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

Well, I'll say this one more time. I'm Gary Taylor, I cover healthcare facilities and managed care at Cowen. My pleasure to have Acadia Healthcare. Acadia is one of the largest behavioral health care providers in the U.S. almost 250 facilities and nearly 11,000 beds in 39 states. The company provides behavioral health care, substance abuse services in a variety of settings, inpatient psychiatric hospitals, specialty treatment facilities, residential treatment centers and comprehensive treatment centers. So with us today, Chris Hunter, who's the Chief Executive Officer; and David Duckworth, who is the Chief Financial Officer. So gentlemen, I really appreciate you coming and being my last presentation of the day. And as Chris said, the last and the best. So hopefully, this will be a great session.

Maybe I'll start with -- I know the call, the fourth quarter call was maybe last week, I'm losing track of time i think, was that last week. Yes. So it's last week. An Investor Day was in December, so not too long ago. But maybe, Chris, just a couple of moments of -- I mean, you've been at the company now for a year, a little over a year or?

Just under a year.

Okay. So sort of keeping track of a pretty well there. I know you get asked this a lot, you've kind of presented, but maybe just give us a minute on payment to the company. Here's what we see as opportunities. Here's where we're laying out a plan to execute on those and kind of what you're most excited and confident about heading into the next couple of years here?

Yes. And again, thanks for having us, Gary. I think there's a number of things that I feel really good about [ the company]. I mean, I think it's unusual to have 4 lines of business where you're seeing record demand for every single line. And so I think we feel really good about the demand tailwinds, unfortunately for society, but certainly great for our business with so much focus and interest on behavioral health right now. I think we also feel like we have really strong visibility into multiple pathways for growth. And I think it's not just adding beds to our existing 250 facilities, but it's also these joint ventures that we've been able to do, where we have 19, and it gives us great visibility into the future in terms of bed addition growth. So we did 570 bed additions last year, we'll do 670 this year. But then that really ramps into '24 and '25 to [ 150 ] that were projecting for those out years. And so we just think a lot of that is from our JV growth, but we're also doing de novos as well. And then with a really strong balance sheet with only 2.1x leverage, we think we have an opportunity to do some selective M&A as well. So I think when you put all that together. And then as someone that really came from more of the payer side of health care, more recent to the provider side, I've been really surprised by the lack of technology that exists within behavioral health, in particular. And so that was a big part of our first ever Investor Day that we did back in December, where we committed to investing heavily in technology, not just in EMR, but also some remote monitoring technology and other things that we think will really help catapult our company and hopefully bring the industry along well. I mean just some real efficiencies that we see, but also just better patient care and better ways to recruit and retain our employees that really want this technology as well. So you put that all together, I think we've been able to also attract a really good team, and I think there are so many people that are really interested in what we're doing that as we better communicate our story externally, we'll be able to even do a better job on improvement in retention. So all of that makes us pretty optimistic .

So there's a lot of [bed] growth built into the forecast in the next couple of years. How are you prioritizing? I guess, we always kind of thought de novo beds or add-on beds are grade and lowest cost and lowest risk existing facility and you're building those where you know you can fill them and JV is pretty good, too, because you're going to have a partner that's going to send business your way versus maybe just building a brand-new facility, but it seems like you have a lot of opportunities on all fronts. So how are you sort of gating and prioritizing which of those you're pursuing -- even as you're doing like some of -- all of them?

