Q2 2020 Acadia Healthcare Company Inc Earnings Call
And as a reminder, this call is being recorded please proceed.
Good morning, and welcome to Acadias second quarter 2020 conference call. Congrats in Homrich director of Investor Relations for Acadia I'll first provide you with our safe Harbor before turning the call over to our Chief Executive Officer, Debbie attesting to the extent any non-GAAP financial measure as discussed in today's call.
You'll also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing Yesterdays 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 Acadias expected quarterly and annual financial performance for 2020 and beyond for this purpose any statements made during this call that are not.
Shipments of historical fact may be deemed to be forward looking statements without limiting the foregoing. The words believes anticipates plans expects and similar expressions are intended to identify forward looking statements. You are hereby cautioned that these statements may be affected by the important factors.
Among others set forth in Acadias 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. The company undertakes no obligation to update publicly any forward looking statements whether as a result.
Of new information future events or otherwise.
At this time for opening remarks, I would like to turn the conference call over to Chief Executive Officer, Debbie as seem.
Good morning, and thank you for being with US today for our second 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 second quarter and year.
We will then open the line for your questions.
I would like to begin by acknowledging and tanking, all our employees and clinicians for their dedication and relentless focus on providing the highest quality care to our patients and their families, especially during these challenging times.
Our top priority remains supporting our patients with quality care provided in a safe manner.
Behavioral health care providers are playing a critical role in addressing the ongoing mental health needs in communities throughout the us and the UK, especially for those who had previous mental health issues and suffer from they added anxiety in isolation.
Our experience teams across our operations and diverse services have met the demand and advanced our position as a leading operator of behavioral health care facilities.
Our 40000 employees truly illustrate the strength of Acadia.
They are a key reason.
We are well positioned to meet the current demand and stand ready for the opportunities to serve those in need in the future.
During the second quarter, we continued to make meaningful improvement in almost every facet of our business.
We made prudent investments to increase our market reach and quality of care.
We further strengthened our liquidity and longer term financial position.
As states reopened we shifted our marketing strategy to connect with our referral sources and emphasize our key advantages in this current environment.
We also quickly expanded our tele health capabilities to better reach and support our patients.
And we did all of this why closely monitoring the business and aligning our expenses with revenues.
These actions lead to results that improved each month throughout the second quarter.
As we discussed on our first quarter call. The initial actions taken by the federal state and local governments related to the cobot 19 pandemic led to lower volumes in April in the U.S.
Due to the actions, we implemented as well as the easing of restrictions.
We saw reversal of these trends beginning in late April from a 6.7% decline in the month of April.
To a 0.1% increase in may as compared to the prior year.
In June we surpassed our pre covert volumes and our same facility patient days increased 4.7% versus the prior year.
For the month of July we've continued to see strong demand with greater patient admissions.
Same facility patient days were up 5.4% in July compared to the prior year.
We believe these trends are indicative of the strength of our services.
Our ability to make real time adjustments to our strategy as well as the ongoing need for our services.
The ramp of activity has also affirmed our view that the need for behavioral health services will accelerate.
As we navigate to the current environment.
We believe we have passed the trough of the volume declines.
And remain focused on stabilization and improvement across our business.
Within our acute service line, we have seen an improvement in volumes driven by our strong network of referral sources, including E ours.
Our teams acted quickly.
To address the early second quarter decline in volumes by shifting our marketing approach to better reach our patients.
Their families and referral sources.
To reinforce the message that we have the expertise and capacity to help.
We also developed additional access points assisted patients with virtual visits.
Establish a crisis hotline and conducted wellness checks.
Additionally, we continue to see stabilization and improvement in volumes in our specialty service line.
As we previously stated several of our specialty facilities have a wide geographic network and draw a patients from across the U.S.
While our specialty patients have continued to travel throughout the quarter.
There is still some reluctance to travel, especially from areas experiencing an increase in cobot cases.
This has led to a slower pace of recovery for certain of our specialty facilities.
In response, we shifted some of our marketing strategies to focus on local and regional markets, which contributed positively to the quarter.
Our RTC line of business continued to see stable volumes throughout the quarter.
