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

Acadia is one of the largest providers of behavioral health services, possess broad portfolio of assets. Presenting today, we have Chris Hunter, CEO; David Duckworth, CFO; and Gretchen Hommrich from IR is in the audience as well.

I'll just jump right into Q&A, but maybe Chris. Within 4 weeks, you must have a whole new strategy for the company. Maybe just kind of tell us how you're thinking about the business and the outlook and what drew you to kind of the opportunity here at Acadia.

Yes. No, thank you, and thank you for having us. It's been a great start. It was helpful to -- in week 3, get to do an earnings call where the company was able to produce such strong results. So I just think the company is operating off a strong foundational base. I think the execution has been an area of focus that really shows. Really pleased to see the strong demand in all lines of business. And there's just a lot to like with respect to our diversified payer mix, our diversified geography, the ages that we serve, really strong balance sheet, the 4 growth levers that we've talked about extensively. There's just a lot of momentum in the business right now, and I think a lot of continued opportunities. So just really pleased to be at the company and to build off a really strong foundation and move on from there.

All right. Great. I mean, I guess, maybe we start with that volume outlook, because volume has held in really well for you during the pandemic and kind of better than some of your peers. But like how should we think about that supply-demand imbalance? Where are we today in that long-term structure?

Yes, Kevin, we continue to believe across all of our service lines that we are seeing very strong demand, and we are seeing volume growth across all 4 of our service lines. And we did deal with, I guess, a little bit of a challenge early in the first quarter with the Omicron variant. It feels like old news, I guess. But as we think about our quarter numbers, we reported 2.2% same-facility patient day growth, but that was after a January that was challenging and had the highest number of cases that we've had to date in the pandemic which impacted our acute businesses. Some of our other service lines were stable throughout the month of January, but we did see the challenge more in our acute business. But we recovered very quickly. I think throughout the pandemic, we've really shown that our services are resilient. And we're pleased to see a very strong February and March where volume growth was above 3% and really seeing that demand across all of our service lines. We continue to grow in our existing facilities and in new facilities because we do believe there's still an increasing demand across all service lines that we operate in.

Is there one that you kind of point to as kind of outperforming the others from a demand perspective?

We are seeing strong performance across all of the service lines. I think naturally, we see more growth in our acute service line because there have been more investments in that service line as we think about the company's growth pathways. Our joint ventures to date have been focused on the acute service line, de novos, or acute and CTC. And so we've been adding more beds in the acute service line and have seen strong growth there because of the capacity additions. But as we think about all the service lines, we would say all of them are performing very well, seeing year-over-year growth, seeing ongoing growth opportunities within the various markets that we're in, within those service lines. There are certainly facilities, as you would imagine, with as many facilities that we have that -- we think have an opportunity to continue to grow and do better. And there's always some facilities that can grow and have the capacity for more volume, but we're also adding beds to other facilities that need to add beds.

Yes. I think one of the things I would add, just in my early days in the company is just being very impressed with the execution that exists. So I think even at the local market level, there is a realization, particularly with some of the labor headwinds, some processes have been put in place where the local market operators are surfacing staffing challenges and expected to surface those challenges immediately. And we did a call very early this morning that we do on a regular basis, where our Head of HR, our COO, our executive team, many members of our executive team are working with these operators to get them the resources that they need. And it's really an expectation that they're raising their hand and asking for help, but also that we have a corporate HR team that is really delivering on that. So that execution is something that I certainly do not take for granted. I think the company does extremely well, and I think we saw that in the results that came out last month -- last week.

Yes. So I can maybe just expand on that a little bit because I think that is -- well, labor is clearly the topic is sure on the provider side of our coverage. So I guess what are you seeing from a labor perspective, what kind of wage increases you're seeing now? And obviously, one of your competitors is struggling a little bit more on the staffing side. Local execution, it sounds like is part of the answer. Is there anything else that you would point to as far as how you're able to source labor when broadly speaking is difficult and when competitors are having trouble?