Yes. I mean it's a conversation that we have internally all the time. And we're fortunate that we do have multiple growth levers that we certainly talk about on all of our calls. But as we step back and did the analysis, we're seeing about 100 markets in the U.S. that we see as underbedded. And so we have our priority list of what are the top 25 where we really want to go quickly and we kind of tier those over time. Sometimes it makes sense for us to move into a market even more quickly by choosing a health system partner. There's a premier health system that's there. Sometimes they're struggling with behavioral health, we'll approach them and that can make sense as a quick way to get into a market. We have many of those going on at any given time. Sometimes, there just isn't a health system that exists, and it's a market that has a real need and in those instances, we might just do with de novo. Other times, we may be more inclined that we want to get into the market so quickly that we lean towards M&A and looking at targeted opportunities on the acute specialty or CTC side and that happens as well. So -- we have, we're fortunate that we have these multiple growth levers. Every market is different, and we're having these conversations every day as to how we can most quickly and effectively deploy capital to move into those markets. And there's just -- there's always trade-offs. But overall, I would say, we do like the joint venture model because historically, they have payer relationships. They've been in those markets for a long time. They frequently have patients that they can bring over that they're deflecting from their facilities, and they also have employees that they can bring over as well. So it's sometimes an opportunity for us to get a little bit of a turbo boost as opposed to doing it ourselves. We've been very, very successful in doing de novos, and we're continuing -- we'll continue to do this as well. We broke ground on one on Monday in Mesa, Arizona, as an example.

And then David, as you're thinking about modeling some of the returns and margins from some of these new investments, I guess, it occurs to me there's maybe in the last 5 or 10 years, maybe a couple of things are different. One is clearly sort of the labor environment. So I don't think we ever historically said, "Oh, we love the thought that you're going to build some new beds," but we wonder if you can staff them or what the cost to staff them might be and hopefully, that's moderating. But the other is just like construction costs, too, with the inflation and what we used to think about the cost per bed good struck. So either of those 2 factors materially changing how you're thinking about these new investments? What the returns be, what the ramps might look like or not?

Yes. As we look at our pipeline across joint ventures and de novos, we do not only think about future opportunities, but we think about the deals that we already have in the pipeline that are in the design and construction process and can be impacted if there is a change in construction cost estimates or the local labor environment. Fortunately, it has not changed the way we think about that opportunity because on the one hand, some markets have seen higher construction cost inflation, but more recently has really leveled out over the last several months. But those same markets tend to also see reimbursement for our industry, really keeping up with that inflation in both labor and construction costs and our design and construction team that we've built out over the last several years really does a nice job finding opportunities for us to leverage the design know-how that we already have built apply what we learn on one project and the efficiencies from that to all of our future projects. So there are some opportunities and strategies that we can employ to really leverage and limit the construction cost inflation and speed up the projects. It's important for the company to get these facilities in the pipeline to open as quickly as we can. So we're highly focused on that. But as we think about projects, fortunately, in most cases where we have seen some construction cost escalation or labor increases, we've also looked at the opportunity in those markets on both the volume side and the reimbursement that we expect in those markets and still see very attractive projects. But it's something that we constantly revisit.

Got it. Chris, one of the opportunities that you talked about and sort of identified coming in with some of the cross reference or referral opportunities between facilities and markets. Where does that, I mean, early days, but are there -- are there markets that are doing that better or had been doing that well? And is there any way to sort of quantify and think about the tailwind or what that means in terms of revenue growth or occupancy or any metrics you might be able to share or what you're hoping for from that?

Yes. I still think the opportunity here is significant. We are still in the process of kind of working through the quantification, which we'll definitely share with investors as we get a little bit further into this. But just to step back, I mean, we obviously are serving 75,000 patients a day. I would say under less than 1% of our referrals are within the Acadia ecosystem, and we have 250 facilities. So it's just a significant opportunity. We have the CTC business, treating those that have opioid use disorder that really has been operated historically almost as a stand-alone business without as much integration into the broader company. And yet someone that is admitted to one of our specialty facilities, 70% of them actually have an OUD diagnosis. So there is significant opportunity to refer patients back and forth. Obviously, those that are coming into our acute facilities have a much shorter length of stay, usually around 10 days, but that can also be a feeder into our specialty facilities. We have so many patients that have co-occurring conditions. We just haven't been intentional about looking for ways to help them step into another line of care. And we candidly have not had the technology in our industry and certainly within our company to track those patients as well. So you just put all those together, we just see significant value to unlock just by being able to be a better referral source within Acadia. And it's an initiative that we've had in place since late last year. And we're just continuing to focus heavily on it, and we'll have more details to come on what that can actually mean financially, but we think it's very relevant.

