Good morning, and welcome to Acadia's Fourth Quarter 2020 Conference Call. I'm Gretchen Hommrich, Director of Investor Relations for Acadia. I'll first provide you with our safe harbor, before turning the call over to the Chief Executive Officer, Debbie Osteen. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing yesterday's news release under the Investors link.

Good morning, and thank you for being with us today for our fourth quarter 2020 conference call. I'm here today with Chief Financial Officer, David Duckworth and other members of our Executive Management team. David and I will provide some remarks about our financial and operating results for the fourth quarter and year, and guidance for 2021. Following David's comments, I will provide additional details on our strategy going forward. We will then open the line for your questions. We are very pleased with our solid financial and operating performance for the fourth quarter, capping off what was an extraordinary and challenging year for our Company and the nation since the onset of the Covid-19 pandemic. Before we get into the results, I want to thank all of Acadia's dedicated employees and clinicians for their continued support and heroic work to provide the highest quality care to our patients and their families, in a safe and accessible manner. As the global COVID-19 pandemic continues to affect communities across the nation, we recognized our critical role as a leading provider of behavioral healthcare services. The ongoing uncertainties and economic and societal concerns, as well as the added fear and isolation caused by the pandemic, have resulted in heightened demand for our services, especially for those already struggling with mental health and substance use issues.

Thanks, Debbie, and good morning.

I'd now like to spend a few minutes giving you our view of the business for the next five years. As we look to the years ahead, we believe Acadia is well positioned to address the needs of those seeking treatment for mental health and substance use issues. And we expect the demand for our services will continue to increase. Without question, 2020 was a very difficult year for many people and even more pronounced for those already struggling with mental health and substance use issues. Based on a recent report by McKenzie, approximately 35 million Americans are expected to experience behavioral health conditions post-pandemic. Prior to the pandemic, there were approximately 20 million adults with substance use disorders. Research collected since the onset of the COVID-19 pandemic last spring has pointed to an increase in substance use related to stress, job loss, isolation and as a means to cope with other issues like anxiety and depression. Studies also demonstrate that COVID-19 is affecting the mental health of children and adolescents and that depression and anxiety are prevalent. Elevated levels of mental health and substance use disorders are expected to remain long after the COVID-19 pandemic ends. Therefore, we believe that there will be continued growth in demand for our services. We are also seeing higher demand as societal acceptance of behavioral health increases and coverage options for those seeking treatment expand and improve. We operate in a growing and fragmented industry. Our four diversified service lines offer exceptional high levels of care for our patients. Our expansive network of treatment facilities and options enabled greater access to care, allowing us to serve the diverse needs of patients while maintaining a keen focus on the individual's needs. I'd like to give a brief overview of our service lines. Acadia's acute business is our largest service line at 47% of U.S. revenues. This segment provides the highest level of care for patients who are a threat to themselves or others. We are very diversified within this service line, with 44 inpatient acute psychiatric facilities across 20 states and Puerto Rico and we see opportunities to further grow our share of this highly fragmented market. Turning to our second largest service line, our specialty business is focused on inpatient residential programs that treat patients who are suffering from either substance use or eating disorders. This area of treatment is highly specialized and Acadia is further differentiated by our strong marketing platform and national clinical referral network.

We'll take our first question from Ralph Jacobi from Citi.

Thank you very much and very helpful framework. Just wanted to clarify on the 10% growth you said to facility expansion, I think was included, M&A was not included. What about the partnership and de novos? Are those included in the 10%?

Yes, Ralph. The facility expansions, joint ventures and de novos are included in the 10%, and as we commented, M&A would be incremental to that threshold.

And then you just de-levered the balance sheet. You talked about the target sort of the - I guess the three to four times range. I guess, how quickly should we think of the speed and ramp-up of these projects and in regard to that leverage ratio?

Well, these projects that we highlighted are really funded with cash from operations. They are included in our projection of capital expenditures, which we do believe will continue to accelerate as we finalize some of those projects. And so there is an earnings ramp associated with new facilities, not with the bed expansions at existing facilities, but with those new facilities. So we plan to fund those with cash that we generate in the business. And really see the de-leveraging benefit of that as we look out over the next several years.

Okay, that's helpful. And then just my follow-up here. Can you talk a little bit more about the guidance? The underlying assumptions may be on the same store metrics, the volume, pricing and then implied margins at the midpoint of guidance is about 22%. Maybe how you view the opportunities to move that higher or whether it's more about sort of driving top line to your point, sort of breaking out all of the opportunities that you have going forward. Any color around trajectory there would be helpful. Thanks.

