Acadia Healthcare Company, Inc. ($ACHC)

All right afternoon, everybody. [indiscernible] sticking around this afternoon. My pleasure to have Todd Young, CFO from Acadia.

I thought it would be maybe helpful to start since Todd is relatively new to the organization joining in a time of change and you've been at other places in your career. I wanted to hear kind of observations around some of the strengths and weaknesses that you've identified within either the company operations, the finance functions. And maybe we'll just start there.

Sure. Yes. I joined Acadia 4 months ago, right at the end of October. So still new, getting used to being on the services side of health care grew up on the product side, including at Acadia Pharma, which has created a little confusion as I joined Acadia Healthcare. Overall, the company is in a really good spot from a market positioning standpoint. The demand for our services continue to grow, and we've got a nice diversified business across both the acute inpatient, specialty inpatient, residential as well as the outpatient business with our opioid replacement therapy, what we call CTC. So I think all of those give us a really good spot to drive growth from. Overall, I mean, the organization is very pleased that Debbie Osteen is back as CEO. Debbie joined us back in mid-January. And so her history in the industry and her proven track record of operating facilities is really something that's breathed fresh life into the employee base and a lot of excitement there. So from the standpoint of our relative strength, certainly, this opportunity to grow from a base of new facilities. We've brought a lot of beds online over the last few years. And I think that puts us in a really good spot to be able to drive growth without needing as much incremental capital. From the standpoint of opportunities, we do have to improve execution. I think you've heard Debbie talk a lot here in her first month on the job about getting the right people in the right place in order to drive that growth. It is about people, it's about everything from hospital, CEOs, to the divisional leadership and making sure that we're set up to have the right people understanding the way to fill these hospitals because the opportunity really is there. But overall, certainly, the people and their passion for taking care of our patients is a real strength. And I think we do have this opportunity to drive growth with a lot of facilities we've brought online over the last 3 years that are -- they just haven't filled up at the pace that was originally expected. But we feel good about the markets they're in and that the opportunity is there with the right execution and the right leadership to do that. So overall, I think the strength is really this opportunity in front of us and the demand for the services. Certainly, it's a different player base. We've seen some of the challenges of the litigation side and medical malpractice. That's a place that I'm getting my arms wrapped around on and an something I just hadn't exposure to previously, but now have been getting up to speed on. But overall, excited for what we can do to serve more patients across the U.S.

And maybe as it relates to just like the organizational review. I know it's incredibly early, and Debbie is just getting her arms listening probably more than taking action at this point. But where are we in terms of like looking at the layers of the organization, identifying the right people? And what would be a reasonable timetable to think about for making some of the changes?

Yes. I think obviously, the benefit Debbie has is she's been around the organization previously the CEO. And so she doesn't start from ground zero. It is something we're actively doing at the moment. So I do think we'll have some movement on that in reasonably short order as we focus on, all right, how do we make sure that the right people are driving it and that we're taking advantage of basically better data streams, as you've heard her talk about on quality and dashboards that maybe we don't need as many people as we thought we did to do those same levels of effort. So I do think we'll have something in reasonably short order that's faster than you'd normally see just because of her understanding of the company and the people that are here.

Okay. She said something on the call about removing barriers to problem solving. And I think that's probably part of it. But maybe just elaborate a little bit more on what you guys are doing?

I think a part of it is, again, it gets back to people, making sure they feel supported, but we also know who's accountable for decision-making, especially with new facilities and new JV facilities so that it isn't just a committee approach where you look left, you look right, and you're trying to find out who can you go to, but really making that a very clear accountable structure as we move forward. And so I think overall, as we evaluate any of the different groups, be it my world in finance, be it quality, be it compliance, legal, HR, IT, all of those things, we're just trying to make sure we understand what the team is doing and how they're driving value to the facility level or making sure that we've got the right compliance and other things in place for the enterprise.

Okay. So fewer meetings, less talk more action?

Certainly, that's a part of the goal.