These facilities leverage relationships with state, referring agencies to serve adolescents with behavioral conditions.
As a result, we had consistent patient admissions throughout the quarter and expect that to continue into the second half of the year.
And in our CTC business line, we also continued to experience solid demand.
As substance use issues remain very prevalent throughout the country.
We firmly believe the ongoing mental and emotional total caused by continuing economic and society concerns will further increase the already strong demand for mental health and substance use treatments, we provide in the U.S.
And we are well positioned to meet this increase in demand.
Shifting to the UK operations.
The impact on our volumes have been limited due to the longer length of stay for many of our service lines.
However, certain services within our health care Division with a shorter length of stay have been affected.
In addition, our labor costs were temporarily impacted by a high level of employees who quarantined.
Our same facility patient days experienced a decrease of approximately 5% in April and May.
As the UK government eased restrictions, we have seen increased patient admissions.
Especially in the service lines with the shorter length of stay.
Our same facility patient days improved to a decline of 3.4% in June and 2.1% in July compared to the same period in the prior year.
Similar to the U.S., we expect to see continued growth in demand from individuals in the UK, requiring mental health and addiction treatment.
We continue to work with the NHS and other referral sources to align our services with expected demand.
And we are able to meet this need across our service lines.
We continue to move forward with our plan to retool beds to meet the demand from the NHS. Despite a slight delay in the construction of the beds.
We reopened 24 beds in the second quarter.
And still expect to reopen 100 additional beds by the ended the year.
We've already started to see the benefits from this retooling strategy and we expect to see further improvement going forward in the UK as these additional beds will be critical to help meet the anticipated increase in demand.
Likewise, we are making strategic investments in our future growth in the U.S.
We continue to expand our market reach the bed expansions.
And additional service opportunities.
Through the first half of 2020, we have added 106 beds to our U.S. operations.
And we expect more than 400 additional beds to come online in the second half of the year.
These new beds include a continuation of our strategy of expanding our reach through joint venture partnerships.
Along with our joint venture partner Tower held.
We opened 144 bed behavioral health facility tower behavioral health in July.
Located in reading, Pennsylvania, the facility will serve individuals who have been experiencing mental health concerns.
This is an example of how Acadia can partner with a leading hospital system to bring essential mental health and addiction services to an underserved areas.
We expect to open a new joint venture hospital with Ascension, Thanks, Thomas in the fourth quarter.
Together, our bed expansions de novo facilities and joint ventures provide many growth opportunities.
For Acadia to reach more patients in new and existing markets and further advance our position in the market as well as the growth of our business.
As we look ahead to the second half of 2020.
We're not providing guidance due to ongoing uncertainties driven by the covert pandemic in both the U.S. and the UK.
At this time and based on recent trends, we have a positive outlook on the second half of the year.
Acadia is well positioned to.
To meet the expected demand for mental health and substance abuse treatment.
We will continue to deliver the highest quality of patient care extends our market reach and advance our market leadership as a behavioral health care facilities operator.
Now I will turn the call over to David Duckworth to discuss our financial results in more detail.
Thanks, Thanks, Debbie and good morning revenue for the second quarter was $750.3 million compared with $789.4 million for the second quarter of 2019.
The Companys consolidated adjusted EBITDA for the second quarter of 2020 was $144.4 million or 19.2% of revenue.
Net income attributable to Acadia stockholders was $41.1 million or 46 cents per diluted share for the second quarter of 2020 compared with net income of $48.1 million were 55 cents per diluted share for the second quarter 2090.
Adjusted income attributable to Acadia stockholders for the second quarter of 2020 was $48.1 million were 54 cents per diluted share excluding transaction related expenses of $5.2 million debt extinguishment cost of $3.3 million.
And an income tax effect of adjustments to income of $1.5 million.
As we discussed on our first quarter call, we have taken decisive steps to mitigate the financial impact of covert night team on our operations.
These initiatives included aligning corporate facility level staffing costs with patient volumes.
Implementing a hiring freeze for non clinical staff.
He is going and now limiting all non essential business travel.
Dusing discretionary expenditures.
Temporarily reducing marketing spending.
Negotiating with certain vendors for discounts and or revised payment terms and closely managing our working capital as our facilities continue to bill and collect for services rendered.
