Acadia Healthcare Company, Inc.

Please stand by. We're about to begin. As a reminder, this call is being recorded. Please proceed.

Good morning and welcome to Acadia's second quarter 2020 conference call. I'm Gretchen Homrick, Director of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to our Chief Executive Officer, Debbie Osteen. To the extent any non-GAAP financial measure 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 on our website by viewing yesterday's news release under the Investors link. 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 2020 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that 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. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. At this time for opening remarks, I would like to turn the conference call over to Chief Executive Officer Debbie Osteen.

Good morning. and thank you for being with us today for our second quarter 2020 conference call. I'm here today with Chief Financial Officer David Duckworth and other members of our executive management team. David and I will provide some remarks about our financial and operating results for the second quarter and year. We will then open the line for your questions. I would like to begin by acknowledging and thanking all our employees and clinicians for their dedication and relentless focus on providing the highest quality care to our patients and their families, especially during these challenging times. Our top priority remains supporting our patients with quality care provided in a safe manner. Behavioral health care providers are playing a critical role in addressing the ongoing mental health needs in communities throughout the US and the UK, especially for those who had previous mental health issues and suffer from the added anxiety and isolation. Our experienced teams across our operations and diverse services have met the demand and advanced our position as a leading operator of behavioral healthcare facilities. Our 40,000 employees truly illustrate the strength of Acadia. They are a key reason we are well positioned to meet the current demand and stand ready for the opportunities to serve those in need in the future. During the second quarter, we continued to make meaningful improvement in almost every facet of our business. We made prudent investments to increase our market reach and quality of care. We further strengthened our liquidity and longer-term financial position. As states reopened, we shifted our marketing strategy to connect with our referral sources and emphasize our key advantages in this current environment. We also quickly expanded our telehealth capabilities to better reach and support our patients. and we did all of this while closely monitoring the business and aligning our expenses with revenues. These actions lead to results that improved each month throughout the second quarter. As we discussed on our first quarter call, the initial actions taken by the federal, state and local governments related to the COVID-19 pandemic led to lower volumes in April in the U.S. Due to the actions we implemented as well as the easing of restrictions, we saw a reversal of these trends beginning in late April from a 6.7% decline in the month of April to a 0.1% increase in May as compared to the prior year. In June, we surpassed our pre-COVID volumes and our same facility patient days increased 4.7% versus the prior year. For the month of July, we have continued to see strong demand with greater patient admissions. Same facility patient days were up 5.4% in July compared to the prior year. We believe these trends are indicative of the strength of our services, our ability to make real-time adjustments to our strategy, as well as the ongoing need for our services. The ramp of activity has also affirmed our view that the need for behavioral health services will accelerate as we navigate through the current environment. We believe we have passed the trough of the volume declines and remain focused on stabilization and improvement across our business. Within our acute service line, we have seen an improvement in volumes driven by our strong network of referral sources, including ERs. Our teams acted quickly to address the early second quarter decline in volumes by shifting our marketing approach to better reach our patients, their families, and referral sources to reinforce the message that we have the expertise and capacity to help. We also developed additional access points, assisted patients with virtual visits, established a crisis hotline, and conducted wellness checks. Additionally, we continue to see stabilization and improvement in volumes in our specialty service line. As we previously stated, several of our specialty facilities have a wide geographic network. and draw patients from across the US. While our specialty patients have continued to travel throughout the quarter, there is still some reluctance to travel, especially from areas experiencing an increase in COVID cases. This has led to a slower pace of recovery for certain of our specialty facilities. In response, we shifted some of our marketing strategies to focus on local and regional markets, which contributed positively to the quarter. Our RTC line of business continued to see stable volumes throughout the quarter. These facilities leverage relationships with state referring agencies to serve adolescents with behavioral conditions. As a result, we had consistent patient admissions throughout the quarter and expect that to continue into the second half of the year. And in our CTC business line, we also continue to experience solid demand as substance use issues remain very prevalent throughout the country. We firmly believe the ongoing mental and emotional toll caused by continuing economic and society concerns will further increase the already strong demand for mental health and Substance Use Treatments we provide in the US. And we are well positioned to meet this increase in demand. Shifting to the UK operations, the impact on our volumes have been limited due to the longer length of stay for many of our service lines. However, certain services within our healthcare division with a shorter length of stay have been affected. In addition, our labor costs were temporarily impacted by a high level of employees who quarantined. Our same facility patient days experienced a decrease of approximately 5% in April and May. As the UK government eased restrictions, we have seen increased patient admissions, especially in the service lines with the shorter length of stay. Our same facility patient days improved to a decline of 3.4% in June and 2.1% in July compared to the same period in the prior year. Similar to the US, we expect to see continued growth in demand from individuals in the UK requiring mental health and addiction treatment. We continue to work with the NHS and other referral sources to align our services with expected demand and we are able to meet this need across our service lines. We continue to move forward with our plan to retool beds to meet the demand from the NHS despite a slight delay in the construction of the beds. We reopened 24 beds in the second quarter and still expect to reopen 100 additional beds by the end of the year. We've already started to see the benefits from this retooling strategy and we expect to see further improvement going forward in the UK as these additional beds will be critical to help meet the anticipated increase in demand. Likewise, we are making strategic investments in our future growth in the US. We continue to expand our market reach through bed expansions and additional service opportunities. Through the first half of 2020, we have added 106 beds to our US operations, and we expect more than 400 additional beds to come online in the second half of the year. These new beds include a continuation of our strategy of expanding our reach through joint venture partnerships. Along with our joint venture partner, Tower Health, we opened 144-bed behavioral health facility, Tower Behavioral Health, in July. Located in Redding, Pennsylvania, the facility will serve individuals who have been experiencing mental health concerns. This is an example of how Acadia can partner with a leading hospital system to bring essential mental health and addiction services to an underserved area. We expect to open a new joint venture hospital with Ascension St. Thomas in the fourth quarter. Together, our bed expansions, de novo facilities, and joint ventures provide many growth opportunities for Acadia to reach more patients in new and existing markets and further advance our position in the market as well as the growth of our business. As we look ahead to the second half of 2020, we are not providing guidance due to ongoing uncertainties driven by the COVID pandemic in both the US and the UK. At this time and based on recent trends, we have a positive outlook on the second half of the year. Acadia is well positioned to meet the expected demand for mental health and substance use treatment. We will continue to deliver the highest quality of patient care, extend our market reach, and advance our market leadership as a behavioral healthcare facilities operator. Now, I will turn the call over to David Duckworth, to discuss our financial results in more detail.

