EarningsCall · ACHC Q2 2023

spk11: Good day and welcome to the Acadia Healthcare second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, then zero, on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Gretchen Homrick. Please go ahead.

spk12: Good morning and welcome to Acadia's second quarter 2023 conference call. I'm Gretchen Homrick, Vice President of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to our Chief Executive Officer, Chris Hunter. 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 2023 and beyond. 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. At this time, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter, for opening remarks.

spk16: Thank you, Gretchen, and good morning, everyone. Thank you for being with us for Acadia's second quarter 2023 conference call. For the second quarter, we reported impressive results across multiple measures. Given this momentum and our confidence in the continued strong performance of our business, we're increasing our guidance for the year. I'm eager to discuss our performance, but first I want to acknowledge several outstanding additions to our leadership team. This includes Heather Dixon, who started with the company earlier this month as our new Chief Financial Officer. Heather brings significant executive-level financial expertise with substantial payer, provider, and pharmacy experience across the healthcare landscape. We're also pleased to welcome Judith Simone as the company's new Chief Human Resources Officer, and Brian Farley as our Executive Vice President, General Counsel, and Secretary. Both Judith and Brian bring deep experience, and we know they will make valuable contributions in their respective roles. And as we welcome these new leaders, I want to also thank David Duckworth and Chris Howard for the contributions they made in support of Acadia's growth and success. We wish them the very best. Turning to the quarter, our second quarter results reflect continued momentum in our business through the first half of 2023. Excluding $8.6 million of income from the Provider Relief Fund recognized back in the second quarter of 2022, we reported year-over-year revenue growth of 12.2%, adjusted EBITDA growth of 10.9%, and adjusted EPS growth of 9.5%. We are pleased with the growth trajectory of our business. with solid performance across all service lines. Same facility revenue increased 11.4 percent compared with the same period last year. Notably, we achieved strong patient day growth of 4.9 percent and revenue per day growth of 6.1 percent, which is supported by favorable rate increases across our service lines, including CTC, markets, and payers. In line with our forecast, we continued to see sequential improvement in our labor trends, with wage inflation decreasing from 7.5% in the first quarter of 2023 to 6.3% in the second quarter of 2023. While not all markets are the same, on an overall basis, the labor environment continues to show signs of improvement, positioning the company for continued stability and wage growth moderation over the remainder of the year. The team has continued to execute on our five distinct growth pathways with significant progress made this year. For our first pathway, facility expansions, we added 98 beds to existing facilities in the second quarter, bringing the total additions to 204 beds to date. We expect to add a total of approximately 300 beds in 2023, consistent with prior years. For our second pathway, we're making good progress towards our plan of accelerating wholly owned de novo hospital growth. We're on schedule to open a newly renovated 101-bed adult hospital and outpatient facility, which is part of the Montrose Behavioral Health Hospital in Chicago, Illinois, as well as an 80-bed inpatient hospital, Coachella Valley Behavioral Health in Indio, California. Both are expected to commence operations later this year and we are actively identifying and advancing additional de novo expansion opportunities to open in 2024 and beyond. Our network of CTCs also continues to expand, and we opened two new CTC locations in the second quarter. We're experiencing solid demand for medication-assisted treatment for patients dealing with opioid use disorder, a chronic disease affecting nearly 10 million individuals nationwide that, untreated, can lead to serious potential consequences, including disability, relapse, and death. We are focused on accelerating the expansion of our network of 153 CTCs in 32 states with the goal of adding at least six CTCs in 2023. Regarding our third growth pathway, we are extremely proud of our work across the country with our joint venture partners, and we continue to expand the strategic network. We recently announced our 19th and 20th joint ventures, a partnership with Solution Health for 144-bed behavioral health hospital in southeast New Hampshire, as well as a partnership with Nebraska Methodist Health System for developing a 96-bed hospital that will serve the Omaha, Nebraska, and Council Bluff, Iowa metropolitan area. These new hospitals will expand our acute service line into two additional states, New Hampshire and Iowa. As we have demonstrated in our other joint ventures, we will combine our expertise with the experience and established market presence of these leading providers to develop and provide quality behavioral healthcare services in their respective communities. Additionally, early in the third quarter, we opened a 96-bed hospital with our joint venture partner Bronson Healthcare in Battle Creek, Michigan, and another 96-bed hospital with our partner Geisinger Behavioral Health Center Northeast in Moosick, Pennsylvania. We look forward to working together with these premier health systems to provide needed quality behavioral healthcare in their respective markets. Today, Acadia's 20 JV partnerships represent a combined total of 21 hospitals with 11 hospitals already in operation and 10 hospitals expected to open over the next several years. We have a growing pipeline of potential joint venture partners and will continue to pursue this important growth pathway in 23 and beyond. For our fourth pathway, we continue to look for acquisitions that advance our growth strategy. We're excited about our announcement yesterday to acquire Turning Point Centers, a 76-bed specialty provider of substance use disorder and primary mental health treatment services that serves the Salt Lake City, Utah metropolitan market. Turning Point Centers provides a full continuum of treatment services, including residential, partial hospitalization, and intensive outpatient services. This acquisition will extend Acadia's geographic footprint for our specialty service line into a new state and enhance our continuum of care in Utah to include all four service lines. We expect to close this transaction in 2023. Our fifth and final pathway is focused on improving our service offerings and ensuring that we have the appropriate level of care for patients seeking treatment. During the second quarter, we have expanded our treatment options by adding 14 outpatient programs in PHP IOPs and virtual services and 23 PHP IOPs since the beginning of the year at select facilities to assist patients after they leave inpatient and residential treatment. Through each of these five growth pathways, we are well positioned to maintain our strong growth trajectory and meet our stated development targets for calendar 2023 as follows. Adding approximately 670 beds through approximately 300 bed additions to existing facilities, of which we've already opened 204 year-to-date, opening two inpatient de novo hospitals, opening two hospitals with JV partners, which we completed early in the third quarter, and opening at least six CTC locations, including the two already mentioned. In addition to expanding our market reach to meet the increasing demand for our services, we're focused on making the right strategic investments to enhance our service offerings and drive favorable clinical outcomes. Importantly, we remain committed to quality in every aspect of our operations. We strive to set the standard for clinical excellence by utilizing our enterprise-wide quality and safety platform, which supports consistent and effective compassionate care delivery. We continue to make investments in our technology platform, leadership development, staff training, and treatment programming with a common goal to deliver the best possible outcome for our patients. As Acadia continues to grow, we're also committed to strengthening the technology and systems that underpin our operations. Our investment in electronic medical records, for example, is focused on improving clinical standardization, workflow, clinician experience, and ultimately the quality and efficiency of the care we deliver for our complex patients. Additionally, we are investing in patient monitoring technology, which helps us ensure our foundational commitment to patient safety. This technology provides real-time data visibility and feedback to our clinical staff, ensuring consistent execution across our facilities. Through the patient safety initiatives that we've implemented over the last 12 months, we are pleased with our progress and have seen positive results in patient care and fewer patient incidents. We're extremely grateful for our dedicated employees who continue to advance our purpose to lead care with light and to provide safe quality care for more patients and families who come to us for treatment during their darkest times. At this point, I will now turn the call over to Heather to discuss our financial results for the quarter and our 2023 guidance.

