Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q1 2024 Earnings Call Transcript

Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q1 2024 Earnings Call Transcript May 3, 2024

Acadia Healthcare Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to Acadia Healthcare’s First Quarter of 2024 Earnings Call. [Operator Instructions] Also please be aware that today’s call is being recorded. I would now like to turn the call over to Patrick Feeley, Head of Investor Relations. Please go ahead.

Patrick Feeley: Thank you, and good morning. Yesterday after the market closed, we issued a press release announcing our first quarter 2024 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website. Here with me today to discuss the results are Chris Hunter, Chief Executive Officer; and Heather Dixon, Chief Financial Officer. To the extent any non-GAAP financial measures is discussed on today’s call, you will find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia’s expected quarterly and annual financial performance for 2024 and beyond.

You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Acadia’s filings with the Securities and Exchange Commission and the company’s first 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’d like to turn the conference call over to Chris for opening remarks.

Chris Hunter: Thank you, Patrick, and good morning, everyone. Thank you for being with us for Acadia’s first quarter 2024 conference call. Before we get to the results, I want to note some recent key additions to our leadership team. He just introduced this call, but I want to officially welcome Patrick Feeley to Acadia as our new Senior Vice President of Investor Relations. Patrick joins the company after leading Investor Relations for Teladoc Health. And prior to that, he spent several years in Health Care Equity Research covering the health care services sector. We want to also thank Gretchen Hommrich for her 8 years of dedicated service leading Investor Relations for Acadia. In early April, we announced Dr. Stephanie Eken as Acadia’s new Chief Medical Officer.

A triple board-certified physician, Dr. Eken brings more than two decades of behavioral health care experience in a variety of settings. She joins Acadia after spending 15 years at Rogers Behavioral Health, a not-for-profit nationwide independent provider of specialized mental health and addiction treatment. At Rogers, she most recently served as Chief Medical Officer partnering with the systems executive leadership to lead patient care quality and facilities expansion. We look forward to working with Dr. Eken and benefiting from her experience and expertise. We also want to thank Dr. Michael Genovese, who has served in this important role for Acadia since 2017. We’re grateful for his dedicated service and are pleased that he will continue in a consulting role for the company and work with Dr. Eken as we make this transition.

Now turning to our first quarter results. Total revenue increased 9.1% over the prior year’s first quarter to $768 million, driven by both rate improvement and patient day growth. Our top line growth, combined with strong operating leverage, drove adjusted EBITDA growth of 14.9% and adjusted EPS growth of 12.0%, as compared to the first quarter of 2023. We continue to be pleased with our progress on labor costs, improvements in the overall labor market combined with our continued efforts around hiring, retention and quality helped drive meaningful operating leverage and margin contribution in the first quarter. Those trends continue to give us a high level of confidence in our EBITDA outlook for the full year. On a same-store basis, revenue growth was strong, increasing 9.2% over the first quarter of last year.

During the quarter, we experienced slightly weaker-than-anticipated same-store patient volumes. This was primarily driven by greater than typical seasonality due to the timing of spring break in Easter, which occurred in March of this year compared to April of last year. While our first quarter outlook contemplated normal holiday seasonality around each of these events, the proximity of Easter to spring break resulted in an extended period of lower volumes through the back half of March. We also experienced weaker admissions towards the end of the quarter for our military specialty programs. Given the strong underlying demand for our services in the broader marketplace, we’re already well on our way towards rebuilding census at these facilities.

Overall demand for our services remain strong, and we believe we are well positioned within our markets for continued growth, especially given the visibility we have with new beds coming online and ramping up over the course of the calendar year. Now I’d like to provide an update on each of our five defined growth pathways. For our first pathway Facility Expansions, we added 27 beds during the first quarter. We continue to expect to add more than 400 beds to existing facilities in 2024, a step up from our historical average of 300. These additions will be more heavily weighted toward the second half of the year. For our second pathway, we remain focused on developing wholly owned De Novo Facilities in underserved markets for behavioral health care services.

