we've seen this quarter, those strong trends are continuing.

Okay. And I guess when we think about the different businesses and you think about that incremental dollar of investment, where is the greatest return? Where would the preference be?

I think as we think about the plan that we already have in place, we have prioritized bed expansions in our existing facilities and think that, that happens across all 4 service lines that we'll see some growth in all service lines because all of our facilities are planning for their next expansion and executing on one right now. We also think joint ventures and de novos will continue to be an attractive opportunity. So that's where we would say the priority is on the next investment dollar that we see. And of course, M&A will continue to evaluate the opportunities that we see there between the larger opportunities as well as those tuck-in opportunities like the one we're doing in California, many of those, we believe, will be attractive.

I think also as we completed our strategic plan, as David mentioned, and just where we see ourselves over the next 5 years, probably the RTC area would be the one where we may not put more into growth. It's a very stable business for us. But I think in acute and specialty and CTC are the areas that we think there may be faster growth with all of them than even RTC adding beds, but just more growth in those 3 service lines.

Yes, and that's something I can follow-up with. So I hear de novos and joint ventures and even bed expansions, I think acute. But I guess you haven't been talking about a bit more about the CTC opportunity in the clinic growth there. Can you maybe talk about -- I don't know if it's a change in view, but you certainly -- we're certainly hearing more about it. What's going on there, driving that increased focus?

Well, there's a couple of things that I think have impacted that business. One is just the opioid abuse, as they exploded with the pandemic, but it was -- there was just a lot of -- I think it was the highest overdose deaths this last year since they started keeping those statistics. So you have this high strong demand. But then also, there's favorable reimbursement trends there. Medicare began covering our methadone business and -- in January of 2020. And then Medicaid is mandated to cover it, as of October 2020, many states actually accelerated that. So I think we have very strong demand. We have a very strong clinical model. And then you've got the reimbursement now that allows us with still states that are underserved with clinics. And we have, as David mentioned, we have very aggressive plans there to grow because there's still a need for those services. And we have a very good team to identify those and then implement and execute on opening the clinics.

All right. I'm sorry. Unfortunately, I think that's all we have time for. So I want to thank you for joining us, and looking forward to doing this in person in Vegas next year.

Sounds good. Thank you, Kevin.

Thank you.