Acadia Healthcare Company, Inc.

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

Good morning and welcome to Acadia's third 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 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 third 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 third 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 third quarter and year. We will then open the line for your questions. We were very pleased with our solid financial and operating performance for the third quarter. Before we get into the results, I want to thank all of Acadia's dedicated employees and clinicians for their continued support and relentless focus on providing the highest quality care to our patients and their families, especially during these challenging times. We are fortunate to have an experienced team across our operations who continue to work tirelessly to execute on our growth strategy and effectively manage costs. As the global pandemic continues to affect all our lives, we are mindful of our critical role as a leading provider of behavioral healthcare services. The ongoing uncertainties and economic and societal concerns continue to contribute to the demand for our services, especially for those already struggling with behavioral health and all of our top priority remains supporting our patients with quality care provided in a safe and accessible manner. As such, we have continued to execute our strategy with solid results and importantly, we are optimistic about the opportunities ahead for Acadia. Across both the U.S. and the U.K. operations, we saw strong results driven by solid volumes. In addition, our revenue per day returned to our normal expected range. During the third quarter, we experienced strong top line growth with revenues up 7.2% over the prior year, reflecting robust demand for our behavioral health services. We believe this result is indicative of the intrinsic strength and demand for our services. We have a resilient business model that can respond to a rapidly changing environment. Acadia is well positioned to address the needs of those seeking treatment for mental health and substance use issues, and we expect that demand for our services will continue to increase. In the U.S., this robust demand is demonstrated by our increase in same facility patient days of 4.2% compared to the prior year. Within our acute service line, we have seen solid volumes attributable to our deep network of referral sources. This has remained consistent despite the current environment. Our teams work closely with our patients, their families and referral sources to reinforce the message that we have the expertise and capacity to help. In order to reach our patients, we continue to use additional access points, telehealth capabilities, wellness checks, and our crisis hotline. For our specialty service line, we were pleased to see stabilization in our volumes. By shifting our marketing strategies to focus on local and regional markets We were able to reach those that need the very specialized services that we provide. During the quarter, we also saw sequential improvement in our out-of-state referrals due to patients being more willing to travel. However, we've not yet seen our referrals return to prior year levels. Volumes in our RTC service line remain solid in the quarter. These facilities leverage relationships with state referring agencies to serve children and adolescents with behavioral conditions. As a result, we had solid patient day year-over-year growth throughout the third quarter, and we expect that to continue. In our CTC service line, we also continued to experience strong patient volumes as both demand and coverage trends remain solid. In the U.S., our same facility revenue per day increased 3.1% in the third quarter as compared to the prior year. This reflects annual rate increases in our expected range of 2 to 3%, as well as normalized CTC reimbursement and improvement in our outpatient revenue. Excluding the impact from the reversal of the CARES Act income of 18.1 million, our same facility EBITDA margin improved 380 basis points to 29%. We are realizing measurable improvement in our cost management efforts and operating efficiencies that we've implemented in 2019 and 2020. We continue to proactively manage staffing and other costs. Our team did a great job making timely decisions to reduce FTEs in response to the declines in volume. And as our patients returned at higher volume to our facilities, we utilized tools implemented last year to monitor FTEs at the facility level. Our team is very focused on evaluating every position and determining what expenses are essential. We have implemented a balanced approach to ensure we have appropriate resources to support our patients. In the UK, same facility revenue increased 2.7% from the third quarter last year, reflecting a 2.8% increase in revenue per patient day and flat year-over-year patient day volumes. We saw monthly sequential improvement throughout the third quarter and our volumes surpassed pre-COVID levels in early July, which we were pleased with. 