Q3 2020 Acadia Healthcare Company Inc Earnings Call

October 30, 2020

[music].

Please standby we are about to begin.

A reminder, this call is being recorded please proceed.

Good morning, and welcome to Acadias third quarter 2020 conference call congratulate Hallmark 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 as team to the extent any non-GAAP financial measure is 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 yesterday's news release under the investors like.

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 statements.

As 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 Acadia.

These filings with the Securities and Exchange Commission and in the company's third 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 using.

Good morning, and thank you for being with US today for our third 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 third quarter and year.

We will then open the line for your questions.

We were very pleased with our solid financial and operating performance for the third quarter.

Before we get into the results.

I want to thank all of Acadias dedicated employees and clinicians for their continued support.

And relentless focus.

On providing the highest quality care to our patients and their families, especially during these challenging times.

We are fortunate to have an experienced team across our operations, who continue to work tirelessly to execute on our growth strategy and effectively manage costs.

As the global pandemic continues to affect all our lives. We are mindful of our critical role as a leading provider of behavioral health care services.

The ongoing uncertainties and economic and societal concerns.

Continue to contribute to the demand for our services, especially for those already struggling with behavioral health and addiction concerns and the added isolation and exciting caused by the pandemic.

Above all our top priority remains supporting our patients with quality care provided in a safe and accessible manner as such we have continued to execute our strategy with solid results and importantly, we are optimistic about the opportunities ahead for us.

Ladies.

Across both the us and the UK operations, we saw strong results driven by solid volumes.

In addition, our revenue per day return to our normal expected range.

During the third quarter, we experienced strong topline growth with revenues up 7.2% over the prior year, reflecting robust demand for our behavioral health services.

We believe this result is indicative of the intrinsic strength and demand for our services, we have a resilient business model that can respond to a rapidly changing environment.

Acadia is well positioned to address the needs of those seeking treatment for mental health and substance use issues and we expect that demand for our services will continue to increase.

In the US this robust demand is demonstrated by our increase in same facility patient days of 4.2% compared to the prior year.

Within our acute service line, we have seen solid volumes attributable to our deep network of referral sources.

This has remained consistent despite the current environment.

Our teams work closely with our patients their families and referral sources to reinforce the message that we have the expertise and capacity to help.

In order to reach our patients we continue to use additional access points tele health capabilities wellness checks and our crisis hotline.

For our specialty service line, we were pleased to see stabilization in our volumes.

By shifting our marketing strategies to focus on local and regional markets, we were able to reach those that need the very specialized services that we provide.

During the quarter.

We also saw sequential improvement in our out of state referrals due to patients being more willing to travel.

However, we have not yet seen our referrals return to prior year levels.

Volumes in our RTC service line remained solid in the quarter.

These facilities leverage relationships with state, referring agencies to serve children and adolescents with behavioral conditions.

As a result, we had solid patient day year over year growth throughout the third quarter and we expect that to continue.

In our CTC service line. We also continued to experience strong patient volumes as both demand and coverage trends remain solid.

In the US our same facility revenue per day increased 3.1% in the third quarter as compared to the prior year.

This reflects annual rate increases in our expected range of 2% to 3% as well as normalized CTC reimbursement and improvement in our outpatient revenue.

Excluding the impact from the reversal of the terror Zack income of $18.1 million, our same facility EBITDA margin improved 380 basis points to 29%.

We are realizing measurable improvement in our cost management efforts and operating efficiencies that weve implemented in 2019 and 2020.

We continue to proactively manage staffing and other costs.

Our team did a great job, making timely decisions to reduce ft ease in response to the declines in volume.

And as our patients returned at higher volume to our facilities, we utilize tools implement.

We implemented last year to monitor fts at the facility level.

Our team is very focused on evaluating every position and determining what expenses are essential.

We have implemented a balanced approach to ensure we have appropriate resources to support our patients.

In the UK same facility revenue increased 2.7% from the third quarter last year risk.

Reflecting a 2.8% increase in revenue per patient day, and flat year over year patient day volumes.

We saw monthly sequential improvement throughout the third quarter and our volumes surpassed pre coated levels in early July which we were pleased with.

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 well positioned to meet this need across our service lines.

We were also pleased to see sequential improvement in our third quarter labor cost in the UK.

Total labor cost as a percent of total revenue improved 240 basis points to 68.2% for the third quarter of 2020.

From 70.6% in the second quarter and was flat as compared to the third quarter of 2019.

Agency labor as a percentage of total labor cost improved from 13.5% in the third quarter of 2019% to 12.7% in the third quarter of 2020.

