Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q4 2022 Earnings Call Transcript

Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good morning and welcome to Acadia Healthcare’s Fourth Quarter and Full Year 2022 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded today. I would now like to turn the conference over to Gretchen Hommrich. Please go ahead ma’am.

Gretchen Hommrich: Good morning and welcome to Acadia’s fourth quarter 2022 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 2022 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 fourth quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time for, opening remarks, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter.

Chris Hunter: Thank you, Gretchen. Good morning everyone and thank you for being with us today for our fourth quarter 2022 conference call. I’m here today with Chief Financial Officer, David Duckworth; and other members of our executive management team. David and I will provide some remarks about our financial and operating performance for the fourth quarter of 2022 and guidance for 2023. Following our comments, we’ll open the line for your questions. In December, we held our first ever Investor Day at Carnegie Hall in New York and we’re appreciative that so many of you joined us in person and through our webcast. It was a great event and we appreciate your support. I’m pleased to say that our fourth quarter results and start to 2023 demonstrate that we’re executing on the strategy we presented with favorable results across our key performance metrics.

Throughout the past year, we continued to see strong momentum in our business, reflecting robust demand for our behavioral health care services. We need to continue to commend our dedicated team of employees and clinicians across our operations who have worked tirelessly to meet the needs of those seeking treatment for mental health and substance use issues. Our strong results reflect our ability to effectively operate our 250 facilities across Acadia’s network and serve our patients with safe, quality care. During the fourth quarter, we continued to see positive trends in our business with an increase in our same facility revenue of 9.4% compared with the fourth quarter of 2021 including an increase in revenue per patient day of 5.2% and an increase in patient days of 4.0%.

Our fourth quarter results marked a strong finish to 2022 and we believe set us up well for 2023. We are proud of our vitally important work to support expanding patient populations in order to make a positive difference in more communities. Acadia has created a strong foundation to build upon during a time of unprecedented demand for behavioral health care services. A recent 2022 study from Indiana University found that approximately 45% of patients who visit the emergency department for physical injuries and ailments also have mental health and substance use problems that are frequently overlooked. Acadia has established strong relationships with med-surg hospitals across the country, bringing our experience and expertise to markets where they are desperately needed.

And fortunately, a greater social awareness of mental health issues and broader acceptance of treatment have made behavioral health care priority with medical professionals and government health care officials. Acadia is well-positioned to address this critical societal need as a leader in providing behavioral health care services across the care continuum. During the fourth quarter of 2022, we continued to advance our growth objectives across each of our service lines. As we’ve previously shared, we believe our five distinct growth pathways will enable the company to meet this demand and extend our market reach. I’ll briefly update you on our accomplishments related to these five pathways during the fourth quarter. On the first pathway, facility expansions remains a primary driver of our growth as this pathway allows us to efficiently expand services in established markets by utilizing our existing infrastructure and experienced staff.

We added 80 beds to our existing facilities during the fourth quarter, finishing the year with a strong second half performance with 212 bed additions and bringing our total number of bed additions to 290 for the year. Looking ahead, we expect to add approximately 300 beds through facility expansions in 2023. Importantly, many of the bed additions in 2023 will open in the first half of the year and are expected to contribute to an accelerating volume growth outlook for the company. A second important growth pathway is to identify underserved markets for behavioral healthcare services and develop wholly owned de novo facilities that bridge this gap and help meet the critical community need. In 2022, we opened a 60-bed children’s hospital. It’s the first stage of our Montrose Behavioral Health Hospital operations in Chicago.

We look forward to increasing the pace of our de novos from opening one per year to two per year in 2023, as we’re on track to open our 101-bed Montrose adult hospital, an outpatient facility in our 80-bed facility Coachella Valley Behavioral Health in Indio California later this year. We’re excited to announce a new de novo facility that is slated to open in 2024. This 100-bed acute care behavioral health hospital will serve the residence of Mesa, Arizona and surrounding communities. Agave Ridge Behavioral Hospital will offer a full continuum of inpatient behavioral healthcare services for adult, older adult, adolescent and child patients. Our groundbreaking is scheduled for next week. We will continue to pursue additional de novo opportunities in other underserved markets with a goal to develop and open acute and specialty facilities in 2024 and beyond.