Thanks, Debbie, and good morning. Revenue for the second quarter was $750.3 million, compared with $789.4 million for the second quarter of 2019. The company's consolidated adjusted EBITDA for the second quarter of 2020 was $144.4 million, or 19.2% of revenue. Net income attributable to Acadia stockholders was $41.1 million or 46 cents per diluted share for the second quarter of 2020 compared with net income of $48.1 million or 55 cents per diluted share for the second quarter of 2019. Adjusted income attributable to Acadia stockholders for the second quarter of 2020 was $48.1 million or 54 cents per diluted share, excluding transaction related expenses of $5.2 million, debt extinguishment cost of $3.3 million and an income tax effect of adjustments to income of $1.5 million. As we discussed on our first quarter call, we have taken decisive steps to mitigate the financial impact of COVID-19 on our operations. These initiatives included aligning corporate and facility-level staffing costs with patient volumes, implementing a hiring freeze for nonclinical staff, canceling and now limiting all nonessential business travel, reducing discretionary expenditures, temporarily reducing marketing spending, negotiating with certain vendors for discounts and or revised payment terms, and closely managing our working capital as our facilities continue to bill and collect for services rendered. We believe these were necessary steps to support our operations during this period. The cost management actions taken by our operations team and the level of variability in our cost structure has helped mitigate the impact of lower volumes during the early part of the second quarter. Our balance sheet remains strong with ample liquidity and capital to invest in and continue to grow our business. At June 30, 2020, we had $212 million in cash and cash equivalents and full availability under our $500 million revolving credit facility. Our cash position reflects a strong second quarter of operating cash flows of $219 million which includes favorable working capital trends in addition to $87 million of total cash benefits related to various components of the CARES Act. Our increase in cash is also favorably impacted by the reduction we made to our 2020 Expansion Capital Expenditures Plan. We have not made any further reductions to our expansion plan since the $35 million reduction made in April of this year. The CARES Act cash receipts of $87 million during the second quarter include several components. First, we received approximately $45 million of Medicare advance payments, which is included in our operating cash flows and cash balance, but does not have an earnings impact. We currently expect that this $45 million will be repaid over a three-month period starting this month in August of 2020. Second, our cash flows were favorably impacted by the delay of approximately $13 million of Social Security payroll taxes, which will be paid in late 2021 and 2022. Third, our income tax payments in the second quarter were approximately $10 million lower than our initial expectations due to changes in interest deductibility thresholds, and we expect a further benefit of approximately $14 million in the second half of 2020 in tax refunds related to 2019. And lastly, the company received $19.7 million from the CARES Act Provider Relief Fund during the second quarter as part of the general distributions. Of this amount, $18.1 million was recorded as other income in the second quarter based on the company's review and understanding of terms and conditions and our analysis of the lost revenue and incremental expenses that we have incurred. Distributions received thus far relate to our acute hospitals only and additional allocations may be received for our other facilities. The company continues to closely monitor further developments and guidance related to the funds received. From a capital structure perspective, during the month of June, we improved our debt maturity profile with the issuance of $450 million of 5.5% senior notes due in 2028. The net proceeds from the offering were used to redeem in full the senior notes that were due in 2021 and 2022. All of these measures relating to expense and cash management and our capital structure, when taken together, put us in a strong financial position for the second half of this year and beyond. We will continue to make prudent investments in the business while aligning our costs to meet the ongoing needs of our patients. This concludes our prepared remarks this morning. I will now ask Keith to open the floor for your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Pito Chickering with Deutsche Bank. Please go ahead.