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 well positioned to meet this need across our service lines. We were also pleased to see sequential improvement in our third quarter labor costs in the UK. Total labor costs as a percent of total revenue improved 240 basis points to 68.2% for the third quarter of 2020 from 70.6% in the second quarter and was flat as compared to the third quarter of 2019. Agency labor as a percentage of total labor cost improved from 13.5% in the third quarter of 2019 to 12.7% in the third quarter of 2020. During the quarter, we also finalized negotiations with the NHS and local payers for our rate increases for the fiscal year. We received an average rate increase of 2.8% across all of our service lines. We believe this demonstrates support for the important care that we are providing their patients. As we recently disclosed, we have relaunched The formal process regarding the potential sale of our UK business. Our objective continues to be maximizing value for our shareholders. Consistent with market practice for UK transactions of this nature and in conjunction with our advisors, we have solicited and have now received non-binding offers to acquire our UK business from multiple bidders. As we continue to work with our financial and legal advisors, we will update the market on the sales process when and as we determine it is appropriate. We continue to make strategic investments in our future growth in the U.S., expanding our market reach through bed expansions and additional service opportunities. For the first three quarters of 2020, we have added 206 beds to our existing facilities in the U.S., and we expect to add approximately 100 beds in the fourth quarter. As part of our strategy, we have continued our strong track record of partnering with health systems and hospitals across the country, which has created important growth opportunities for Acadia. Along with our joint venture partner, Tower Health, We opened 144 bed behavioral health facility in Redding, Pennsylvania in July. We expect to open a new joint venture hospital with Ascension St. Thomas in Nashville during 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. Going forward, we believe Acadia will play a critical role in meeting the needs of many people who are struggling with the uncertainties related to the pandemic. We will continue to focus on our primary objective, to deliver the highest quality of patient care as we extend our market reach and advance our position as a leading 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 third quarter was $833. and other members of the company. The company's decision to reverse this income was based on additional guidance issued by HHS. The company received $12.8 million of additional general distributions from the Provider Relief Fund in the third quarter of 2020 and has now received cumulative total distributions of approximately $32.5 million. These distributions are recorded in other accrued liabilities on the company's balance sheet at September 30, pending the company's final review of HHS guidance. Excluding the impact from the reversal of the CARES Act income of $18.1 million, the company's consolidated adjusted EBITDA for the third quarter of 2020 was $177.5 million, or 21.3% of revenue. Net income attributable to Acadia stockholders was $37 million or 42 cents per diluted share for the third quarter of 2020 compared with net income of $42.6 million or 48 cents per diluted share for the third quarter of 2019. Adjusted income attributable to Acadia stockholders for the third quarter of 2020 was $60.3 million or 68 cents per diluted share, excluding a loss on impairment of $20.2 million, transaction-related expenses of $8.5 million and an income tax effect of adjustments to income of $5.4 million. I'd like to give you some additional perspective into our strategic focus on managing costs and improving margins. As Debbie said, we are pleased with the steps we have taken the past 18 months to streamline our operations while continuing to make strategic investments. Our cost savings initiatives implemented following our strategic review last year are on track as evidenced by our results for the third quarter. We recognized $4.6 million of savings in the third quarter relating to the 2019 cost savings initiatives. And we are on track to achieve a run rate of $20 million by the end of the year. Turning to our balance sheet, our balance sheet remains strong with ample liquidity and capital to invest in and continue to grow our business. At September 30th, 2020, we had approximately $339 million in cash and cash equivalents and full availability under our $500 million revolving credit facility. Our cash position reflects a third quarter with robust operating cash flows of $207 million. Our increase in cash was driven by our strong earnings growth, positive working capital trends and benefits from the CARES Act. From a capital structure perspective, we improved our debt maturity profile with two recent transactions. As mentioned on the second quarter call, we issued $450 million of 5.5% senior notes due 2028, and the net proceeds from this offering were used to redeem the senior notes that were due in 2021 and 2022. In October, we finalized the issuance of $475 million of 5% senior notes due in 2029 and use the net proceeds to prepay outstanding borrowings under our existing Term Loan B facility due 2022. Together, these initiatives relating to expense and cash management and our capital structure have put us in a strong financial position for 2020 and beyond. We will continue to make strategic investments in the business while aligning our costs to meet the ongoing needs of our patients. Turning to our financial guidance, as noted in our press release, we are providing guidance for the fourth quarter as follows. Revenue in a range of $810 million to $835 million. Adjusted EBITDA in a range of $160 million to $165 million and adjusted earnings per diluted share in a range of 68 cents to 72 cents. While we remain cautious regarding factors that could impact our November and December results, our fourth quarter guidance represents management's expectations given the positive revenue and cost trends we are seeing in our U.S. and our U.K. operations. We believe the essential nature of the services we provide, combined with strong demand, will drive growth for the remainder of the year and beyond. This concludes our prepared remarks this morning. I will now ask Lauren to open the floor for your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Brian Tankelet with Jefferies.