Yes, sure. We do believe that revenue growth will continue at the 6% to 8% range. Our second quarter obviously will have a comp that compares to what was a challenging quarter in 2020. So it is expected to be above that range. But in addition to that 6% revenue growth, we do see margin improvement in the business. Our 2021 guidance assumes about a 27% margin for our U.S. same facility group. And then as you mentioned, the implied guidance for the company in total, which would include our corporate office as well as any new facilities and start-up losses that are not part of that same facility group puts our consolidated margin in the range of 22% to 23%. The revenue growth is 6% to 8%. It continues to break down very similar to the trends we've seen in the past with about 2% to 3% pricing growth within that, as well as 4% to 5% volume growth. We do believe going forward, as we look past 2021 with the volume growth, the efficiencies and the ongoing cost management focus that we have, we should continue to see margin improvement as we grow the business and the expectation there is around 50 basis points of annual margin improvement.

Your next from Pito Chickering with Deutsche Bank. Please go ahead.

Good morning, guys, thanks for taking my questions. Just dwelling a little bit on the same store patient days are up 3.6% comprised of admissions up 70 basis points and length of stay up 2.9%. Can you give us some more color on the admissions? What you're seeing from each referral channel, for example, you said that acute is nearly 40% of your business? How is demand in the ER of referral channel trended? And also length of stay, any color on what's happening in terms of length of stay growing? Is this a read-through for trends in 2021 and beyond in a post-COVID environment?

Good morning, Pito. I've just mentioned a little bit along the service lines and what we saw in the fourth quarter, our acute continue to see very strong volumes and it's really driven by our referral network which includes the ERs, and we did not see much disruption there and in fact that stayed very consistent with what we've seen from June forward. Our specialty service line, we did see a sequential decline there from Q3 and that was really due to the resurgence in COVID. There was some reluctance to travel, and we saw certain markets that we consider to be more hotspots, California and Arizona. We managed through that very well, but - and we have actually started to see recovery on that in January and it's even stronger in February. So I think that was temporary, and that's again based on the fact that we pull from a broad geographic area across the country. RTC was very stable and it's really been stable throughout the pandemic. We actually not only saw stability there, but we saw improvement in our census in RTC. And then the last area that I'll mention is our CTC and that continues to be strong. It's outperformed the prior year, and we mentioned that we're adding clinics this year. We feel like this is an area for strong growth, but it certainly in the fourth quarter was extremely strong, and we were very pleased that we were able to offer services and there was really no disruption there. Linked to stay I think it has been, even though it is up slightly, I think as we look at it, we don't see one common factor there. I think that it's within our expected range if we look at it by service line. I think that while I say there's no one common factor, I do think that in the acute area, it is up from what we have seen over the years, and I think part of that could be due to some increase in acuity, but as I said, it's still within the range that we see and have seen over many years.

And then for a follow-up question telehealth is typically used more in the outpatient setting. Can you give us some color on what you mean by growing into new services? Is there a chance that you can leverage your physicians and nurses to expand outside of the inpatient or residential service market? Thanks so much.

Sure. We feel like we have a strong platform here. And as I mentioned in my remarks, we did expand the capabilities of our facilities very quickly, really within about two weeks, which I have to give credit to our IT department, working in collaboration with our facilities. But we also think there may be opportunity to expand telehealth and as you mentioned, using our physician network and our capabilities that we have clinically, not only for patient follow-up that might occur as patients are discharged, but then also we're looking at additional markets that we might not be in right now, as well as partnerships that we might have with other telehealth providers or perhaps even trying to expand our capabilities here within Acadia.

So I mean, just to be sort of very clear, on the telehealth, you're talking about possibly expanding outside of your core business lines into the demand you're seeing within the behavioral telehealth market?

Yes, Pito. We do believe that could be an opportunity. We have already seen an expansion and just a better continuum of care in our existing markets that does expand our reach, and we believe that trend could continue.

Great, thanks so much guys.

I will just add, Pito, before you go, what we have used telehealth for is really - even through our assessments and using it as a way to extend the therapy because we do pull from some wide geographic areas. So when we talk about extending beyond our current offerings, we believe that we may have opportunity to extend our connection to patients that are in other parts of the country, and also - we also pull from rural markets where sometimes they go back and they don't have a continuum, and they don't have resources. So we want to be available to them and we see telehealth as a way to do that.