During the quarter, we also finalized negotiations with the NHS and local payers for our rate increases for the fiscal year.

We received an average rate increase of 2.8% across all of our service lines.

We believe this demonstrates support for the important care that we are providing their patients.

As we recently disclosed we have relaunched the formal process regarding the potential sale of our UK business.

Our objective continues to be maximizing value for our shareholders.

Consistent with market practice for UK transactions of this nature and in conjunction with our advisors.

We have solicited and have now received non binding offers to acquire our UK business from multiple bidders.

As we continue to work with our financial and legal advisors, we will update the market on the sales process when.

And as we determine it is appropriate.

We continue to make strategic investments in our future growth in the U.S.

Expanding our market reach to bed expansions and additional service opportunities.

For the first three quarters of 2020, we have added 206 beds to our existing facilities in the us and.

And we expect to add approximately a 100 beds in the fourth quarter.

As part of our strategy. We have continued our strong track record of partnering with health systems and hospitals across the country, which.

Which is created important growth opportunities for Acadia.

Along with our joint venture partner Tower Health, We opened 144 bed behavioral health facility in reading, Pennsylvania in July.

We expect to open a new joint venture hospital with Ascension Saint Thomas in Nashville during the fourth quarter.

Together, our bed expansions de novo facilities and joint ventures provides 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.

Going forward we.

We believe Acadia will play a critical role.

In meeting the needs of many people who are struggling with the uncertainties related to the pandemic.

We will continue to focus on our primary objective.

To deliver the highest quality of patient care as we extend our market reach and advance our position as a leading 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 Ren.

Revenue for the third quarter was 833.

$3 million compared with $777.3 million for the third quarter of 2009 two.

Results for the third quarter of 2020 include a reversal of $18.1 million in other income recorded in the second quarter of 2020 related to the provider relief fund established by the carriers out there.

The company's decision to reverse this income was based on additional guidance issued by HHS.

The company received $12.8 million of additional general distributions from the provider relief fund in the third quarter of 2020 and has now received cumulative total distributions of approximately $32.5 million.

These distributions are recorded in other accrued liabilities on the company's balance sheet at September 32020, pending the company's final review of HHS guidance.

Excluding the impact from the reversal of the Cures Act income of $18.1 million. The company's consolidated adjusted EBITDA for the third quarter of 2020 was $177.5 million or 21.3% of revenue.

Net income attributable to Acadias stockholders was $37 million or 42 cents per diluted share for the third quarter of 2020, compared with net income of $42.6 million or 48 cents per diluted share for the third quarter of 2019.

Adjusted income attributable to Acadias stockholders for the third quarter of 2020 with $60.3 million or 68 cents per diluted share excluding a loss on impairment of.

$20.2 million transaction related expenses of $8.5 million and an income tax.

Effect of adjustments to income of $5.4 million.

I'd like to give you some additional perspective into our strategic focus on managing costs and improving margins as.

As Debbie said, we are pleased with the steps we have taken in the past 18 months to streamline our operations, while continuing to make strategic investments.

Our cost savings initiatives implemented following our strategic review last year are on track as evidenced by our results for the third quarter.

We recognized $4.6 million of savings in the third quarter relating to the 2019 and cost savings initiatives and we are on track to achieve a run rate of $20 million by the end of the year.

Turning to our balance sheet, our balance sheet remains strong with ample liquidity and capital to invest in and continue to grow our business.

At September Thirtyth 2020, we had approximately 339 million in cash and cash equivalents and full availability under our $500 million revolving credit facility.

Our cash position reflects a third quarter with robust operating cash flows of $207 million.

Our increase in cash was driven by our strong earnings growth positive working capital trends and benefits from the cares Act.

From a capital structure perspective, we improved our debt maturity profile with two recent transactions.

As mentioned on the second quarter call, we issued $450 million, 5.5% senior notes due 2028 and the net proceeds from this offering were used to redeem the senior notes that were due in 2021 and 2022.

In October we finalize the issuance of $475 million of five.

5% senior notes due in 2029 and use the net proceeds to prepay outstanding borrowings under our existing term loan b facility due 2022.

Together these initiatives relating to expense and cash management and our capital structure have put us in a strong financial position for 2020 and beyond.

We will continue to make strategic investments in the business, while aligning our cost to meet the ongoing needs of our patients.

Turning to our financial guidance as noted in our press release, we are providing guidance for the fourth quarter as follows.

Revenue in a range of $810 million to $835 million adjusts.