We also continued to expand our network of comprehensive treatment center facilities or CTCs, specifically designed to meet the growing and critical need for addiction treatment, especially for patients dealing with opioid-used disorder. During the fourth quarter, we opened three new de novo CTCs in Florida and Delaware, bringing our total to seven new CTCs for the year, which exceeded our goal of at least six CTCs. As the opioid crisis has continued to escalate across the country, we believe Acadia’s CTC facilities play a vital role in the communities they serve with programs that combine behavioral therapy and medication to treat opioid-used disorders. Each CTC provides a range of comprehensive substance use treatment support services that include medical, counseling, vocational, educational and other treatment services to help our patient’s progress.

We will continue to expand our CTC network and service offerings to meet this essential need with an objective of adding six CTCs in the year ahead. Our third attractive growth pathway is forming strategic partnerships with leading health systems across the country. We’ve been fortunate to establish strong relationships with leading national healthcare providers and premier healthcare systems, who want to expand behavioral health care treatment options in their respective communities. We bring the clinical expertise and experience they need to deliver high-quality care while we have an opportunity to leverage the provider’s market presence and establish relationships in the community. In the second half of 2022 we were pleased to open two new facilities.

The first facility was a 90-bed facility with our joint venture partner Covenant Health in Knoxville, Tennessee in August; and the second facility was Maple Heights Behavioral Health, a 120-bed facility, which was opened in December with our partner Lutheran Health Network in Fort Wayne, Indiana. Acadia now has 19 joint venture facilities in various stages of development, with nine facilities opened, and 10 facilities expected to open over the next several years, including two in 2023. We remain encouraged by the strong continued interest from potential partners in our JV pipeline. For our fourth growth pathway, we have maintained a very disciplined focus on M&A opportunities and continue to look for selective acquisitions that complement our growth strategy, and are incremental to our financial objectives.

During the fourth quarter, we acquired four CTCs from Georgia-based brand-new start treatment centers located in separate suburbs of the Atlanta metropolitan area extending Acadia’s CTC network to 151 locations at the end of 2022. We remain focused on selectively identifying attractive M&A opportunities that are complementary to our existing geographic footprint, and portfolio of service offerings. We are fortunate to have a strong balance sheet that provides the flexibility to pursue acquisitions, as well as make the necessary investments to support our other strategic growth pathways. For our fifth and final growth pathway, we remain focused on extending the continuum of care across our facilities and identifying additional ways to support patients.

For example, we are continuing to strengthen our mid-level acuity programming, which we most often use to step down our patients after residential treatment. Since 2019, we have added over 50 PHP and IOP programs, including five in Q4 2022 alone. We are also continuing to advance our cross referral program, including by launching system improvements in Q4, which make it easier for our nurses and clinicians to identify cross-referral opportunities and facilitate the referral process itself. Finally, we continue to fill in service line gaps in our markets. Our previously mentioned acquisition of four CTCs in the Atlanta area for example complements our existing acute specialty PHP and IOP service lines in that market. In conclusion, we are well-positioned to maintain our strong growth trajectory and meet our development targets for the year, which are adding approximately 670 beds in 2023 through approximately 300-bed additions to existing facilities, opening two inpatient de novo facilities, two facilities with JV partners, with more JV announcements to come and opening at least six CTC locations.

We’re working hard to deliver on our 24 €“ our 2024 and 2025 growth targets, as well as strengthening the foundation that these new facilities will become a part of. As Acadia continues to lead and grow, we are committed to creating and implementing best-in-class IT solutions that will further enhance the delivery of care and support the patients we serve. As we discussed at our Investor Day, investments in technology will be a key area of focus for Acadia in 2023 and beyond. We are accelerating investments where we can strengthen our capabilities, and lead the industry forward by leveraging technology to increase access to care, improve the delivery of care and ultimately support clinical integration and operational efficiencies. Initially, the areas where we expect to make short-term investments include enhancing our infrastructure, which involves improving all of Acadia’s technology capabilities across our network.

A top priority is centered around electronic medical records. Today, we have manual paper-based processes across most of the company, and the potential for electronic medical records is a significant opportunity for not only Acadia, but also the industry. As we migrate to electronic records, there are significant benefits from both a clinical and financial perspective. We are focused on technology investments across five main categories. The first is that, we’ll be able to better support our medical teams, with respect to patient safety and compliance. Second, we believe these investments will enhance the overall patient experience. Third, we expect improvement in employee satisfaction, which will support recruiting and retention. Fourth, the additional data and analytics capabilities will also help us engage with payers, as we are better able to support value-based care and identify operational efficiencies.

