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

Hi, good morning. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok, and I'm the facilities and managed care analyst here at Barclays, and I'm pleased to be joined on stage with Patrick Feeley, SVP of IR; and Heather Dixon, CFO of Acadia Healthcare. Welcome.

Thank you.

Thanks for having us.

With 4Q results, you took the opportunity to revise long-term targets, revenue and EBITDA by about 200 basis points and reduced the bed additions by about 40%-or-so. How much of the revision was driven by recent legal and media issues? And how much of it was driven by a modified fundamental outlook on the business?

Sure. If I may, let me jump in on a few of those. So this was not driven by any legal or media issues. This was just a reflection on the number of beds that we have been adding and what we had planned for the future. If you just look backwards a little bit, we have added a significant number of beds in the last couple of years, but we've actually added fewer in the most recent years than what our previous outlook for 2022 would have included. Just in 2024, for example, we added 776 beds, which is still very healthy rate of growth, but it's about 35% to 40% lower than what we previously would have anticipated. And then maybe just on that note, the significant majority of those beds were added right at the end of 2024. So that means that they won't hit breakeven or start contributing, from an EBITDA perspective, until 2026 effectively. And then just stepping back from '24, we're just reflecting and taking a more moderate approach and balanced approach to focus on growth, but also on CapEx and free cash flow generation. So that's looking forward what our plans now reflect. If you look at what we're planning to add, just at the midpoint, it's about 3,000 beds over the next 4 years, and that is still, again, a very, very healthy growth rate from a bed add perspective, but it's about 28% lower than what we would have anticipated in the previous guide that was out a couple of years ago. And then maybe one other thing to add is just in the mix of beds. The beds are slightly more skewed now to de novos and new facilities, which is a great thing. That's a really healthy perspective for the future, but they ramp a little slower than bed additions to existing facilities. And so to that extent, you have EBITDA contribution spread over a longer period of time from those de novos versus the bed additions. And that just means there's more to come on the back of those de novos because we will have the opportunity to add beds to those facilities as well, whenever you think about it from a longer-term perspective. But just maybe to come back and just refocus on the growth strategy, it's -- that is still our priority from a capital allocation perspective. We're still focused on expanding the footprint. The unmet need is still significant, and frankly, probably growing each year. And so we want to make sure that we're there to meet that need, and nothing has changed in that regard. But we just recognize the opportunity to balance our CapEx, cash flow and growth.

Got it. That's helpful. So in your view, it's more of a recalibration, so to speak. Is that more so at the industry level or specifically to what Acadia is seeing in their local markets?

I think -- I can't speak for the rest of the industry. I think the whole industry is seeing unmet need, significant demand, growing demand. But from our perspective, we just thought it was the right thing to do to just take a more balanced approach and just show the embedded cash flow generation that's in this business that people are maybe not seeing as clearly as they could because we are focused on high growth, and we still have really significant growth rates, certainly larger than anything this company has seen in the past.

Right. And you mentioned the shift from maybe adding beds to existing facilities back to de novos. Why is that the right decision, just given the emphasis on cash flow? My understanding is that the beds to existing facilities would have potentially better cash flow and higher returns on invested capital.

It's -- I think it's just a reflection of maybe two things. One, a longer-term view. Those de novos -- for example, when we look at the projects, we evaluate the returns for de novo based on just the initial beds that we add. And so we make sure that the return thresholds are met on our side without those incremental bed additions in the future. And then we have that to come. So it's really planning for the future and not just an immediate short term. The other thing I would say is there are opportunities for us to partner with really, really high-quality joint venture partners. And if we can focus on that and building de novos with the joint venture partners that also have incremental beds that will come in the future, that's a really good situation for us.

Got it. Let's move on to pricing because I still think there's some confusion there and the underlying assumptions in guidance. Your revenue per patient day had been consistently running in the 6% to 7% range throughout 2024 -- from 2022 through the first half of 2024, that decelerated in the back half, and now you're talking about low single-digit price increases for 2025, let's call it, like a 300 basis point downward revision. When you break that apart, what are the drivers of that revision between kind of core underlying rates, state directed payments, payer mix and CTC revenue that might impact those KPIs?