Yes. Our view of the labor market in general continues to be that we do see some challenges in certain markets and certain job categories. We are diversified in terms of our service lines and in terms of our geographic markets. So one market may be going to a challenge that we don't see in another market. So what we're always focused on when we talk about bringing corporate resources to help our facilities is just identifying a local challenge early and bringing the right recruiting and other employee engagement initiatives to that facility to make sure that on the volume side, we continue to meet the strong demand that we see. In terms of other aspects of the labor market, wage inflation has been a little bit higher. We've always just taken a proactive approach around pay and want to make sure that we remain competitive in our markets because that base group of employees is where we want to be sure that we provide the staffing. But at the same time, if we need to use one of our contract agency partners to provide staffing, we do have that available to us as well because the most important thing is that we have the right staffing resources to meet the demand that we see. But we continue to see one market that may be more challenging than another, and our focus continues to be just bringing the right resources and attention and make adjustments quickly to support the volume growth in that market.

And I would add that I think the contract labor has been consistent at 2% of revenue approximately. But the team has done a very good job historically of just continuing to keep those relationships on the contract side and have been able to utilize that when we need to, to flex up, particularly with RNs, and that has also been very helpful.

And when you say wages are up a little bit, like where are they now versus where they've been?

And it can depend on the market, as you can imagine, depending on the job, we, of course, focus our initiatives on where we may see a challenge. I think pre-pandemic, we usually talked about an average of 3%, again, depending on the market and the job. As we look back over the last year or so, that's been more like 5%. The good news for us, I guess, is that we have seen volume growth as we have increased wages. We think that's important to do that, remain competitive in our markets, and it has gone along with us being able to treat more patients, see the volume growth. And then also, we continue to be focused on just cost efficiencies to offset some of that wage inflation and other cost inflation. And then we've seen good rate increases from our payers. We reported in the first quarter more than a 6% increase in revenue per day. And that doesn't all relate to this quarter's increase in costs. Some of that is related to initiatives around our rates that have been in place for a longer period of time. But we've seen wage inflation, but we've also seen volume growth and reimbursement improvements over the last several quarters.

Yes. Can you talk a little bit about that pricing dynamic because that's been kind of a surprise for me, I guess, the last several quarters and pricing has been quite strong. And I guess, normally, when I think about the growth being more balanced between volume and pricing, and so pricing has been a bigger part. And then to your point, there tends to be a lag, it seems, between rate updates and how quickly you can kind of get the rate so you -- this time, it just kind of happened to come in. So why did it come in now? You must have been doing something a few years ago. So let's dig into that a little bit more.

Yes, sure, sure. And we do have an expectation on the volume side that it's above 3% and that rates in a normal quarter might be more in the 2% to 4% range. But when we do see higher cost increases, we do hope over time that, that leads to stronger rate increases. As we think about this quarter, I think that, unfortunately, for our business, not every payer has a perfectly scheduled rate negotiation timeline, but it does exist in many cases for our commercial payers. But for many of our Medicaid and managed Medicaid payers, it depends on the state and the methodology and the rate increases aren't predictable from year-to-year. And the methodology isn't just the previous year's cost increases become next year's rate. So it is a process for many of our Medicaid payers and Medicaid is half of our revenue. It depends on the history that we have with that payer and the methodology in place within that state. So there is not a perfect relationship between cost increases and the rate increases. But there's -- the cost increases are one component of the discussions that we have with our payers. They're obviously focused on mental health services and the treatment options that we bring to their states and their markets. But going forward, we do think the cost increases that we've seen will be more of a topic with our payers, especially if we feel like the history of rates with that payers positions us for a rate increase.

So to maybe just dig into that, so you're saying kind of that you've got some relatively strong Medicaid rates. Is that kind of the answer to why now?

