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

Hello, everybody. I'm A.J. Rice, the health care services analyst at Credit Suisse. We're really pleased next to have up Acadia Healthcare, Chris Hunter, Chief Executive Officer, for Acadia is here; as well as David Duckworth; Chief Financial Officer.

I'm starting a lot of these off. I think I'm just going to ask, we're 10 months into the year, almost -- well, now 11, I guess, into 11th month. As you look back, and I know, Chris, you kind on during the year. What are some of the wins and positives that you've seen? What will it be some of the challenges and any initial impressions maybe you've been on board for 6 months worth sharing.

Sure. Thanks for having us, A.J. A few things I would say to start. First, I've been just incredibly impressed with the resilience of the company. I think the ability to continue to manage through a very tough labor market with the headwinds that we've seen with COVID, with inflation with just labor challenges in general, has been really impressive to me. I think the company has also done just a great job with these JV partnerships. We have 18 now that we've signed up. I think we've been very focused on all four of our growth pathways, whether it's adding beds, de novos, JVs, and certainly M&A, we announced a small M&A deal this morning on the CTC side. And I think, overall, just -- I've been very impressed not only with the existing talent in the company, but our ability to attract new talent in during a very difficult time. I think there's a lot of interest in behavioral health, but I think as the largest pure-play company in behavioral health, we've been able to really attract some very strong folks. So feel good about that as well. I think on the challenges side, there's probably two things and they're related. I'd say as an industry and having been in health care for a long time, I'm still struck by how much paper we see in behavioral health, just in general across the board and Acadia is no exception. I think there's a number of reasons for that. I think if you go all the way back to the Hi-Tec Act in 2009 in meaningful use, there just wasn't as much capital that was applied to the behavioral health companies relative to the Med-Surg players. And you still see that today, clearly. And then I think related to that, I think the communication at Acadia, both internally and externally, could probably be a little bit better. And I think there had been more -- there had been a little bit more focused historically on technology, maybe we would have more opportunity to improve that. But I think we have a great story to tell. I think we have a very strong business, record demand for all lines of business. I think we also have just a very strong balance sheet that positions the company well for the long term. So I think on the communications side, not only internal but also external telling our story a little bit more clearly is one of the reasons that we decided to do this Investor Day on December 7 in New York, which is the first Investor Day the company has done. And we're really looking forward to talking about our strategy and the advancement of our business and how we anticipate being able to grow.

Yes. No, that's great, and good to get a plug in for the Investor Day there. We have probably a diverse crowd in this audience, some of whom may be relatively new to Acadia. Maybe just take a second to talk about the business lines. So I think people think about the company as an in-patient psychiatric hospital company in a lot of ways, but there's a lot more to what you're doing now. You want to just take a minute and talk about that and some of the growth opportunities in each one of the segments you're in.

Sure. And in-patient acute is still a very important part of our business, were $2.6 billion in revenue and half of our revenue is in-patient related. And obviously, these are folks that are deemed dangerous to themselves or others. And we see a lot of continued opportunity in that business. I mean, right now, it's 50% of our revenue, 51 facilities that we have. We can continue to grow through de novos, JVs. We're always looking for opportunities there. I think the second segment of our four that I will -- that I'd highlight is our specialty business, which is folks that would have a disorder, whether that's an eating disorder or other substance use disorder as well. And that is right now 22% of our business. We have 37 different facilities across the U.S. and we do a really good job just with a strong marketing team and that is a different type of patient that is voluntarily coming to one of our facilities to get treatment, all in-patient. And then on the out-patient side, our third line of business is our CTC business, our comprehensive treatment centers, which is right now about 18% of our business which is -- we're helping people that have opioid use disorder across the country. We're in 37 different states. That's the line of business where we announced the four clinics this morning that we purchased in the Atlanta area, but we have now over 140 of those facilities across the U.S. And then finally, our residential treatment facilities, which is really serving adolescents and children that -- in a non-hospital setting, but a residential type facility that there's opportunity to help them with various psychiatric disorders as well. So those are the four.

