Earnings Call Transcript - ACHC Q2 2021

Operator, Operator

Good morning, and welcome to the Acadia Healthcare Second Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Gretchen Hommrich, Director of Investor Relations. Please go ahead.

Gretchen Hommrich, Director of Investor Relations

Good morning, and welcome to Acadia's Second Quarter 2021 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 Chief Executive Officer, Debbie Osteen.

Debbie Osteen, CEO

Good morning. And thank you for being with us today for our second quarter 2021 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 second quarter of 2021 and our increased guidance for 2021. Following David's comments, we will open the line for your questions. We are very pleased with the momentum in our business for the second quarter as Acadia delivered a solid financial and operating performance. These results reflect increased demand for our behavioral health services and our continued focus on delivering efficiencies across our operations. We experienced favorable volume trends while providing exceptional patient care across all of our service lines. Before we get into the results, I want to commend Acadia's dedicated employees and clinicians across our operations who've continued to meet this critical demand for our services and provide high-quality care in a safe and accessible manner. We have a proven operating model, supported by an experienced team as well as the financial strength to support our ability to reach more patients who need our services.

David Duckworth, CFO

Thanks, Debbie, and good morning. Revenue for the second quarter was $582.2 million compared with $491.5 million for the second quarter of 2020, a growth rate of 18.5%. For the second quarter of 2021, net income attributable to Acadia stockholders was $44.5 million or $0.49 per diluted share and adjusted income attributable to Acadia stockholders per diluted share was $0.71. For the current and prior year periods presented in our earnings release, adjusted income excludes transaction-related expenses, debt extinguishment costs, loss on impairment and the income tax effect of these adjustments to income. Acadia's adjusted EBITDA for the second quarter of 2021 increased 25% to $141.3 million compared with $112.8 million for the same period last year. Same-facility adjusted EBITDA margin improved 180 basis points to 29.3%. During the second quarter of 2021, the company received $24 million of additional Provider Relief Funds under the CARES Act. These funds have not been recognized in the second quarter or included in our 2021 guidance. We are evaluating the guidelines to determine whether any of the funds will be recognized or will be returned. During the second quarter, we repaid $41 million of debt, including $35 million on our $600 million revolving credit facility, reducing the outstanding revolver balance to $125 million at June 30, 2021. The company's net leverage ratio was approximately 2.4x as of June 30, 2021, and cash at the end of the second quarter was $185.5 million. As noted in our press release, we have revised our full year expectations due to our strong operating and financial performance for the first half of this year and our outlook for the second half of the year. We have increased our 2021 financial guidance as follows: revenue now in a range of $2.280 billion to $2.320 billion; adjusted EBITDA now in a range of $530 million to $550 million; adjusted earnings per diluted share, now in a range of $2.50 to $2.70; and operating cash flows now in a range of $275 million to $310 million. Our guidance for 2021 reflects our expectation that the recent trends in patient volume and pricing and the focus on cost efficiencies and discipline will continue in the second half of the year. As a reminder, this guidance does not include discontinued operations or the impact of any future acquisitions, divestitures or transaction-related expenses. With that, Andrea, we are ready to open the call for questions.

Operator, Operator

And our first question will come from Kevin Fischbeck of Bank of America.

Kevin Fischbeck, Analyst

Great. Just wanted to dig into labor cost. It seems like some of the providers have been signaling that labor is getting more and more difficult to source. Some companies are talking about that as being getting factored into growth. Just want to hear what you're seeing and how you feel about the labor pressure on growing or just margins going forward?

Debbie Osteen, CEO

Well, Kevin, I think, generally, we have seen a tight labor market, but I believe that we have done a very good job of managing through it. We have a very strong, consistent focus on recruiting and also retention. We're in many markets. We are in 40 states, and we do see, from time to time, isolated staffing challenges. I think that the team has done, as I said, a good job. They're very aggressive, and we've been very proactive in our approach. So our goal is to be competitive in our markets. We have very robust local efforts and focus. And we also have a corporate team that supports the facilities. So they are recruiting and helping the facilities with some of the challenges that are there. We haven't seen a significant disruption or change in the cost of our staffing. Our agency labor has been pretty consistent, around 2% of our total labor. So I think we're managing through it. I think it takes a lot of effort and focus. And again, I just have to commend the team because I think they've done a good job with just managing that and making sure that we're not limiting our growth.