Good morning, everyone. Thanks for taking my questions. I understand not providing guidance at this time, but if you look at July revenue growth in the U.S., is it fair to think about maintaining or growing pre-COVID margins And it can give us a puts and takes about how we should think about margins in the UK with slight revenue declines that, to your point, are still increasing.

Yeah, we do think, Pito, with the volume growth that we're seeing in the US, that we should see strong margins. There is still, of course, uncertainty. We don't know what stage we're in here of the recovery, but we are seeing some very positive signs obviously on volume. And we do think in the US that will lead to us kind of returning and seeing some margin improvement on a year-over-year basis. In the UK, we did see margins during the quarter impacted by a higher level of employees that were out. And we did see that peak in early April. So we should see that continue to improve. And we saw sequential improvement as we look at each month of the quarter in the UK. We did see labor costs there that had been improving and had been stable in the 67 to 68% of revenue range. For April and May, we did see that above 71%. But as we close the quarter in June, We saw that return to below 69%. So really seeing a temporary impact from employees that were out and we had sick pay along with some backfill costs related to that, but have seen sequential improvement in the UK. We do expect to see that continue to be stable and to see all the positive signs around recruiting and retention continue. in the UK, and for that to lead to the stable environment that we were seeing pre-COVID.

Okay, great. And then, quick question. UK, to your point, is bouncing back. Visibility is there. Overall markets are stable. Any quick update on the sale of UK business you can give us at this time?