And finally, we believe these disciplined investments will drive revenue and margin improvement opportunities for the company over time. As we communicated in December at our Investor Day, we expect to allocate approximately $35 million to $45million in IT investments in the coming year, of which $15 million to $25 million is incremental to our historical investment. We will continue to evaluate the value derived from these investments and believe that over the four-year period from 2023 to 2026, that we could see a total of $75 million to $125 million in dedicated IT incremental capital expenditures. We are highly encouraged by the value that this will provide for Acadia, as we lead the industry forward in leveraging technology to improve the delivery of care.

As we also noted in December, we had planned to add key leadership for this important initiative. And we’re pleased to add that Laura Groschen joined Acadia as thecompany’s new Chief Information Officer in early January. Laura joins Acadia with over 25 years of experience, driving strategic transformation at large health care and consumer-focused IT organizations. She most recently served as the business unit CIO of Medtronic, the $30 billion global health care solutions company, where she led a team supporting information and technology for 20 operating units in global business functions across Medtronic’s locations in 150 countries. As Acadia CIO, Laura will shape and advance our IT strategy as an integral part of our digital transformation and she will drive continued digital transformation across Acadia’s scaled behavioral health capabilities.

I also want to reinforce our commitment to quality across our operations. As we continue to extend our market reach, safe and quality care remains the top priority for the patients who seek our help. I’m pleased to announce that we recently added Dr. Navdeep Kang to our management team as our new Chief Quality Officer for inpatient services. In this role, Nav will work closely with our Chief Medical Officer, Dr. Mike Genovese and will be responsible for ensuring patient safety and superior quality of care by improving delivery of clinical services in our inpatient facilities. Nav will lead our initiative to provide a robust proactive culture of quality and excellence, supported by processes and systems, designed to prevent any issue and when necessary, quickly respond to any adverse events.

Nav is a clinical psychologist and brings extensive experience in addiction treatment and behavioral health. So as we look to the year ahead, we remain focused on increasing our pace of growth and capitalizing on expansion across our service lines. At the same time, we’ll look for ways to improve upon the delivery of care we provide and strengthen our capabilities with the right technology investments in differentiated services that drive improved clinical outcomes. Across our network of 250 facilities, we have a shared mission to provide high-quality behavioral health care services and we look forward to the opportunities ahead for Acadia in 2023 and beyond. At this time, I will now turn the call over to David Duckworth to discuss our financial results for the quarter and 2023 guidance.

Photographee.eu/Shutterstock.com

David Duckworth: Thanks, Chris, and good morning. Looking at the fourth quarter, we delivered strong financial and operating results, as we successfully delivered on our key performance metrics, demonstrating consistent execution of our strategy. Revenue for the fourth quarter of 2022 increased 13.8% to $675.3 million compared with $593.5 million for the fourth quarter of 2021. Our revenue growth includes an increase in same facility revenue of 9.4%. For the fourth quarter, our adjusted EBITDA was $150.9 million and adjusted income attributable to Acadia stockholders per diluted share was $0.74, which includes income of $5.2 million related to the provider relief fund also related to the American Rescue Plan payments. Adjusted — adjustments to income for the fourth quarter of 2022 include transaction-related expenses and the related income tax effect.

The company also recorded an unfavorable adjustment of $5.9 million, or $0.05 per diluted share to its self-insured professional and general liability reserves relating to the settlement or expected settlement of certain prior year claims relating primarily to the 2017 to 2018 period. The estimated accrual for professional and general liabilities is based on historical claims, prior settlements and judgments and other factors and actuarial assumptions. While we could see volatility in this reserve due to our self-insured retention level of $5 million, we view this fourth quarter adjustment as a non-recurring item relating to unique facts and circumstances for certain claims in that 2017 to 2018 period. From a cost management perspective, we were pleased with our execution throughout 2022.

While we saw higher wage inflation in 2022, including approximately 8% base wage inflation for the fourth quarter we believe it’s important to remain proactive in our pay and our volume and reimbursement growth have remained strong. While base wage inflation is expected to remain higher in the 7% to 8% range in the first half of 2023, we are seeing positive recent hiring trends and we also saw an 8% sequential reduction in premium pay from the third quarter to the fourth quarter of 2022. Maintaining a strong financial position will remain a top priority for 2023 providing us the flexibility and capital to support our growth strategy and future investments. As of December 31, 2022 the company had $97.6 million in cash and cash equivalents and $525 million available under its $600 million revolving credit facility with a net leverage ratio of approximately 2.1 times.