Hey, good morning. Congrats on a very good quarter. I guess, Debbie, my first question is just on the recovery of volumes. It sounds like you've seen a good bit of recovery, but we're not quite back to pre-COVID levels yet, and there's still some disruption. So is it right to think that the strong growth trends you saw in Q3 should carry over into Q4 and into 2021? And how are you thinking about just The market share gains and secular growth that the industry is going to see as we go into next year.

Well, Brian, we did have very strong volumes across all of our service lines. And I think my comment about pre-COVID really relates more to those patients that travel for our specialty services. But overall, in the acute cases, We saw very robust volume and far exceeding where we were last year and certainly pre-COVID. We also, I think throughout this, have maintained very consistent volumes in the RTC business as well as CTC, which is continuing to grow in volume and also has some favorable payer trends, which I mentioned in my remarks. But I think overall, our visibility is we are you know, now almost through October and we've continued to see improvement in the census in both, you know, US and the UK. And I think, you know, we actually hit the highest census in the history of Acadia in October. So we believe that because of the strong demand trends and really just the fact that we have such diversity in the service lines that this is going to continue into 2021. I think as we read about individuals that are suffering from anxiety and depression and other suicide attempts, I mean, it's just exploding. And I think that we're seeing those trends now, but I do think they're going to continue to be into 2021 as people cope with this. And with the resurgence, I think that just added to the demand. And so we feel good that all of our service lines are really seeing this demand. And I think that's what's reflected in the third quarter.

Now, that makes sense. And then just on the UK sale process, thanks for the color you gave us. I guess the question that I have is, what else is left to do in the process? And is there anything you can share with us on timings?

Well, we're going to move as quickly as possible, and as I mentioned in our remarks, we do have initial bids that have been submitted. We're not going to be commenting on detail around that, but I will say that, you know, there is continuing to be, you know, a lot of interest in Priory, and certainly we have buyer interests that remain strong. and so we'll be giving more detail as it's appropriate around timing and also just how this is progressing.

All right, awesome, thank you.

Thank you. Our next question comes from Ralph Giacobi with Citi.

Thanks, good morning. Just hoping you can give a little more of the underlying assumptions, I guess, for the fourth quarter guidance at this point, both in terms of sort of maybe the volume and pricing side of the equation. And then if you're willing at all to give sort of early thoughts on 2021, sounds like you're pretty optimistic around some of the growth opportunities. So how would we frame that or think about that from a modeling perspective off of either the 2020 baseline or maybe 2019? Thanks.

Yeah, Ralph, first of all, in our fourth quarter guidance, we are projecting mid-single-digit revenue growth and EBITDA growth of more than 10% on a consolidated level on a year-over-year basis. And the key trends underlying this guidance include a continuation of the revenue trends we're seeing in our U.S. segment, with volumes increasing 3% to 4%, obviously potentially even stronger, but we do have some seasonality that we deal with in the fourth quarter and just cautious approach that we are taking around the resurgence. And we see revenue per day trends continuing to be positive and have a range of around two to 3% for revenue per day growth. In the US, we also expect to see an ongoing contribution from both the cost savings initiatives identified in 2019 as well as the cost management actions that we've implemented in 2020. So believe that our margin will reflect all of those initiatives. And in the UK segment, expect to continue to see sequential improvement, which we've seen recently in both the census and the pricing, as well as the labor cost trends over the past several months, all of those metrics in the UK have improved and we expect to continue to see that. As I mentioned, our guidance does reflect seasonality that we typically see in the fourth quarter, but we do have a very positive outlook for the quarter. We will provide more thoughts around 2021 in February as we typically do, but we, you know, as Debbie mentioned a minute ago, we think that The trends, the demand, the volume growth opportunities that we have going into next year will continue. Okay. All right.

Fair enough. And then just follow up. I guess, how are you finding the labor backdrop at this point, maybe specifically in the U.S.? Any staffing challenges and maybe wage rate increases you're having to give kind of in this environment? Thanks.