That's great. Before I forget, because there's a new thing off script here, you -- the acquisition you did in the CTC business today, you haven't done a lot of acquisitions in there, and I wasn't even sure that there were that many acquisitions to be had out there. Maybe before I forget to ask about it. Can you just comment on whether there are likely to be more opportunities for consolidation in that side of the business and roughly what the pricing on something like those deals looks like?

Sure. I'll start and maybe, David, you'd like to chime in as well. But I mean we're really excited about this. It's a small transaction. There's only four facilities. We have one facility already in Atlanta, really large market that has a lot of challenges around opioid use disorder. And so we were able to find this -- these four facilities that we think we'll be able to significantly grow over time. We do think that there are other tuck-in type opportunities -- the valuations on these, I think, are reasonable. They're in the single digits, and we feel like we were able to pay a very fair price. And at the end of the day, grow the business. But I do think it's illustrative of our ability to look at a market and say, sometimes it makes sense to -- for us to do with de novo. Sometimes it makes sense for us to partner on the JV front if it's an in-patient facility. Other times, it makes sense for us to do M&A, and we're constantly balancing that equation. But David, anything you'd add on the deal?

In the case of our CTC service line, we have seen growth in the number of de novos and believe that will continue. But as Chris mentioned, we continue to look at markets, especially a market like Georgia, where we -- prior to this acquisition, we only have one clinic. And so a de novo strategy there, obviously, would take time in having an M&A opportunity like the one we closed yesterday and announced this morning really helps us enter the market more quickly in a more meaningful way. So we're excited to have more scale in that market. And there are some larger players in that industry -- that there could be a variety of valuation multiples that we see across that industry. But for a smaller tuck-in of which there are, we think, more that could be attractive. It's a great opportunity to overlay with the de novo opportunity that we're continuing to pursue.

Yes. That's good. One of the, obviously, bright spots for the last couple of quarters has been whatever metric you call it revenue per patient day, whatever, those have been quite robust. I know there's a lot of discussion about needing to fund more for behavioral health, that's probably a part of it. I don't know how much is mix shift because you give one aggregate number. But maybe just comment on that, it seems like pricing is on a -- realization of whether it's pricing mix. is on an upswing. Can you comment a little bit more on that?

Sure. I'll start on that. Coming from the payer side and having been on the payer side for a long time, I had clearly done a lot of research on Acadia coming in I've just been increasingly impressed with the company's relationships that it has formed over many years with payers. I mean it's a very collaborative discussion even though these -- sometimes these negotiations can sometimes be a little bit contentious, but not as much as I would have thought. And I think the company has these multiyear relationships where they're sitting down with payers on a year-by-year basis and going through the rationale for increases. I think there's also a recognition that we're dealing with the most severe, highest acuity patients in health care that have really significant psychiatric challenges, and we're providing great quality care. So I think that is really justification that undermines so many of these rate increases, and I think we're really doing a good job on that. But anything you would add, David?

Yes. And I think our team locally, a lot of those discussions do happen at a local level, but our corporate managed care team continues to maintain good relationships with those payers and has for a number of years, making sure that we do -- just make sure they understand the programs that we provide in their markets and the quality of those programs. And we've had efforts underway for a number of years just to establish more consistency in rate increases and hope that we'll see that trend continue for the industry. That hasn't always been the case -- if you look back 5 to 10 years ago for the industry, but with the tailwinds and the support for the service we provide, the importance of it, I believe we've seen more consistency there in the last couple of years.

Yes. That's good. And so would you characterize that as mostly being some better performance on the managed care commercial side. It seems like -- I sort of had the feeling there's also some element of that on the Medicaid side as well, the states are saying, "Hey, we got to fund this and help this. Are you seeing that as well?"

Yes. We are, we are. Medicaid is 50% of our revenue. So -- we are seeing those trends within that 50%. That's a lot of different states and managed Medicaid payers within the states, but we're seeing that for commercial, but also for the Medicaid payers as well.

And there have been some discussion about some of these opioid settlements starting to potentially have some impact. Have you seen any of that money flow to you? Do you expect in the next few years that some of that might flow to some of your businesses?