Adjusted EBITDA in a range of 160 million to $165 million and adjusted earnings per diluted share in a range of 68 cents to 72 cents.

While we remain cautious regarding factors that could impact our November and December results.

Our fourth quarter guidance represents managements expectations, given the positive revenue and cost trends, we are seeing in our us and our UK operations.

We believe the essential nature of the services, we provide combined with strong demand.

Will drive growth for the remainder of the year and beyond.

This concludes our prepared remarks. This morning, I will now ask Lauren to open the floor for your questions.

Thank you if you would like.

To ask a question please signal by pressing star one on your telephone keypad if you.

We are using a speaker phone. Please make sure your mute function is turned off to understand how to reach our equipment. Please limit yourself to one question and one follow up.

Again that is star one question.

For just a moment to allow everyone an opportunity to signal.

Well take our first question from Brian Tanquilut with Jefferies.

Hey, good morning, Congrats on a very good quarter I.

I guess my first question is just on the recovery of volumes it sounds like you've seen a good bit of recovery, but we're not quite back to.

Recorded levels, yet and there is still some disruption so.

Is it right to think that the strong growth trends you saw in Q3 should carry over into Q4 and.

In 2021, and how are you thinking about just.

The market share gains and secular growth that the industry is going to see as we go into next year.

Well, Brian we did have very strong volumes across all of our service lines and I think my comment about pre cove. It really relates more to those patients that travel for our specialty services, but overall in the acute.

Area, we saw a very robust volume and as you know far exceeding where we were last year and certainly pre coded. We also I think throughout this have maintained very consistent volumes and the RTC business as well as CTC, which is continuing to grow in volume.

And also has some favorable payer trends, which I mentioned in my remarks, but I think overall our visibility is we are now almost through October and we've continued to see improvement in the senses in both.

Yes, and the UK and I think we actually hit the highest census in the history of Acadia in October. So we believe that because of this strong demand trends and really just the fact that we have such diversity and the service lines that this is going to continue into.

2021.

I think as we read about individuals that are suffering from anxiety and depression and other.

Other.

Suicide attempt I mean, it's just exploding.

And I think that you know we're seeing those trends now, but I do think they are going to continue to be.

Yes into 2021 as as people cope with this and in with the resurgence I think that just added to the demand and so we feel good that all of our service lines are really seeing this demand and I think that's what's reflected in the third quarter.

Now that makes sense and then just on the UK sale process. Thanks for the color you gave us I guess the question that I have is.

What else is left to do in the process and is there anything you can share with us the timing.

Well, we're going to move as quickly as possible and as I mentioned in our our remarks.

We do have initial bids that have been submitted.

We're not going to be commenting on detail around that but I will say that there is continuing to be you know a lot of interest in priory and certainly.

We have buyer interest that remained strong and so we'll be giving more detail as its appropriate around timing and also just.

How this is progressing.

All right awesome. Thank you.

Thank you for next question.

Next question comes from Ralph Jacoby with Citi.

Thanks, Good morning, I'm, just hoping you give a little more of the underlying assumptions I guess for the fourth quarter our guidance at this point both in terms of sort of the maybe the volume and pricing side of the equation and then if you're willing at all to give sort of early thoughts on 2021 sounds like a pretty optimistic around some of the growth opportunity.

So how how do we frame that or think about that from a modeling perspective offer.

Off of either the 2020 baseline or maybe 2019. Thanks.

Yes, Ralph first of all on our fourth quarter guidance, we are projecting mid single digit revenue growth and EBITDA growth of more than 10% on a consolidated level on a year over year basis.

And the key trends underlying this guidance includes a continuation of the revenue trends, we're seeing in our USA segment with volumes, increasing 3% to 4%.

Obviously, potentially even stronger, but we do have some seasonality that we deal with in the fourth quarter and just cautious approach that we are taking around the resurgence.

And we see revenue per day trends continuing to be positive and have a range of around 2% to 3% for revenue per day growth.

In the U.S., we also expect to see an ongoing contribution.

From both the cost savings initiatives identified in 2019 as well as the cost management actions that weve implemented in 2020, so believe that our margin will reflect.

All of those initiatives and in the UK segment expect to continue to see sequential improvement, which we've seen recently and in both the census, and the pricing as well as the labor cost trends over the past several months all of those.

Patrick in the UK have improved and we expect to continue to see that as I mentioned, our guidance does reflect seasonality that we typically see in the fourth quarter, but.

But we do have a very positive outlook for the quarter.