Chris, your payer perspective, I think it's interesting to me, I guess, my thought, you can correct me on public if I'm wrong, which will be embarrassing, but I'll take it. But I kind of think about for the inpatient side, state Medicaid sets of rate, the Medicaid -- the Medicaid MCO sort of piggyback off that rate. Medicare sets a rate on a per diem and the MA plans generally sort of piggyback around those rates. Is there -- is this happening yet? Or is there an opportunity where as MA plans gain more share as certainly the Medicaid MCOs have gained a lot of share that you can do market sort of contracting where it's -- you're including all your facility types and some leverage from the fact that you're delivering for them this network effect as opposed to just sort of one-off? Is any of that happening today?

It's not happening yet, but it would be a great question. And I just when I put my payer head on, I think it inevitably will. And that doesn't necessarily mean that everything has to move to value-based constructs. I mean, I think that, that is an opportunity in our industry. It's obviously hard when there aren't a prevalence of EMRs and you're not capturing data. But I just think history will show and has shown that, over time, we as a company, as we're thinking about our Investor Day and how we want to compete and how we want to deploy resources with all this demand, we're really focused on the highest acuity conditions, but we just think that there's so much opportunity across the market. So we're just spending -- we're going to continue to spend a lot of time on that. And I think on the -- on the technology front, we will get to a point where we can truly compete on the strength of our health outcomes. But we have to sit down with payers and be in a position where we can bring them our data and show them that our outcomes are better than another provider. And I think that's where the market is going to move. Maybe not immediately, but it's one of the major reasons we're making these technology investments now because we want to be able to position ourselves to be there. And I think it will start early. I don't think we're going to full capitation or we're taking downside risk anytime soon. But there are payers already that are asking us for some share savings or upside only models where if we deliver certain efficiencies on readmissions as an example, they'll give us a kicker. And I just think that is indicative, not every payer is interested in moving that direction yet, but I think it's indicative of what's to come. And then when you couple the density that we have across our 4 lines of business in various markets, I think it makes us really an attractive partner in those geographies. So I think these contracts will change over time.

And is there an opportunity? I mean you've talked a little bit about this, but sort of expanding your service offering a little bit, adding more on the outpatient side, comprehensive outpatient new programs. But a lot of your population is more acutely ill than when we think about like life stands or refresh or a lot of the virtual behavioral companies, which have gained -- it's a different population at a far lower acuity level of mental illness. But does it ever make sense to put any of that together with the business you're in? Or do you think long term or not?

Yes. I mean I think there's opportunity there. Strategically, I like the position we're in, dealing with the highest acuity patients and having an opportunity to go a little further down market to lower acuity and being lower acuity trying to come up market. I just think that's very challenging for others. That said, we really like the outpatient business. And back to your payer comment, I think payers would like to see us playing a role in working with the lower acuity population. I think there's ways to do that through a partnership though, in the near term and trying to kind of cross refer patients as opposed to us having to solve that through M&A. So there are a number of conversations that we're already having on that front where we're looking at various ways for us to work better with some of these lower acuity outpatient companies, many of which have seen a significant investment in capital over the last few years, and they have much -- their expansion of their capabilities is much more impressive than it was even a few years ago. So a lot of opportunity for us to work with them. These conversations are happening. I just don't think it needs to be an M&A transaction to get there.

I just want to talk about balance sheet and cash flow a little bit. So you mentioned the leverage being far lower than it has been for most of the company's history. So Dave is looking younger and younger every day with -- because of that, but when you think about this growth that you're funding the de novo growth, the same market growth, the JVs, et cetera. Is the intention that the bulk of that is funded with free cash flow? And if leverage moves up over time, is that primarily because you do acquisitions?