Yes. Let me break a few pieces of that apart. So if you think about the rate, and I just break it into a couple of different drivers. First, recall, we pointed out in guidance that we are guiding to supplemental payments being flat to up $15 million for the year. So that's what's in the guidance. And effectively, we're just assuming no material tailwind from supplemental payments. And if you look in the past few years, that's probably been about 100 basis points of a tailwind compared to this year where it's a small tailwind, but not anything that significant. The timing and the magnitude of those payments is really hard to predict. So we have been conservative in the view that we've included in the guide. But obviously, if the timing or some of the decisions are earlier than what we've anticipated in the guide, then that would be a positive swing to the guidance. Maybe just one other thing to pick up on and follow on there with CTC, that business grew at significant rates historically over the past couple of years. If you look at 2023 alone, it grew at 20% in some of the quarters within the individual years were even higher than that. So that was a significant pace of growth. I believe just an under-invested business for a while and Chris came in and really drove that forward, and we saw some really significant growth. But from that perspective, that was also a tailwind to us in prior years, and now it's just not a tailwind to us because it is sort of the moderated pace of growth there now that it's had the high growth. And then just maybe two more things. One, if you recall about 2 years ago, the end of 2022, beginning of 2023, there was a significant -- sort of significantly different inflation environment, certainly from a labor cost perspective, you'll remember that we were peaking at the high single digits for labor costs on base wage inflation there. And I think that's part of what was reflected in some of those rates previously was certainly supplemental rates as well on the payments just to meet the needs associated with those labor costs. So I think that's a piece too. And then finally, we've mentioned a couple of times that we just felt like it was more prudent to have a more conservative approach to setting those rates this year. There is certainly some noise coming out of certain places in the country. And we think that it's just the right approach to introduce a little bit of prudence in there. Nothing specific I would point to. We're not tracking anything that we're concerned about. It's just really just taking a little bit of caution there, while things continue to unfold certainly this early in the year.

Great. I want to follow up on a few of the CTC comments. With the revised long-term targets, you gave some color around revenue, EBITDA, bed additions, but we didn't get as much color around the CTC growth outlook. I think you were previously targeting 14 de novo CTCs annually. How should we think about that growth and investment in that business, both in the near and intermediate term?

Sure. That's a great question. So first, just to come back to your comment on the 14, we had said up to 14, and that was just trying to recognize the fact that all of these builds, whether it's a CTC clinic or a new facility, they're very sensitive to timing for construction, licensure certification of the building. And so there's -- there can be a little bit of wiggle room in those depending on the timing. But also, if you just go through what happened in 2024, we did close or consolidate I think it was 3 clinics. And so that's part of what you're seeing impact the overall number of clinics there. Those were smaller clinics where we had the ability to consolidate or just make those a more efficient choice there with capital. And then we also have found what we find as a really attractive way to deploy capital in terms of new CTC clinics and that is to find small subscale probably individual owners of 1, 2, 3 clinics, find those clinics, acquire them and then apply our operating model to them. And that's a really efficient use of capital, it's very quick to get up and running. And certainly, less of a J curve because the customer list is effectively in place. And so we can really focus on those clinics in a good way. So that's been a really nice addition to how we think about adding clinics as opposed to just a pure de novo. And then finally, I'll say we have found some other clinics to acquire. We found some attractive clinics. We've already acquired several this year, and we're planning to close on a few more just before the end of the quarter as well.

Great. So taking that all together, should we be thinking about a reduced number of just CTCs over the next few years, maybe thinking in the mid- to high single-digit kind of revenue growth for that business? Just trying to understand what the...

In total, for all of them together with acquisitions?

Yes.

Well, I would think on a longer-term basis, yes, I just mentioned we're going to have a handful, certainly, a healthy handful for Q1 this year already. But I think that's reasonable for a longer-term basis. And we've talked about that business having really a long-term growth rate in the mid-single digits, and I think that's a good way to think about it.

Right. And if we think about some of the demand factors, opioid overdose deaths had been rising for several years. I think it probably peaked around late '22 or '23. And then we saw a surprising reversal of that in 2024. Well, that's obviously a great outcome, there are demand implications of that. What are your organic trends that you're seeing in CTC patient census? And what's your take as that number continues to fall?