Sure. I mean, we really have not had any significant disruption or change in, you know, the availability or really the cost of our staffing. I think that, you know, certainly we are closely monitoring the health, you know, of our employees and we want to ensure we have the right staff available, but we haven't had an issue around that. I think that, you know, certainly in the UK, The number of the self-isolating employees there, it peaked at the end of March, early April, so we've continued to see a lot lower levels of that, and I think they've been able to manage the staffing there, and we certainly have here in the U.S. We do think that the, I think, just general economic environment in the US and UK might provide some opportunities for us to access perhaps staff that had not been in the industry. I know in the UK they have started a preceptor program for staff that are not trained in healthcare but come from other industries. Their turnover is down. And we have the same, I think, focus here in the US is just to really utilize those individuals that might seek employment in our industry and make sure that we're using them appropriately. But, you know, overall, we really haven't seen disruption there.

Okay. Very helpful. Thank you.

Our next question comes from Pito Chickering with Deutsche Bank.

Good morning, guys. Thanks for taking my questions. A couple questions for you here. On U.S. demand, you talked about seeing strong demand across all segments. Can you talk about what you're seeing on geographic areas if you're seeing spikes or weaknesses in areas that have COVID or don't have COVID? I'm just curious how COVID is impacting your core business.

I think that we've been through this now for several months, and I think that the staff out in the field and the leadership in the field have really done an amazing job of just handling Thank you. Thank you. Thank you. putting them on another unit if they're diagnosed with a positive test. But they are continuing treatment. And I think certainly if their medical symptoms become more severe, we would move them out of our setting. But overall, we've continued to see a flow of patients. We haven't stopped admissions. I know there are a few of our higher volume substance use facilities that saw more COVID. And so there was a little slowing of admissions, but no one was stopped from coming into the hospital. We just wanted to make sure we were very cautious and careful about how we handled those patients. And it varies really right now with some of just the resurgence and there may be a market that has resurgence and then that seems to ease. But we're being very focused on just making sure we're keeping access to our services because we feel like that's more important than ever now.

Okay. And then on the U.K., revenue per pricing was strong. It looks as though it could have been from higher admissions due to the lower length of stays. How do we think about higher short-term emissions in the U.K. and its impact on margins? and at the same time, on the NDTS pricing comment, it's at 2.8%. Is that for 2021? And then also on the UK, any chance you want to share with us the highest bid you've gotten so far for that business?

Good try there. We'll start with the first part of that question. The UK revenue per day, we talked earlier in the year about, given the pandemic, of there being some interim rate increases with our payers there. So it has been a process to work through the negotiations for what we typically receive in April. And that 2.8% that we have now received on an average basis across our payers, that is the 2020 rate increase. That is around the level of our 2019 rate increase. and is really in the range of the two and a half to 3% expectation that we have going forward. But that does represent our 2020 increase. From a volume perspective, we did see a strong recovery in our shorter length of stay services. That is reflected in our commentary around getting back to our pre-COVID volumes early in the third quarter. and that's reflected in strong year-over-year patient days considering managing through the pandemic, the impact that we saw in the second quarter. We are very pleased with the UK volumes really across all of the service lines and think we're well positioned for the continuing demand in the UK.

Peter, I'll take your last question. We're not going to provide an update on any detail around the initial bids. but I'll just again say that our objective is to maximize value and that's what we're focused on but we will provide additional updates when it's appropriate.

Okay and then because you want to answer that one let me ask one more follow-up one. Fourth quarter margins looks to be a step down versus what we saw in third quarter excluding the return to CARES Act. It looks to be about 160 basis points if my math is right. Sequential decline. I guess curious from a margin perspective, what do you guys are assuming different in fourth quarter than you saw in the third quarter, again, excluding the CARES Act?

Yeah, we do project a strong margin in the fourth quarter. If you think about our U.S. business, we see a 200 basis point type improvement over the fourth quarter of 2019. And a step down from the third quarter, mainly relates to seasonality that we see. We do typically see a lower occupancy, especially in between the Thanksgiving, Christmas holidays, right at the end of the year. And so the margin reflects that as it does in many years for certain service lines that experience some seasonality. And we have just a little bit of caution, thinking about potential resurgence and the effect it may have in different markets. We want to be somewhat cautious. But the trends that we've seen so far in October, as we mentioned, have been very positive. We think that'll be reflected in the volume and a strong margin for the quarter. So that's the margin. PDO does continue to show the year-over-year improvement that we reported in the third quarter.

Great. Thanks so much, guys, in this quarter.

Thank you. And our next question comes from Kevin Fishbeck with Bank of America.