Yes, we've seen some good Medicaid rate increases, and there certainly have been states where they may go years without revisiting their Medicaid rates. So over the last several years, that's been an initiative. Obviously, there is more Medicaid now that is with a managed Medicaid payer. So we have a lot of those commercial managed Medicaid relationships. And we also would just credit our local leadership team, which is supported by a corporate managed care team that we have that we've had it for a number of years, but they've really seen some traction in just a lot of their initiatives, especially with those states that may not have seen an appropriate rate historically.

And so is there like a -- is this where you say we're going to anniversary something in that, that comes to the base rate, we should expect rates to kind of come down? Or are you thinking that these types of rates might be sustainable for a longer period of time?

I think they're sustainable. There's nothing that we look at and no concentration of revenue that we look back at from last year that would anniversary. We did see a strong increase in our revenue per day in the second half of 2021. But we have really sustained that level and grown from that level. And there are certainly payers that have still not given us the rate increases, and we have ongoing discussions with broadly all of our different types of payers and expect there to be more that's effective in this -- later parts of this year that weren't reflected in the first quarter.

So it's really an on -- there's a lot of different payers and it's an ongoing discussion, and we always expect for there to be some rate increases effective throughout each quarter. Not perfectly predictable as to what that looks like, especially in some of the Medicaid payers. But we do think it happens evenly throughout the year for the most part.

All right. Great. I think on the call, you mentioned that there was an acuity benefit as well. I don't normally think about acuity being a dynamic on the rate side for you guys. So can you talk a little bit about what that relate to?

We did mention acuity, not in the context of our revenue per day. Our reimbursement does not depend on acuity. We typically are paid the same amount under the different levels of treatment with a payer. Where we did mention acuity is more around our admissions and our length of stay. We did see -- and we can see this from time to time, our length of stay impacted by the service mix that we have. Even within a service line, we have a lot of different programs and different demographics that can have different lengths of stay. And so we have seen certain programs that we provide did have a longer length of stay increase as a mix of our acute business. And so while that's not exactly acuity, it's more of just a service mix difference, but that's where we saw acuity or service mix have some impact on the quarterly metrics, but not as much on the revenue per day metric.

Okay. And then actually, going back to the volume conversation, we talked about -- you mentioned kind of you normally think about 3% growth. I mean so 2.2% is actually really good, given kind of where the peers are. But -- at the same time, it's not the 3%. So like would you say that labor is on the margin stopping from taking volume? Or just the 2.2% which is just the fluctuation you see from quarter-to-quarter, and it's not really -- there's no labor impact on restricting volume?

Yes. The 2.2% for this quarter reflects January being basically flat year-over-year because of the Omicron variant and the impact there. So February and March were at the 3% plus level, just over 3%. And in terms of staffing being a limiting factor to our volumes, we can see that from time to time in a market where we may need to hire a certain number of additional staff in order to increase the number of patients that we treat. That has been an isolated issue for us and hopefully, always a temporary issue where we bring the resources and additional recruiting assistance to that facility and very quickly, allow that facility to not have staffing, be a limiting factor on volumes. But it can, from time to time, certainly over the last year, it can have an impact. And we would say, during the quarter, during January, there was the variant and there were a handful of facilities that had a temporary challenge there. But we've been pretty successful in making sure that's just a temporary challenge.

Okay. And I guess when you think then about the volume and just the backdrop being so strong, I think, for recognition of mental health continuing to improve and the demand and access continue to expand. Do you feel like you're gaining share in the marketplace? Are you going with the market? How are you thinking about that?

I think it depends on the market. It depends on the growth pathway where we're growing for a lot of our -- and our growth pathways would include expanding our existing facilities, but then also opening new de novo facilities or joint venture facilities and then M&A. So in the case of expanding an existing facility in many markets, we are just growing with demand. In some cases, we are probably gaining market share in our existing markets. But at the very least, we are growing with demand. In the case of a joint venture or even a de novo, we could be needing unmet demand, and we're going into many markets that are underbedded. So we may be meeting some demand that hasn't been treated before. But in many of those joint ventures and de novos, we do believe we're gaining market share as we enter that new market. And certainly for an M&A transaction, we think about it as gaining market share. So I think it looks different from market to market overall. We certainly believe at a nationwide level, we are gaining market share.