Yes, that's a great question. We are very pleased, obviously, with the reduction in the number of opioid deaths. I would just point out that from our perspective, it is a very good thing, obviously, for society in general, that there are fewer opioid deaths, but also, that means more patients stay in treatment for longer, which is exactly what the business is designed to do, to help people get better over a longer period of time. The reduction in the number of deaths, I believe, is very highly attributable to the availability of Narcan widely. I think you can access Narcan very easily. There are campaigns to show people how they can get access to Narcan, it's easily available, which is a big shift from the past. Maybe the other thing just on the overall demand, though, there's also an increase in the potency of the drugs that people are choosing to use from an opioid perspective, Fentanyl has a very highly addictive and negative pattern, but some of the drugs that are being mixed with that are making the potency multiples of times worse when you think about it. So to directly answer your question, the trends that we're seeing from a volume perspective in the CTC business are great. We're seeing record levels of census actually at those clinics. So doing very well.

Excellent. And the availability of Narcan can be, I think, linked in some ways to the opioid settlement dollars that were flowing into the industry. What's your take on where we are in that cycle? I'm a little bit surprised that, that hasn't kind of trickled down to a greater degree to the CTC kind of business and clinics overall. Just where are we in terms of disbursement? And what's your understanding of where those dollars have gone?

So I think it's early innings. I think all of us are a little surprised at the pace that the dollars are starting to flow. They're flowing. I think your word to trickle out is probably the right phrase to use. There are over $50 billion worth of funds that have been paid into the fund to try to remedy some of the problems that, that opioid epidemic caused. But the way that it works is quite complicated. So that first gets allocated to the states and then the states need to determine how to allocate it to the counties and then the counties need to figure out how to use it. And so as you can imagine, that takes a little while to trickle through the system. We have seen funds slowing, and we have seen certainly our fair share of success when those funds are flowing. And some of that is used for OpEx support to ensure that the clinics are staffed in the right way and some of it is used for capital growth. And we've seen success in both of those lanes, but it's just a very slow pace. So I think it's early days. I think it's going to continue to trickle for a while, but I certainly think that's a little further in the future to see anything material. That said, we have a team that is dedicated to focus on not just opioid dollars that are moving, but any kind of grants that are out there that we could use and that we could -- that are applicable to our business and they watch for those things and they're very active in that environment to respond to those.

Great. Moving on to the 2025 guidance. I think the EBITDA guidance implies a fairly significant step-up from 1Q for the rest of the year to the tune of about $50 million-or-so. That looks pretty steep against historical patterns. I know Tennessee payments influenced some of that, but I think it would be helpful to walk through the considerations from 1Q for the rest of the year?

Sure. So if you think there are a few things that are impacting Q1. First, as you mentioned, there's a supplemental payment differential for Q1 versus the rest of the year. We called out that there's likely a $10 million to $15 million impact from supplemental payments Q1 '25 versus Q1 '24. And that also includes, if you recall, we called out $7 million of onetime payments in 2024. So first, you have just the delta on supplemental payments for Q1. We have included in Tennessee, as you mentioned, in our guide, but we have not assumed that, that happens in Q1. So that's a piece of it. Second, I would point to the start-up costs, those preopening costs. They are -- there's a significant proportion of those in Q1. And, as I mentioned, we opened 776 beds in '24, a very high proportion of those right at the end of the year. So you see this preponderance of beds coming online. The -- if you just think about the math, I think we're anticipating around $20 million in start-up costs in Q1 for '25 and that's roughly 40% of what the entire year will have. So that's a big swing factor for Q1 as well when you think about it. If you kind of look for the balance of the year, I think there is some confusion. Certainly, we've heard a lot of questions in regards to how that transitions to the rest of the year. And to your question, how does that move forward? I think if you look historically at the pattern of EBITDA contribution Q1 versus the rest of the year, it's historically been around 22.5% for Q1, and that looks back from when we sold the U.K. business about 4 or 5 years ago. It's been pretty consistent if you kind of back out some of the noise from last year as well. And that is what we've guided to each year, and that's been fairly consistent. I think some of the models are assuming a higher proportion attributed to Q1 and that is a highly sensitive piece of sort of the model, certainly. And so if you reflect more accurate level of what we've actually seen in prior years and what we've guided to, that will make a big difference to the cadence at the balance of the year.