spk13: Thanks, Chris, and good morning, everyone. I'm honored to be with you today as Acadia's new Chief Financial Officer and look forward to working with this extraordinary leadership team. Acadia has significant opportunities to deliver high-quality care to our patients and sustainable value to our stockholders, and I'm excited to partner with Chris and the management team to further enhance our scope of services and extend our market reach. Now looking at the results for the quarter. Our second quarter financial performance showed continued momentum through the first half of 2023. We achieved solid top line growth with $731.3 million in revenue for the quarter, up 12.2% over the second quarter of last year. During the second quarter of 2022, the company recorded income of $8.6 million related to the Provider Relief Fund established by the CARES Act. Excluding this income, adjusted EBITDA for the second quarter of 2023 increased 10.9% to $174.5 million, compared with $157.3 million for the second quarter of 2022. And adjusted income attributable to Acadia stockholders per diluted share was 92 cents, up 9.5% for the second quarter of 23, compared with 84 cents for the second quarter of 2022. Adjustments to income for the second quarter of 2023 include transaction-related expenses, loss on impairment, and the related income tax effect. We remain focused on maintaining a strong financial position, providing us the flexibility and access to capital to support our organic growth strategy and future investments. As of June 30, 2023, we had $112.2 million in cash and cash equivalents, and $505 million available under our $600 million revolving credit facility with a net leverage ratio of approximately two times. Before I discuss our updated guidance for the full year, I want to touch on the 8K we filed on July 11, 2023 regarding the Desert Hills verdict and related litigation in New Mexico. Since that filing, there have been no developments and we have nothing new to report. In accordance with the accounting guidance, we have maintained our professional liability reserves related to this matter, consistent with the amounts recorded in prior periods. We are evaluating all legal options and intend to challenge the verdict. Given this is ongoing litigation, we will not be providing additional commentary regarding this legal matter on today's call. Now turning to guidance. As noted in our press release, we are increasing our financial guidance for the full year, which includes Revenue now in a range of $2.86 to $2.9 billion. Adjusted EBITDA now in a range of $655 to $685 million. And adjusted earnings per diluted share in a range of $3.25 to $3.50. Please refer to our press release for all other metrics that we affirmed. As a reminder, the company's guidance does not include the impact of any future acquisitions, divestitures, transaction-related expenses, or the recognition of additional provider relief fund income. With that, operator, we're ready to open the call for questions. Thank you.

spk11: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster.

spk09: Our first question comes from Andrew Mock with UBS.

spk11: Please go ahead.

spk02: Hi, good morning. My first question is on guidance. You beat street estimates by about 7 million and raised the guide by 15 million. Just wanted to better understand the strengthening trends that you're seeing that prompted you to raise the outlook for the back half of the year. And any color on the second half pricing outlook would be helpful. Thanks.

spk13: Sure. Thanks for the question, Andrew. So first of all, I just want to reiterate that we're very pleased to see the strong results and the operating trends that we had for the first half of 2023. And I would point to a few things that are really driving the confidence that we have to look towards the back half of the year. The first is volume trends, reflecting strong demand, occupancy rates, and capacity additions. The second is improved visibility into the back half of the year for our revenue per day. We expect that to continue for the full year to be in mid-single digits. And then finally, I would point to labor costs continuing to moderate throughout the year.

spk02: Got it. Maybe just to follow up on the labor, sequentially SWB stepped down in the quarter, which busts historical trends and possibly steps over some April merit increases. Can you flesh out the drivers of the sequential decline? And if we look at SWB per patient day, is the expectation from here that you'll hold that flat such that the year-over-year increase steps down meaningfully in the back half of the year? Thanks.