We will provide more thoughts around 2021 in February as we typically do.

But we as Debbie mentioned a minute ago, we think that the trends the demand the volume growth opportunities that we have going into next year, we'll continue.

Okay, All right fair enough and then just to follow up on I guess, how how are you finding that labor backdrop at this point, maybe specifically in the us any staffing challenges and maybe wage rate increases you're having to give kind of in this environment. Thanks.

Sure I mean, we really have not had any significant disruption or change in the availability or really the cost of our staffing I think that certainly we are closely monitoring the health.

All of our employees and we want to ensure we have the right staff available, but we haven't had an issue around that I think that certainly in the UK. The number of the self isolating employees. There. It peaked at the end of March early April So we've continued to.

I see a lot lower levels of that and I think they've been able to manage the staffing there and we certainly have here in the US we do think that the I think just general economic environment in the us and UK might provide some opportunities for us to.

Access, perhaps staff that had not been in the industry I know in the UK. They have started a preceptor program for staff that are not trained in healthcare, but come from other industries. They're turnover is down and we have the same I think focus here in the US is just.

Really utilize those individuals that might seek employment in our industry and make sure that we are using them appropriately, but overall, we really haven't seen disruption there.

Okay very helpful. Thank you.

Our next question comes from Peter Chickering with Deutsche Bank.

Good morning, guys. Thanks for taking my questions. A couple of questions for you here on U.S. demand you talked about seeing strong demand across all segments.

You talked about what you're seeing on geographic areas that you are seeing spikes or or weaken season. There is that that are that have cobot or don't have covered I'm, just curious how cobiz and back to your core business.

You know I think that.

We've been.

Going through this now for several months and I think that the staff out in the field in the leadership in the field have really done an amazing job of just handling.

Areas like hot spots that have seen more co that but also making sure that individuals are able to access our care. So we did have some facilities that have been more impacted than others, but what we've done is we have very very solid procedures around.

Rules that might come in if we suspect that they.

Have co bid, we isolate them and then we are putting them on another unit if they are diagnosed.

With the positive test.

But they are continuing treatment and I think you know certainly if their medical symptoms become more severe we would move them out of our setting, but but overall, we've continued to see a flow of patients we haven't stopped admissions.

There may be I know there are a few of our higher volume substance use facilities that.

More covert and so there was a little slowing of admissions, but no. One was stopped from coming into the hospital. We just wanted to make sure we were very cautious and careful about how we handle those patients and it varies really right now with some of just the resurgence and there.

May be a market that.

That has resurgence and then that seems to ease so we're being very focused on just making sure. We're keeping access to our services because we feel like that's more important than ever now.

Okay, and then on the UK revenue for pricing was was strong it looks as though it could have been some higher admissions due to the lower.

Due to the lower length of stays or just how do we think about higher short term emissions the UK and its impact on margins.

At the same time on any test pricing comics, a 2% is that for 2021.

And then also on the UK intangible share was to high speed, you've gotten so far for that business.

[laughter].

Good try there [laughter], let's start with the first part of that question.

The UK revenue per day, we talked earlier in the year about given the pandemic.

There being some interim rate increases with our payers. There. So it has been a process to work through the negotiations for what we typically receive in April and that 2.8% that we.

We have now received on an average basis across our payers that is the 2020 rate increase that is around the level of our 2019 rate increase and it is really in the range of the 2.5% to 3% expectation that we have going forward, but that does represent our 2020 increase.

From a volume perspective, we did see a strong recovery in our shorter length of stay services that.

That is reflected in our commentary around getting back to our pre co bid volumes early in the third quarter and that's reflected in strong year over year patient days, considering those managing through the pandemic the impact that we saw in the second quarter. We are very pleased with the UK volume.

It's really across all of the service bonds and think we are well positioned for the continuing demand in the UK.

Well I'll take your last time.

Take your last question, we're not going to provide an update on any detail around the the initial bids but I'll just again say that our objective is to maximize value and that's what we're focused on that we will provide additional updates when its appropriate okay and then because units that will let me ask.

One more follow up one fourth quarter margins looks to be a step down versus what we saw on third quarter. Excluding return. The cures act it looks to be optimistic point sort of 60 basis points. If my math is right sort of sequential decline I guess curious from a margin perspective, what do you guys sort of assuming different in fourth quarter than you saw in the third quarter again excluding.

Leading the Cures Act.

Yes, the we do project a strong margin in the fourth quarter. If you think about our US business, we see a 200 basis point type improvement over the fourth quarter of 2019.