We do. I mean it's still early innings, and we'd like for it to go a little bit faster. But not only has the -- some of these settlements have been dispersed to the individual states, they are in turn turning some of the decisions over to the individual county level. So I think there's a real opportunity for us to come in as a large player. An example I gave an investor earlier that we saw last month was that we were approached by a county that had received some of these settlement dollars that was really interested in standing up some opioid use disorder clinics -- the new of our CTCs, but actually approached us in a market where we didn't have a CTC in place, but we instead had an in-patient facility. And so I think there's some opportunity just given our scale that their counties know that we have a broad range of services, and they're looking to us to advise them and to help them as they're trying to put dollars to work. I mean, there are so many different ways that these settlement dollars can be used, but it's primarily around treatment and access to care. And we have just extensive experience in how to deploy that, depending on what the individual state and county is looking for. And I think there's some ways for us to get scale there by putting some playbooks together and really sharing some of our learnings in and capabilities that we've been able to amass over the years for the benefit of helping them. So we feel well-positioned.

There's been a lot of discussion about how the pandemic has worsened the mental state of the population, for lack of a better word. Can you see at this point that that's translating into volume for you? Do you believe that is? I know there's a lot about out-patient where some of the out-patient utilization has picked up. I think that's still a fairly small portion of everything you do. But any comment on that aspect?

We do believe across the four service lines that we operate and we have out-patient programs within the acute and specialty service lines that would also see this. But across those four service lines, we do believe that demand has been stronger. And we do believe that the pandemic has increased demand really across all service lines and across all demographics. As we think about what we're seeing for adult programs and our child and adolescent programs. And so there's a number of metrics out there, I know to just get at the pandemic effect on the increased demand. Just to share one anecdote, something like 1/3 of adults have reported elevated depressive symptoms compared to less than 10% prior to the pandemic. And so we think we're seeing the impact of that. There's a number of other tailwinds that we would say in addition to just that demand being higher. There's a greater acceptance and societal acceptance of receiving treatment for mental health issues and a reduced stigma that we believe is essential and a positive going forward because not everybody gets treatment today. And something like half of those adults that have reported those elevated depressive symptoms are actually receiving treatment for it. And there are metrics like that across all of our service lines. So a strong demand environment, coupled with reduced stigma, better insurance coverage than there's been in the past for mental health across different type of insurance products. It does create a volume growth outlook for us going forward. And is part of our growth strategy and investments that we're making today in that growth.

And there has been discussion off and on over the last few years about labor being a constraint on the ability to take all the patients that you might otherwise take. Is that something that -- I mean, are you turning away volume at this point that you might -- or referral that you might otherwise be able to take? Or is that sort of normalized at this point.

I think it depends market by market. We literally look at this every single day, and we have a call with some of our executive team, where there is an expectation that the individuals, CEOs that are running these facilities in the field are surfacing challenges they have. We call it deflections when there is volume that we're not able to take in because we have staffing challenges. So it's incumbent on those leaders to surface that challenge, to speak with us and our HR team where we can get after that very proactively and aggressively literally that same day. So there are times where we still see deflections here and there, but I think we've done a really good job managing through it. It's something that is a huge focus for the company and will continue to be in the coming weeks and months as we continue to manage through it.

And in the grand scheme of things, when you think about the labor issues, your use of contract labor has been pretty steady. You have talked recently about a little bit of an uptick in permanent labor in what you're putting through in increases. But maybe just give us a sense of where you're at? I know you've got relationships with nursing schools. That's a part of the pipeline. You've got other dynamics that you're pursuing to get ahead of labor pressures. Give us a little flavor for that.

Yes. We have continued to take a proactive approach around all of our recruiting and retention initiatives, especially if there is a market or a category of labor like nurses that can be a greater challenge. So the company's investments and proactive approach to recruiting and retention has been a big part of our success in just navigating labor environment that has been difficult, but we've been able to have the staffing that we need to see the strong demand and the volume growth that we've seen. Contract labor does continue to be low. It's less than 2% of our overall labor supply. And it's something where in certain markets, if we do need to use contract labor, then we're willing to use it. And so it's been stable and can be a good source for us. Longer term, we, of course, want to reduce that contract labor along with other premium pay that we have seen a greater level of over the last year, and those can look like retention bonuses, shift bonuses and other types of incentives like that, that we do use selectively and temporarily in certain markets if there is a greater challenge in that market because, again, we want to continue to treat the patient and have the staffing there to support the volume growth that we've seen. Longer term, of course, we hope that there is some moderation in those costs. but we've done a nice job in the last couple of years navigating through this environment.

