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

Good morning, and welcome to the Acadia Healthcare's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jason Plagman. Please go ahead.

Thank you, and good morning. Yesterday after the market closed, we issued a press release announcing our second quarter 2026 financial results. This press release can be found on the Investor Relations section of the acadiahealthcare.com website. Today, Debbie Osteen, Acadia's Chief Executive Officer; and David Duckworth, Interim Chief Financial Officer, will discuss the results. To the extent any non-GAAP financial measures is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2026 and beyond. These statements may be affected by the important factors among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's second quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to Debbie.

Good morning, and thank you for joining us. I'm pleased to be with you today to discuss Acadia's results for the second quarter of 2026. Overall, Acadia delivered solid results in the second quarter that were consistent with our expectations across our key financial and operating metrics including revenue, adjusted EBITDA, adjusted EPS and free cash flow. David and I will discuss our results in more detail. As always, Acadia is guided by our mission to provide compassionate care that improves lives, inspires hope and elevates communities. Our capabilities allow us to stand as a leader in the behavioral health care industry to the important work we do. Since I returned as CEO 6 months ago, we have refocused on our key priorities in order to create lasting value for our patients and communities, our partners, our employees and our investors. We are building on our strong foundation with operational discipline. As I discussed last quarter, our primary focus in 2026 continues to be on operational execution and serving patients through our existing facilities and our new locations. I'm pleased to say that we have made significant advances on these priorities in the first half of the year, and we are confident in our ability to deliver further progress in the coming quarters. Looking at our second quarter results, a few notable highlights include the following: we delivered revenue that was above the high end of our guidance range as well as adjusted EBITDA and adjusted EPS that were near the high end of our guidance. We generated $124 million of free cash flow and reduced our debt by $113 million. We are taking a disciplined approach to capital deployment, including CapEx, and we expect to generate additional free cash flow in the second half of the year. During the quarter, we opened 2 new acute facilities on schedule. A 144-bed JV facility with Orlando Health in Florida and a 96-bed JV facility with Methodist Jennie Edmundson in Iowa. For the second quarter, our total revenue was flat compared with the prior year period. After normalizing for the impact of the timing of supplemental payments related to prior periods in Florida and Tennessee, our total revenue growth would have been 2.8% on a year-over-year basis and 3.2% on same-facility revenue growth. In our acute business, we saw continued progress in ramping occupancy and revenue at our new facilities that have opened over the last few years. And our growth in same-facility volumes was consistent with our expectations. Our Specialty business delivered solid performance in the second quarter, including a $5 million sequential increase in revenue. The team also made progress in mitigating some of the impact on our Pennsylvania facilities related to changes in the New York Medicaid program that we discussed in prior quarters. Our RTC business delivered strong revenue growth in the second quarter, driven by volume growth and capacity expansions that were completed last year. In our CTC service line, revenue was flat on a year-over-year basis. Our CTC clinics provide important services that are highly valued by patients, families and payers, and we opened 2 new CTC clinics during the second quarter. Our adjusted EBITDA for the second quarter was $149.2 million. Adjusted EBITDA includes 2 items that were not included in our guidance. A benefit related to the Florida supplemental payment program and an expense related to an increase in our professional and general liability reserves for prior years. The combined impact of these 2 items was a $2.5 million reduction to adjusted EBITDA in the second quarter. David will provide additional details. Switching to our key operational priorities. We continue to focus on delivering more value from our increased bed capacity and the new facilities that we've opened over the last few years. During the second quarter, we made further progress with that group, including revenue and facility level EBITDA results for those 2023 to 2026 cohorts that were ahead of our expectations. I am pleased with the progress we've made in these facilities. And I want to highlight a few contributing factors that have enabled this success. First, our team has been operating with a heightened sense of urgency and focus, which has allowed us to accelerate time lines across multiple critically important milestones for new facilities, including licensing, accreditation and payer contracting. Second, we've been emphasizing expense discipline alongside the occupancy ramp through a focus on execution, ensuring our facilities have the resources necessary to support patient care and operational needs. Third, we're maintaining strong referral partnerships in the markets we serve. We've increased our focus on consistent communication with our JV partners to better align around shared growth objectives, patient access and ensuring that patients are receiving the right care at the right level and in the right setting. The organization is now operating with a clear set of priorities and has the right resources in place. And the combination of ramping volumes and disciplined expense control has allowed us to outperform our start-up targets for 2 quarters in a row. An increasing number of our new facilities are beginning to contribute positive adjusted EBITDA. We remain confident in this group, delivering on the $200 million of incremental adjusted EBITDA relative to 2025 that we've discussed previously. We also continue to strengthen our leadership team at both the corporate level and at our facilities as we focus on having the right leaders in place to support our facilities. We are seeing increasing benefits from our decision to refine the structure of our acute service line. And we are confident that we will continue to see clinical excellence and consistent value over the coming quarters. We are also advancing in our initiatives to deliver quality care for the patients that we serve. For example, we are expanding our measurement-based care initiative to additional acute facilities as well as through our specialty and CTC service lines. We are leveraging evidence-based practices to guide clinical decision-making and improved treatment outcomes. It allows clinicians to use real-time data to identify changes in symptoms, adjust treatment plans and help patients remain engaged in their own care. As I reviewed earlier, we are also pleased to share that we successfully opened 2 new acute facilities in June in partnership with Premier Health Systems. In total, we've added over 300 beds in the first half of the year, and we remain on track to add 500 to 600 beds in 2026 including our planned opening in the third quarter of a de novo acute facility near Jacksonville, Florida. As we look ahead, we see the demand for our services remain strong, and we are well positioned with added capacity to meet this demand. Above all, we remain committed to our mission and to providing clinical excellence for patients and the communities we serve. With that, I will turn it over to David to review the financial details.