And the step down from the third quarter, mainly relates to seasonality that we see we do typically see a lower occupancy, especially in between the Thanksgiving and Christmas holidays right at the end of the year and so the margin reflects that as it does in many years for certain service lines.

Did experience some seasonality and we have a just a little bit of caution.

Thinking about potential resurgence in the effect that may have been different markets.

We want to be somewhat cautious, but the trends that we've seen so far in October as we mentioned have been very positive. We think that will be reflected in the volume and the strong margin for the quarter.

So that.

Thats the the margin Peto does continue to show the year over year improvement that we reported in the third quarter.

Great. Thanks, so much guys this quarter.

Thank you.

And our next question comes from Kevin Fischbeck with Bank of America.

Hi, Good morning. This is Joanna Gajuk saline for Kevin today. Thanks for taking the question. So so first first one or two quick one on the follow up so did I hear you.

You talk about outpatient.

Bonds also coming back right.

Yep.

We did see an increase in outpatient China it's.

It's not at the level that we have been but it's much better than it was in the second quarter.

Okay that makes sense because that could hurt you, saying that it was across business lines I just want to confirm that.

Then on the.

I guess on another piece of the pricing outlook, So I know.

The last quickly you you mentioned that you have not seen anything on the Medicaid rate push it but anything changed there or anything that.

That you're watching any particular states.

No. We are not aware of at this point any changes or rate cuts from the states. We there was one state that we have one facility and which was Nevada.

And they recently cut their rates by 6%.

We were excluded from those costs as a mental health provider and I think this really demonstrates the support from from the state and also just a recognition of the value of the services, especially right now we are monitoring each state that we're in we're in 40 states and.

You know, but we believe that with our diversity and just said the climate in general and then I think the increased demand that we believe payers are going to be supportive of of our services and the payments.

Okay.

If I can follow up on the commentary about the strength you've seen October.

So the question about labor, you say, you're not seeing any pressure, but its you know if you're talking about the outlook of.

Create demand given does it's all just depending on how people struggling with that are.

Are you anticipating you will have enough labor to serve this demand or are you preparing for some sort of spiking in the cost because of you know kind of the increased demand.

You know we have a lot of experience and a strong track record just adding beds opening new facilities and being able to appropriately add staff based on the volume growth that we see so we are not anticipating any challenges there is a.

A focus of the team and we have a strong record on just being able to recruit and staff for our growth.

Okay. That's great and then on the last question on the UK, which you you've said it used you also seeing pretty positive trends there.

And in the past you talk about the retooling of bad So I don't know if there's anything that's happening there or it's been largely complete on them I suspect you know with a with a pandemic I'm just.

It's probably some disruption maybe to the process so any kind of update on that thank you.

Well, we are continuing with our re tooling and we're on track to reopen the majority of our beds that we talked about by the end of the year. I think you know these beds that we have opened throughout the year are being used and I think that we're going to continue.

On you to see.

The positive contribution from those retooled bed I.

I think that as in a jazz is starting to see the surgeon and more demand we are utilizing the retool beds as well as certainly the existing beds that we have but I.

I think one of the I think strong messages that NHS is given is they are willing to actually back those beds with block contract. So they are paying for bad.

Without regard to whether a patient is in them and I think part of that is really insurance and really comfort for them that as demand is growing and it certainly is in the UK that they have that available. So we think our retooling is very timely and we're on track for what we had said we were going to.

I do.

Great. Thank you so much.

Uh huh.

Our next question comes from John Ransom with Raymond James.

Hey, <unk>.

Hi can you hear me.

Yes. Good morning, good morning, Alright, Little Little I've got these fancy new wireless.

Yes, that's it thanks and I'm terrible it operating in so weisel nervous.

[laughter].

I'm not going to go Ido and ask you something you want to answer but.

Maybe if I could ask on the UK are you.

Finish, but what's the thing beds and is this should we understand your comments as you've gotten pulmonary beds and now we're into the kind of data rent due diligence phase.

Oh, Yeah. We we have received the non binding offers and are moving forward through the process and don't really have much of an update other than that John regarding timing and where we stand on.

Valuation.

But you expect to receive any more offers you got me offers you expect to get it.

Working through that process. So that's the way to think about what you said.

We're not providing more specific updates of what we commented on are there.

[laughter] picking about 2021.

If we adjust for seasonality.

For for Q.

What else what other things should we think about in terms of a jumping off point for next year.

I guess, you've got 20 million of cost cuts. So shall we say, maybe 10 million and that new in 2021, but anything else that we should look at for Q as we think about 21.