Are you -- I know you've been proactive in reaching out to nursing schools and making sure people do a rotation in a behavioral setting and so forth during their clinicals. And so they get exposed to it. Are you seeing any increase in the percentage of nurse graduates that are choosing to go into a broad behavioral health, mental health type of career path? Or is that sort of steady with what it's been historically. We saw the publicity around it. I wondered if that might be leading to any kind of uptick.

I don't know that we've seen broadly a meaningful uptick. I think we continue to look for those patients that have chosen that path early in their careers because many behavioral nurses and other clinicians have decided that that's what they're passionate about. That's what we want to do. And so in many cases, we are recruiting that clinician and nurse that's already made that career choice. And I don't know that we've seen broadly an uptick in that, but certainly we have as many efforts as we can put in place with affiliations with health systems and other programs to increase that supply and that experience early on as potential employees are making that career choice.

Maybe to take a minute to pivot over to some of the development in inorganic growth opportunities that are available to you. So you're adding beds to existing facilities. You've been pretty consistent in the number of beds you've been added. You're opening de novos. Maybe I'll take those two first. Do you think the pace of de novos -- I mean, bed additions could step up as the portfolio gets bigger because it's been pretty consistent the last couple of years. And I don't have a sense, I may be wrong, bed capacity is really improved. The industry is still pretty tight on bed capacity, if I'm not mistaken. Any thoughts about all that?

Yes, we've been historically adding about 300 beds a year, and I think that's a sustainable pace for us to continue. When we get to approaching 70% occupancy in a facility, we're asking that facility's CEO to think about expansion and adding additional capacity. So we've been pretty consistent with that, and we continue to see that continuing. And then I think the de novo side, you're asking about de novo, not JVs, but they really work together as -- we think there's 100 underbedded markets in the country. We've done some pretty extensive MSA work. And there are some instances where it just makes -- there isn't a logical partner in that market. We see the real opportunity to come in and expand, and we're just going to do that on a de novo basis. But frequently, there are also opportunities on the JV side where there is a prestigious health's system that has some challenges on the behavioral side that already has relationships with payers and that clearly has employees and volume, and they want to get their patients that have psychiatric challenges out of the emergency room to an organization like us that is really an expert -- that is all we do in treating them. And so we're a logical partner. So we're always looking for that trade-off between de novos and JVs.

It does seem like the JV pipeline and activity levels picked up. I mean, in the pandemic, maybe it's got people focused on. I've got labor challenges in my core business. Let me give somebody that's got expertise, our psychiatric or behavioral health there. Maybe there's some other dynamic that's going on. Would you agree that the pace of activity in the JV side has picked up? And any other comments you'd make on what's driving that?

Yes. I would say that it has picked up, and I think there's a number of reasons for that. Clearly, as David stated some very good statistics in terms of just the challenges that the country has coming out of the pandemic around mental health. So I think there's more opportunity there as well. I think there clearly are many situations to where JV partners are hearing there's significant referenceability now that we've signed 18 and many of them will talk to someone that has done a JV with us and has had a really good experience, and they're coming to us even without an intermediary frequently and asking how we can potentially help. So I think there's kind of a natural pipeline that's building and some actually run a process, and we've been very, very successful in those as well. So we're constantly out there and looking at it. But I think our pitch is that we're one of the largest pure-play behavioral health company in the country. This is what we do, and these JVs are an important part of our growth, and it's a great way for us to align ourselves to some very strong brands in these markets and really to accelerate our growth in that MSA in a way that would be more challenging for us just coming in de novo. And so it's been good for them, and it's certainly been very positive for us.

And is the lead time to putting one of these in place? I know it can take a while with some nonprofit health systems, but has it picked up? Is it compressed in any way? Are you getting things across the finish line quicker as a result of all this or not that's about the same.

I would say it is a very long lead time...

We'd like for it to be quicker.