Good morning. This is Joanna Godrick filling for Kevin today. Thanks for taking the question. So first one, actually a quick one on follow-up. So did I hear right you talk about outpatient volumes also coming back, right?

Yes. We did see an increase in outpatient, Joanna. It's not at the level that we have been, but it's much better than it was in the second quarter.

Okay, that makes sense. Okay, I clearly heard you saying that it was across business lines, so I just want to confirm that. And then on the, I guess, on another piece of the pricing outlook, so I know the last quarter call you mentioned that You know, we are not aware of, you know, at this point, any changes or rate cuts, you know, from the states.

There was one state that we have, you know, one facility in, which was Nevada, and they recently cut their rates by 6%. But we were excluded from those cuts. as a mental health provider. And I think this really demonstrates the support from the state and also just their recognition of the value of the services, especially right now. We are monitoring each state that we're in. We're in 40 states. But we believe that with our diversity and just the climate in general and I think the increased demand that We believe payers are going to be supportive of our services and the payments.

Okay, and if I also, if I can follow up on a commentary about the strength you see in October and also the question about labor, you say you're not seeing any pressure, but if, you know, if you're talking about the outlook of, you know, increased demand given the results of the pandemic and and people struggling with that, you know, are you anticipating you will have enough labor to serve this demand or, you know, are you preparing for some sort of, you know, sparking in the cost because of, you know, kind of the increased demand?

You know, we have a lot of experience and a strong track record just adding beds, opening new facilities and being able to appropriately add staff based on the volume growth that we see. So we are not anticipating any challenges there. It is a focus of the team, and we have a strong record on just being able to recruit and staff for our growth.

Okay, that's great. And the last question on the UK, which you've said you're also seeing pretty positive trends there. and in the past we talked about the retooling of beds so I don't know if there's anything that's happening there or it's been logic complete and I suspect with the pandemic there's probably some disruption maybe to the process so any kind of update on that? Thank you.

Well, we are continuing with our retoolings and we're on track to reopen the majority of our beds that we talked about by the end of the year. I think these beds that we have opened throughout the year are being used and I think that we're going to continue to see the positive contribution from those retooled beds. I think that as NHS is starting to see this surge and more demand, we are utilizing the retooled beds as well as certainly the existing beds that we have. I think one of the strong messages that NHS has given is they are willing to actually back those beds with block contracts. So they are paying for beds without regard to whether a patient is in them. And I think part of that is really insurance and really comfort for them that as demand is growing, and it certainly is in the UK, that they have a bed available. So we think our retooling is very timely, and we're on track for what we had said we were going to do.

Great. Thank you so much.

Our next question comes from John Ransom with Raymond James.

Hey. Hey, can you hear me? Yes.

Good morning. Good morning.

All right. I've got these fancy new wireless headset things, and I'm terrible at operating them, so I'm always a little nervous. I'm not going to go pedo and ask you something you won't answer, but maybe if I could ask on the UK, are you finished soliciting bids? Should we understand your comments as you've gotten preliminary bids and now we're into kind of data room due diligence phase?

You know, we have received the non-binding offers and are moving forward through the process and don't really have much of an update other than that, John, regarding timing and where we stand on valuation.

You don't expect to receive any more offers. You've got any offers you expect to get. You're just working through that process. Is that the way to think about what you said?

Now, we're not providing more specific updates than what we commented on earlier.

All right. Thinking about 2021, if we adjust for seasonality for 4Q, what other things should we think about in terms of a jumping off point for next year? I guess you've had $20 million of cost cuts, so should we say maybe $10 million kind of net new in 2021. Anything else that we should look at before Q as we think about 21, just as we get our preliminary numbers out there?

John, I think that assumption around the savings realized this year, $10 million is there. And we think that will be reflected in the first half of next year because we have achieved a lot of that by the second half of 2020. Other than that, it will obviously be an interesting comparison as we move to next year, but I think the positive trends will continue, as we said earlier.

Great. So, as we think about your short-stay U.S. acute business, traditionally ER emergency rooms were big sources of referrals, and ER businesses are down some 20%, and yet your numbers are up. So, is it that The mental health cases are still presenting at the ER, or have you diversified your referral sources? Because obviously your numbers are up, ER's down, and I'm just trying to square the circle about where these patients might be coming from.