Yes, I don't like meetings. When you look at the new de novos that you've opened up in the last few years and the underperformance, any common themes as to why they've underperformed some of the targets?

I mean I think we probably had outsized expectations from the start that obviously proven that's an easy one when you know what the actuals look like after the fact. I think the timing element certainly is one where assumptions that things would move faster, meant staffing occurred earlier, which meant you had ran losses with a fixed cost base being delevered even sooner. So I think that's part of it. I think some of it just gets to understanding the time line and the urgency of getting through licensure requirements. Obviously, most of the new beds we've brought on have been in the acute facility space in order to get to involuntary patients with Medicaid, we've got to go through all the licensure process, including getting Medicare tie-in numbers and the like. Some of those just went much slower than what had been historically the norm. And so that's a part of it. And I think just a lot of kind of overarching volume of change over the last couple of years that somewhat like in the case of you do a big M&A deal, you assure everyone that it won't cause any disruption internally and yet you're doing lots of change all at the same time, and that does create. And I think there's been some of that over the last couple of years that we're really focused on the facilities, focused on driving admissions and taking care of our patients safely versus a lot of other distractions. And with that, I think we're going to get a bump in quality of delivery as we just focus on that key deliverable, which is running the facility well.

Okay. There's been a handful of underperforming facilities that have emerged in the last year or 2, many of which have been shut down, most of which I think were probably specialty and due to environmental factors and industry factors and GLP-1s impacting the demand for eating disorder. Are we through the bulk of closure activity at this point. It doesn't sounds like Debbie believes that closing facilities is probably the right action to take?

We think so. Our focus really is on taking advantage of the beds that we have and driving occupancy with them. We don't expect to be closing any facilities other than the ones we called out on our earnings call a few weeks back. We did consolidate two facilities in Pennsylvania as part of the New York Medicaid decision that were leased facilities that were leases were coming up, so it made more sense to consolidate into some bigger facilities for efficiency reasons. And then one facility that we had previously announced in Q3 or Q4 of last year that officially closed in January. But fundamentally, our focus is on making facilities work as we've seen from the cost of adding new beds has become much more expensive with the construction costs. And so we think there's an opportunity to serve more patients in the beds we have and are really looking to do that. That being said, if there's something that happens to a facility, and we do not think it is financially viable, then we'll make the decision to close it. But right now, our focus in '26 is operating all of our facilities as well as we can run them.

You mentioned the New York, Pennsylvania headwind of $25 million, $30 million. How do you -- what's the math behind that? Is it just saying, here's all of the out-of-state patients. And if we get none of them like that revenue is gone, is that?

Yes. Like fundamentally, it's a conservative assumption based off losing all of those patients that we historically had from New York. We're going to actively backfill and I'd like to think that gives us some additional opportunity relative to the guidance we've given. But fundamentally, yes, we took out that patient population of revenue. We also took out the associated expenses of the care you need as occupancy grows. But we'd argue it's probably a conservative view. We're actively looking to backfill those beds. We did get approval from New Jersey Medicaid to be inside their system, which means we can take Medicaid patients from New Jersey. We're obviously looking in Greater Pennsylvania as well, just given the location of the facilities.

Okay. You've got a number of de novos you're opening up this year as well. And I would have thought that the start-up losses would have been less than what you're guiding to kind of like flat to slightly down something in that range. How would you characterize that assumption that you've embedded in the plan this year?

Yes. We've got a number of large facilities coming online. We brought on ECU Medical, which I think is 166 beds in December 10. So it's 25, but it's certainly embedded there. Tufts, opened I guess, 2 weeks ago in the big snowstorm in Boston. So pleased to get that one ongoing and then Orlando Health is the next one on the docket. We've generally tried to use good reflective assumptions based off recent history. When building out our guidance because that is the most relevant time frame we have. Now do we want to do it faster? Are we moving with a sense of urgency? Are we trying to make sure we get all of our documentation done to get joint commission and to do the surveys as promptly as possible? Absolutely, all of that. And I think that's our goal is obviously to do and run everything better than what we've assumed based on the ability to do so, understanding that, we also don't want to just assume initiatives have already worked before we've seen traction of them working. And so that's the balance within that. But we do have a lot of new big facilities coming online here that are driving that number with the 26 facilities being about $30 million of it and the rest of that delta of about $20 million coming from the 25 facilities that haven't moved to the same store yet.

