Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q2 2023 Earnings Call Transcript

Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good day, and welcome to the Acadia Healthcare Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gretchen Hommrich. Please go ahead.

Gretchen Hommrich: Good morning, and welcome to Acadia’s second quarter 2023 conference call. I’m Gretchen Hommrich, 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.

Chris Hunter: 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 health care landscape.

We’re also pleased to welcome Judith Simon, as the company’s new Chief Human Resources Officer; and Brian Farley, is 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% compared with the same period last year. Notably, we achieved strong patient day growth of 4.9% and revenue per day growth of 6.1%, 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 in 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, consists 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 are actively – 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 this strategic network.

We recently announced our 19th and 20th joint ventures, a partnership with SolutionHealth for a 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 Bluffs, 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 health care 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 Moosic, Pennsylvania.

We look forward to working together with these premier health systems to provide needed quality behavioral health care 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 we’ll continue to pursue this important growth pathway in 2023 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.

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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 in our 2023 guidance.

Heather Dixon: 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 $0.92, up 9.5% for the second quarter of 2023 compared with $0.84 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 8-K, 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 billion to $2.9 billion, adjusted EBITDA now in a range of $655 million to $685 million and adjusted 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Andrew Mok with UBS. Please go ahead.

Andrew Mok: Hi, good morning. Maybe first question just 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 and 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.

Heather Dixon: 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.

Andrew Mok: Got it. Maybe just a follow-up on the labor. Sequentially, SWB stepped down in the quarter, which booked 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 today, 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.

Heather Dixon: Sure. Sure. And 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 a 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.

Andrew Mok: Great. Thanks for all the color.

Operator: Our next question comes from Whit Mayo with Leerink Partners. Please go ahead.

Whit Mayo: 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.

Chris Hunter: Yes. I think – thanks for the question, Whit. And there were 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.