We believe these were necessary steps to support our operations during this period.
The cost management actions taken by our operations team and the level of variability in our cost structure has helped mitigate the impact of lower volumes. During the early part of the second quarter.
Our balance sheet remains strong with ample liquidity and capital to invest in and continue to grow our business.
At June Thirtyth, Twentytwenty, we had $212 million in cash cash equivalents and full availability under our 500 million dollar revolving credit facility.
Our cash position reflects a strong second quarter of operating cash flows of $219 million, which includes favorable working capital trends. In addition to $87 million of total cash benefits related to various components of the cares Act.
Our increase in cash is also favorably impacted by the reduction we made to our Twentytwenty expansion capital expenditures plan.
We have not made any further reductions to our expansion plan since the 35 million dollar reduction made in April this year.
The cares that cash receipts of $87 million during the second quarter includes several components.
First we received approximately $45 million of Medicare advance payments, which is included in our operating cash flows and cash balance, but does not have an earnings impact. We currently expect that this $45 million will be repaid over a three month period, starting this month in August of 2000.
20.
Second our cash flows were favorably impacted by the delay of approximately $13 million of social security payroll taxes, which will be paid in late 2021 and 2022.
Third our income tax payments in the second quarter were approximately $10 million lower than our initial expectations due to changes in interest deductibility thresholds and we expect a further benefit of approximately $14 million in the second half of 2020 and tax.
Funds related to 2019.
And lastly, the company received $19.7 million from the cares that provide are really fund during the second quarter as part of the general distributions.
Of this amount $18.1 million was recorded as other income in the second quarter based on the company's review and understanding of terms and conditions in our analysis of the lost revenue and incremental expenses that we have incurred.
Distributions received thus far relate to our acute hospitals, only and additional allocations maybe receive for our other facilities.
The company continues to closely monitor further developments and guidance related to the funds received.
From a capital structure perspective during the month of June we improved our debt maturity profile, where the issuance of $450 million of 5.5% senior notes due in 2028.
The net proceeds from the offering were used to redeem in full the senior notes that were due in 2021 and 2022.
All of these measures relating to expense and capital and cash management and our capital structure when taken together put us in a strong financial position for the second half of this year and beyond.
We will continue to make prudent investments in the business, while aligning our cost to meet the ongoing needs of our patients.
This concludes our prepared remarks. This morning, I'll now ask Keith to open the floor for your questions.
Thank you, ladies and gentlemen, if you would like to ask your question. Please signaled by pressing star one on your telephone keypad.
We are using a speaker phone. Please make sure your mute function is turned off your signal to reach our equipment.
Please press star one to ask a question, we'll pause for a moment hello, everyone and opportunity to signal for questions.
Well take our first question from Peto Chickering Deutsche Bank. Please go ahead.
Good morning, everyone. Thanks for taking my questions.
I understand not providing guidance at this time, but if you look at July revenue growth in the U.S. is it fair to think about maintaining or growing pretty tobin margins.
Can you give us the puts and takes to how we should think about margins in the UK.
A slight revenue declines at your point or are still increasing [noise].
Yeah, we do think peto with the volume growth that we're seeing in the U.S. that we should see strong margins. There is still of course uncertainty.
We don't know what stage, we're in here of the recovery, but we're seeing some very positive signs obviously of volume and we do think in the U.S. that will lead to us kind of returning.
And seeing some margin improvement on a year over year basis in the UK.
We did see margins during the quarter impacted by a higher level of employees that were out and we did see that peak in early April.
So we should see that continue to improve and we saw sequential improvement as we look at each month of the quarter in the UK Oh, we did see labor costs, there that had been improving and had been stable in the 67% to 68% of revenue range of for April.
In May we did see that above 71%.
But as we closed the quarter in June we saw that return to below 69%. So really seeing a temporary impact from employees that were out and we had sick pay along with some backfill cost related to that.
I would have seen sequential improvement in the UK.
We do expect to see that continue to be stable and to see all the positive signs around recruiting and retention.
Continue in the UK and for that to lead to the stable environment that we were seeing pre Toby.
Okay, Great and then quick question.