Remind me, are there any de novo slated to be opened in '27?

Not right now, there'll be more beds inside facilities that we would expect to continue to grow as licensure goes on a -- especially at Tufts, where they get it on a unit-by-unit basis. And so we only opened 24 beds when we opened Tufts. I think it's 144 bed facilities. So there's a number of units that would come on, including some in '27.

If Acadia has always added beds to existing facilities that hit peak occupancy, whatever, you take a wing down, you build some more beds. Would you expect the target around those number of bed additions to existing facilities to change going forward? And what are you baking in this year for new beds to existing facilities?

We've given the 400 to 600 in total beds. That includes some expansion beds that will come online. We haven't broken it out specifically yet, but we'll do it on an actual basis. We do expect to continue that efficient expansion sort of mindset, often adding 40 beds to a facility where you're already at sort of 80%, which given you have adolescents adults, often that means you're kind of fully occupied. You can leverage the fixed infrastructure, leverage the referral sources and continue to do that efficiently. So I think that will be more of the focus in the '27, '28 time frame, the new facilities as we have brought on a number of new facilities as we've talked about that we need to fill.

Okay. Of all the things you've built, I think, what resonated with investors is at the midpoint, you guided $600 million of EBITDA, let's say, and there's another $200 million of embedded earnings, $150 million like to get to the EBITDA margins you think plus the add-back of $50 million or so of start-up losses. I have you, as a company deployed resources around those facilities to really try to focus on getting them back on plane to get to where they need to be?

As you can imagine, those facilities get a lot of attention. I mean that's where we're sitting, and we're reviewing those on a very regular basis to understand right, how are they tracking? How are they tracking relative to expectations? How are they tracking relative to what we believe they can do in the marketplace. That fundamentally, obviously, a facility that's 85% occupied and going great, we pay attention to because we don't want that to change. But those that are running at 20% capacity. They were opened in 2025, and we've got to get it to 80% capacity. That's where the focus is, is making sure we're thinking about that on the right track, have the right leaders in place really driving that. And then a lot of focus with our JV partners, I think that's a place where Debbie believes there is opportunities. We will look and have looked at all of our referrals from JV partner hospitals and seeing, okay, what number do we get from our best JV partners versus our worst JV partners? And the question is, all right, why can't we make them all look like our best partners? And so a lot of time being thought about that JV partner strategy and how do we use them both after they're opened as well as on the front end as we talk about how do we ramp things quicker. They often have relationships with payers or governmental approval bodies where we're trying to take advantage of their market position to help us.

I would ask how long is it going to take to realize that $200 million, but you're not going to tell me. But just maybe remind us and refresh what is the typical timetable that you can generally get facilities from open to target?

We've said kind of inside 5 years, not as illuminating as you'd like, understand that. But it's 3,000 beds. That math makes it $50,000 of EBITDA per bed. We have facilities, obviously, that make more than that on a per bed basis. We have some that make less, but we feel like that's a reasonable assumption as we drive these. And obviously, ones that we opened in 2023 are much further along that curve. But then we also have some that had really great starts. Henry Ford, for example, was one with a really great health system in Greater Detroit. They had beds that they were closing down that were moving over to our facility. And so that's an example where the JV partner is hugely beneficial and helpful in driving greater occupancy sooner and that one will get to a higher level of profitability earlier as a result. But yes, that's the big opportunity in front of us is these 3,000 beds brought on between '23 and '26 primarily acute beds there. That doesn't include expansion beds. As we talked about, we do add 10 to 40 beds, two facilities. Those are already in our same-store base. And we also view that as opportunity to continue to drive profitability in the base business as well.