During the first quarter, we opened a 20-bed specialty facility, Sabal Palms Recovery Center located near Tampa, Florida, which will provide residential addiction treatment services. Additionally, planning is already underway for an expansion to this facility. Following the end of the first quarter, Acadia opened a 100-bed acute care hospital, Agave Ridge Behavioral Hospital in Mesa, Arizona. We continue to plan to open up to 14 additional comprehensive treatment centers or CTCs in 2024. As a reminder, our CTC service line offers comprehensive care for patients who are affected by opioid use disorder or OUD. For our third growth pathway, we are working to expand our reach through our Joint Ventures. We’re extremely proud to partner with premier health care systems across the country with a shared mission to expand behavioral health care in more communities.

During the first quarter, we commenced construction on two new hospitals with previously announced partners. Acadia held groundbreaking ceremonies for a 144-bed behavioral health hospital in Apopka, Florida, in partnership with Orlando Health, as well as another 144-bed behavioral health hospital in Malden, Massachusetts, in partnership with Tufts Medicine. These facilities will expand much needed access to life-saving behavioral health services in their respective communities. Today, Acadia has 21 joint venture partnerships for 22 hospitals, with 11 hospitals already in operation and 11 additional hospitals expected to open over the next few years. Joint Ventures will continue to play an important role in Acadia’s future growth and we are excited about the opportunities to work with other leading providers in attractive geographies.

For our fourth pathway, we continue to look for acquisitions that support our growth objectives and meet the criteria of our capital allocation strategy. During the quarter, we closed on the acquisition of Turning point Centers, a 76-bed specialty provider of substance abuse disorder and primary mental health care treatment services in Utah. At the end of the first quarter, we completed the acquisition of 3 CTCs in North Carolina, serving patients with OUD in Raleigh, Greenville, and Hillsborough and their respective surrounding communities. These acquisitions build upon our existing and strong clinical foundation within the state of North Carolina. North Carolina is a focus for Acadia to expand capacity and add additional sites of care given the state’s immense need and progressive approach to behavioral health care treatment programs.

With the addition of these 3 CTCs, Acadia now operates 10 CTC locations in North Carolina and 160 locations in 32 states across the country. As the opioid epidemic continues to intensify, we will continue to expand this important area of our business, as we see record demand for our CTC services. It’s estimated that 9 million Americans are suffering from OUD and only about 10% of this group is in treatment for medication-assisted therapy, which is considered the gold standard for treatment. As we have previously discussed, the increasing prevalence of fentanyl mixed with other potent drugs has escalated the complexity and severity of OUD. We remain focused on meeting the critical demand for treatment by improving access to treatment, driving favorable clinical outcomes and delivering an exceptional patient experience.

For our fifth growth pathway, extending the continuum of care remains important to our clinical strategy. One of the key focus areas of this pathway is expanding our partial hospitalization programs or PHPs in intensive outpatient programs, IOPs that can provide 4 to 6 hours of care per day. These programs not only improve clinical outcomes, but also enhance the overall patient experience. We added 15 outpatient programs during the first quarter of 2024, and we’ll continue to focus on this important clinical service. As we continue to extend our market reach, patient safety and quality – quality patient care remain top priorities for delivering the best possible outcome for our patients. Quality is foundational to every aspect of the work we do at Acadia and drives operational effectiveness.

We continue to make investments in our quality programs that drive greater efficiency, including electronic medical records, patient monitoring technology and employee safety technology. We also recognize the importance of having quality measures and the right technology in place to make sure we’re providing data that aligns with what our payers want to measure. We expect to compete on the strength of our clinical outcomes, and the ability to measure and demonstrate these outcomes is important for our collaborations with payers. We’re proud of the important work that we’re doing. The demand for our behavioral health services across our nation has never been greater. Every demographic is affected by the lack of affordable access to behavioral health services, especially for the poor and elderly populations.

While 1 in 5 adults have a mental illness, less than half of those received treatments. A recent report from the Office of the Inspector General or OIG found that about 1/3 of behavioral health providers in selected counties serve patients in the Medicare, Medicare Advantage or Medicaid programs. The shortage of providers also explains the lower use of the behavioral health system, with only 8% of Medicaid enrollees and less than 4% of Medicare and Medicare Advantage enrollees receiving behavioral health services. Acadia is dedicated to serving the needs of Medicare and Medicaid patients, as well as all other patients who come to us for care. For example, Acadia has 10 facilities that serve Medicare and Medicaid beneficiaries in the top 20 underserved counties cited by OIG in the study just referenced.