As we think about our cash flow, the company has always generated strong cash flows that gives us a lot of discretion as to the investments that we make across our growth pathways. And our outlook for 2023 is cash flows of $450 million to $500 million. And we believe even as our investments in new facilities and joint ventures are stepping up as we outlined with bed additions going from 600 to over 1,000 a year in 2024 and 2025, we will fund those entirely with operating cash flows. As we've done in the past -- in the past, we've even had some discretion to make debt repayments and have some other optionality as we've gone through a year. But we do think of those investments even at a higher level as being funded with our operating cash flows, which preserves the balance sheet or M&A transactions, Chris mentioned, we are at 2.1x leverage today and have -- thought about a target of 3x to 3.5x as the ideal leverage for the company. I'll say with rates being higher with the capacity that we have for acquisitions even at the 3x level, we think that might be the right place to be in the near term. That gives us a lot of capacity and preserves a very strong balance sheet for the company in a period where rates have been higher. So we do think about M&A as the source of that balance sheet capacity that we have, but we'll stay very disciplined. We've always had a real strategic view and a long-term view as to what value does an M&A opportunity create for the company. And we look at that in a disciplined way, factoring in where valuations might be within our industry, and we'll continue to do that.

And just in terms of the acquisition environment, it would seem like COVID awfully disruptive set of years for a lot of health care operators and labor costs being an issue and staffing. So inherently, I would think maybe there's more stuff flowing across your desk to look at. Is that fair? Do you think the next couple of years are a period of elevated acquisition activity? And if so, do we still think about that primarily being an inpatient site or not?

I would say our pipeline is the strongest it's ever been. Back to the MSA analysis that we do, where we're really focused in on those geographies where we want to grow. That's really helped us narrow the universe of assets that we're interested in, I would say it would be primarily acute and specialty, although we did an acquisition of 4 CTCs and at the Atlanta, Georgia area late last year, which was an opportunity. We had one site that was already in Atlanta. We added these 4. We've got some scale there now, and there will be those types of opportunities here and there. I think this is still a very fragmented industry. There's a lot of mom-and-pops. There are single facilities that I think we're a very attractive strategic partner. I think -- we're going to continue to look at scale opportunities, but I think it really helps for us to have done the work to know the geographies where we want to play and to have that level of focus. We're not sitting back just waiting for bankers to bring us folks to consider various assets. We can be proactive on that front, too. So we're going to look at scale opportunities in acute and specialty. We'll look at some CPC as well. And we'll just be -- continue to be very careful on the deployment of capital. But I think that there will be more opportunity in the next couple of years. But I wouldn't say that, that always -- doesn't always mean there will be willing buyers and sellers. I mean you've got to always find a path. But I do think that, particularly with the higher interest rates, it's challenging, some of the smaller players.

Got it. I want to talk about reimbursement a little bit heading into '23. I think what probably surprised me most about how 2022 played out wasn't that you were seeing more labor pressure because everybody was, but the strength of your revenue per day or however you want to define the metric, just on the reimbursement really covering that through the year. So you've got visibility on what commercial you have. You have visibility on what Medicare have. But as you talked about on the call, most of your states are July fiscal year. So you have a really good visibility on Medicaid in the first half of the year, but the second half is where the uncertainty is or where we don't have great visibility yet. So any dynamic changing there, though? I mean, we look at the state budget situations, most states are flush. Obviously, they've been very supportive in rate for behavioral. It almost seems very difficult for anyone to like pick out behavioral is a place that they want to try to save money. So to me, my instinctive is still very supportive, but -- is there anything you're thinking about now conversations you're having that make you feel better or worse about second half of '23?