Okay. Can we spend just a minute on malpractice, something recognizing, of course, the frequency of activity on the legal side has been quite high, and we've seen industry challenges as well. Cost per claim has gone up. But just -- it would be helpful to hear just the process that you guys undertake to establish reserves and any way to maybe characterize your level of comfort around the malpractice reserve today?

Yes. Very fair question given the impact on our 2025 results from our PLGL expense. So embedded in PLGL expense is both the premiums we pay for insurance. And so we do have insurance for these claims but the insurance market has changed a lot. It used to be in 2022, I believe, $3 million of self-insurance and then the insurance would kick in. That's now moved to $15 million. And for certain sexual assault claims, there's cost sharing even up above $25 million. And so that insurance has changed dramatically with respect to its relative protection for most claims. As we got our actuarial report, which we have to do every year, the big change that had the big impact in 2025, where PLGL expense went up $61 million was both historic claims not being reserved at a higher enough amount, and so we had to increase the amount on those historic claims that were already in our embedded base. That was about $18 million, which is what we don't expect to repeat in 2026, because we feel like we've adequately reserved for those historic claims based off the settlements we see across our entire base. Then the number of claims jumped up dramatically. After being reasonably stable for 3 to 4 years, they were up 186% last year. That dramatic jump is a big driver of the cost. As we look forward for this year, we assume claim volume would stay at that elevated level, we didn't assume it would get better and revert to the mean of the previous years. One other difference we've made from just a monitoring standpoint is I meet with our legal team every month and I look at what claims came in the door? What settlements did we have? How is that tracking versus what the actuarial estimate that we used to establish the PLGL reserve is tracking. And so we just gave guidance. I've looked at it. We're in line right now with those assumptions, which is what gives me, I guess, the most confidence at the moment that what we've assumed is running at the right level for 2026. That is a continued process. If you look at our balance sheet reserve for this, it's now up to $155 million after being $78 million last year. So we do have a lot bigger reserve on the balance sheet. As a lot of these adjustments we've had have really been noncash costs as this new claim volume, this 186% growth, most of that won't play out from either a settlement or a litigation standpoint in the courts for 2 to 7 years, just because of the nature of how long it takes to work through the settlement. So a lot of this was a negative on EBITDA but less of a flow-through to cash flow.

Okay. Some of your peers will perform a malpractice test twice a year. Does it makes sense to you to maybe have a more formal review more often?

Yes. And we'll be doing that at least twice a year, as part of the actuarial assumptions.

Yes. Managed Medicaid, that's been described as a pressure point for you guys plans shifting their behavior. Debbie seems to think that the activity with the plans is probably in her mind, no different than what she's seen in the past. How would you characterize the -- your experience with some of those payers today?

Yes. I think it obviously varies by payer. I take comfort as well in Debbie's long experience in the industry and her view of this as she feels like this is very much sort of the cycles that you go through over longer stretches. We have seen our bad debt increase last year, as we called out, and a lot of that's embedded in the base, and we've assumed that stability into '26 versus a significant improvement. But the team is very focused on doing the right advocacy for patients, having the right documentation in place so that we can defend our assumptions and our documentation and a review we get, understanding that, obviously, some of those players are having greater financial challenges, and that's always something we have to be cognizant of as they look to improve their bottom line. But the team is very focused on that and very focused as we have the negotiations with the payers of getting some better data, we've been able to obtain some better information on how others in the industry and rates they're getting from payers that we think will help our team as we focus both at a corporate-wide on lots of big contracts as well as at the facility level with smaller ones. That's a key element every year is those rate negotiations we go through.

Okay. So it was a few years ago that Medicare started to cover partial hospitalization and intensive outpatient programs in the industry is sort of coalesced around the strategy to try to advance that? Just maybe update us on where Acadia is in terms of allocating capital and focusing on an outpatient access point strategy.