Okay. So to your point is bouncing back visibility is there sort of rural markets were stable any quick update on the sale Dk business and give us at this time.
Peto, we are watching closely the country in say ease their restrictions.
We're looking right now there are you know still can travel restrictions and those have been changing a little similar to the U.S., but you know we're monitoring and we are looking for of the opportunity to restart the process.
I will say that and I said this you know in those into the first quarter buyer interest is a we believe it's very strong.
And we are also seeing improvement in the debt markets and our advisors are watching that very closely but we're seeing positive signs there.
More normalized activity levels. So as we start to see this recovery happen you know we're watching for that and we will use that as a guide as to when we reopened our process that we suspended and the first part of the year.
Great. Thanks, so much and great quarter guys [noise].
Thank you.
[noise] well take our next question from A. J Rice with credit Suisse. Please go ahead.
Hi, everybody.
Maybe just to ask.
U.S. acute behavioral business.
Still have schools close yards as reported by the acute care hospitals or are probably the slowest to come back there is also travel.
Good returns that people have done yet you're seeing a pretty good bounced back in.
And your acute behavioral business.
Do you think that's just incremental demand or people finding other ways to you what do you what do you think.
When we come out the other into this the demand picture is going to look like for behavioral services.
Well actually I think you know generally I believe that demand is stronger than it ever has been I think said you know there were some individuals that delayed their care a when would there were to stay at home orders in place and also just the fear of of seeking care.
There you know at any are and I think that has improved I think you know patients and we said. This are are a treatment is not an elective you know service and I think that you know with respect to the yards in the acute our E. R visits and we track that very carefully.
As you can imagine have returned to either at or above where they were before covance and.
And so I believe that while there may still be visits down in the E. R. I think that our patients are reaching out to the yards, we maintain very close contact with them through this whole a pandemic and we still are doing that we have our mobile teams we have.
Well assessment and also just a as good plan around timeliness of our responses. So I think generally as we look at our acute you know service line, we are getting business from me he ours as well as our other referral sources in the pipeline has had been very soon.
Wrong and I think that's you know evidenced by the numbers in June in certainly in July.
Okay.
Maybe a little more granular question the revenue per patient day was down in the U.S., 2.7% and I realize that may have something to do with the.
Outpatient inpatient mix, but can you just comment on that specifically and then also well discussion about state budgets being under pressure.
Just comment.
Well, there any oh, what you're seeing in that revenue patient day relates to any pressure in state reimbursement, either Medicaid or other programs.
Yeah, It's very first of all our revenue per day does include our total revenue for the U.S., but our patient days is only for our inpatient business. So we do have outpatient and our CTC business that can impact that metric.
Outpatient did see a greater impact from the stay at home orders.
It was down around 30% in the month of April but has since rebounded in a very similar way to our inpatient business.
And the CTC business has been very stable from a volume perspective.
But we do have certain markets.
And certain payers that are based on in person services being provided around dosing and group therapy and so we did see early in the quarter, our reimbursement impacted by that and I think we mentioned that on our on our call last quarter, both the impatient and the CTC.
Had temporary issues those have been resolved by the ended the quarter and we should see going forward. It just a more normal metric there.
Ed for inpatient business, we continue to see stability in our payers and continue to maintain the the pricing expectations.
We have for the U.S., which is a range of 2% to 3%.
So after working through some of these temporary challenges early in the quarter expect that to return to more of our normal expectations.
And AJ I'll, just add our payers had been very supportive and we have not seen or heard as you know cuts in Medicaid and in our states were in 40 again. So there is a lot of diversity, but you know we are not expecting cuts that we are monitoring just to see how.
Now the budgets you know are sad and you know, we're advocating for our services and as I as I mentioned, our payers have been very supportive our cash coming in it's been very strong. So we haven't seen disruption there are really changes of any material nature that would have impacted the revenue.
It's really what David just explained.
Alright. Thanks.
I appreciate it.
Thank you Josh.
Well take our next question from Kevin Fischbeck with Bank of America.
Hi, there you actually have Brad Bowers on for Kevin Today, a quick question on the marketing strategies something much just cobot it related or is it something that will help with the long term growth outlook.