spk13: Sure, sure. Let me take those one at a time. So I would say partially you're right. What we did see is some seasonality that's coming through from Q1 to Q2. If you remember in the first quarter, we have about 70% of our employee base merit increases that come through. And in the second quarter in April, we have the remaining 30% of those that come through. I mean, those are addressed according to the geographic markets, the performance, job categories, et cetera. But generally speaking, it's about a 70-30 split. In addition, we have seasonality in the payroll taxes that we see that come through in the first quarter of every year. So for sure, there's a portion of that that you're seeing in that sequential decline. And that said, I would say that we expect to see that hold flat and to continue to moderate overall. We are seeing improvements in the labor trends. And we would expect to see that to continue. The base wage inflation went down about 120 basis points from 7.5% in Q1 to 6.3% in Q2. And we would expect to see that to continue to moderate throughout the back half of the year.

spk09: Great. Thanks for all the color. Our next question comes from Whit Mayo with Learing Partners.

spk11: Please go ahead.

spk04: Thanks, and welcome, Heather. Chris, maybe just to start, just a strategic question. I mean, I think you've been sort of identifying some field-level initiatives around cost management, specifically maybe standardization opportunities in the back office, IT, administrative functions, just where maybe you see some of the largest organic growth opportunities on the cost side to standardize some of those functions, and maybe any way to put some numbers around it. Thanks.

spk16: Yeah. Thanks for the question, Whit, and there are a number of things that we have had ongoing. I mean, clearly we see technology as an opportunity for us to not only achieve efficiencies in the business, but we're also seeing some real improvements on the safety side and clearly just evidence of being able to produce greater clinical outcomes. I know that everyone would like to see more detail on some of the efficiencies that these IT investments will drive, and I think we'll have that in short order. I would say in the near term, the results that we're seeing from the EMR installations that we've seen to date have been extremely beneficial, in that we have seen not only really solid feedback from surveyors and regulators that have been into our facilities, but we're also seeing a really nice uptick in employee engagement for those facilities where we do have an EMR in place, which has really helped us on the recruitment front and we think will continue to help us on the retention front as we roll those out as well. And then I alluded in the prepared remarks to some of the remote monitoring software that we've been able to put in place that also has proven some really strong benefits to our patients as well. I think overall, just given how paper-intensive this industry has been, we just know that we're going to continue to see back-office improvement as time goes on as well. So those are just some of the broader things. I mean, clearly, as we continue to roll out the EMR across all of our acute facilities, we'll continue to see greater efficiencies. But I think the point I would want to make is that we are already seeing the benefit to date on the patient engagement side and on the employee engagement side, and also just with the surveyors and regulators already.

spk04: Last question, just views on the physician fee schedule, the proposal there, the impact on the CTC business, and maybe any updated thoughts on the opioid settlements. Some of the states are disclosing now direct support to OTP programs, so wondering if you had any updated views. Thanks.

spk16: Yeah, I mean, clearly, we continue to watch the CTC, the settlement dollars, you know, very closely. You know, $54 billion, again, have been allocated. Only about $3 billion of the total settlement funds have been dispersed to this date. There was a report that we saw earlier this summer by Reuters that only 16 states right now actually have a central statewide publicly available process for organizations to apply for funding. But we have been successful in applying for and receiving funds early on. Usually this is at the individual county level and to date it's been for things like harm reduction services and wraparound care. things like case management and even housing support. But I would just say it's still very early days. We've bolstered some of our capabilities there and continue watching and tracking these grants as they come over and think that we'll continue to be really well positioned for that. But overall, I think we just continue to be really optimistic here. 70% of the money that is actually received by states has to be spent on future opioid remediation efforts. And so we feel great about that and the transparency that we're beginning to see. I think there's 15 states now that have explicitly promised to publicly report 100% of their settlement expenditures, which is really a contrast to the way that tobacco settlements worked out. So it's still very early stages here. We've bolstered our team on the CTC side and, you know, just continue to feel very positive about our ability to continue to win, you know, many of these awards as they continue to come out. But clearly this will accelerate into 24 and well into 25 as well. Okay. Thank you.

spk11: Our next question comes from AJ Wright with Credit Suisse. Please go ahead.

spk19: Thanks. Hi, everybody. Just maybe first to delve in a little bit more on the pricing for the back half of the year and year ahead. You had, I think, back in February when you gave the fourth quarter release, there had been some discussion, and it actually created a little bit of confusion that the company was at least banking into guidance at that point, the possibility of a moderation in pricing in the back half of the year as pricing has been pretty robust. It sounds like you're feeling a little better about the sustainability of at least the level you're at now. Can you just comment on whether I'm hearing that right? And does that tend to concentrate more on what you're seeing on the Medicaid side, on the commercial side? Any thoughts on that?

spk13: Hi there. Yes, you are hearing that correctly. You were correct that we had anticipated some moderation in the revenue per day and the rates in the back half of the year previously. But as we've finalized the number of the Medicaid and commercial rate increases since the last time we spoke to you, many of which have effective dates as of July 1st, we're seeing much more direct visibility into the second half of the year. I mean, the experience can, of course, vary by market and payer, but we continue to see average rate increases in the mid-single digits. And so that's now what we're projecting for the back half of the year is for that continued mid-single digit growth across all service lines, including CTC. We'll expect to see that continued growth.

spk19: Okay. And then just maybe on the follow-up, the turning point deal looks like an interesting one. Maybe just spend a minute talking about that opportunity. And I know one thing with the development pipeline in general in the M&A pipeline, there was a time when we had to think about startup losses associated with that, those pipelines. And it doesn't seem like that's as much of a headwind for you. And I wondered if I'm hearing that right and why might that be the case? You seem like you're managing that a little more, a little better in terms of the potential costs and so forth of all the new development you're pursuing.