Ours is very focused on the continuum of care, making sure that our patients in the acute setting are stepping down into places that allow them to continue to get better over time. And that's really where our outpatient focus is as a step down from the acute versus it being on a pure outpatient model for patients. Now obviously, our opioid replacement therapy CTC business is entirely outpatient. But when we get to the straight behavioral, it's really more focused on having that right continuum of care, having outpatient be part of the therapy. But we do have straight outpatient as well in a lot of our specialty businesses, that was part of the hit we took in Pennsylvania was a lot of our outpatient population were New York residents that we now can't treat because of New York's decision.

On the CTC business, there was some hysteria among the investment community when there was legislation out. I'm forgetting even the name of the?

AHA or something like that? No?

Well, I think that's a different one. That's a different one. It will come to me in a minute. But the punchline is that you could access methadone from non-CTC locations, it could be dispensed at Walgreens or CVS. Is there any update around that idea that concept, that legislation, is it dead? Is it?

I know it's -- I don't think it's dead, but it doesn't seem to be overly active at the moment either. Our perspective is that we're treating some pretty acute patients that have a real need. And part of what our value proposition is, is patients come in and get their therapy and move on in less than 5 minutes. Now if they have a therapy session, it's obviously longer, but if they're coming in just to get the methadone and move on, less than 5 minutes. So it's a really efficient well-run process. We're seeing thousands and thousands of tens of thousands of patients a day. And so I think most of us probably been to Walgreens recently, it usually isn't less than 5 minutes. So I do think that, that's a real competitive advantage we have versus an alternative option for people to get a daily therapy, especially before we're 6:00 a.m., 7:00 a.m. type time frames.

We spent some time a few years ago really examining the national opioid settlement. And are you guys seeing any of those dollars directly or indirectly flow into the organization?

Very little. Yes. I think we -- it's something we're always working on and on the lookout for. We have seen a few things on some capital grants where we'll get some mobile units that we put into place that came from grants, that came from the settlement dollars. But given the amount of money that's been allocated to that, we've seen very little flow in from a business demand perspective.

Okay. Thinking about all the organizational review, things you guys are going through right now, how do -- if you're me, and you're looking at my little Excel model and playing with the corporate overhead number. Would I expect that it would be flat on a dollar basis this year, growing at a smaller percentage of revenue? What's the right way to think about the corporate costs this year?

Yes. It's very much in the flat to down. There's a little build back of incentive comp, that is...

That's what I was going to ask. How much is that?

We haven't given specifics, but that's the only thing growing, I'd say, is that add back, I'm assuming that we're back at 100% funding. But overall, that's been a focus where we've got an ongoing review right now of those costs. But as a general matter, as we built the budget back in November, December, it was very much focused on no growth in corporate and where is there opportunities to reduce heads, reduce spend in that area.

Okay. The Board last year authorized share buyback authorization. I don't remember, maybe $200 million, something in that?

I think $300 million.

$300 million. [indiscernible] I can't remember. I can't imagine that, that's a priority at this point right now to think about that.

Yes, I think our leverage now is 4x, and we've guided to being in that general range for 2026, which is a little higher than we would like it to be. And I think most of the feedback we get from investors, it's a little higher than they would like to see it. So I think from a free capital perspective, we'd be looking more to pay back debt than to buy back shares. As you've seen in the guidance, we're bringing CapEx down dramatically here in 2026, and that's allowing us to expect to be free cash flow positive for the year, and so that should help us start down this path of reducing leverage. But that's certainly more of the focus than stock buyback.

Okay. And then I know we're just in the beginning of '26. But going into '27, what does the slope of the CapEx spend look like?

It will drop off more. I mean, as I said, we don't have a big de novo build plan right now. And so with those being the main drivers of getting these finished this year. I would expect the growth CapEx to take another step down. It won't be $300 million because there's not $300 million to take out of it this year, but I do think it will make another drop and something that we will obviously provide greater guidance on when we get close to '27.

Okay. All right. Well, we've got about 10 seconds here. If there's a question in the audience. I could keep going. But all right, Todd. I appreciate it. Thanks for the time today. Thanks for conference.

Thank you. Thanks for the conference. I appreciate it.