Kevin Fischbeck, Analyst

All right. Great. And I think you referenced earlier, certainly in the press release about a favorable reimbursement environment. I guess there was a high-profile press release about United going out-of-network. I just want to hear, I guess, your color on that, maybe specifically, but then more broadly speaking, what the reimbursement outlook looks like among commercial payers?

David Duckworth, CFO

Yes, Kevin. We do have very long-lasting, strong relationships across our diversified group of payers, including our commercial payers. The majority of our commercial, over 90% of our commercial revenue, is in-network. And so we are pleased with that strategy and pleased with the relationships that we have, the referrals that we get across our commercial payers. We are aware of the announcement you are referring to, but do not believe that it has an impact on our company, given that we are mostly in-network with United. In fact, we believe that with that strategy, we could see some benefit to our volumes because we do have most of our facilities in-network. So out-of-network for the company across our U.S. operations is about 2% of our revenue. And again, over 90% of our commercial revenue is in-network. So we think we're positioned well and any potential impact, not only could be limited, but also could provide some benefit in certain markets and certain facilities.

Operator, Operator

The next question comes from Ralph Giacobbe of Citi.

Ralph Giacobbe, Analyst

Great. Debbie, in your prepared remarks, you talked about seeing more push for access for behavioral health. Hoping you can give a little bit more context. Is it employer, states? Does it relate to payers? Is it the telehealth influence? Just trying to understand where that push for that incremental behavioral access is coming from.

Debbie Osteen, CEO

Ralph, I think when we think about access to our services, many of our patients, certainly those that come to our inpatient facilities, start usually in a lower level of care. And I think that there is a shortage of practitioners in many markets. So I think what we have seen through telehealth is in some of the outpatient companies is really trying to make sure that people that need our assistance for mental health and addiction can see a professional that can help them diagnose what their needs are. I do think that as we think about just going forward, we are really trying to make sure that people can reach us. We've instituted a crisis hotline that we developed last year during the pandemic, but there are other funding and sources for these hotlines and crisis centers where people can access and reach out. With the suicide rates that are climbing, I think it's even more important that people be able to get service at the right time and not have to wait in an ER or other places. So we're working with our partners to ensure that they can access our facilities. But then just generally, I think there's a real movement and funding around it, frankly, for access so that as this pandemic has unfolded, many individuals have needs. One of the studies I read recently indicated that half of adults continue to report negative mental health impacts. So as we see this, they need to be able to access someone that can help them. And so we're a part of that, but I think it's happening really across the industry.

Ralph Giacobbe, Analyst

Okay. That's helpful. And then it does seem like the joint venture efforts with hospitals and larger systems is accelerating. Is the catalyst you think at this point simply the COVID pandemic or anything else that would be driving it? And maybe just give us a little bit more on the pipeline and how easy or difficult it is to integrate and operate the JV relationship versus MA or de novo build, if you can help us with the economics there.

Debbie Osteen, CEO

Sure. I mean, we thought that we would see less discussion during the pandemic, and in fact, we actually saw more. I think that our potential partners wanted to keep the momentum going. They have really started, and I think these large health systems want to see mental health and physical health integrated. So this started before the pandemic, but I do think it continued to be strong throughout 2020. We do have a robust pipeline, and we have projects that are in different stages. We recently announced the Bronson, which I mentioned in my remarks. We also plan to have a groundbreaking later this week for a JV with Lutheran Health Network in Indiana. We just announced a partnership with Geisinger to build two hospitals. So as we think about just our pipeline going forward, there's usually a competitive process. There are others that are seeking to partner. But we have been fortunate because I think our track record stands for itself, and we've been chosen as preferred partners with many health systems. We have signed several letters of intent that we have not announced. We will do so when we have a definitive agreement. And I think that what we have seen is that as we work together, we're able to enter a market with a strong partner, they have an established reputation. And so together, as we build a facility, which is usually, in fact, always what happens, together with their relationships with payers and certainly, their referral pipeline, usually they're closing beds and that's folded into the partnership. So it does give us an advantage if we're entering a market to do that with a partner. As for just ramp-up and other things, it usually moves a little bit faster. And I think that certainly, the payer relationships help us with our price negotiations with payers. But we think we're very fortunate because I think that we have these 13 partnerships now. They all check references when they make a decision, and we're fortunate that we have such a strong reputation. Again, I give a lot of credit to those that are in the field working with these partners, and we really want to see that as a growth pathway that will continue for several years because we do have over 30 in the pipeline right now.