spk16: Yeah, AJ, this is Chris. Thanks for the question. Why don't I take turning point and I'll let Heather just speak to the startup loss question that you have. But first on turning point, we feel great about the ability to announce this transaction. I mean, this is the first time that we have been able to have all four lines of business in one geographic region in Salt Lake City. This is a nice opportunity for us, 76-bed specialty provider of substance use disorder and primary mental health treatment services. We expect it to close by the end of the year and are already beginning to work on the integration related to that. This is one where just our ability to extend our specialty footprint but also the synergies with our other lines of business just have made this one particularly attractive. This is a proprietary transaction that we identified and sourced ourselves. And when we have historically looked back at those acquisitions that have been most successful at Acadia, the ability to have expansion opportunity has proven really important. And this is one where we think we can add an incremental 48 beds to the 76 beds that they currently have over time. So that really was a deciding factor for us on this transaction. And we do expect, while this won't close until the end of the year, that the acquisition will be accretive in its first year. So Heather, do you want to speak to the startup loss question?

spk13: Sure. In terms of the startup losses, we do continue to project those to be fairly consistent. We usually expect them to be between $15 and $20 million a year, and that's consistent with what we saw in Q2 of $5.4 million. And we would expect for that to continue to be roughly that same amount per quarter. As we think about how we moderate the scheduling of the openings and as how you think about new facilities opening roll in and then facilities that ramp roll out of that calculation, we just expect that to stay pretty stable.

spk09: All right, thanks a lot. Our next question comes from John Rinson with Raymond James.

spk11: Please go ahead.

spk03: Hey, good morning. a two-parter for me. Number one, if you look at your pre-overhead margins, they're about as high as they've been. What do you think the ceiling is for those margins, number one? And then number two, do you have an idea like what the spending for hospitals is going to look like when you fully roll out your EMR? Thanks.

spk13: So maybe I'll speak to what I think you're asking is the corporate overhead sort of costs, and if we see that stabilizing over the period to period, we would.

spk03: No, no, no. Okay. Heather, I'm actually asking the pre-overhead hospital margins, you know, in the high 20s. What do you think the ceiling is? It's pre-covert overhead. What do you think the ceiling is for the pre-overhead hospital margins as you said today? Thanks.

spk13: Okay, thanks. Thanks, I understand. So I would say that we continue, we expect to see that to be a continued strong margin as we look at what those will contribute.

spk03: And then the EMR spending for hospitals?

spk16: Yeah, John, I'm sorry. You cut out on the tail end of that. What specifically was the question around EMR?

spk03: Sorry, so the EMR spending You provided a range at your analyst day, but as you think about your EMR spending, have you landed on a kind of rollout schedule and a cost per hospital on that line item? Thanks.

spk16: Yeah, we're still working through that. I mean, I would say that what we laid out in our investor day continues to be very consistent. You know, we broke that out between CapEx and OpEx, and I would say we're still very much tracking there. I think one of the things we're looking at, just given the early results that have been very attractive as we've continued to bring a number of these acute facilities up on an EMR is can we even go a little bit faster? Right now we've had a plan to roll all of our acute facilities out over a two year period and we're looking closely with Heather's help at whether or not it would make sense for us to accelerate that. But, you know, we're still, we haven't disclosed the cost per facility. I think most importantly, what we laid out in Investor Day continues to be very much on track.

spk09: Thank you. Our next question comes from Kevin Fishback with Bank of America.

spk11: Please go ahead.

spk08: Hi, this is Nabil on for Kevin. Thanks for taking the question. Can you talk about how volumes trended across the different segments in the quarter, and how are you thinking about growth in the second half of the year?

spk13: Sure. So we have seen strong demand in patient volumes during the second quarter, as we've been saying. The last three years of same facility volume growth has been roughly in the 2% to 4% range, and we've been really highly focused on delivering volume growth acceleration. And the opportunities that we've identified have led us to really point to a four to six percent growth expectation for 2023. We really attribute that and some record patient census levels to a few things. First is demand across the service lines. Second is optimization in our marketing and admissions processes. Third is the stronger occupancy rates that are driven by that demand and the operational execution. And then finally, I just point to the recent VET additions that we mentioned. We had 212 that we added in the second half of 22, and then we combined that with another 204 in the first half of 2023. And that's really what's driving us to be well-positioned, I think, to hit that 4% to 6% range for the second half of the year.

spk08: Thanks. And then for the follow-up, can you provide us an update on redeterminations and what your guidance is assuming on the impacts?