We believe there are significant opportunities ahead for Acadia to extend our market reach to serve even more patients in 2024. Our strategic priorities will focus on accelerating facility growth, expanding services across the care continuum, strengthening our core capabilities and strategically leveraging technology to enhance patient care and improve clinical outcomes, all with a focus on delivering the highest quality patient care. We’re well positioned to meet our objectives with our impressive scale and proven operating model across our network of 258 facilities. The financial strength to support our continued growth and over 23,500 committed employees and clinicians, who work hard every day to address the nation’s critical need for safe quality treatment for mental health and substance use issues.

At this time, I will now turn the call over to Heather to discuss our financial results for the quarter.

Heather Dixon: Thanks, Chris, and good morning, everyone. Our first quarter financial performance reflects continued growth across our business and a solid start to the year. We reported $768.1 million in revenue for the quarter, representing an increase of 9.1% over the first quarter of last year. As Chris discussed, we experienced certain headwinds in the quarter that affected our same-store revenue and patient day growth by approximately 150 basis points. Despite this, we drove same facility revenue growth of 9.2% over the first quarter of 2023, including a 6.9% increase in revenue per patient day and a 2.2% increase in patient days. Adjusted EBITDA for the first quarter of 2024 increased 14.9% over the prior year to $173.9 million.

Adjusted EBITDA margins expanded by over 100 basis points over the prior year’s first quarter to 22.6%, a reflection of strong cost control efforts particularly on the labor line. Adjusted income attributable to Acadia shareholders per diluted share was $0.84, up 12% from the prior year. Consistent with previous periods, adjustments to income for the first quarter of 2024 include transaction, legal and other costs and related income tax effects of all items. We continue to focus on maintaining a strong financial position, providing the flexibility to deploy capital and make strategic investments in our business that offer the greatest return. As of March 31, 2024, we had $77.3 million in cash and cash equivalents and $371.5 million available under our $600 million revolving credit facility, with a net leverage ratio of approximately 2.5x Moving on to our outlook for 2024, as noted in our press release, we have affirmed our previously announced 2024 guidance, which includes revenue in the range of $3.18 billion to $3.25 billion, adjusted EBITDA in the range of $730 million to $770 million, adjusted earnings per diluted share in the range of $3.40 to $3.70.

And total bed additions, excluding acquisitions, of approximately 1,200 beds. Please note that our guidance includes onetime payments from a state of approximately $10 million or $0.09 per diluted share for the year, of which approximately $7 million or $0.06 per diluted share was received in the first quarter of 2024, in line with our prior expectations. Also as a reminder, the company’s guidance does not include the impact of any future acquisitions, divestitures, transaction, legal and other costs or non-recurring legal settlements expense. With that, operator, we’re ready to open the call for questions.

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Q&A Session

Operator: [Operator Instructions] We will now take our first question, which will come from Scott Fidel with Stephens. Please go ahead.

Scott Fidel: Hi, thanks, good morning. First question, just in the context of some of the volume headwinds that you did cite in the first quarter and also I talked about intra-quarter. Just interested in sort of how you’re thinking about the achieving of the full year revenue guidance? Is there a particular sort of area of the range that you’re comfortable with in terms of the low end, the midrange, the higher end? And then also if you can talk about how you’re expecting volumes and patient days to sort of ramp now from the first quarter over the balance of the year?

Chris Hunter: Great. Scott, thanks for the question. This is Chris. I’ll start and maybe let Heather pick up on some of your questions on guidance. But maybe just a little bit of backdrop on volume. As we had previously discussed, January got off to a little bit slower than expected start coming out of the holiday season. And then we saw a really nice improvement in February and certainly into March. And we felt really good about where we stood at that point. As we approach the back half of March, we began to see some softness in volumes. And it’s, of course, normal for us to experience lower volumes during holidays and school breaks as our patients spend more time with their families. However, what we found was an extended period of slower admissions in between spring break and Easter, which was earlier than usual, that being Easter at the end of March this year.