Sure. I mean, we have seen really our ER referrals return to normal. So I guess if we think about that, there are patients that are needing mental health and substance use services going to the ER. But we've also diversified our referral sources in markets that we think have served us well through this. But on the other hand, we've really seen a return to normal of most of the referral patterns. And I think individuals that might have been afraid or during the stay-at-home orders did not seek care, they are seeking care and they are going to the ERs and we are getting referrals at a normal level.

Great. Last one for me. David is, again, as we think about 21, is there any reason to think that your capital expenditure cadence or rhythm would be changed at all because of COVID or other factors? So should we still kind of layer on the same amount of growth capex that you've been doing over the past few years?

Yeah, we do think you should layer in a similar number. We are going through our detailed project by project projection right now in connection with our budget. And we'll have more guidance around that in February. We do see a growing opportunity around our joint ventures and partnerships. And so that's one thing that we will be looking at that potentially could grow. But for the most part, it is a similar level of investment as what we've seen this year. Great. Thanks so much. Thanks, John.

Thank you. We'll take our next question from Gary Taylor with JP Morgan.

Hi, good morning. Great quarter. Any CARES Act assumption in your fourth quarter guidance?

No, Gary. We have received, as we mentioned in our press release, $32.5 million of cumulative distributions. All of that is on our balance sheet and was not included in our fourth quarter earnings projections as something we would recognize in the quarter. We are finalizing our review of the guidance that has been issued in September and October. but we do not have an assumption in the fourth quarter that any of that would be recognized.

And then just thinking about the 4Q seasonality you're talking about I know it's been asked about a little bit. There is a bigger step down sequentially than we've typically seen in your EBITDA and I think EBITDA margins up 330 or 300 basis points this quarter. Your midpoint for 4Q implies up about half of that year-over-year. Is there anything else you can explicitly call out? It looks like you're looking for 5% to 7% same-store revenue growth, so potentially a little softer. Is that just the primary driver of that margin performance step down for 4Q?

Well, we did have a very strong third quarter and expect the fourth quarter in that 5% to 7% range to continue to be very strong. It's mostly seasonality. And as we commented on earlier, us taking a cautious approach, knowing that we do have facilities and markets that could see some disruption from a resurgence. We want to be cautious around the volumes and other projections as we think about November and December. Obviously, we've seen strong trends in recent months, and we do expect that to continue. It is seasonality and some element of us being cautious around the resurgence.

If I could just ask one more quick one. It seems over the last few years, as revenue growth has been slower, margins had declined for four years or so in a row. Is there a level, just rule of thumb level on same store U.S. revenue growth that you need to be at to drive margin improvement? So four or five percent or higher, you're pretty comfortable you're driving margin improvement. Is there any rule of thumb you would throw at us?

Well, we think that Just the revenue per day growth being in the 2% to 3% range helps us maintain the margins. And then the volume growth that we see is a significant factor in margin improvement opportunities as we realize efficiencies and are able to leverage the fixed cost structure as we grow our volumes. And so really only need revenue growth to be in that 2% to 3% range and above that, we do expect margin improvement. And we've seen that, you know, obviously in the third quarter as the revenue growth has been stronger, we have seen strong margin improvement from that volume growth.

Thank you.

Thanks, Gary.

Our next question comes from AJ Rice with Credit Suisse.

Hi, everybody. Just first, I know there's been discussion over time about what the long-term targets are for capital structure. Any updated thoughts on the amount of leverage that you're comfortable with long-term?

Well, I think we've seen this quarter. Yeah, we've seen this quarter something we've talked about before around just the investments that we've made over the last several years contributing to earnings growth and that helping us lower our leverage We saw that in the third quarter. And then obviously, you know, anything above and beyond that relates to a more strategic transaction like the U.K. transaction. We are not providing a specific target yet relating to that. We do have a goal of lowering our leverage through the earnings growth and other potential opportunities, but are not sharing a target yet. AJ. Okay.

Obviously, there's been a lot of discussion about telehealth and deploying that in the behavioral area. You guys, as you talk about it, it sounds like it's to support the existing services in some ways that you provide, but I wonder, are you looking at anything where that might be a growth avenue to pursue? Outpatient More. Are you getting any discussions with third-party telehealth companies that are interested in working with you? Anything to share along those lines?