We will take our next question from Whit Mayo with UBS.

Just quickly on the 10%. Does that include start-up costs and should we think that same store EBITDA is more like a high-single digit number? And then the de novos and the new hospitals will contribute above and beyond the 10% number? I'm just trying to make sure I sort of decompose the building blocks to get to 10%?

Yes. Whit, it's a good question. That does include us covering our start-up costs. In every year, we have some normal level of start-up, given that we are typically opening multiple facilities every year. We of course could see a year especially in 2022, where we have more facilities opening. But the 10% does have us covering that investment in that start-up period. Of course, keeping in mind that we could see some years where we have more facilities coming online. But it's inclusive of that number.

Also what are you budgeting for startup cost in 2021?

In 2021, we believe it will be in the range of $6 million to $8 million. We do have three facilities in various phases of the process right now. That compares to more like $4 million to $5 million in 2020 for the facilities that were at a similar phase in the process. So some slight growth in that investment in 2021.

Okay. And maybe two quick ones. I'm just curious. Debbie, maybe to get an update on some of the underperforming hospitals that you had in late 2019? How are those performing versus budget and plan and then back to your comments around sort of like policy and legislation, when I've seen like California ACT 5. Is there anything that is kind of like bubbled up to the surface that you are paying a particularly close amount of attention to? Thanks.

Sure. With respect to the five facilities, I think in 2020, we were able to execute our plans around them for improvement, and despite COVID, they actually performed very well. And I was pleased and they were all unique as we had talked about a couple of years ago. But I think that they have all exceeded the budget expectations. And then they are strong performers, and we did see a couple more specialties as we had talked about, and we saw some disruption from COVID, not anything that was controllable by the facility, but overall we see a lot of opportunity for each of those; they are meeting our expectations, but we expect them to continue to improve this year, and they are very solid, strong facilities for the company. As far as legislation, and I think I've been watching the - as we have a new President, just his views on healthcare and particularly mental health, and I think that I've been pleased to see that he is supportive of enforcing mental health parity and I think that while there's been some work and attention given to that, I think that's opportunity frankly for the industry. I do think that there are still managed care companies that have not embraced parity, and should be held accountable. And so I think he has said very publicly that he wants to focus on that. He is also a supporter of telehealth for rural communities and I see that as a positive because telehealth is not going to replace our inpatient business, but it can be, as I talked earlier, a real continuum for us that allows people that can't drive or have too far of a distance to come to services. And then I think just from the state point of view, we've seen strong support for mental health across the board, and I think a lot of that is based on the attention that mental health is getting, and you've been putting some of those numbers out. And there is very strong demand and I think the states have really collaborated with us and been very supportive in what we're trying to do at our place, and really the industry and meeting the needs. So I'm encouraged that I think we have a president that is supportive of what we do, and also had talked about funding for opioid and extending that. So we're watching that very carefully and we're making sure our voice is heard, but I'm pleased that he understands the importance of mental health.

We'll hear next from Kevin Fischbeck with Bank of America.

I just want to confirm the five-year growth targets of 10% EBITDA. What EBITDA number is that? Is that of the 2021 guidance or is that off of the 2020 pro forma number?

That's off of the 2021 guidance. And it's a similar growth rate, if we think about 2021 compared to 2020. So it's a trend that we see in 2021 and continuing over that five-year period.

Okay. And just to confirm that you think it should be relatively stable. You talked a few times about like 2022 is going to be a big year for JVs and we're going to be adding more beds in the out years. But that it should be more of that kind of consistent ratable over that time period?

That's how we see it, Kevin. We do see just the ongoing bed expansions being very stable. Within that the number of new facilities being very stable. And so we do think that is really as we look at each year, that's a number that we think we can achieve. And I think the new facilities, of course, even if we are investing in a greater number of those, and there is potentially a greater investment in that and a cost in that that could drive incrementally greater returns once you get one to two years into those new facilities. But it's a very stable rate of growth that we are projecting.

And Kevin, we see potential for M&A over and above that, which I talked about earlier. We think that there is a good pipeline, and we believe that that will be additional growth opportunity, which obviously we have not included in the 10%, but we think that there is real potential now that we do have our balance sheet in much better condition. We look at tuck-ins and other opportunities out in the market and we think that there is a good pipeline for that.

Then my question. It is very helpful if you kind of reset the U.S. business and the exposure to different service lines. As you think about exiting this growth strategy five years from now, are those percentages going to be pretty much the same or would you expect the business to be shifting in one direction over another? Thanks.