PETA, we are watching closely the country as they ease their restrictions. you know we're looking right now there are you know still some travel restrictions and those have been changing a little similar to the U.S. but you know we're monitoring and we are looking for the opportunity to restart the process I will say that and I said this you know in the end of the first quarter buyer interest is we believe it's very strong and we are also seeing improvement in the debt markets and our advisors are watching that very closely, but we're seeing positive signs there of more normalized activity levels. So as we start to see this recovery happen, we're watching for that and we will use that as a guide as to when we reopen our process that we suspended in the first part of the year.

Great, thanks so much, and great quarter, guys.

Thank you.

We'll take our next question from AJ Rice with Credit Suisse. Please go ahead.

Hi, everybody. First, maybe just to ask, in the U.S. acute behavioral business, you know, we still have schools closed, ERs, as reported by the acute care hospitals, are probably the slowest to come back. There's also travel restrictions concerns that people have, and yet you're seeing a pretty good bounce back in your acute behavioral business. Do you think that's just incremental demand? Are people finding other ways to get to you? What do you think when we come out the other end of this, the demand picture is going to look like for behavioral services?

Well, AJ, I think you know generally I believe the demand is you know stronger than it ever has been I think that you know there were some individuals that delayed their care when would there were the stay-at-home orders in place and also just the fear of seeking care you know at an ER and I think that has improved I think you know patients and we said this our our treatment is not an elective you know, service. And I think that, you know, with respect to the ERs and the acute, our ER visits, and we track that very carefully as you can imagine, have returned to either at or above where they were before COVID. And so I, you know, believe that while there may still be visits down in the ER, I think that our patients are reaching out to the ERs We maintain very close contact with them through this whole pandemic, and we still are doing that. We have our mobile teams, we have tele-assessment, and also just a good plan around timeliness of our responses. So I think generally, as we look at our acute service line, we are getting business from ERs as well as our other referral sources, and the pipeline has been very strong, and I think that's evidenced by the numbers in June and certainly in July.

Okay. Maybe a little more granular question. The revenue for patient day was down in the U.S. 2.7%. I realize that may have something to do with the outpatient-inpatient mix, but can you just comment on that specifically, and then also A lot of discussion about state budgets being under pressure. Can you just comment whether any of what you're seeing in that revenue per patient day relates to any pressure in state reimbursement, either Medicaid or other programs?

Yeah, AJ, first of all, our revenue per day does include our total revenue for the U.S., but our patient days is only for our inpatient business. So we do have outpatient in our CTC business that can impact that metric. Outpatient did see a greater impact from the stay-at-home orders and was down around 30% in the month of April, but has since rebounded in a very similar way to our inpatient business. And the CTC business has been very stable from a volume perspective, but we do have certain markets and certain payers that are based on in-person services being provided around dosing and group therapy. And so we did see early in the quarter our reimbursement impacted by that. And I think we mentioned that on our call last quarter. Both the inpatient and the CTC had temporary issues. Those have been resolved by the end of the quarter. And we should see going forward just a more normal metric there. and for our inpatient business, we continue to see stability in our payers and continue to maintain the pricing expectations that we have for the US, which is a range of two to 3%. So after working through some of these temporary challenges early in the quarter, expect that to return to more of our normal expectations.

And AJ, I'll just add, our payers have been very supportive. and we have not seen or heard of cuts in Medicaid in our states. We're in 40 of them, so there is a lot of diversity. But we are not expecting cuts, but we are monitoring just to see how the budgets are set and we're advocating for our services. As I mentioned, our payers have been very supportive. Our cash coming in has been very strong. So we haven't seen disruption there or really changes of any material nature that would have impacted the revenue. It's really what David just explained.

All right. Thanks a lot. Appreciate it.

Thank you.

We'll take our next question from Kevin Fishbeck with Bank of America.

Hi there, you actually have Brad Bowers on for Kevin today. Quick question on the marketing strategy. Is this something that's just COVID related or is it something that will help with the long-term growth outlook?