Sure. I mean, we, as you said, we see telehealth as not a replacement for the inpatient part of what we do. It is a good access point, and we've used it for that with patient engagement. I think that the regulatory changes and reimbursement changes that have been made and look like they're going to at least be in place through the end of this year I think have been favorable. So we have looked at how we can expand the use of telehealth, AJ, with our partial and our outpatient programs, and we're doing that now. We are already collaborating with some outside outside vendors for telehealth. We also have internal capabilities around that, which we've expanded certainly with the pandemic. But I think that as practitioners as well as patients get more comfortable, and I think they have, we see that as a growth area for what we're doing and primarily for the partial and outpatient, but also for assessments and then even we're using it right now for visitation. of those that can't come into the facility. But I think it is an area that can, now that reimbursement changes have started to reflect the importance of it, we plan to use that and we're open to collaboration. We're already doing that now and we think it makes sense.

Okay, maybe I'll slip one more in if I could, because it sort of falls on some of the other questioning. You're in 40 states, so you've seen clearly COVID surges and then COVID easing and obviously how communities responding to those surges has evolved over the last six or seven months. Do you see at this point when there's a surge in a community, because you're sort of using that as one of the cautionary comments about the fourth quarter, do you see surges in a community really impact the business or is it now people are sort of just... back to at least healthcare utilization as usual. And really, when there's a mini surge in a community, you really don't see that much impact anymore. Can you just give us a little flavor, given you've got a pretty wide view?

Well, I think, AJ, that as we have had markets that have seen more cases, that our patients are still coming to our facilities for treatments. I think where we have really focused on this is how we manage them when they are in the facility and making sure that we are appropriate with isolating patients as necessary, having the right unit for COVID patients as opposed to those that don't have COVID. But I do think when we talk about resurgence and caution, I would say that's more around just the referral networks. We don't anticipate that happening but we also want to make sure that we're being conservative because we don't have control over that. We've done a lot of things and I think we've learned a lot. The facilities know what to expect. I think they're focused on very quickly adapting the referral outreach and also just how the sales and marketing approach is working. We've got that platform that we've used. It's given us a lot of visibility. So I think overall as we see cases go up. We haven't seen that really interrupt our business other than just managing within the facility.

Interesting. Okay. All right. Thanks a lot.

Thank you. And as a reminder, please limit yourself to one question with one follow-up. Our next question comes from Whit Mayo with UBS.

Hey, thanks. Good morning. We've seen this interesting trend begin to develop for maybe a quarter and a half now where COVID is beginning to actually drive tailwinds for certain providers. Some of you have no T&E expense. Your malpractice is probably down, workers' comp down, self-insured costs down. Then there's the offset with increased PPE supplies to support your your field, and I guess I'm just wondering, do you think that COVID was a tailwind for you in the third quarter? Would you net those two together? We also have the sequester, so I'm just wondering if the COVID tailwinds actually offset the headwinds at this point, and should we be thinking that maybe some of those expenses leak back into the business next year?

We do not believe on a net basis There are a lot of moving pieces and some savings and some incremental costs, as you mentioned. On a net basis, we do not think there's a significant tailwind that we're seeing here. I mean, obviously, the volume and the demand, we do think, will continue partially because of what people have been through. But from a cost perspective, there's nothing significant that we would highlight. We are seeing a lower level of travel, a lower level of employee medical and some other costs this year, but have also seen, as you mentioned, a higher level of the incremental PPE cost. And we will be looking at just how that changes, you know, what is essential for us to add back from a travel perspective, for example, as we think about next year. but I don't think there's any significant amount that we would highlight for you at this point.

And I'll just add with that I think a lot of our efforts around the expense management have been focused on making sure we're matching volume with our staffing and primarily in the non-clinical areas but we have taken the opportunity through this to really step back and say what is essential Do we need some of the travel costs that previously we had done in marketing and even through some of the travel to our events and looked at virtual solutions? So I do think going forward that we will be changing some of the way we do things. and there will be, I think, some return of perhaps health claims and I think that as we get back to normal, which I'm not sure when that will be, but I think that most of our impact on expenses has been around just managing the flow of patients and making sure that we're being very careful and prudent about our staffing.