During the fourth quarter, the company completed its repayment of amounts received pursuant to the Medicare Accelerated and Advanced Payment Program under the CARES Act. Of the $45.2 million of advanced payments received in 2020, the company repaid a total of $25.1 million in 2021 and paid the remaining $20.1 million in 2022, including $1.2 million in the fourth quarter of 2022. Moving on to our guidance. As noted in our press release, we narrowed our previously issued guidance for 2023 as follows: revenue in a range of $2.82 billion to $2.88 billion, adjusted EBITDA in a range of $635 million to $675 million, adjusted earnings per diluted share in a range of $3.10 to $3.40, interest expense in a range of $80 million to $85 million, a tax rate in the range of 25% to 26%, depreciation and amortization expense in a range of $125 million to $135 million, stock compensation expense in a range of $30 million to $35 million, operating cash flow in a range of $450 million to $500 million, expansion capital expenditures in a range of $350 million to $400 million, maintenance capital expenditures in a range of $40 million to $50 million, and IT capital expenditures in a range of $35 million to $45 million.

We also established financial guidance for the first quarter of 2023, including revenue in a range of $690 million to $700 million, adjusted EBITDA in a range of $145 million to $150 million, and adjusted earnings per diluted share in a range of $0.70 to $0.74. The company’s guidance does not include the impact of any future acquisitions, divestitures, transaction-related expenses or the recognition of any additional provider relief fund income. With that Joe, we are ready to open the call for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. And our first question will come from A.J. Rice with Credit Suisse. Please go ahead.

A.J. Rice: Thanks. Hi, everyone. I know — at the Investor Day and then in your comments today you’ve talked about a little bit about the potential acquisition pipeline that’s out there for you. I wondered if you’d expand a little more on what you’re seeing. It seems like there’s a lot of JV and potential acquisition opportunities coming out of pandemic. Is that still there? And then is there any opportunity you think this year as you look out for larger deals are there any of those potentially out there?

Chris Hunter: Yes. Thanks, A.J. This is Chris and I’ll start. We continue to feel very optimistic about the M&A pipeline, which is clearly one of our important growth levers for 2023. I would say that we have done extensive work in looking at the underbedded markets and really targeting the MSAs where we believe we have the most upside potential over time. So we have — we’re always looking to find ways to optimally deploy capital whether that is doing more JVs, doing de novos, clearly looking at M&A. And right now we feel very good about the pipeline that we have on the M&A front. And I feel also that we have some confidence that valuations are slightly softening as we’re heading here into the New Year. I would say to your question on the JV front, we also feel very strong about the pipeline there.

Our existing JV announcements are expected to take us from our current acute states of 21 plus Puerto Rico into three additional states; Colorado, Minnesota and North Carolina. And then the pipeline of near-term deals on the JV front are expected to take us into two additional states. And I think really just strengthen our geographic footprint overall. So we feel very good about the pipeline that’s building in these MSAs on the JV front certainly with de novos and definitely with M&A as well.

A.J. Rice: Okay. Great. And maybe my follow-up. Obviously, the 9.4% revenue increase is a robust number. I wonder, if you could give us a little flavor for — across the individual segments. Was that a consistent rate of growth, or was there much variation across your key business loans?

David Duckworth: Yes, A.J. we were pleased with the same-facility revenue performance in the quarter, which included another strong quarter of revenue per day growth and our strongest quarter of the year from a volume perspective. And as we look at that by service line we saw incredibly strong performance demand, volume pricing really across all of the service lines but we would highlight acute specialty and the CTC business all saw a very strong quarter. RTC also performed well very stable. Of course, there are fewer investments going into that service line, but the facilities we have had a very good 2022 and fourth quarter, but acute specialty and CTC really led the charge in terms of revenue growth for the quarter.

Christ Hunter: And I would just add — for 2023, we really continue to expect strong patient day growth of 4% to 6% for the year. And I would say that the volume is supported by three things. The first is just our strong demand that continues. The second would be the important capacity additions that we’ve seen and that we just discussed in the second half of 2022 that will continue into early 2023. And then the third is just the improved performance that we’re starting to see from optimizing our marketing and admissions processes. So it’s early in the year. But so far into the quarter, we’re seeing record census and patient day growth that we really think at the higher end of the 4% to 6% that we’re projecting for the year.

A.J. Rice: Okay, great. Thanks so much.

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