We would. And we have seen with some partners and ability to move faster through the initial stages and getting to know each other. And then certainly, if there's a way to have already identified land that they may have in the market and be able to use that or even a building that could help accelerate our projects. So we're always looking for that opportunity. But for the most part, there's a very long lead time. And the benefit of that is because we have announced a number of transactions, we do feel like we have a lot of visibility into those facilities opening over the next few years. But there's been, yes, a significant amount of work by the time we get to announcing one of those transactions and then we're working on the construction and the opening of that facility with our partner.

Is the financial terms changed much? Or they're pretty standardized at this point on these transactions.

It can depend on the partner. There are certain criteria, of course, that we -- from our perspective, that need to be met as we evaluate a partnership versus de novo opportunity in a market. But we like to work with the partner. And if they do have something that's important to them, we can incorporate that into the transaction. But overall, our ownership tends to be around 80% of the joint venture entity and the partners contributing something for that other 20% that they would own. And there's a number of other terms that we've seen a lot of stability in the typical JV structure for the eight that we've opened to date and the ones that we've signed going forward.

Okay. And you obviously announced the CTC deal this morning, a small one. But when you think broadly about acquisitions and what's out there, any comment on that? I mean, these other things are more steady and predictable, I guess, than when you might do a deal of any meaningful size. I may be reading too much into the comments around on the third quarter, but it did sound like you guys were open potentially on the strategic acquisition side, looking at adjacencies and expanding your service mix? If you are, would you want to comment on that?

Yes. I would just say that M&A continues to be an important lever for growth. Obviously, we had the U.K. operations, and I think upon divesting that and our leverage levels now are just over 2x. We've got a really strong balance sheet and an ability to put some capital to work. And so we're going to continue to look at M&A across all four of our lines of business. CTC was one example, but we're looking at in-patient opportunities right now. We're certainly looking at specialty opportunities also. And I think this is a market where as we continue to work through MSA attractiveness, we can more proactively outreach and not wait for a process to happen, but to get to know some of these -- it's still a very fragmented industry that is mom-and-pop and get to know a lot of these players during a time where we're well-positioned when they do want to transact. So we've got a good pipeline building and I think our team is doing a really good job.

Is there any service area that you're not in that sort of -- or maybe there are several that are interesting to you 5 years out, Acadia might be involved in a fifth or sixth area of service line in addition to the four you have today?

Yes. We're still working through that. I mean, that's something we'll talk a little bit about at our Investor Day. So you can't steal our thunder here, A.J...

Would love to do that.

But we're very interested in the out-patient side. Clearly, there's a lot of growth there. And there's ways to do that, that could be partnership, could be minority investments, could be M&A. There's a lot of ways for us to solve for that. But I think as we continue to position the company to deal with the higher acuity cases, there's a lot of opportunity for us to partner on some of the lower acuity conditions as well.

There's a lot of fanfare around the national hotline on behavioral health and suicide. And during the summer, we were hearing a fair amount about it as it's actually rolled out, and I think that people were worried it might get overwhelmed. We haven't heard as much. Is that -- are you involved in anything along those lines? Is it having any impact at all at this point? Or is that still pretty much in front of us.

Yes. We are involved and I know we've -- we reach out at the national level for those that oversee it, and then also locally understand the response, and there's already a lot of contracts in place with providers that have already been built out from just a call center perspective, but we're focused on if that does change the way that people in crisis and the need of treatment, access treatment, we want to make sure that we're partnering the right way. We haven't seen, at this point, any significant change. So it's hard to say and maybe it's still early.

Quickly on this capital structure, your leverage is down in the low 2s, 2x. What -- any quick comment on where you would settle out? Is that -- you're comfortable to? Or is that below your target in some ways almost?

We would say it's below our longer-term target, which we believe is more like 3 to 3.5x. But we're pleased today with where we stand and the flexibility and the options that, that gives us. We'll stay disciplined, of course, in terms of how we use that capacity because we have so many options as we pursue the different types of opportunities. Longer term, we do think it will be higher.

Okay. Great. Well, it's exciting. I have Acadia participating, Chris and David thanks so much, and we'll look forward to the Investor Day and hearing all about these additional things you're handing at. So thanks again.

Thank you, A.J.

Thank you.