I would say just to add on the JVs and the de novos, though. I mean, that clearly has been a real focus of ours. The demand continues to increase in terms of the health systems that want to partner with us. We have 7 JVs that are operating right now, 9 agreements that we've signed, and we have a pipeline of a number of additional ones as well. So I think we have -- the team has done a fantastic job of looking at 100 MSAs that we really see as underbedded trying to prioritize the areas that we want to get into first and where it makes sense to partner with an existing health system we will, and that's a great opportunity for us to really take share as well as some of the de novos also. But I think we're doing a good job of building the pipeline and then really working through that prioritization.

Actually, maybe we could talk a little bit more about that because I don't know, from the outside, it seemed like when Acadia made that move to the U.K., that it was kind of a signal that maybe the U.S. opportunity was slowing down a little bit, and it was good to kind of diversify or find a new area of growth. And then since you sold that business all of a sudden, the opportunity in the U.S. seems to have improved. So I just want to understand a little bit about kind of how you see the marketplace, that JV pipeline and the opportunity set to keep doing de novo? So I don't know, that could be completely off base statement, but maybe react to that and then how are you thinking about those types of opportunities?

Yes. I don't think I look back on the U.K. investment and think it was any indication as to the U.S. opportunity. It was viewed as just an extension and a new platform, new market that would see further growth, but the U.S. would keep growing and did keep growing during that period. So we -- I think the U.S. has always been a market that has seen demand growth and more investment opportunities continues to be a fragmented market as we think about M&A and continues, like Chris mentioned, to have a number of under-bedded markets. So we continue to believe and have always believed that the U.S. does have a number of opportunities really across service lines and across the different growth pathways that we have. Obviously, the joint ventures have accelerated that as there's more and more systems that really are looking to partner and maybe move the beds that they have in one of their hospitals into a more specialized freestanding facility through the joint venture. So there's certainly -- that is a trend that has accelerated our outlook for U.S. growth.

And why has it accelerated so much?

Well, I think there's more hospitals that are focused on behavioral and see a partnership with Acadia is really bringing in behavioral expertise into their system, where they still have a role in a partnership and a stake in the entity, but it's not in a unit in their hospital where it may not have been the right setting for behavioral services. So they see it as a chance to improve the behavioral offering that they provide and also bring in expertise from the Acadia relationship. So we certainly think through our pipeline that we've seen more and more interest across the country from different systems.

Yes, I think just in my early days, having talked to several of our existing partners as well as several prospective JV partners, I think there's just increasingly a recognition that behavioral is hard. It's not their core. They increasingly have come to realize over the years that having a partner could really be a benefit to them. I think they've also begun to see the success of some of the early operations that we've been able to stand up, and we have referenceable accounts that I think further accelerates the pace. And I think for us, it's a great way for us, I mean, first of all, they already own the real estate. There is clearly services they bring. They have very strong payer relationships and rates that are in place. They have staff that can immediately come over and they can channel patients to the facility as soon as it comes up. So there -- and they're very motivated in getting the facility up as quickly as possible. And sometimes we can even compress the time frame as to -- if we were to do a de novo. So I think it's a true partnership and there's -- both sides get a lot of benefit, and I think it's just building on itself over time.

Yes. And so then can you talk about the outlook? You mentioned still the business is fragmented. So can you talk about the M&A outlook? You've done a couple of interesting deals recently. So maybe you kind of can comment on a center point, but just broadly beyond that.

Yes.