Operator, Operator

The next question comes from Brian Tanquilut of Jefferies.

Brian Tanquilut, Analyst

Congrats on a really strong quarter. David, I guess, I'll start with you. You mentioned something in your prepared remarks about cost efficiencies that you expect to carry over into Q2. Just wondering how you are thinking about that given the tight labor market? And I know you've managed through it pretty well. But also, as we think about kind of long-term margin targets from a same-store perspective, where should we be thinking about where that would land?

David Duckworth, CFO

Yes, Brian, the operations team has done a fantastic job for several quarters now managing the volumes, and really seeing with the incremental volumes that we've seen, the opportunity to drive efficiencies and to leverage the cost structure that we have. And that is reflected in our margin. We are managing through, as Debbie mentioned, a tight labor market, but it really shows that as we see the incremental volumes, we can manage through that labor market that we're going through right now. And we have seen the sustained benefits of many of the cost savings programs that I know we've talked about for the last couple of years. So the team continues to do a good job, maintaining discipline really focused on using our data, our dashboards and just weekly visibility into costs at the facility level so that we're able to staff and see the volume growth that we see and also match our costs according to the volumes that we see. Going forward, we do continue to add capacity. We're working on our pipelines across all of our growth pathways. And part of that is adding beds to our existing facilities. We do think that the additional capacity that we add will drive further margin improvement opportunities. The way we size that, Brian, is that that should add around 50 basis points of margin improvement to our same-facility group of facilities. We will continue, of course, to invest in new facilities, joint ventures and de novos. And so that's a startup process, that's an investment. Those are very attractive longer-term opportunities. But outside of that same-facility group, where we expect to see the 50 basis points of margin improvement, we'll see some investment in that. But once those mature, we think those will be accretive to margins as well. So we think with the additional capacity that we plan to add, we'll continue to see that margin improvement opportunity.

Debbie Osteen, CEO

We are observing a fragmented market, especially in the behavioral segment. There are many smaller multi-facility systems and single-facility operators that could represent future opportunities for us. While we do not discuss specific transactions, we are carefully considering M&A opportunities. Our approach is disciplined and focuses on strategic fit and financial metrics. We assess the potential synergies, market entry possibilities, and evaluate return metrics such as internal rate of return and return on invested capital. I believe we will have M&A opportunities ahead, and we will remain disciplined to ensure that any acquisition aligns with our goals. Acadia has several avenues for growth, including organic growth, and I believe there will be additional opportunities, particularly in light of current market conditions. Our experienced team is well-prepared to identify these opportunities, and we will maintain our disciplined approach as we move forward.

Operator, Operator

The next question comes from A.J. Rice of Crédit Suisse.

A.J. Rice, Analyst

Debbie Osteen, CEO

I believe that as we see patients entering our facilities, they need to meet the medical necessity criteria. They are acute cases requiring specialized services. The impact is evident, especially with multi-diagnosis patients needing treatment for substance use, highlighted by the alarming statistics from the CDC regarding overdose deaths, indicating a significant area of need. We observe this in our specialty facilities, which address not only substance use but also co-occurring mental health issues. Demand has remained steady across our CTC last year and continues into this year, prompting us to open more new CTC clinics. We are seeing an increase in individuals experiencing depression and suicidal thoughts, a trend that has risen during the pandemic. Our facilities have effectively prepared for this, and while we have treated many of these patients prior to the pandemic, we are now encountering higher acuity in some locations. Additionally, payers have requested us to develop more specialized programs, which we have successfully implemented, benefiting our specialty service line. Overall, both acute and specialty services are experiencing strong demand, and I expect this to persist.

A.J. Rice, Analyst

Maybe a follow-up question would be about the ongoing discussions in the marketplace regarding telemedicine for behavioral needs and outpatient services. How do you view this? Do you see it as completely separate from your current focus, or do you think it will become important for you to integrate with those initiatives over time? What are your thoughts on this?

