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

All right. We can go ahead and get started. My pleasure to have the team from Acadia today. We've got Chris Hunter, and Heather Dixon and Patrick is in the front row, welcome. So thought I might just get into it. If anyone has any questions throughout this, let's keep this as interactive as possible and raise your hand and we'll try to get to everyone's questions.

But obviously, there's been a lot of discussion lately around like how you stepped into the second quarter. Heather, with volumes you provided some, I think, clarifying comments. Maybe if you just want to refresh everyone's view here on the room and to the trajectory of the volumes as you're thinking about the progression in the second quarter.

Sure. Happy to. You're right. On the earnings call, we talked about experiencing a period of softness towards the end of first quarter which we think was in large part due to the impact of the timing of Easter and Spring break this year versus other years. And I think that's pretty similar to what others in our space have experienced as well. But what gives us confidence in the acceleration of volume throughout the rest of the year, 2 things I would point to. The first is we expect that what we experienced was transitory in March, and we're pleased with our year-over-year admissions growth and the way since it has been rebuilding since that time. So we expect that softness is largely behind us at that point -- at this point. Second, I'll just remind you what we've said in regards to second quarter. We said that we expect our year-over-year same-store patient day growth will be at least in line with what we saw for Q1, if not better. And then maybe lastly, I'll just point to the benefit from the ramp of bed additions. We've talked quite a bit about the bed additions and de novos that we put in place over the last several quarters. But maybe if we just talk about that a little bit more. You recall, we added over 1,000 new beds in the past 18 months and 400 of those were in the second half of last year alone. So of course, we'll be seeing an increasing benefit from those bed additions in the second half of this year as compared to the first half of this year as those just continue to ramp. And then, of course, you all know, we're adding around 1,200 beds for this year, and we will see some incremental benefit from those beds coming online in the second half of the year. And we've mentioned before that these are largely weighted to the back half of the year.

Right. So the 1,200 this year, how many are in the third and the fourth quarter? The timing is always a factor on when they all open.

Yes. The significant majority is in the second half of the year, and it's hard to pinpoint exactly which quarter because of the way that construction works, but significant majority are in the second half and weighted towards the back end of that.

Okay. There's also been some noise in addition to volumes, just around that, maybe consensus estimate, some analysts have been cutting numbers. So I don't know if there's anything that you'd like to just go ahead and address, Heather.

Yes. Maybe let's just talk about a couple of things. First, let me just reiterate, feel really good about the census build and admissions growth since Q1. So just want to make sure that's really clear. Second, we are, as I just mentioned, expecting some growth and some increment from those bed additions. And maybe just to click a little deeper into the bed additions and put some quantification around it, just go back through the math over the last 18 months, roughly 1,000 new beds and then the 400 in the second half of last year. Those are ramping very nicely, and we think those are going to be a pretty good contributor to EBITDA for the second half. And if I just try to put some quantification around that, we would expect from the bed additions that are coming online in the second half of the year alone, that would contribute at least $10 million of incremental EBITDA in the second half versus what we saw in the first half of the year. So just to dive in on that and maybe just couple more things to add to why we feel really good about the back half of the year. Medicaid revenue, we've mentioned before, the vast majority of the Medicaid revenue renews, those contracts renew in the second half of the year, usually July 1st to October 1st dates. If you just think about the sequential cadence of EBITDA that would contribute to -- those rate updates would contribute to improved EBITDA in the second half of the year versus the first half of the year. So that's part of what we have built into our expectations. And then finally, you're right, I do think the Street may have mismodeled the [ cadence ] of EBITDA at the start of the year, and that's frankly a place that we could have done a better job of giving you some indication there whenever we gave our initial outlook. But given the pace of the bed additions and how we expect EBITDA to ramp for all those reasons I just mentioned, we would expect for 2024, the weighting of EBITDA in the second half versus the first half to be slightly more towards the second half of the year than what we've experienced in the past years. And so a little bit more. And then finally, I think what you're seeing is model changes and people are beginning to reflect that in their models, and I think consensus is starting to capture that cadence now.

Okay. So a couple of things to unpack in there. You normally get better -- you normally get rate updates from states in the second half. That's recurring. Would there be any difference in the rate of growth that you would expect to get from states this year versus prior years?

No.

Okay. So then if I look at like what you normally earn and I'm talking about, normally earn in the first half versus the second half, I would then add maybe $10 million of incremental EBITDA on top of normal seasonality. Is that a fair way...

For the bed additions? For sure.

Okay. Okay.

Yes.

All right. Okay. All right. I think I got that. And remind me the number of beds that you've got targeted for 2025 at this point.

Roughly in line with 2024, for sure. I think the one difference to point out just what is your thinking about how those increments will contribute in 2024 and then continue for 2025. We accelerated the number of bed additions to existing facilities in 2024 versus what we've historically done. We went from roughly 300 to at least 400. So that's going to have a growing impact to the back half of '24 as well.

Yes. And Whit, for '25, I would just take you back to our Investor Day in late 2022, where we kind of laid out the progression, particularly with the visibility that we have into the JVs. We've guided to over 1,100 in '24 and '25. I think we'll do 1,200 this year, fully expect to. And I would say '25 continues to be in line.

Got it. Okay. One of the things that stood out in the first quarter to me was the growth in the number of closures. There is in any given year, you're shutting down programs and facilities that are either not performing or you don't want to spend the time and maybe it's a distraction doesn't really matter, but certainly, things have elevated to increase a bit around closures. Is there any consistent themes around how you're approaching this in terms of internal discipline? Or how do I interpret the growth that we're seeing in closures?