Just as we get our pulmonary number out there.

All right, John I think that assumption around the savings realized this year $10 million. So is there.

We think that will be reflected in the first half of next year, because we have achieved a lot of that by the second half of 2020.

Other than that it will obviously be an interesting comparison as for next year, but I think that the positive trends will continue as we said earlier.

[laughter] when we think about your short stay U.S. acute business traditionally.

Iara E. R. Mercy Roes were big sources of referrals from New York visits are down some 20% and yet your your numbers are up so is it that the mental health cases are still presenting a PR or have you diversified your referral sources, just because obviously your numbers are up yards down and I'm just trying to square the circle.

All about where the space just like the collateral.

Sure I mean, we have seen really our E. R referrals returned to normal.

So I guess, if we think about that there are patients that are needing mental health and substance use services, you know going to the E. R. But weve also diversified our referral.

Sources in end markets that we think have served us well through this but on the other hand, we've really seen a return to normal as most of their referral patterns and I think individuals that might have been afraid or during to stay at home orders did not seek care. They are they are seeking care.

And they are going to the E ours, and we are getting referrals at a normal level.

Great last one for me David is again as we think about 21 is there any reason to think that.

Your capital expenditure cadence a rhythm what would be changed at all because of because it or other factors. So should we still kind of layer on the same amount of growth capex that you've been doing over the past few years.

So we do think you should layer in a similar number we are going through our detailed project by project projection right now in connection with our budget and we'll have more guidance around that in February we do see a growing opportunity around our joint ventures and partnerships.

Ships.

And so that's one thing that we will be looking at potentially to grow but for the most part it is a similar level of investment is what we've seen this year.

Okay. Thanks, so much.

Thanks, Joe Thank you.

Well take our next question from Gary Taylor with JP Morgan.

Hi, good morning, Great quarter, any cares act assumption in your fourth quarter guidance.

No Gary we have received as we mentioned in our press release 32, and a half million of cumulative distributions all of that is on our balance sheet and was not included in our fourth quarter earnings projections as something we would recognize.

During the quarter, we are finalizing our review of the guidance that has been issued in September and October.

But we do not have an assumption in the fourth quarter that any of that would be recognized.

And then just thinking about the fourq to seasonality you're talking about I know, it's been asked about a little bit there is a bigger.

Step down sequentially than we've typically seen in your EBITDA and I think.

EBITDA margins up 330, or 300 basis points. This quarter. Your your midpoint for Fourq implies up about half of that year over year.

Is there anything else you can see explicitly call out is it just the you.

You know the the thought it looks like you're looking for 5% to 7% same store revenue growth slowed so potentially a little softer or is that just the primary driver of that.

Margin performance stuff down for Fourq you.

Well, we did have a very strong third quarter and expect the the fourth quarter in that 5% to 7% range to continue to be very strong, it's mostly seasonality and as we commented on earlier us taking a cautious approach knowing that we do have.

Facilities in markets that could see.

Some disruption from a resurgence and so we want to be cautious around the volumes and other projections as we think about November and December but.

But obviously, we've seen strong trends in recent months and we do expect that to continue so it is seasonality and some element of us being cautious around the resurgence.

I could just that's one more quick one it seems over the last few years as revenue growth has been slower margins had had declined for four years or so in a row is there a level just rule of thumb level on on same store U.S. revenue growth said that you need to be a touch.

Drive margin improvement so.

Four or 5%, you're pretty or higher you're pretty comfortable you're driving margin improvement is there any rule of thumb you throw at us.

Well you know, we think that just the revenue per day growth being in the 2% to 3% range helps us maintain the margins and then the volume growth that we see is a significant factor in margin improvement opportunities as we realize the fish.

Senses and are able to leverage the fixed cost structure as we grow our volumes and so really only need revenue growth to be in that 2% to 3% range and above that.

We do expect margin improvement and we've seen that obviously in the third quarter as the revenue growth has been stronger we have seen strong margin improvement from that volume growth.

Thank you.

Thanks, Gary.

Our next question comes from AJ Rice with credit Suisse.

Hi, everybody just first.

I know that's been discussion over time about what a long term targets are for.

Capital structure any updated thoughts on the amount of leverage that you are comfortable with the long term.

Well I think we have trained right this quarter yeah.

We've seen this quarter something we've talked about before around just the investments that we've made over the last several years contributing to earnings growth in that helping us lower our leverage.

We saw that in the third quarter and.