Well, we have a marketing and sales platform that really you know its proprietary and it's really different it actually gives us very real time visibility and you know around a lot of metrics and and I think is we have whether this pandemic and we're still.
No in some of it.
It's really been great tool for us to use to a just so we have our consumer marketing spend that we use them we target and we also have a plan that's very detailed by facility and so the team and I give them just enormous credit you know they were very responsive.
States opened up and you know we've had a few kind of roll back some of their restrictions and and I think that what what's happened with the marketing is we already had this platform in place. So we've been able to utilize it I think to.
Really make sure we're reaching our patients but also our referral sources. So I see it is the strength of Acadia and it will be a strength going forward or you know after we get through that as a its you know it's a it's a very good platform that works well together with a lot of metrics and alive.
What I consider to be key actions that we were able to take to to build our volumes bat.
Got it and then switching gears here a little bit.
Just curious on Capex, obviously actually strong from here, but obviously want to maintain that liquidity. So just kind of wondering if we should be expected capex to come back.
To be higher next year, if there's some additional spending that you could be making next year. If it just kind of going back to run rate. Thanks.
No I don't think the changes we made in our Capex plan for this year would lead us to say theres any significant changes going next year from a maintenance perspective, we are still expecting to be in our $80 million to $90 million range for the year.
And then we'd expect that going forward and then we did make a 35 million dollar adjustment to our capex.
Plan on the expansion side and saw some savings from that during the second quarter. Some of that will continue ended the third and fourth quarter, but we think we saw the most significant piece of that this year and are really.
Focused on bringing a strong number of beds online in the second half of this year and a strong number of beds online next year.
As we think about year over year capital expenditures. She has still expect to bring a strong number of beds online and are really looking at ways to do that as efficiently as possible from a capital perspective and are excited about the opportunities we have to really gain efficiencies.
And continue to grow our business.
All right good quarter. Thank you.
Thank you.
Well take our next question excuse me.
Well take our next question from Brian Tanquilut with Jefferies Group.
Hey, good morning, guys. Congratulations I'm, just going back to the Medicaid question. We've had some questions from investors over the last few weeks just trying to figure out if state budgets get squeezed mean basing your experience.
How do they view the RTC business and then is that part of their regular Medicaid budget or is that a carve out that shields us from any pressure the theoretical pressure that we did see in 2021 or 2022, it in a full blown recessionary environment.
Well I think that you know each state handles their funds you know differently, but most are part of the the general health care budget.
I do think that in the past when we've had you know these economic turn that you know backs dot this health crisis worrying Buck, but certainly the economy suffered there wasn't really a you know.
Change to the the budget around our T.C. I think there was certainly you know management of utilization and other things, but you know it's it's different our business line for RTC is very specialized and so the states have adolescents that they cannot provide service.
As for we do were sees a lot from out of state. It's I think that does make us different than just a general a program that might be in a state. So these these adolescence calm and they're very specialized from a behavioral health point of view I think that protect says but yeah.
Just generally we have not.
Oh I heard a rate cut I do think that there will be pressure on the budgets, but I also think said just the nature of this pandemic and the mental health aspect of it that we would not be a first line to tie that we would be you know protected because I think that there's a lot.
A lot of acknowledgement right now and even before the pandemic that mental health is a real need and debt funding has to be there for those individuals.
Now let me, let me tell us something that I guess going back to the question in marketing right and the acceleration of growth to north of 5%. So do you think you guys are gaining market share at this point with your marketing programs or is that sort of the market growth rate in the service lines and geography that you were did your.
Right.
I think it has to do with our services and just the diversity you know we're we're very specialized in many of our locations. We we do have just great support from our referral sources you know the track record that we have so I think that you know we are seeing more.
Or individuals I believe that that need help and yeah. There are those positive things that were already in place before this with just a reduction in that the stigma. Another positive factors around reimbursement. So I think if you take that and you take our services how they you know our configure.
And with respect to being able to treat you know they co morbidities. The you know specialty focus of substance abuse and then just the general diagnosis you save for for a mental health I think that you know our team and back to our marketing they've done a very good.