Got it. So there's some natural kind of historical growth Q1 to Q2. There's the Tennessee startup -- the Tennessee state-directed payments which are assumed Q2 to Q4, and then there's also kind of like the moderation of start-up costs and those three items together kind of collectively...

Maybe one more I would add in. We closed a facility early in Q1. We started to wind that facility down in Q4 of last year, and we've called that out as a specific roughly $5 million headwind for Q1 for 2025. So that's about the only other thing that I would add in.

Okay. Great. I want to go back to the revenue guidance for a minute here. At the midpoint, the new revenue target is 8%-or-so. Can we talk about the underlying price and volume embedded in that assumption? And what's the new growth algorithm look like, including new store contributions?

Yes. I'll maybe take each piece of those. If you look at price, we'll just -- we'll start with the rate. We talked about a couple of the influencing factors for rate. If you just step back from that and think about the overall rate patterns, we have consistently said that we think that the right way to think about rate for this business on a longer-term basis is low, low- to mid-single-digit growth and that's what we are assuming. We're assuming that in the guide, we're assuming that in the longer term guide is that low single-digit rate, certainly for this year based on some of the onetime factors that we've talked about. From a volume perspective, we have historically talked about this business as being a mid-single-digit grower, and that's how we feel about the business today, and that's what we've built into the guide. In terms of new facilities and how those are contributing and coming online, there is, I would say, a good pace of those facilities. And as we moderate the timing of the bed openings, not just each year, but throughout the year, you'll see a consistent pattern of that growing as well. Some of it will be because of the de novo, some of it will be bed additions. And just recall that we have added beds to existing facilities consistently over the years, probably 85% of the facilities that we had as of 2020, which is assume anything from 2020 and previous would be fully ramped, we've added consistently to those.

Got it. Okay. And then the flip side of seeing maybe the revenue per patient day moderate is that you've also been able to manage the SWB per patient pay pretty well, especially considering the revenue pressure on the inpatient and specialty side of the business. So how are you able to achieve that outcome? And maybe add a little bit more color on how underlying wage inflation is tracking underneath those KPIs?

Yes, for sure. You're right, we have seen really good success with managing the wage inflation. There will be just -- I'll call out that certainly for the beginning of this year, you will see some growth in that number, but that's kind of going back to those start-up costs, you will have the underlying labor in those facilities without the requisite fully ramped revenue. So you'll see a little bit of an impact there. But we have managed to do a really nice job there. It's been relatively consistent throughout the last year, and we would expect that to continue to be in a good place. In terms of some of the things that we're doing, I think we've had great success with just focusing on the facilities. There are some really basic things that we have done and some more sophisticated things. I think, on a basic level, we've, as of a couple of years ago, did our first employee engagement survey at the facility level, which, as you can imagine, gave us the ability to hear from employees and really understand what their thoughts are and how they feel about being in those hospitals. But also when you just think back to all the investments in technology that we've made, we've put a lot of things in place in the hospitals, we've put in EMRs, which is highly unusual in the -- certainly in the behavioral business, remote patient safety devices, staff safety devices, all of those things contribute to just the way that they think about their day-to-day job in the hospital, and it's certainly a big difference between what they see in other behavioral facilities.

Great. Maybe a last question here. Tariffs are another issue currently contemplated by the administration. Your supply expenses are relatively low when we look at the broader provider industry, but you do spend a lot on growth CapEx, building new de novo facilities and the like. So how do you think about the risk of tariffs for your business?

That's a great question, and I think it's -- certainly it's top of everyone's mind today. We've actually done some work. We've done lot of math around that, as you can imagine. If you look at our CapEx just on a continuing basis, we've sort of pulled out the proportion of what we source internationally. And we took a factor to apply to it, but 25% rate we've added to that. And even when you pull that apart and do the math, it's still a relatively low piece, I think low single-digit impacts to our overall construction cost as a percentage of the total cost. So that's the first thing that we looked at, of course. The second thing I would say is we are pretty sophisticated, as you would imagine, in procuring the goods for our construction of facilities. And just for 2025 and 2026 beds that we're building, we have already locked in the price on pretty much all of the underlying pieces of construction that we need to bring in for those. So we've employed some pretty good strategies there.

Great. With that, we're just about over time. So let's end it there. Heather, Patrick, thank you so much for joining us, and please enjoy the rest of the conference.

Thank you for having us.

Thank you.