Well, we have a marketing and sales platform that's really, you know, it's proprietary and it's really different. It actually gives us very real-time visibility around a lot of metrics. And I think as we have weathered this, and we're still in some of it. It's really been a great tool for us to use to adjust. So we have our consumer marketing spend that we use and we target and we also have a plan that's very detailed by facility. And so the team, and I give them just enormous credit, they were very responsive as states opened up and we've had a few kind of roll back some of their and I think that what's happened with the marketing is we already had this platform in place, but we've been able to utilize it, I think, to really make sure we're reaching our patients, but also our referral sources. So I see it as a strength of Acadia and it will be a strength going forward. After we get through this, It's a very good platform that works well together with a lot of metrics and a lot of what I consider to be key actions that we were able to take to build our volumes back.

Got it. And then switching gears here a little bit, just curious on CapEx. Obviously, cash is strong for the year, but obviously we want to maintain that liquidity. So just kind of wondering if we should be expecting CapEx to come back to be hired next year if there's some additional spending that you could be making next year if it just kind of goes back to run rate. Thanks.

No, I don't think the changes we made in our CapEx plan for this year would lead us to say there's any significant changes going next year. From a maintenance perspective, we are still expecting to be in our and a number of other people. And then we did make a $35 million adjustment to our CapEx plan on the expansion side and saw some savings from that during the second quarter. Some of that will continue into the third and fourth quarter, but we think we saw the most significant piece of that this year and are really focused on bringing a strong number of beds online in the second half of this year. and a strong number of beds online next year. As we think about year-over-year capital expenditures, still expect to bring a strong number of beds online and are really looking at ways to do that as efficiently as possible from a capital perspective and are excited about the opportunities we have to really gain efficiencies and continue to grow our business.

All right, good, Cora. Thank you. Thank you.

We'll take our next question from Brian Tanquillette with Jeffrey's group.

Hey, good morning, guys. Congratulations. Just going back to the Medicaid question, we've had some questions from investors over the last few weeks just trying to figure out if state budgets get squeezed. I mean, based on your experience, How do they view the RTC business and then is that part of their regular Medicaid budget or is that a carve-out that shields it from any pressure, theoretical pressure that we could see in 2021 or 2022 in a full-blown recession environment?

Well, I think that each state handles their funds differently, but most are part of the general healthcare budget. I do think that in the past when we've had these economic turn backs, not this health crisis we're in, but certainly the economy suffered, there wasn't really a change to the budget around RTC. I think there was certainly management of utilization and other things. But it's different. Our business line for RTC is very specialized. And so the states have adolescents that they cannot provide services for. We do receive a lot from out of state. And so I think that does make us different than just a general program that might be in a state. So these adolescents come and they're very specialized from a behavioral health point of view. I think that protects us, but just generally, we have not heard of rate cuts. I do think that there will be pressure on the budget, but I also think that just the nature of this pandemic and the mental health aspect of it, that we would not be a first line to cut. We would be You know, protected because I think that there's a lot of acknowledgement right now and even before the pandemic that mental health is a real need and that funding has to be there for those individuals.

That makes a lot of sense. And then I guess going back to the question in marketing, right, and the acceleration of growth to north of 5%. So do you think you guys are gaining market share at this point with your marketing programs or is that sort of the market growth rate in the service lines and the geographies that you're present in?

I think it has to do with our services and just the diversity. We're very specialized in many of our locations. We do have just great support from our referral sources, the track record that we have. So I think that We are seeing more individuals, I believe, that need help. And there are those positive things that were already in place before this with just a reduction in the stigma and other positive factors around reimbursement. So I think if you take that and you take our services, how they are configured with respect to being able to treat the comorbidities, Specialty Focus of Substance Use, and then just the general diagnosis you see for mental health. I think that our team, and back to our marketing, they've done a very good job of really being able to stay in contact with the referral sources through all of this. And they've used telehealth and the virtual mechanisms that we have available. I think that's made a difference, you know, with respect to the volumes and also our market share.

Awesome. Thank you so much.