John but really being able to to stay in contact with their referral sources through all of this and I've used you know tele health into virtual mechanisms that we have available. So I think that's made a difference you know with respect to the volumes and also our market share.
Awesome. Thank you so much.
And ladies and gentlemen, as a reminder, star one for question Star One please well go next to piano Chickering with Deutsche Bank.
Hey, good morning, Thanks for taking my follow up questions here.
Couple ones here can you sort of talk a little more about your specialty businesses like eating disorders and drug rehab.
Yes, we're talking about getting travel restrictions I guess, how distances rebounded in July.
The other businesses it is easier to get commercial insurers to pay for these services today.
Well first of all we we did.
Going into the month of April and May we were focused on travel.
We do have several of our facilities that have a nationwide network and get a good portion of their patients from out of their region.
We were pleased with the level of travel we saw a it really continued throughout the early stages of the pandemic.
Although it was at a lower rate than what is normal and we've seen that still be somewhat volatile with a a rebound during the quarter.
But it still depends on many factors, including the region is that patient might be traveling from.
But it did continue to be stable fee, though and I think that speaks to the strength of our services a platform that we have and really the diversity of of our specialty service lines.
But you know the volumes there and specialty have been stable.
And and so you know we're pleased with the specialty performance that we saw during the quarter I.
I think you know our patient yeah, when we do get quite a few commercial patients we really haven't seen I change there I think that they have.
I realize that this care as needed and so our facilities are still getting those patients is just as David said some are coming from a closer proximity. But also then some are traveling which I think it's just a you know they they know that they need those services and you know there right.
Turning out to our facilities to to receive that care.
Okay, and then a follow up on on the UK started the business. Okay. So we're talking about how any tests is acting for me as a referral source right now so you're still seeing weakness and shorter length of stay procedures is that because any death is keeping those patients and their own hospitals and not discharging into private hospitals.
Or just pages is not entering the system at this point.
Well I think the referral system in the UK with the commissioning groups and certainly in H. as there was disruption to that and so some of the workers that would've been assessing patients.
A word we deployed as the coal that became you know the volume of Coven patients grew also with the stay at home orders and the restrictions on travel. The commissioning process was also disrupted and I think that as things reopened the first week of July.
Right and that started to change we have seen a return to more normal conditions and I think it'll build overtime. Because there are you know and this is Ben said by NHS a number of individuals that have not actually access care and as these referral.
Mechanisms and channel is open back up we're already seeing that business coming to us I mean, we opened two retooled units a in the quarter and both of them are almost full and so I think that's really an example of just the demand that's going to be there, but it's too.
Taking a little longer than it has certainly here in the U.S., but but I do think NHS still wants to send those specialty patients to our facilities, which is why were retooling. These bad but they also recognize that you know dose or services that they use the private sector for and we.
Don't expect that to change.
Okay, and then last one here as you think about cost optimization leads during the quarter, how much a cost cutting measures could be sort deemed more permanent versus.
Versus temporary is pacing demands comes back online I'm trying to figure out sort of Africa's cost measures. We just talked in the quarter were margins can go when demand is realized thanks [noise].
So Peter we did see strong flexibility by our operations team and the costs in the early part of the corridor and and then as the volumes recover just being able to have the resources and adding that back but we have been careful with that and we do think that some of the cost adjustments we have made.
Could see an ongoing benefit throughout the year.
And in addition to that you know we are still on pace, but at the end of the year to be at our $20 million of cost savings and expected to receive 10 million of that during 2020 and we're on pace for that as all of those initiatives are still going well and we expect that to contribute.
To margin throughout the quarter, along with some of those sort of ongoing cost savings that we've seen more recently.
Great. Thanks [noise].
[noise], ladies and gentlemen. This concludes today's question and answer session. At this time I would turn of the conference back to Debbie Oh stands for closing remarks. Please go ahead.
Thank you again for being with us today and for your interest in Acadia Health care.
And so grateful to our field and our corporate leaders for their resiliency and for their commitment to keeping our key growth and operational initiatives moving forward, while responding to this unprecedented crisis.
If you have additional questions today, please do not hesitate to contact us.
Have a good day.
Ladies and gentlemen, this concludes todays discussion.
We appreciate your participation you may now disconnect.
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