Debbie Osteen, CEO

I believe one of the positive outcomes of the pandemic has been the improved regulatory and payment environment for telehealth. We see it as part of our services, and we are currently using it in our facilities to enhance our existing offerings. We plan to expand some of our specialty services nationwide, using telehealth to keep patients connected to our programs. It's provided us with additional coverage for physicians, especially during times of physician shortages when we often rely on locum tenens. Telehealth will be an important component moving forward; however, it won't replace our inpatient care, as it is essential for patients to be in a safe environment. Our team, led by our Chief Medical Officer, A.J., is exploring ways to integrate telehealth further. We are connecting with telehealth companies that have emerged recently. This year, we've noticed a decline in telehealth usage, dropping from about 20% last year to around 10%. While some patients prefer face-to-face interactions, there are individuals in rural areas or those without access who prefer telehealth. Overall, I see it as a positive development for the industry and an extension of our services. Currently, we're using it for our counseling and therapy in the CTC, as patients have requested it. I believe telehealth is here to stay, and we are closely monitoring the evolving regulatory environment. Payers are examining the appropriateness and methods of reimbursement for telehealth, and we are advocating for it as a means to enhance access.

Operator, Operator

The next question comes from Pito Chickering of Deutsche Bank.

Pito Chickering, Analyst

Just a couple from me at this point. Can you talk about the revenue per day a little more? Can you break that into commercial pricing increases versus mix? What's the biggest driver there? And talk about the collaboration between you and your payers on specialty? And how we should think about revenue per day increasing over the next couple of years?

Debbie Osteen, CEO

Yes, Pito, we were pleased to see the strong revenue per day trends continue. We had revenue per day this quarter of $816, and we saw something very similar in our first quarter. The key drivers for that are rate increases across all of our payers, which we did meet, our expected range of 2% to 3%. And we're also seeing a favorable payer mix where commercial has grown slightly as a percentage of our revenue; it's typically just under 30%, and this quarter, it was just over 30%, close to 31% of our U.S. revenue. And that commercial mix really does reflect the strong relationships we have across our commercial payers and also the performance of our specialty facilities, which is where we see a higher level of commercial volumes. So we do believe we are positioned well from a service offering perspective in our specialty facilities and also with the long-term relationships that we have and expect to continue to have with our commercial payers. There is a component of our revenue per day growth this quarter that is a challenging comparison to last year. We did see a different service mix in the second quarter of 2020, with acute and specialty being temporarily lower on patient volumes. Therefore, RTC mix was a little bit higher. So that's part of our 7.5% revenue per day growth this quarter. But as we look ahead, we think where we are right now, the $816 is a very strong metric. We do expect that to continue into this year, and that will continue to provide revenue per day growth, probably more in the 2% to 3% range given that a component of this quarter is the comparison to last year. But we do think a lot of the trends that we see and the revenue per day that we see will continue moving forward. Our out-of-state has also added to that during this quarter. So as we bring patients from out-of-state to our highly specialized programs, they tend to be a higher commercial mix, and we expect that to continue as we go forward.

Pito Chickering, Analyst

Great. And then a few quick follow-ups, and I'll ask them all upfront to save time. Any more details on sort of what you're seeing on the Delta variant in July? Can you talk about sort of seasonality in the back half of the year, what we should think about for 3Q and 4Q? And then on the labor side, if you look at behavioral technicians versus nurses, do you see any more or less pressure on one type of employee versus the other?

Debbie Osteen, CEO

I will address the first part of your question. We have noticed a slight increase in COVID patients in some facilities. However, there hasn’t been a significant rise, and it hasn't affected our volume or staffing. If we do encounter another wave, there is considerable discussion regarding its impact. We believe we are well-prepared with our comprehensive procedures and are in constant communication with our facilities to ensure they are ready. We have kept all of our PPE supplies and maintained our protocols even as COVID cases started to decline. Most importantly, I want to stress that we intend to treat our patients as they come and ensure they continue to have access to care. We are ready for any resurgence of COVID and the Delta variant, and we are confident in the procedures we previously managed successfully during the peak of the pandemic. We are closely monitoring the situation and feel prepared.

David Duckworth, CFO

Pito, on seasonality, we do expect the third quarter to be very similar to the second quarter. And so there's not a lot that's seasonal that has a significant impact, at least from the second quarter to the third quarter. In the fourth quarter, we typically do see some holiday seasonality in certain service lines around our census. We typically size that as having about $3 million to $5 million impact in the fourth quarter compared to the third quarter, and that's around where it's been in the past. So the third quarter might be a little bit stronger than the fourth quarter. But we do think the trends will continue. And the only seasonality we would really highlight would just be right at the end of the year around our service line census. On your labor question, we wouldn't highlight any specific group of employees. It does depend some on the service line. Certain service lines are more reliant on nurses as compared to other clinical employees, where specialty would have more therapists, and in our RTC business, it would be more of the mental health techs and not as many of the nurses. But it does depend on the market, and it's a very market-specific approach. And as Debbie mentioned, we're focused on recruiting resources at the local level and the corporate level to make sure that we're able to staff our facilities. And it can depend on the market, but I think we're focused on all of our clinical groups of employees, nurses and the techs.