No, that's super helpful and just one follow-up is Are you seeing any notable changes in how the payers are responding to you guys? I'm curious around denials, pre-auth, anything that may have impacted length of stay, the adjudication process. Just curious on any observations you have with any headwinds or tailwinds you feel like you're seeing from a payer perspective. Thanks.

I mean, I think that we really haven't seen much of a change there with. I mean, they're still requiring medical necessity. We make sure that that's in place as we admit patients. But as I look at payer behavior, I don't see any big difference there. And I think that, you know, our link to stay increased. As we looked at it, there wasn't any one, you know, factor there. It's been pretty stable across all of our service lines. And so I think that, you know certainly they've been very collaborative with us as we've gone through the pandemic and they're trying to make sure their patients that are part of their plans get taken care of but I wouldn't identify anything that's changed. They're still focused on making sure that patients are getting appropriate care for the appropriate length of stay.

I figured, thank you.

Our next question comes from Matthew Gilmore with Baird.

Hey, thanks. I just had a quick clarification. I think Debbie made a comment about record census levels in October. Did that mean that was the best ever census level for the company during October or just a record for an October month?

It's actually the best census that Acadia has had in the U.S. So it's a record that was set for highest census for the company.

Just to follow up on that, is that unusual in the sense that maybe September is normally a better month than October, or is that generally kind of what you'd expect sequentially, maybe with the bed adds to perhaps contributing to that?

You're right. The bed additions have helped us, and our operations team has done a great job bringing beds online this year, new facility online in July. October does typically have a strong census month and so it's a month as you think about other months of the year where we expect a strong census and we're very pleased to achieve that high number during the month and have seen strong performance from across the service lines to help us achieve that.

and I'll just add that with our de novos that we have put in place and also just as David said, bed additions, we have been pleased that those beds have been ramping at our expectation and some above our expectations. So I think all those factors go together with just where we were able to actually end up. We've still got a few days left in October, not many, one, But I think across the service lines, we've certainly seen some very, I think, strong numbers around acute as well as specialty returning to kind of normal ranges. So all that adds up with the RTCs as well, certainly, to the strong number that we saw in October.

Okay, great. Thanks a lot.

and we'll take our next question from Ryan Daniels with William Blair.

Hey guys, Nick Speakout for Ryan. Thanks for squeezing me in. You mentioned in the U.S. that referral kind of distribution is basically back to normal at this point. Is that similar in the U.K.? And then is any of this strength kind of as a result of backlog filling or do you think most of that is basically shaken out at this point?

Well, I think in the UK, there was a dynamic in March and April and even into May where the commissioners were redeployed for med-surg services. And I think as that happened, there were also case managers in the UK that were also redeployed for MedSurge, and I think that that had some interruption, as well as the stay-at-home orders which were in place in the UK. We have seen the commissioning process return to normal, and as they have returned to normal, there are patients that are being sent, obviously, to our facilities in the UK I think that there's a combination of individuals that need this care that perhaps might have delayed, but I also believe that there's a strong demand even without the pandemic that we've talked about before. If you add then the pandemic and the anxiety and depression, I think they both kind of have impacted us, not just in the U.K., but the U.S., where people are coming in that perhaps wouldn't have had an issue prior to the pandemic, but then we're also seeing patients that have had longstanding issues. And frankly, they become more acute as they've gone through this pandemic.

Great. That makes sense. And then you talked about kind of CapEx for 2021, kind of looking at 2020 for being a A good estimate. Would that be the case, too, for kind of bed ads for 2021, kind of like a similar level to 2020?

Yeah, we'll provide more detail there, but we have consistently had bed additions at the level that we're seeing in 2020. So it's not just this year. It's been consistent over the last several years, and we think that will continue, but we'll provide more guidance around that in February.

Got you. Great. All right. Thanks, guys. Congrats on the quarter.

Okay, thank you.

Thank you. And there are no further questions at this time. I'd like to turn the conference back to Debbie Osteen for any additional or closing remarks.

Well, thank you again for being with us today and for your interest in Acadia Healthcare. I am very grateful to our field and corporate leaders for their resiliency and also their commitment to keeping our key growth and operational initiatives moving forward while responding to this unprecedented crisis. I think they are one of the main reasons that I stand here today optimistic about our company's future. If you have any additional questions today, please do not hesitate to contact us directly and have a good day.

That does conclude today's conference. We thank you for your participation. You may now disconnect.