And then obviously you know anything above and beyond that relates to a more strategic transaction I like the UK transaction, we are not providing a specific target yet relating to that we do have a goal of lowering our leverage through the earnings growth and other potential opportunities, but are not sure.

During a target yet Asia.

Okay.

Obviously, there's been a lot of discussion about a talent how deploying that it in the behavioral area you guys. As you talk about it sounds like it's to support the existing services in some ways that you provide but I wonder are you looking at anything where that might be.

Growth avenues.

Pursue outpatient more are you getting any discussions with third party tele health companies that are interested in working with the a share along those lines.

Sure I mean, we as you said, we see Tele health is not a replacement for the inpatient part of what we do and it is a good access point and we've used it for that with with patient engagement I think that you know the regulatory changes and reimbursement changes.

That have been made and look like they're going to at least be in place through the end of this year I think have been favorable. So we have looked at how we can expand the use of tele health AJ with our partial in our outpatient programs and we're doing that now I.

I do we are already collaborating with some outs outside vendors for Tele health. We also have internal capabilities around that which we've expanded certainly with the pandemic, but but I think that you know as practitioners as well as patients get more comfortable and I think they have a week.

See that as a growth area for what we're doing and primarily for the partial an outpatient but also for assessments and then even you know we're using it right now for visitation of those that can't come into the facility, but I think it is an area that can.

You know is now the reimbursement changes have started to reflect the importance of it we plan to use that and we're open to collaboration we're already doing that now and we think it makes sense.

Okay.

Okay, maybe I'll slip one more in if I could just sort of falls on some of the other question do you like 40 States are you seeing clearly cope.

Cobot surgeries, and then cobot easing and obviously, how TV is responding to those surgeons has evolved over the last six or seven months.

Do you see at this point, where there's a surge in a community I consider sort of using that as one of the cautionary comments about the fourth quarter you see surges in a community really impacts the business or is it now the people are sort of just a back.

Back to at least health care utilization as usual and really when there's a mini surge in a community really don't see that much impact anymore can you just give us a little flavor for a given you've got a pretty wide.

So I think A.J. that as we have had markets that have seen more cases that our patients are still coming to our facilities for for treatment I think where we have really focused on this is how we manage them when they are in the facility.

And making sure that we are appropriate with you know isolating patients as necessary, having the right unit for Cosan patients as opposed to those that don't have covered but I do think you know when we talk about resurgence and caution you note I would say that's more around just the.

Referral networks, we don't anticipate that happening, but we also want to make sure that we're being conservative because we don't have control over that we've done a lot of things that I think we've learned a lot. The facilities know what to expect I think they're focused on very quickly adapting to the referral outreach.

And also just how the sales and marketing approach is working we've got that platform that weve used it's given us a lot of visibility. So I think overall as we see cases go up we haven't seen that really interrupt our business other than just managing within the facility.

Interesting, okay, alright, thanks, a lot.

Thank you.

[noise] reminder, please limit yourself to one question with one follow up our next question comes from Whit Mayo with yes.

Hey, Thanks. Good morning, we've we've seen this that's interesting trend begin to develop for maybe a quarter and a half now where coal that is beginning to actually drive.

Tailwinds for certain providers or that you have no t. any expense your malpractice is probably down workers comp down self insured costs down then there's the offset with increased TV the supplies to support your.

Your your field and I guess I'm just wondering do you think the Cove. It was a tailwind for you and that's in the third quarter. What do you net those two together, but we also have to sequester. So I'm just wondering if the coal the tailwinds actually offset the headwinds at this point and should we be thinking that maybe some of those expenses leak back into the.

The business next year.

Which we do not believe on a net basis. There are a lot of moving pieces and some savings in some incremental cost as you mentioned on a net basis, we do not think theres a significant tailwind that we're seeing here I mean, obviously the volume into.

Demand, we do think we'll continue partially because of what people have been through but from a cost perspective.

Theres nothing significant that we would highlight we are seeing a lower level of travel a lower level of employee medical and some other costs. This year, but have also seen as you mentioned a higher level of the incremental pp he cost.

And and we will be looking at just how that changes what is essential for us to add back.

From a travel perspective for example, as we think about next year.

You know I don't think Theres any significant amount that we would highlight for you at this point and I'll just add with it I think a lot of our efforts around the expense management have been focused on making sure we're matching volumes with our staffing and primarily in the <unk> the non.

Clinical areas, but we have taken the opportunity through this to really step back and say you know what is essential you know do we need some of the travel costs that you know previously we had done in marketing and even through some of the the travel to our advance and looked at virtual.