spk16: Sure. This is Chris. You know, we've been working on redetermination since late last year and it's continued to just be a really major focus for the company across all of our service lines. And, you know, as of July 1, every one of our states except for Oregon has now launched. So, that said, I would say only a fraction of our patients under 25% have completed redetermination. due to the way that so many of these states continue to spread the disenrollment throughout all the way into 2024. So, as we've previously discussed, we're seeing good early results in our patients maintaining coverage. I would say on our RTC service line, those children are increasingly protected because 80% of Medicaid patients are wards of the state. On our specialty service line, those Medicaid recipients are also protected due to the unique county level backstop funding that we have in place for patients in Pennsylvania where we have most of our specialty Medicaid volume. And then on the CTC side, I mean, we just continue working very closely with our patients to ensure that they have visibility as to whether there could be some disruption. We're seeing some patients moving to self-pay in a few cases. But overall, we're really encouraged by our ability to work with these patients, to use the hotline we put in place, the kiosk that we put in so many of our centers. And I think it's done, you know, it's been very in ensuring continuity of care overall. Maybe a couple other things I'll just point out. I mean, clearly everyone has read about CMS's action to pause redetermination in a handful of states. And, you know, I would point to some of the Kaiser Family Foundation data that came out earlier this month, that said of the 3 million people that have been disenrolled from Medicaid since redetermination began in April, of those disenrolled, 74% were due to procedural reasons, rather being disenrolled due to ineligibility for Medicaid. So, clearly, CMS is encouraging a number of states to just slow the process down. We continue to see some pretty wide variation in terms of the way that states are handling redetermination. So, you have some states that are scheduling members really early in the unwind period, like Florida. Others are taking the opposite approach where they're really back-end loading the disenrollment. A member of Michigan and Oklahoma would be examples there. You also have some states that are just doing a great job of giving us transparency. into when patients are going to lose coverage. Virginia and Tennessee would be examples there. That gives us an opportunity to be proactive and to reach out to these patients in advance of potentially being removed from the Medicaid roles. And we've seen that working really well. So all in all, I'd say it's still early. The process does vary significantly state to state. We're continuing to track it very closely on a number of levels, but we continue to believe the overall impact is going to be modest, particularly in 23, and our early experience just continues to align pretty well with that view.

spk07: Great. Thank you.

spk16: Yeah.

spk11: Our next question comes from Gary Taylor with Cohen. Please go ahead.

spk18: Good morning. Just a couple questions. One, I just want to clarify, when you talk about wage inflation, how are you defining that? Is that just average hourly rate excluding benefits? I don't know if overtime or contract labor would be in there, but since we can't quite reconcile that, we can only look at the reported figure. I just want to make sure I understand how you define that when you talk about that 7.5 going to the 6.3.

spk13: You are thinking about that correctly. They are excluded, but I would add that they're stable across the board.

spk18: Okay. And then my second one would just be on the New Mexico settlement. I know you're hopeful that'll be reversed on appeal. My question, though, since it is a fairly material amount, does it have any impact? It sounds like no on the investment. You're willing to make on the NOVA beds and facilities in the near term, but any other impact just in terms of how you're thinking about balance sheet management or even just retaining credit availability, anything material to say on how you're thinking about that at this point?

spk16: Yeah, thanks for the question. This is Chris. I would just say that we obviously are tracking this very closely. And as I think you can tell from the execution that we've seen just in the last few weeks in announcing two JVs and an M&A deal, we continue to be extremely focused on the core business and continuing to advance the company and all the things that we laid out on our investor day. So we do not see any material change at all. And, you know, obviously we're not going to be talking in detail about the litigation and given that that is underway, but we are super focused on the business as I think our results reflect.

spk09: Thank you. Our next question comes from Peter Chickering with Deutsche Bank.

spk11: Please go ahead.

spk05: Good morning, guys. Thanks for taking my questions. Congrats on an excellent quarter, and Heather, welcome to the team. I'll follow up to AJ's question. With pricing continuing mid-single digits in the back half of the year, that would make sort of over two years with pricing tracking at mid or above mid-single digit range. As you sort of look at your contracting you have today in sort of confidence back half a year, is that the right level that we should be thinking about for 2024?

spk16: Yeah, Peter, this is Chris. Thanks for the question. I would say that we continue to work really closely with our managed care team and with our payer partners. And I think that the reimbursement levels that we've seen, that we've discussed in the beginning of the year, have continued to hold true in the second half of the year. I don't think we're ready to comment on 2024 yet, but I think we are doing a really good job of helping payers understand the acuity of our patients, the quality of care that we're providing, the inflationary impact on wages. And we're coming very prepared to those meetings and leveraging the strong partnerships that we've built over a multi-year period with our payers to continue to achieve really strong rates.

spk05: Okay, great. And then one question on CDC. As you look at today's brain person model for methadone clinics, do you see a shifting in the near term away from a bundled model where you're paid a monthly fee to provide both drugs and services? into more of an unbundled model or managed care splits of payments between providing medication-assisted drugs and another payment for providing counseling services?

spk16: Yeah, thanks for the question, Pito. And I would say we are not seeing that trend at all. As of right now, we're obviously in very close contact with payers all the time, and there isn't any movement towards unbundling that we have seen in our extensive negotiations that we're doing on a regular basis. Great. Thanks so much.

spk10: Our next question is a follow-up from John Ransom with Raymond James. Please go ahead.

spk03: Hey, I just wanted to circle back on the MAT. You know, there was some, you know, concern in the marketplace about some new therapeutic options with the bupe. And I just wondered, you know, kind of what your take is on that, if you've seen any sort of deterioration in the opportunity from that new modality. Thanks.

spk16: Yeah, well, I would say, thanks, John. You know, methadone continues to be the gold standard. for treatment. And we continue to provide buprenorphine as well. But as we've looked at our outcomes, we just feel continuously comfortable with with our approach overall. I would say that our quality, as well, I think is going to continue to be very important. CARF, which is the regulatory body that provides oversight for opioid treatment programs, and they're doing 3,500 site surveys annually. They came in and assessed Acadia at a 98-plus percent compliance across the board, outperforming all of the other OTPs. So we just continue to feel really good about our model. As we frequently say, and Nasir Khan, the leader of our business, who's a physician, says, you know, this is a program, it's not a pill, where there's counseling that is required. It's not just dispensing treatment. It's engaging these chronic members of these chronic patients in treatment, particularly in the early stages where their addiction is more pronounced, and continuing to engage them in that treatment as their treatment evolves over a period of time. So we have not seen any trend. I think you may be referring to the public health emergency, which clearly allowed doctors to provide buprenorphine for up to 30 patients in their care. And the data that we saw during the public health emergency was the number of scripts written per month remained largely flat relative to pre-public health emergency, and we're just not seeing any changing trends. We're continuing to see really strong volumes and just continue to feel very good about the outlook of that business and the leadership team that we've put in place.