Well, maybe I'll start, and I'll talk about some of the magnitude and the growth that you're pointing to. Over the past 4 quarters, we've closed 4 underperforming facilities. And those -- there were 3 of those in just the last 2 quarters. And so you're right, a little bit of an elevated pace. And just to quantify that a little bit from a year-over-year perspective, that's roughly $12 million to $15 million per quarter for the first and second quarter related to those. And you can see that in the same-store revenue comps. I do think that there's been a little bit of confusion about those contributions from a modeling perspective. So I'll try and maybe give a little bit of clarity and then we talk about the reasons for them. But just to start with, there's generally no EBITDA impact to speak of from those closures. That's typically a large driving factor to why we're closing them. So just talking about revenue. If you look back over the past few years, roughly the run rate was about $5 million a quarter from closed facilities in the past years. And of course, I just mentioned it, so at a much higher level sort of currently. And that's just because some of the optimization of the portfolio that we've done. I don't expect that to continue. We wouldn't expect that elevated level to continue, and we think that would normalize back down to what we've seen as a traditional rate. But I'm sure, Chris would say the same thing.

Yes. I mean this is deliberate in terms of what you guys have been doing, internally?

Yes. I just think this is continued portfolio optimization, it's something we'll continue to evaluate. But I think as Heather said, we don't have an expectation at this level that we just saw going forward. And we obviously want to make sure that our facilities are performing and that there's a sustainable path. And so we'll continue to look at that on a regular valuation, but it's just normal portfolio optimization is the way I'd capture it.

Not to put you on the spot about this is I'm just thinking about some of the other internal changes, the COO.

Yes.

You know if there's any comments, thoughts you care to share with the audience?

Yes. John Hollinsworth has been in this industry for 30 years and has decided to retire, and we're really pleased to have internal replacement. Dr. Nasser Khan and we brought in to lead our CTC business, who has really done a fantastic job of reigniting growth within that business, also leading the company through Medicaid redetermination last year. He's on the Board of NABH. Just a really proven operator who not only brings us a very strong track record from when he was at Shields before that entity was sold to Walgreens, but also spent some time at DaVita with just very strong growth track record. And I think just the way that he has come in to CTC through Medicaid redetermination, put a number of things in place that enabled us to reduce our employee turnover in that line of business, but also to see really strong clinical outcomes as well as very strong patient retention and reducing the wait times, which is a big driver of growth in that business because patients just do not want to come in and wait at a facility. So Nasser has done a phenomenal job of attracting in talent. John and Nasser already working very closely together. I think we have the benefit of continuing to see John. He'll be a consultant through the end of the year, still a significant shareholder and is doing a great job and just working through the transition. So we're really excited about what Nasser is going to bring.

Got it. One of the frequent questions we get is around just the enterprise-wide pricing and trying to drill down into kind of a core pricing, you obviously get a benefit of having the revenue from the CTC business. It depends like which one of your service lines might be growing faster or slower than others could have. Is there just a simple rule of thumb, Heather that you look at and say, if our same-store revenue per patient day is x, it's normally inflated by one point from CTC and then lately, it's been driven acute's been driving at, I guess where we're trying to go is, I get a lot of questions on like what's kind of the normalized core pricing that we should think about moving forward?

Yes. I would say, you hit on the first piece that I would point out. So when you look at the revenue per day growth, you're right. CTC does contribute to that calculation without any patient days. And CTC, as you know, has been growing at a really nice pace. So if you back out just the impact from Q1 of CTC growth, that's about 100 basis points off of that growth rate. And then if you recall, we mentioned a onetime payment that we received in Q1 of about $7 million. And we get those from time to time if they're large, we'll call them out specifically as we did in Q1. If you back that out, that's about another 100 basis points. And so that gets us down to what I would think of as our baseline growth rate of about 5%.

Okay. Chris, can we just spend a second, when I think about 2023, it was a year of heavy investment of people, processes, technology. There's a lot that's going on in terms of investing in the organization that a lot of investors don't see. Maybe can you can just step back and talk about some of the processes that you undertook last year to modernize the organization where -- I mean we all know about the EMR, but maybe some of the less obvious areas.

Yes. I think we're a company that has 260 facilities that has really grown through acquisitions. So as you would expect, there has been a lot of variation that we've seen facility to facility, but I think we've done some very focused work going in and looking at how can we leverage technology to take out some of the [ variation ]. But I think we've also done a really good job of making investments inpatient quality. And I think our remote patient monitoring software that we put in place that we now have in place at all of our acute facilities. We've seen tremendous outcomes from those in terms of just being able to monitor our acute patients consistently. We've also put some technology in place with respect to patient safety that we're rolling out in all of our acute facilities through the end of this year. And we've done that across really all of our lines of business. I mean our CTC business has some of the highest CARF quality scores in the entire industry. And we're continuing to do that on the EMR front as well. I mean, obviously, the EMR is quite an installation. It takes a little bit longer, so it will go well into next year in getting those facilities up. I think those are representative of some of the things we're doing on the technology side. And then just on the clinical versus nonclinical, I think we have been very consistent in looking at staffing ratios for our HR team that's in the facilities in the field, our IT team. Even looking at the way that we train our clinicians or new employees that are coming into the organization, there was a lot of variation around how that is done. Our Chief Nursing Officer led an effort to routinize the way that we train our staff, and it has led to significant improvement in our retention. So I just think that we're still in the early innings of this journey and working through how do we address the variation, but I think the early proof points have been very encouraging, and we've got quite a ways to continue to go.