Thanks, Debbie, and good morning, everyone. I'm glad to be back at Acadia Healthcare and collaborating with the team as we execute on our mission and build upon our leadership position in the behavioral health care industry. Looking at our second quarter results, we reported revenue of $866 million, which was flat compared to the second quarter of last year. As previously discussed, the second quarter of 2025 included $48.7 million of revenue from the Tennessee supplemental payment program that related to prior periods. Our second quarter results this year include $22.3 million of revenue from the Florida supplemental payment program related to the 2025 program year. After normalizing for these 2 items, our total revenue growth would have been 2.8%. Same-facility revenue in the second quarter was flat on a year-over-year basis with a 0.8% increase in patient days, offset by a 0.8% decrease in revenue per patient day. After normalizing for the impact of the Florida and Tennessee supplemental payments related to prior periods, our same-facility revenue growth would have been 3.2%. Our same-facility revenue growth rate was further impacted by approximately 1% from the changes in the New York Medicaid program on our Pennsylvania facilities. Revenue in our Acute business was $495 million in the second quarter, which was flat on a year-over-year basis, but reflects 6% growth after normalizing for the supplemental payments related to prior periods. We delivered strong volume and admissions growth in the second quarter from both existing acute facilities and our new JV and de novo facilities. Specialty revenue in the second quarter was $134 million and increased 4% sequentially as compared with the first quarter. The second quarter included a full quarter of impact on our specialty business from the New York Medicaid decision that was implemented at the beginning of the year. Our team continues to work to build upon and expand our referral sources within Pennsylvania and in additional states. In our RTC service line, revenue in the second quarter was $97 million, and increased 12% year-over-year, driven by solid volume growth as well as growth in revenue per day. In our CTC business, second quarter revenue was $141 million. Demand for CTC services remains steady, and our team is focused on meeting the needs of current and potential patients. Moving down the income statement. Adjusted EBITDA for the second quarter was $149.2 million. Adjusted EBITDA includes 2 significant items that were not included in our guidance, a $26.1 million benefit from Florida supplemental payments related to the 2025 program year, which is offset by a $28.6 million actuarial adjustment to increase the company's professional and general liability or PLGL reserves. The total impact of these 2 items was a negative $2.5 million impact on second quarter adjusted EBITDA relative to our guidance provided in April. With respect to the PLGL adjustment, we made a proactive decision going into 2026 to conduct midyear actuarial reviews in addition to our traditional fourth quarter review. This quarter's PLGL adjustment is primarily driven by our progress in moving towards settlement related to certain prior year cases from the 2025 policy year. While reserves for the current year are trending in line with our expectations, the resolution of these prior year matters was incorporated into the midyear actuarial reserve estimates and were the primary driver of the adjustment. On a same-facility basis, adjusted EBITDA was $200.9 million in the second quarter. Our focus on operational discipline helped drive strong cost efficiencies at both the corporate level and at our facilities in the second quarter. Our corporate overhead cost declined by approximately $3 million compared with the first quarter and were flat on a year-over-year basis. Outside of the same-facility group, our losses from start-up facilities were $12 million in the second quarter, which was better than our expectation. Start-up losses in the second quarter included a ramp-up in preopening expenses as we prepared for the 2 new facility openings that Debbie mentioned. For closed facilities, we had $1 million in operating losses during the second quarter. Moving to the balance sheet. We remain in a solid financial position. As of June 30, 2026, we had $171 million in cash and cash equivalents. Operating cash flow in the second quarter was $162 million, and capital expenditures were $39 million, resulting in free cash flow of $124 million. We repaid $113 million on our debt during the second quarter, and our net leverage ratio at the end of the quarter stood at approximately 4.1x adjusted EBITDA. From a revenue cycle perspective, our bad debt and denials in the second quarter were stable, and our days sales outstanding or DSOs declined compared to the first quarter. With respect to capital expenditures, following a review of our ongoing and planned capital projects, we have revised our full year forecast for CapEx to a range of $235 million to $255 million, which includes a range of $120 million to $140 million for the second half of the year. This updated expectation reflects our focus on free cash flow and our disciplined approach to capital deployment as well as the timing of our capital projects. We expect positive free cash flow in the second half of 2026. Turning to our guidance. We are updating our guidance ranges based on progress made this year and our updated full year guidance now reflects revenue in a range of $3.4 billion to $3.45 billion, adjusted EBITDA in a range of $590 million to $615 million, adjusted EPS in a range of $1.45 to $1.60 and operating cash flow in a range of $350 million to $400 million. Our team continues to monitor supplemental payment programs that we believe could be approved in 2026. We have not fully reflected expanded programs in our guidance at this time beyond a $5 million historical baseline amount for Florida that is included in our Q3 expectations. We estimate that programs in Florida and Ohio currently under regulatory review for the 2026 program year could add more than $20 million in incremental EBITDA. I will now turn the call back over to Debbie.