spk09: Thanks so much. Our next question comes from Brian Trent.

spk11: Salute, Liz. Jeffrey, please go ahead.

spk20: Hey, good morning, guys, and congrats and welcome to Heather. I guess, Heather, my first question, as I think about Q3, you know, historically, pre-COVID, there was seasonality in the business, largely driven by the RTC business. But as that has gotten smaller, how should we be thinking about the Q3 sequential trend versus Q2?

spk13: Hi, thanks for the welcome and for the question. I would think about it consistently with the sequential trends that we've seen, and I would see that we're expecting sort of sequential improvement for that to continue. So I think just in line with the expectations and what you've seen previously from a seasonality perspective.

spk20: Okay, got it. And then, Chris, as I think about some of these new efforts, these trends in mental health parity, How are you thinking, you know, if those efforts are successful, how do you think that will flow through like operationally or coverage wise to Acadia?

spk16: Yeah, it's a great question and one that we're still trying to analyze. I mean, you're probably referring to the Biden administration's recent efforts here to ensure that they're going to put out these proposed rules that impact how payers demonstrate mental health parity to federal regulators. And I think the way that will show up for payers is still a little bit to be determined I mean, clearly the Mental Health Parity Act was put in place all the way back in 1996, so this legislation has been around for decades. The question has been around enforcement, which historically has been pretty limited and inconsistent by both federal and state governments. So we applaud the focus on this, but in terms of what the downstream impact is will be, and ultimately how impactful it will be, I think it's just a little bit early for us to tell. The first public mention of the rule came in on July 10th, and we're still waiting on some additional detail, and there's a public comment period after that. So it's something that we're tracking overall, could lead to adjustments over time, but we just don't really have much visibility to share at this point.

spk09: Got it. Thank you. Yep. This concludes our question and answer session.

spk11: I would like to turn the conference back over to Chris Hunter for any closing remarks.

spk16: Okay. Thank you. Now, before we end the call, I just want to again thank our committed facility leaders, clinicians, and approximately 23,000 dedicated employees across the country. who have continued to work tirelessly to meet the needs of our patients in a safe and effective manner. We really have an outstanding platform for growth and value creation, and the momentum in the business right now reinforces our confidence in the future and the work that you all do every day. Thank you all for being with us this morning and for your interest in Acadia. And if you all have any questions at all, please do not hesitate to contact us directly and to follow up.

spk17: Have a great day, everyone.

spk10: The conference is now concluded.

spk09: Thank you for attending today's presentation. You may now disconnect. you Thank you. Thank you. Okay. you

spk11: Good day and welcome to the Acadia Healthcare second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Gretchen Homrick. Please go ahead.

spk12: Good morning and welcome to Acadia's second quarter 2023 conference call. I'm Gretchen Homrick, Vice President of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to our Chief Executive Officer, Chris Hunter. 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 2023 and beyond. 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. At this time, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter, for opening remarks.