Operator, Operator

The next question comes from John Ransom of Raymond James.

John Ransom, Analyst

David, if we look at 2021, how much do you think the CTC business factors in as a percent of your same-store revenue growth?

David Duckworth, CFO

John, I think for this particular quarter, acute and specialty were the service lines that were really strong contributors to our growth. And part of that is just seeing very strong current year trends. And part of that is seeing those two service lines last year that had a temporary impact and the decline in their census. CTC last year did stay very stable. And so I would say CTC revenue growth is more in our typical range, strong single-digit-type growth for the CTC business, where acute and specialty, because of the comparison and because of some strong census trends this year, are leading among our four service lines.

John Ransom, Analyst

Great. And just kind of looking over the next 5 years, I know you guys have not have to or made the migration from paper medical records to electronic medical records. Is that something that you think is in your future? And if so, do you have any kind of idea what sort of capital investment that might look like?

David Duckworth, CFO

Yes, John, we do actually have certain facilities that do have an electronic health record system. We are implementing that and focused on many of our acute facilities. That's where we do have some within our existing portfolio of facilities. We do have a plan, and it begins later this year, to begin investing more in those implementations. And again, we are focused on many of our acute facilities and many of our joint venture facilities that we bring online. We'll have some EHR system. So the capital that we're expecting, of course, it depends on the system that you use. I think we have a good plan to improve our systems and make that transition with a partner that will be a slightly lower cost than many of the investments that I know we've evaluated in the past. So we're excited. We'll have more to share on that probably as we move into next year, but we are beginning to work on that transition.

John Ransom, Analyst

Can you say at this point who your vendor is for that project?

David Duckworth, CFO

No. I don't know if we can. So I'll just say, no, we can't right now, but we will be sharing that later.

Operator, Operator

The next question comes from Frank Morgan of RBC Capital Markets.

Frank Morgan, Analyst

Yes, we have a substantial portion of our revenue that comes from Medicaid, and this spans across 40 different states, indicating a strong diversification in our Medicaid revenue. Currently, more than 80% of our acute Medicaid revenue is with managed Medicaid payers. We're observing very positive coverage trends at the state level, particularly with our CTC business showing significant improvement across states. Behavioral health coverage remains robust at the state level, and we have not encountered any rate decreases from our Medicaid payers. Looking ahead, we anticipate a growth rate of 1% to 3% for Medicaid, although some states may perform better based on historical rate increases. Overall, Medicaid continues to be a stable and reliable source of revenue for us, with strong diversification across states. Okay. Maybe one last one. Back to the sequential guidance for the third and the fourth quarter. I know the third quarter has always been a tough one. So I guess what level of confidence do you have this year, say, versus past years where it seems like the third quarter has always been not as predictable?

David Duckworth, CFO

This is our first third quarter in several years without the U.K. business. The summer, particularly August, presented some interesting dynamics in the U.K. due to vacation seasons. We believe that, as mentioned earlier, the third quarter should resemble the second quarter closely, which has typically been the case in our U.S. business. We've reviewed the July numbers, and we are very pleased with the trends continuing from the second quarter into July. Therefore, we do not foresee any significant changes in the third quarter compared to the second quarter, and we have strong confidence in the guidance revision we provided.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Debbie Osteen for any closing remarks.

Debbie Osteen, CEO

Thank you, Andrea. While we continue to manage through the pandemic, the mental health crisis is not over. This pandemic has been a period of tremendous challenges, loss, and stress. At the same time, it has brought greater awareness to issues that had not received the prominence they deserve. There is a growing awareness of mental health and substance use disorders across our country. Acadia will continue to be a voice for equity in mental health and strong advocates for patients to receive the right care in the right setting and at the right time. We remain ready across our 229 facilities in 40 states to ensure access to high-quality care for those that need our help. I want to thank you again for being with us today and for your interest in Acadia Healthcare. If you have additional questions today, please do not hesitate to contact us directly. Have a good day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.