We've made significant progress on our key priorities in the first half of the year, and we expect to deliver consistent operational performance in the coming quarters. Acadia is fortunate to have an experienced and dedicated team who work every day to improve the lives of the patients we serve. We have an important mission to provide safe, quality care and we share a clear purpose, meeting a critical need and making a difference in the communities we serve. With that, we will now turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Brian Tanquilut from Jefferies.

Congrats on solid quarter. Debbie, maybe first, as I think about your comments on the continued confidence in the $200 million of brands in the beds that were opened from '23 through '26. Just thinking, are there any measures or qualitative comments you can share with us in terms of the progress that you're already seeing there other than the 2.5% or so growth rate that we saw in those net cohorts. So just curious, anything you can share with us in terms of achievability of that path and the progress you're making there?

Thank you, Brian. I mean, we have confidence in delivering on the $200 million of the incremental adjusted EBITDA. It's been a significant focus for the team. I think we've made further progress during the second quarter with really revenue volume, facility level EBITDA. They were ahead of our expectations for each cohort. We expect to deliver additional progress and visibility over the second half of 2026. And as the facilities continue to ramp each step gives us more confidence and visibility to the $200 million that we feel very, very confident about. I'll give an example of the cohort is one, which is Cochela Valley. We have made very, very good progress there, and it was one of our 2024 de novo facilities. It's now above 90% occupancy. And we're actually planning and looking at building additional beds, which we think we can do with the space that may already be there. We want to meet the demand in the market. And so that's one facility that I can point out. And we have others that are now positive EBITDA, but it's really a result of all of what the team has done to focus on new dashboards, strategic plans to build occupancy and really to be ready to meet the needs of our partners in the community.