So while, we bake normal holiday seasonality into our outlook, what we experienced with significantly stronger seasonality in March really due to this dynamic. We also had two markets, where government facilities opened access to new behavioral beds. And this resulted in a temporary slowdown in admissions to several of our military specialty programs in those markets toward the end of the quarter as those new beds were filled. We’re already well on our way back to building back census at those facilities, and we expect to be back on track by the end of the second quarter. The issues that weighed on volumes in March, while we were certainly frustrating or distinct issues that we just don’t expect to have a lasting impact. We’ve seen consistent improvement in volumes over the course of April.

We expect to be back on track by the end of the second quarter. We continue to expect mid-single-digit same-store patient day growth in the second half of the year. And what gives us confidence in the back half of the year is that we really start to see a benefit from the ramp and a number of the bed additions and the JVs that we put in place last year, as well as the expansion plans for this year. Heather, anything you want to add from there?

Heather Dixon: Yes, sure. Maybe I’ll just pick up on the questions around sort of what we expect to see in the following quarters. I mean, as you know, we don’t provide quarterly guidance, except for the first quarter amounts that we issue, but we did experience these issues towards the end of March, and that resulted in a little bit of a slower start to the month of April. So we’ll still have a similar drag to second quarter in the same-store growth numbers. Just recall that our Specialty Facilities have a longer length of stay. It’s usually about 28 days or longer. And so you get a little bit of a lag effect whenever you have a delay in admissions for patient days. And then if I think about the full year, as we discussed in February, our guidance already contemplated that we would have a little bit slower start to the year at our sort of slightly below our mid-single-digit target.

And obviously, first quarter finished a little bit below that expectation. And then the knock-on effect that I just mentioned will have a little bit of a slower start to second quarter than we previously would have assumed. But as Chris said, we continue to have a lot of confidence in the back half of the year, as we benefit from that ramp-up of bed expansions and JVs that we opened over the last several quarters. We have a large number of beds that will come online throughout the second half. And so that gives us a lot of confidence. So while one quarter – the first quarter volume was a little weaker than our expectations, when I look at the prior year comps and the ramp that we’re seeing in beds that we’ve added over the last several quarters and then the new beds, of course, I think we’ll be comfortably in the mid-single-digit range in the second half and within striking distance of that for the full year.

Scott Fidel: Appreciate all that color. And just as a related follow-up, just appreciate all that color on the [indiscernible] side. Just wondering on the rate side, on the pricing side, how things are developing so far in-line with your expectations. It looked like you did have a solid pricing print in the first quarter, you did have some benefit from that one-time or you had called out. So just interested in sort of your updated views on pricing for the year relative to how you were thinking about the initial guidance? And that’s it for me. Thanks.

Heather Dixon: Yes. Sure. You’re right. We did – as we discussed in February, with our guidance, we did benefit from the $7 million of onetime state supplemental payments, and that was probably around 100 basis points on our same-store revenue per patient day. Remember, we also have CTC growth that goes into that calculation and that contributed probably around the same amount, about 100 basis points to the year-over-year patient day growth. And then when I think about those same-store comps, the first quarter does have an easier comp than the rest of the year. So we’re not assuming that the year-over-year revenue per patient day growth continues at the same pace as first quarter after the rest of the year. And just taking you back to our guidance that we put out in February for the full year, we talked about revenue per patient day in the mid-single-digit range, and that hasn’t changed.

Operator: And our next question will come from Whit Mayo with Leerink Partners. Please go ahead.

Whit Mayo: Hey, thanks. Can you maybe comment a little bit on closures or divestitures in the quarter, it looks like the prior year comp was a little bit lower than we expected?

Heather Dixon: Yes. If you think about what affected the quarter with – if you recall, we had four facilities that we closed last year throughout the year. And those would have certainly been in Q1 last year but not in Q1 of this year. Three of those were in the Specialty business and then one was in the acute side. And then we had one other closure in Q1 of this year on the acute side.