spk16: Thank you, Gretchen, and good morning, everyone. Thank you for being with us for Acadia's second quarter 2023 conference call. For the second quarter, we reported impressive results across multiple measures. Given this momentum and our confidence in the continued strong performance of our business, we're increasing our guidance for the year. I'm eager to discuss our performance, but first I want to acknowledge several outstanding additions to our leadership team. This includes Heather Dixon, who started with the company earlier this month as our new Chief Financial Officer. Heather brings significant executive-level financial expertise with substantial payer, provider, and pharmacy experience across the healthcare landscape. We're also pleased to welcome Judith Simone as the company's new Chief Human Resources Officer, and Brian Farley as our Executive Vice President, General Counsel, and Secretary. Both Judith and Brian bring deep experience, and we know they will make valuable contributions in their respective roles. And as we welcome these new leaders, I want to also thank David Duckworth and Chris Howard for the contributions they made in support of Acadia's growth and success. We wish them the very best. Turning to the quarter, our second quarter results reflect continued momentum in our business through the first half of 2023. Excluding $8.6 million of income from the Provider Relief Fund recognized back in the second quarter of 2022, we reported year-over-year revenue growth of 12.2%, adjusted EBITDA growth of 10.9%, and adjusted EPS growth of 9.5%. We are pleased with the growth trajectory of our business. with solid performance across all service lines. Same facility revenue increased 11.4 percent compared with the same period last year. Notably, we achieved strong patient day growth of 4.9 percent and revenue per day growth of 6.1 percent, which is supported by favorable rate increases across our service lines, including CTC, markets, and payers. In line with our forecast, we continued to see sequential improvement in our labor trends, with wage inflation decreasing from 7.5% in the first quarter of 2023 to 6.3% in the second quarter of 2023. While not all markets are the same, on an overall basis, the labor environment continues to show signs of improvement, positioning the company for continued stability and wage growth moderation over the remainder of the year. The team has continued to execute on our five distinct growth pathways with significant progress made this year. For our first pathway, facility expansions, we added 98 beds to existing facilities in the second quarter, bringing the total additions to 204 beds to date. We expect to add a total of approximately 300 beds in 2023, consistent with prior years. For our second pathway, we're making good progress towards our plan of accelerating wholly owned de novo hospital growth. We're on schedule to open a newly renovated 101-bed adult hospital and outpatient facility, which is part of the Montrose Behavioral Health Hospital in Chicago, Illinois, as well as an 80-bed inpatient hospital, Coachella Valley Behavioral Health in Indio, California. Both are expected to commence operations later this year and we are actively identifying and advancing additional de novo expansion opportunities to open in 2024 and beyond. Our network of CTCs also continues to expand, and we opened two new CTC locations in the second quarter. We're experiencing solid demand for medication-assisted treatment for patients dealing with opioid use disorder, a chronic disease affecting nearly 10 million individuals nationwide that, untreated, can lead to serious potential consequences, including disability, relapse, and death. We are focused on accelerating the expansion of our network of 153 CTCs in 32 states with the goal of adding at least six CTCs in 2023. Regarding our third growth pathway, we are extremely proud of our work across the country with our joint venture partners, and we continue to expand the strategic network. We recently announced our 19th and 20th joint ventures, a partnership with Solution Health for 144-bed behavioral health hospital in southeast New Hampshire, as well as a partnership with Nebraska Methodist Health System for developing a 96-bed hospital that will serve the Omaha, Nebraska, and Council Bluff, Iowa metropolitan area. These new hospitals will expand our acute service line into two additional states, New Hampshire and Iowa. As we have demonstrated in our other joint ventures, we will combine our expertise with the experience and established market presence of these leading providers to develop and provide quality behavioral healthcare services in their respective communities. Additionally, early in the third quarter, we opened a 96-bed hospital with our joint venture partner Bronson Healthcare in Battle Creek, Michigan, and another 96-bed hospital with our partner Geisinger Behavioral Health Center Northeast in Moosick, Pennsylvania. We look forward to working together with these premier health systems to provide needed quality behavioral healthcare in their respective markets. Today, Acadia's 20 JV partnerships represent a combined total of 21 hospitals with 11 hospitals already in operation and 10 hospitals expected to open over the next several years. We have a growing pipeline of potential joint venture partners and will continue to pursue this important growth pathway in 23 and beyond. For our fourth pathway, we continue to look for acquisitions that advance our growth strategy. We're excited about our announcement yesterday to acquire Turning Point Centers, a 76-bed specialty provider of substance use disorder and primary mental health treatment services that serves the Salt Lake City, Utah metropolitan market. Turning Point Centers provides a full continuum of treatment services, including residential, partial hospitalization, and intensive outpatient services. This acquisition will extend Acadia's geographic footprint for our specialty service line into a new state and enhance our continuum of care in Utah to include all four service lines. We expect to close this transaction in 2023. Our fifth and final pathway is focused on improving our service offerings and ensuring that we have the appropriate level of care for patients seeking treatment. During the second quarter, we have expanded our treatment options by adding 14 outpatient programs in PHP IOPs and virtual services and 23 PHP IOPs since the beginning of the year at select facilities to assist patients after they leave inpatient and residential treatment. Through each of these five growth pathways, we are well-positioned to maintain our strong growth trajectory and meet our stated development targets for calendar 2023 as follows. Adding approximately 670 beds through approximately 300 bed additions to existing facilities, of which we've already opened 204 year-to-date, opening two inpatient de novo hospitals, opening two hospitals with JV partners, which we completed early in the third quarter, and opening at least six CTC locations, including the two already mentioned. In addition to expanding our market reach to meet the increasing demand for our services, we're focused on making the right strategic investments to enhance our service offerings and drive favorable clinical outcomes. Importantly, we remain committed to quality in every aspect of our operations. We strive to set the standard for clinical excellence by utilizing our enterprise-wide quality and safety platform, which supports consistent and effective compassionate care delivery. We continue to make investments in our technology platform, leadership development, staff training, and treatment programming with a common goal to deliver the best possible outcome for our patients. As Acadia continues to grow, we're also committed to strengthening the technology and systems that underpin our operations. Our investment in electronic medical records, for example, is focused on improving clinical standardization, workflow, clinician experience, and ultimately the quality and efficiency of the care we deliver for our complex patients. Additionally, we are investing in patient monitoring technology, which helps us ensure our foundational commitment to patient safety. This technology provides real-time data visibility and feedback to our clinical staff, ensuring consistent execution across our facilities. Through the patient safety initiatives that we've implemented over the last 12 months, we are pleased with our progress and have seen positive results in patient care and fewer patient incidents. We're extremely grateful for our dedicated employees who continue to advance our purpose to lead care with light and to provide safe quality care for more patients and families who come to us for treatment during their darkest times. At this point, I will now turn the call over to Heather to discuss our financial results for the quarter and our 2023 guidance.