I appreciate that. And then maybe, David, just real quickly, obviously, you raised the EBITDA guidance, but the free cash flow or the operating cash flow guidance is pretty notable. Just curious what is driving that delta? And then what are the levers that you pull to get that CapEx spend targets down?

Yes. Thank you, Brian. We were pleased with the free cash flow performance during the second quarter, and expect that to continue into the back half of the year. And it is attributable to strong performance in the core business and strong execution on many of our new facilities in addition to just some EBITDA visibility and confidence in the full year number that we have after being through the first part of the year, moving into the second half of the year. We're also seeing positive trends in our working capital and would highlight that AR days decline relative to where they were, not only in the first quarter, but the forecast that we had going into the year with respect to AR days. We are pleased to be at 49% at the end of the second quarter. And that is a key contributor to not only our second quarter performance on operating cash flows, but our outlook in the back half of the year. There are a few other items that we would point to just related to other working capital management initiatives that we have as a company. In addition to cash interest and a few other items being lower than we had forecasted with our ability to pay down some debt during the quarter. So pleased with that performance. From a CapEx perspective, we also went through all of our projects in detail our expansion and other projects in detail. Some of the lower number during the second quarter does just reflect timing. And you can see in our second half outlook, there is some increase relative to where we were in the second quarter. But we have a disciplined approach to not only managing our existing projects, but managing any additional expansion or maintenance projects moving forward, and are pleased to just see the free cash flow performance of the business really across both earnings items, working capital and just a more disciplined approach to capital expenditures.

Our next question comes from A.J. Rice from UBS.

Debbie, when you came on 6, 7 months ago, the company over the last year or 2 had faced the number of challenges, some related to managed care contract, some related to litigation. I think there was also some uncertainty around the pacing of development JVs and so forth and how the returns on those would look. Maybe just if you could comment on where you've made progress, where there's still opportunities to be added maybe in those areas or any other that you'd highlight?

Sure, A.J. I mean we really have the back to basics, and you mentioned some of the challenges that the company faced. But I think just building a strong experienced operations team has just made a big difference to our focus and our execution. And as I think about what we've been able to accomplish in the first 2 quarters, we are seeing those facilities in the cohorts, which I talked about just a minute ago, ramp actually exceeding our expectations on that. I think that we continue to have positive strong relationships with our referral sources. They -- we are now able to show them outcomes, which has been a very keen focus for not just the clinical team, but the operational team in the field to be able to demonstrate what we do. But we really -- we're focused on problem solving. So as things come up, and we see something that is not going as we expected. And the team is really doing a good job of saying, what can we do to change this? What actions do we need to take? We developed additional dashboards that we can look at to monitor our progress, not just on the cohorts, the 2023 to 2026 that on our same facility metrics as well as looking at expense management that has -- the team has done a great job there of just let's make sure we're matching our staffing to the needs of our patients. So all of that has come together and there's a real momentum that I think we have. So as we look for the second half of the year, I think we're going to continue to see the progress. And I believe that as we start to execute as we're doing now, that that's going to be sustainable. And so I'm very encouraged, and I know the team, they worked very well together, and they're also working very hard to make sure that we improve what we can control and that we are able to see the value of the investments that we've made.

Okay. And maybe just labor. I know in this segment, that's sometimes a gating factor on your ability to get growth, the ability to get people at reasonable rates. What are you seeing in labor? What is the wage rates turnover? Any updated thoughts on that?

Yes, A.J., we are continuing to see a stable and positive labor environment and have seen for several quarters just a strong recruiting ability to recruit as well as just a retention of our existing employees. And importantly, as we bring on new facilities and new beds, we have had success bringing on new teams and are just very excited to bring on new leadership teams at our new facilities and build staff and have been able to do that at our new facilities. And at the same time, just we mentioned operating discipline, just making sure across the company, corporate and at our facilities, we have the right discipline and focus on staffing just as we ramp up our census in certain facilities. And the team has done a great job just managing and having the right resources for our facilities. From a wage perspective, it has been trending in the 3% or so level. It does depend on just the role in the geographic market and other factors. But overall, for the company, we've seen a stable year-over-year wage cost growth.