Yes, Gary, I think the team that we have, our local leadership, our corporate managed care team, others that are involved across all of our payers have really done a nice job, maintaining what's been for the company, long-standing and very good payer relationships. And we have seen mid-single-digit increases and think of that as being broadly experienced across our service lines and across our different payers, which include Medicaid, commercial and Medicare payers. And as we provided our outlook last year -- or last week for 2023, we did talk some about the visibility that we have for the first part of the year, but some caution that we're preserving in the second half of the year. But as we engage in those markets with our payers, we are still expecting to see mid-single-digit increases. We're very mindful of just all the factors that sometimes play into that discussion at the state level, but believe with the value being placed on mental health and addiction treatment at the state level, with the states that we're in, really investing in mental health, focusing on what's provided and do they have the right network and treatment options within their state, across our service lines, we think we're in a good position to see that continue.

Okay. I want to go to the labor question. I think from the fourth quarter call was the one thing The Street, I guess, didn't like or didn't like what they thought they heard. And I guess maybe I'll let you correct me if I didn't hear it correctly, but what I thought I heard you saying all through '22 was 2022 is going to land somewhere in the 5% to 7% range. The second half is going to be higher than that. And then you told us 3Q was about 7% on the underlying wage in the fourth quarter it was 8% and you thought that continues through the first half and by the time you get to the second half, you would be lower. So to me, I guess, the new information was you explicitly said 7% and 8% versus you had said the second half of the year would be towards the higher end of the 5% to 7%. I didn't fall out of my chair because I thought I heard something dramatically new, but there was a lot of reaction to it. So I guess the question is, one, did I have those numbers right? And are you saying signaling that you have seen more labor pressure? Are you worried about more labor pressure in the first half or for '23 or not?

I think you summarized it very well and accurately. And from our perspective, we did see 7% in our Q3 increased to 8%, but that was intentional decisions that we made in certain markets to bring on new employees at the right level and in certain markets to make pay adjustments to ensure that as we see significant volume opportunity that we remain competitive and have the right employees and improve some -- and continue some positive momentum we have right now around recruiting and retention. We are seeing positive signs regarding the labor environment for our industry. And that includes reduction in contract labor. Monthly improvement now for several months around our retention in our hiring activity and job postings. And then we're looking at external data being positive. And so while we did see that 1% step-up, it is not a view from our perspective that the environment we're in is becoming more challenging. In fact, we're seeing some positive signs as we move into 2023, and that's reflected for us in the back half of the year. And it's mainly in the back half of the year because of the timing of our employee merit increases, which happened in the first half of the year and really have the effect of keeping that year-over-year growth elevated because we want to move forward with those increases. That's the right thing to do for our employees and for the company and the volume growth that we see. But second half of the year, we're seeing some very positive signs as to moderation that will happen over that period.

And the primary reason it moderates in the second half of '23 is really just comping where you were sold those planned merit increases. So comping that, not feeling like you have to go back to that same level again? Is it.

That's exactly right. It's comping and seeing the benefit of taking action over the last year to be in a good position to be able to -- once the overall environment improves, we'll be in a good position to see the benefit of that.

And then some have pressed and said, "Well, you raised the revenue a little bit, but you kept the EBITDA the same. So '23 has to be landing somewhere worse than you once thought in terms of labor or something else. Can you address that if you think that's the right conclusion there.

We've heard the readthrough into how we adjusted our revenue and EBITDA guidance, but that's not our thinking there other than flowing through that 1% into the year, we did not change our labor outlook for the year. And our guidance for the year in our view is very positive. Our EBITDA guidance reflects 10% growth at the midpoint and well above 13% growth even at the high end. And we did narrow the guidance from December to February, which, in our view, was just a tightening that reflects the increased visibility and confidence that we have into delivering on a successful 2023. And our revenue guidance does reflect strong volume growth for the year, but the EBITDA guidance staying at the midpoint did not reflect any change in our view of our cost.

Okay. Great. We're out of time. Gentlemen, thank you very much.

Thank you, Gary.

Thank you, all.