And ladies and gentlemen, as a reminder, star one for questions. Star one, please. We'll go next to Pito Chickering with Deutsche Bank.

Hey, good morning. Thanks for taking my follow-up questions here. A couple ones here. Can you sort of talk a little bit more about your specialty businesses like eating disorders and drug rehab? You sort of talked about lifting travel restrictions. I guess how have those businesses rebounded in July versus other businesses? And is it easier to get commercial insurers to pay for these services today?

Well, first of all, we did – Going into the months of April and May, we were focused on travel. We do have several of our facilities that have a nationwide network and get a good portion of their patients from out of their region. We were pleased with the level of travel we saw. It really continued throughout the early stages of the pandemic, although it was at a lower rate than what is normal. and we've seen that still be somewhat volatile with a rebound during the quarter, but it still depends on many factors, including the region that that patient might be traveling from. But it did continue to be stable, Pedo, and I think that speaks to the strength of our services, the platform that we have, and really the diversity of our specialty service lines. but the volumes there in specialty have been stable. And so we're pleased with the specialty performance that we saw during the quarter.

I think our patients, and we do get quite a few commercial patients, we really haven't seen a change there. I think that they have realized that this care is needed and so our facilities are still getting those patients. It's just as David said, some are coming from a closer proximity, but also then some are traveling, which I think is just a, they know that they need those services and they're reaching out to our facilities to receive that care.

Okay, and then follow up on the UK side of the business. Can you sort of talk about how NHS is acting as a referral source right now? So you're still seeing weakness in shorter length of stay procedures. Is that because NHS is keeping those patients in their own hospitals and not discharging into private hospitals? Or are those patients just not entering the system at this point?

Well, I think the referral system in the UK with the commissioning groups and certainly NHS, there was disruption to that. and so some of the workers that would have been assessing patients were redeployed as the COVID became, you know, the volume of COVID patients grew. Also, with the stay-at-home orders and the restrictions on travel, the commissioning process was also disrupted and I think that as things reopened the first week of July and that started to change, We have seen a return to more normal conditions. And I think it'll build over time because there are, and this has been said by NHS, a number of individuals that have not actually accessed care. And as these referral mechanisms and channels open back up, we're already seeing that business coming to us. I mean, we opened two retooled units in the quarter, and both of them are almost full. And so I think that's really an example of just the demand that's going to be there, but it's taken a little longer than it has certainly here in the U.S., but I do think NHS still wants to send those specialty patients to our facilities, which is why we're retooling these beds, but they also recognize that Those are services that they use the private sector for, and we don't expect that to change.

Okay, and the last one here. As you think about cost optimization that you took during the quarter, how much of cost-cutting measures could be deemed more permanent versus temporary as patient demand comes back online? I'm just trying to figure out, after these cost measures you guys took during the quarter, where margins can go when demand is normalized. Thanks so much.

Peter, we did see just strong flexibility by our operations team and the cost in the early part of the quarter. And then as the volumes recover, just being able to have the resources and adding that back. But we have been careful with that. And we do think that some of the cost adjustments we have made could see an ongoing benefit throughout the year. And in addition to that, we are still on pace. at the end of the year to be at our $20 million of cost savings and expected to receive $10 million of that during 2020. And we're on pace for that. All of those initiatives are still going well, and we expect that to contribute to margin throughout the quarter along with some of those sort of ongoing cost savings that we've seen more recently.

Great. Thanks so much, guys.

Ladies and gentlemen, this concludes today's question and answer session.

At this time, I'd like to turn the conference back to Debbie Osteen for closing remarks.

Please go ahead.

Thank you again for being with us today and for your interest in Acadia Healthcare. I'm so grateful to our field and our corporate leaders for their resiliency and for their commitment to keeping our key growth and operational initiatives moving forward while responding to this unprecedented crisis. If you have additional questions today please do not hesitate to contact us. Have a good day.

Ladies and gentlemen, this concludes today's discussion. We appreciate your participation. You may now disconnect.