A.J., I'll just add. With our JVs, one of the advantages of our partnership with them have had units and actually hospitals. So as we open and we prepared for all of the processes that we go through, we very often can bring those staff to the new facility, and that's been a real advantage of just having those partnerships.

Our next question comes from Matthew Gillmor from KeyBanc.

So I wanted to ask about bad debt and payer denials. I think the year-over-year impact for bad debt with $7 million, which is a little bit better than last quarter. Can you just update us on the trends you're seeing and some of the progress that [indiscernible] has made as you come back to the team and try to tackle it?

Yes. We are encouraged to see some progress in our revenue cycle initiatives, which have been a focus in the first half of the year. And the team is doing just a good job just assisting where we do have isolated issues in certain markets and facilities related to either bad debts, denials, AR, collection, et cetera. The team is doing a nice job just making progress there. And we were encouraged in the second quarter to see stability in our bad debts and denials as we look at that sequentially versus Q1. We did see a stable number sequentially compared to the first quarter. And on a year-over-year basis, you mentioned the -- just the improvement on a year-over-year headwind basis from $9 million in the first quarter to a $7 million year-over-year headwind in the second quarter. And that improves as we go through the second half of the year because the second quarter -- or the second half of 2025 is where we saw a step-up in overall bad debt and denials. And we continue to have just a 3-pronged approach to improving revenue cycle performance. We mentioned the team, the revenue cycle leaders, the specialists that we have are doing a nice job just strengthening our processes, leveraging technology. Secondly, just the tools that we have to proactively intervene and assist with specific issues that we have at the payer and local level. And in select cases, the appeals and the process for appeal is important to just the way that we respond the way we learn from one market and apply that to other markets. And documentation of the care we provide and how we can just control what we can control to drive improvement going forward. But we've seen just good progress in the second half of the year with more opportunity as we look ahead into the second half of the year.

Okay. And I was hoping to get an update on the de novo pipeline. I think you mentioned you had some other opening schedule for the third quarter. Can you just remind us what the pace is over the next few quarters? And if you had any comments on the trajectory of the startup losses and cash flow, even as you look out to '27, if you're able to comment on that, that would be great.

Yes. We did mention we have one other de novo facility to bring online and that's our facility near Jacksonville, Florida, have confidence just having made so much progress in the first part of the year around new facilities and expansion projects at other facilities have just high level of visibility at this point in the year as to the 500 to 600 beds that we're adding in total for the year. Beyond that de novo facility, we believe the opportunity that we have as a company is the capacity that we've added over the last several years. And so we do not have, at this point, another de novo or JV project that begins in the fourth quarter or in early 2027, just based on the current pipeline. Of course, we continue to look at attractive opportunities. Some focus there just on existing facilities and not as much joint ventures and de novos, but we do continue to look at those opportunities as well. But the bed additions for the year is a strong number with high visibility and a lot of that having already happened in the first part of the year or are getting close to happening in the third quarter. With respect to the start-up losses, we have had 2 quarters in a row where our losses for the facilities opening in the last 12 months has been around $12 million. Those facilities are doing a great job in the early stages of opening and are ahead of our expectations. And we revised our full year expectation there slightly and would guide everyone towards a little bit of a step-up in that $12 million as we think about the third quarter, just given 2 new facilities at the end of the second quarter as well as one more facility opening in the third quarter. So I think it could get a little bit larger, not significantly, but maybe in the $12 million to $14 million range before we really have an opportunity starting in the fourth quarter to see that number come back down certainly below the $12 million as we think about what's possible for the fourth quarter based on progress that we've made so far with those new facilities.

And I'll just add, as you look at the facilities that we have, and certainly, we have our cohort group, but we also have same facility that we've had for some number of years, when they become 75% or higher in occupancy, they really are at a point where they have to start turning away patients due to [indiscernible] and male, female to kind of programs. So we are looking at those facilities, and we believe that we have potential to add additional beds. And that's really the best return on our capital. And so we have a focus on that. In fact, we had a meeting earlier this week to look at what's out there, where our facility is at and how many of them can we start to really do our due diligence around whether bed additions are needed.

Our next question comes from Whit Mayo from Leerink Partners.