We provided the detail around the service lines within our U.S. business, and we do certainly see the acute service line growing through the joint ventures and other growth pathways that are focused maybe more on acute, but the growth should occur throughout all of our service lines. So I think any shift would be very gradual. We could see acute continue to grow as a mix of our U.S. business, but we believe all the service lines really provide a good platform for continuing growth. So I don't think we see a significant shift in the composition of the business five years from now.

We will hear next from A.J. Rice with Credit Suisse.

Yes, thanks for laying out those different business segments. That was very helpful. It does sound like acute will grow given where some of the strategic initiatives are with M&A and JV and so forth faster than the rest of those business lines. I guess the question is if part of the target is to get a 50 basis point improvement in margin sort of annually, how much of that is driven by margin differentials across the business lines and the business shifting toward higher margin business, which I would assume acute is relative to some of those other businesses? But if you could confirm that.

No, we don't see that being a contributing factor to the margin improvement. It really is more the growth, the efficiencies that we believe we should continue to see from volume growth at existing facilities, leveraging the cost structure that we already have. That is the key driver of margin growth. We don't view the service mix being a factor in that margin improvement.

Is there a big differential in margin across the business lines?

We see across our U.S. service lines strong margins and would really characterize all service lines being around the U.S. same facility level, which is approximately 27%. It can be different across the country and the different programs that we operate. But in general, our service lines are similar to our overall U.S. same facility margins.

And A.J., I'll just add. I think in the specialty area, we have a lot of diversity. And so depending on payer mix, you might see some variance of margin there because you have some larger and very specialized and there is a lot of diversity there. So with acute, it's a little bit more straightforward and certainly with CTC as well. But I think within specialty, we have a very strong payor mix there as well as referral base.

Okay. And then maybe the other question, just to ask, would be around labor. Obviously, that's been a constraint in this sector from time to time on growth and some of the other sectors like acute are talking about some pressures they're having in finding adequate labor and some burnout of existing staff and so forth. Can you just sort of give us an update on how you see that, what's happening with your turnover rate? What's happening with your ability to recruit and some of the initiatives, maybe in that regard?

Well, A.J, we've had a very strong focus on recruitment and retention and I think that we did see occasions in the fourth quarter because of COVID and because we saw a lot more staff being impacted, and we certainly saw more patients coming in that. I think the team did a fantastic job of just making sure they got services. But I will say that there are occasions where we've utilized agency and over time just to ensure that we have appropriate staff, but as I look at the company and really look across the service lines, we haven't seen significant disruption or change in the availability. We were very fortunate. Our turnover rate is fairly stable. We always work to bring it down, but it's stable and I think that again - I just go back to the operators in the field just did a great job of making sure we had the staff there within the patients needed to seek treatment.

We'll hear next from Brian Tanquilut with Jefferies.

Good morning, guys and congratulations. I guess, Debbie just to follow up on your comments on M&A earlier. What is your appetite for larger deals at this point? Or should we be thinking about this more as a tuck-in strategy? And then I guess given the lack of deal flow in this space. I mean is it safe to assume that valuations are much lower than what we saw, say, three years to four years ago?

I'll take the first part of that question and let David talk about valuations. But I think M&A has historically been a priority here. I think, we're very well-informed about platforms that are out there and larger platforms. We're not going to comment on any specific transaction, but I'll just say we're open to what makes sense for us. We do look at valuation in multiples, but we also look at the strategic part of that as well as synergy. So I think that we - as we approach this year, we have an open mind for M&A, but we also have a disciplined approach to it in a framework that's going to keep us very disciplined. And I think that it looks from just the pipeline that there are opportunities not only for the tuck-ins, but perhaps going forward some of the larger M&A that might come to market. You want me to mention that?

And really Brian, nothing to add around valuation compared to the last several years. I think Debbie's point is the right one. We will remain disciplined. We think many different types of M&A opportunities will be attractive. And we will look at those and just evaluate it under our framework. But we do not have a specific view right now on where valuation should be.

And then I guess as I look at the CTC side of the business or just the whole addiction treatment complex, right. Obviously, the states are trying to negotiate a big settlement with the drug supply chain and they're saying that they're going to use the funds to pay for addiction treatment at the community level. So have you had conversations with your state clients yet on what that could mean for Acadia or just the industry as a whole once that settlement happens, presumably sometime this year?