Do you want me to start and you can fill in? So I think M&A is something that I think is a real opportunity. Obviously, until the U.K. business was divested, the leverage ratios were up over 4 and into 5. And so now that we've delevered to 2.3, there's a lot of flexibility and a lot of obvious focus on M&A. I think we brought in a new corp dev leader at the end of last year, who has built out a nice team. We've looked at the universe of opportunities. I think one of the benefits of Acadia's strong execution is that, that is in contrast to a number of players in local markets. I mean, there is still a very fragmented space. And we see that there's opportunity for us because some of these some of these single-site facilities and smaller geographic regions in many instances are just not going to make it and they're going to look to find a partner over time. So I think we are really trying to work on identifying those areas of focus and making sure that we're building relationships with those assets where we can and trying to be as opportunistic as possible. And we'll look at larger opportunities that are brought by bankers as well. But I think there's a lot of opportunity for us to do tuck-ins in the near term and have really begun to build a nice pipeline there. But do you want to speak to center point?

We're, I guess, 4 months into the recent acquisition we completed at the end of the year. And it's, I think, a great example of the type of acquisition that we're describing, where it was just in 1 state, so not a huge scale, but really an opportunity for us to go into -- it's a CON state, so definitely more attractive for an acquisition relative to the additional work to open a de novo or a joint venture. And it's a lower margin than the existing business, and we looked at it and identified a number of opportunities going forward to grow and add services but also just to bring the benefit of our infrastructure and our purchasing and all the benefits of tucking a facility into Acadia, which just brings cost efficiencies and cost savings. So it was a good acquisition. We've made good progress through the first quarter on getting that integrated and continue to be optimistic about that one and looking for similar deals that are similar to that one. Some may be smaller single facilities and some may be larger, but it's -- that's been a good transaction for us.

There's no reason to think that those margins don't get back to your corporate margin or...

I have a view that over time, whatever the factor is impacting it, if it's reimbursement or costs that over time, and we've seen this across all markets that have been under at some point that it does trend to the company average. It may take a number of years or it may happen quickly. But yes, we certainly believe that it has a margin improvement opportunity.

Yes. And I guess, Chris, you -- on the call, in your prepared remarks, you talked about like finding different ways to add value a little bit so -- it's like -- tell me a little bit more about that. Is there something specific that you're looking at in the company already has a double-digit EBITDA, kind of algorithm kind of in place. So where are you thinking about additional value? And how does that work?

Yes. I think obviously, we have a great foundational business. I think when I'm talking about adding value, I'm speaking specifically to leveraging technology to enhance what we're already doing. I think there is also a way for us to be a continued strong partner to these payers and helping them, when I put my payer hat on, having worked with payers for a long time to come further up market and to identify patients at risk earlier, particularly for those payers that are at risk for those lives. And so I think there are things that we can be doing proactively with our payer partners to help them and to work together over time. And I think that there will be ways that we'll be able to continue to invest and certainly to innovate and to do some pilot programs that start with our really strong core business, but look to glean better outcomes, better clinical outcomes, better efficiencies and just continue to drive the business over time. So I just -- when I talk about value and I'm ultimately talking about shareholder value, I think those are some of the ways that I think about it.

All right. Great. And the talk among investors is increasingly about the potential for recession. And how do you think about your business and how it might grow in a recession?

I think the services we provide are resilient, and I know there may not be many data points to look back at that in previous recessions. But 2009, I guess, from talking to various people who are in the industry at the time and looking at data from that period of time, the business performed well and saw volumes hold up and really continue to grow throughout the recession. We think our diversification from a service mix and a geographical and -- from a payer perspective, also should hold up well. And we have a very low mix of self-pay. I know during a recession, that could be a business that could have a greater level of risk. So we think we're positioned well. Obviously, we're -- we'll always be focused on any type of financial operational risk by just looking at even the pandemic, where our services through a challenging period were very resilient, we think we have a strong business and good diversification within the business.

And all the data in the research would continue to point to coming out of the pandemic demand continuing to escalate when you look at historical patterns, and we're clearly seeing that already. So just all factors to consider when you ask the [ recession question ]. Yes.

Great. All right. I think that's all we have time for. Thank you very much.

Thank you.

Yes. Thank you.