spk13: Thanks, Chris, and good morning, everyone. I'm honored to be with you today as Acadia's new Chief Financial Officer and look forward to working with this extraordinary leadership team. Acadia has significant opportunities to deliver high-quality care to our patients and sustainable value to our stockholders, and I'm excited to partner with Chris and the management team to further enhance our scope of services and extend our market reach. Now looking at the results for the quarter. Our second quarter financial performance showed continued momentum through the first half of 2023. We achieved solid top line growth with $731.3 million in revenue for the quarter, up 12.2% over the second quarter of last year. During the second quarter of 2022, the company recorded income of $8.6 million related to the Provider Relief Fund established by the CARES Act. Excluding this income, adjusted EBITDA for the second quarter of 2023 increased 10.9% to $174.5 million, compared with $157.3 million for the second quarter of 2022. And adjusted income attributable to Acadia stockholders per diluted share was 92 cents, up 9.5% for the second quarter of 23, compared with 84 cents for the second quarter of 2022. Adjustments to income for the second quarter of 2023 include transaction-related expenses, loss on impairment, and the related income tax effect. We remain focused on maintaining a strong financial position, providing us the flexibility and access to capital to support our organic growth strategy and future investments. As of June 30, 2023, we had $112.2 million in cash and cash equivalents, and $505 million available under our $600 million revolving credit facility with a net leverage ratio of approximately two times. Before I discuss our updated guidance for the full year, I want to touch on the 8K we filed on July 11, 2023 regarding the Desert Hills verdict and related litigation in New Mexico. Since that filing, there have been no developments and we have nothing new to report. In accordance with the accounting guidance, we have maintained our professional liability reserves related to this matter, consistent with the amounts recorded in prior periods. We are evaluating all legal options and intend to challenge the verdict. Given this is ongoing litigation, we will not be providing additional commentary regarding this legal matter on today's call. Now turning to guidance. As noted in our press release, we are increasing our financial guidance for the full year, which includes Revenue now in a range of $2.86 to $2.9 billion. Adjusted EBITDA now in a range of $655 to $685 million. And adjusted earnings per diluted share in a range of $3.25 to $3.50. Please refer to our press release for all other metrics that we affirmed. As a reminder, the company's guidance does not include the impact of any future acquisitions, divestitures, transaction-related expenses, or the recognition of additional provider relief fund income. With that, operator, we're ready to open the call for questions. Thank you.

spk11: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster.

spk09: Our first question comes from Andrew Mock with UBS.

spk11: Please go ahead.

spk02: Hi, good morning. My first question is on guidance. You beat street estimates by about $7 million and raised the guide by $15 million. Just wanted to better understand the strengthening trends that you're seeing that prompted you to raise the outlook for the back half of the year, and any color on the second half pricing outlook would be helpful. Thanks.

spk13: Sure. Thanks for the question, Andrew. So first of all, I just want to reiterate that we're very pleased to see the strong results in the operating trends that we had for the first half of 2023. And I would point to a few things that are really driving the confidence that we have to look towards the back half of the year. The first is volume trends, reflecting strong demand, occupancy rates, and capacity additions. The second is improved visibility into the back half of the year for our revenue per day. We expect that to continue for the full year to be in mid-single digits. And then finally, I would point to labor costs continuing to moderate throughout the year.

spk02: Got it. Maybe just to follow up on the labor, sequentially SWB stepped down in the quarter, which busts historical trends and possibly steps over some April merit increases. Can you flesh out the drivers of the sequential decline? And if we look at SWB per patient day, is the expectation from here that you'll hold that flat such that the year-over-year increase steps down meaningfully in the back half of the year? Thanks.

spk13: Sure, sure. Let me take those one at a time. So I would say partially you're right. What we did see is some seasonality that's coming through from Q1 to Q2. If you remember in the first quarter, we have about 70% of our employee base merit increases that come through. And in the second quarter in April, we have the remaining 30% of those that come through. I mean, those are addressed according to the geographic markets, the performance, job categories, et cetera. But generally speaking, it's about a 70-30 split. In addition, we have seasonality in the payroll taxes that we see that come through in the first quarter of every year. So for sure, there's a portion of that that you're seeing in that sequential decline. And that said, I would say that we expect to see that hold flat and to continue to moderate overall. We are seeing improvements in the labor trends. And we would expect to see that to continue. The base wage inflation went down about 120 basis points from 7.5% in Q1 to 6.3% in Q2. And we would expect to see that to continue to moderate throughout the back half of the year.

spk09: Great. Thanks for all the color. Our next question comes from Whit Mayo with Learing Partners.

spk11: Please go ahead.

spk04: Thanks, and welcome, Heather. Chris, maybe just to start, just a strategic question. I mean, I think you've been sort of identifying some field-level initiatives around cost management, specifically maybe standardization opportunities in the back office, IT, administrative functions, just where maybe you see some of the largest organic growth opportunities on the cost side to standardize some of those functions and maybe any way to put some numbers around it. Thanks.

spk16: Yeah, I think... Thanks for the question, Whit, and there are a number of things that we have had ongoing. I mean, clearly we see technology as an opportunity for us to not only achieve efficiencies in the business, but we're also seeing some real improvements on the safety side and clearly just evidence of being able to produce greater clinical outcomes. I know that everyone would like to see more detail on some of the efficiencies that these IT investments will drive, and I think we'll have that in short order. I would say in the near term, the results that we're seeing from the EMR installations that we've seen to date have been extremely beneficial in that we have seen – not only really solid feedback from surveyors and regulators that have been into our facilities, but we're also seeing a really nice uptick in employee engagement for those facilities where we do have an EMR in place, which has really helped us on the recruitment front and we think will continue to help us on the retention front as we roll those out as well. And then I alluded in the prepared remarks to some of the remote monitoring software that we've been able to put in place that also has proven some really strong benefits to our patients as well. I think overall, just given how paper intensive this industry has been, we just know that we're going to continue to see back office improvement as time goes on as well. So those are just some of the broader things. I mean, clearly, as we continue to roll out the EMR across all of our acute facilities, we'll continue to see greater efficiencies. But I think the point I would want to make is that we are already seeing the benefit to date on the patient engagement side and on the employee engagement side, and also just with the surveyors and regulators already.