We stay in very close touch with our states and I think the CEOs and leadership out in the field really do a good job of making sure that they're talking with state officials and those that are, I think involved in making decisions around funding. I do - we talked about this, I guess maybe year before last and it didn't work out. It does look like this it's going to happen now with the settlement. And I think that we believe that we're in a good position to receive some of those funds, but we can't really predict how the states right now will lay that out. There are other proactive preventive services that I think they would seek to have. But we also believe we provide a key part of that continuum. So I think we are in close contact. We're watching that and we're hopeful that it will allow us to treat more individuals with the funding that may or may not become available.

Your next from John Ransom with Raymond James.

Good morning, thanks for the update and all the detail on your U.S. business. Just a couple for me. On the CTC side, given this - there is no public comp out there stand-alone. I don't think that businesses fully understood. But are there any sizable private equity-backed portfolio companies that you could see yourself being interested in or is this going to be in your opinion probably just a de novo type of this?

Well, as I mentioned to Brian, we don't comment on specifics, but there are platforms for CTC. And we certainly know them and I think that they have some different geographies than we might have. So those platforms might provide an opportunity for us to move into other states that we're not in or states that we feel would be good to go in with an acquisition rather than a de novo. I do think the team does a very thorough job of really looking at what makes the most sense for states. And really, they've got some good criteria and metrics that they view, but we would not limit M&A in the CTC area. We just now see a very strong pipeline frankly for our de novos and we have plans and they are concrete, very defined by state. But on the other hand, we would always be open to opportunity if it presented.

Okay. On your labor, you know off here as how many of them vaccinated. And are you seeing - is there a subset that just not willing to take the vaccine at this point as we've seen in other sectors of healthcare?

We have tried to be very open with our staff and provide communication and education about the vaccine. I think that right now, I think about 15% of our staff have received the vaccine. I think that it varies by facility and by state, but they're also states as we know from hearing the news are in varying stages of actually getting the vaccine out to those that need it. But we're going to continue to educate about I think the importance of the vaccine, but we've not mandated it here. We don't plan to do that, but we do think it's important for just the country, and we would always encourage our staff to receive it. But we're not at this point mandating it.

And then lastly for me, if you - if we think about the de novo losses that you're going to absorb in your 10% EBITDA target, could you maybe provide some sizing of that just from a dollar perspective at least kind of 2020, '21 and you've got it maybe in '22?

Yes. We mentioned, John, for this year, we have three facilities that are starting up, and that's around a $6 million to $8 million number for us. So that first year where our facility is going through the opening process and the licensing survey process tends to be around a $2 million loss. I think the team that we have has done a great job in finding ways to manage that, and the survey process and our work with the survey team is essential to that. So I think in general, it's around $2 million of facility. The timing of opening is a factor.

Right.

But I think we could see some improvement in that number. But in general, it's about $2 million per facility and should stay sort of in that $5 million to $10 million range.

And how long does it generally take you to get to your average occupancy? When you open up a new either wholly-owned or JV. Is there a difference in the JV and the wholly-owned in terms of the - I would assume the JVs ramp quicker because you're probably transferring over some existing patients from the acute care hospitals? But just how long does it take on those two cases to get the full occupancy?

Yes, we do have a goal for a new facility of getting to breakeven from an earnings perspective by the end of the first year. Getting all the way to the average occupancy for the company of a mature facility can be two years to three years, and the joint ventures that we've opened have demonstrated a faster ramp in the occupancy compared to a de novo. So intend to be a little bit faster in getting to that occupancy, but it's a two to three-year ramp to get all the way to the company average.

And I'm sorry if you mentioned this, but do I remember correctly that you own generally 80% of the JVs? Is that right? I mean...

It depends on the transaction. Yes. Sorry, John...

Yes.

It depends on the transaction. The contributions from both parties that is a general target that we have, and where we see a lot of our joint ventures. But we're very flexible in working through what's right for a specific transaction and it can vary some around that level.

Thank you. And that concludes today's question-and-answer session. I would now like to turn the conference back over to Debbie Osteen for any additional or closing remarks.

Well, thank you again for being with us today and for your interest in Acadia Healthcare. I'm so grateful to our field and corporate leaders for their resiliency and their commitments to keeping our key growth and operational initiatives moving forward, while at the same time responding to this unprecedented crisis. If you have additional questions today, please do not hesitate to contact us directly, and have a good day.

Thank you. That does conclude today's conference. Thank you all for your participation.