You know solution. So I do think going forward that we will be changing some of the way we do things and there will be I think you know some return of perhaps you know health claims and and I think that as we get back to normal, which I'm not sure when that will be but I think that most of our impact on expenses has been around.

Just managing the flow of patients and making sure that we're being very careful and prudent about our staffing.

No that's super helpful and just one follow up is.

Are you seeing any notable changes in how the payers are responding to you guys. Just I'm curious around denials pre off you know anything that may have impacted length of stay the adjudication process. Just curious on any observations you have with do you have any.

The headwinds or Tailwinds, you feel like you're seeing from a payer perspective. Thanks.

I mean, I think that we really haven't seen much of a change there when I mean, they're still requiring medical necessity, we make sure that that's in places we admit patients, but as I look at payer behavior I don't see any big difference there and I think that you know are linked to stay.

<unk> increased as we looked at it there wasn't any one factor there it's been pretty stable across all of our service lines and so I think that.

Certainly they've been very collaborative with us as we've gone through the pandemic and they're trying to make sure. There are patients that are part of their plans get taken care of but I wouldn't identify anything that's changed they're still focused on making sure that patients are getting appropriate care for the appropriate length of stay.

I figured thank you.

Our next question comes from Matthew Gilmore with Baird.

Hey, Thanks, I just had a quick clarification I think Debbie you made a comment about record census levels. In October did that mean, no that was the best ever census levels for the company during October or just a record for an October month.

It's it's actually the best census that Acadia has had in the U.S. So it's a record that was set for highest senses for the company.

And with you just to follow up on that good.

Is that unusual in the sense that yes, maybe september rate normally a better month than October or is that.

Generally kind of what you'd expect sequentially, but maybe with the bed adds to perhaps contributing to that.

Yeah, you're right the bed additions have helped us in our operations team has done a great job, bringing beds online this year new facility online in July.

October does typically have a strong since this month and so it's it's a month as you think about other months of the year. We expect a strong census, and we're very pleased to achieve that high number during the month and have seen strong performance from across.

The service lines to help us achieve that at.

And I'll just add that you know with our de Novos that we have put in place and also just as David said bed additions you know we have been pleased that those pads have been ramping as at our expectation and some above our expectation. So I think all those factors go together with just where we are.

We are able to to actually end up we still got a few days left in October not many one but I think across the service lines. We've certainly seen some some very I think strong numbers around acute as well as specialty returning to kind of.

Normal ranges. So all that adds up you know with the RT sees as well certainly to the strong number there that we saw in October.

Okay, great. Thanks, a lot.

And we'll take our next question from Ryan Daniels with William Blair.

Hey, guys make speak out in for Ryan. Thanks for squeezing me in you you mentioned in the U.S. that referral kind of distribution Thats basically back to normal at this point or is that similar in the UK and then as any of the strength Oh.

Kind of as a result of backlog filling or do you think most of those basically shaken out at this point.

Well I think in the UK there was the dynamic in the <unk> and March and April and even into May where the commissioners were redeployed for med surge.

Services and I think as that happened. There were also case managers in the UK that were also redeployed for med surge and I think that that had some interruption as well as the stay at home orders, which were in place in the UK, we have seen the commissioning process.

Return to normal.

And as they have returned to normal there are patients that are being sent obviously to our our facilities in the UK I think that you know there is a combination of individuals that that need this care that perhaps might is delayed but I also believe that just there is a strong demand.

Even without the pandemic that we've talked about before if you add then the pandemic and the anxiety and depression I think they both kind of.

I guess have impacted us not just in the UK that the U.S., where you know people are coming in and that perhaps wouldn't have had an issue prior to the pandemic. But then we're also seeing patients that have had longstanding issues and frankly, there you know they become more acute as they've gone through this pandemic.

Great that makes sense and then you talked about kind of Capex for 2021.

Kind of looking at quake 20 for being a good estimate would that be the case to for kind of bad ads for 2021 kind of like a similar level to 2020.

Yeah, we'll provide more detail there, but we have consistently had bed additions at the level that we're seeing in 2020. So it's not just this year, it's been consistent over the last several years and we think that will continue but we'll provide more guidance around that in February.

Got you great all right. Thanks, guys congrats on the quarter. Okay. Thank you.

Thank you.

And there are no further questions at this time I'd like to turn the conference back to Debbie steam for any additional or closing remarks.

Well, thank you again for being with US today and for your interest in Acadia healthcare I am very grateful to our field and corporate leaders for their resiliency.

And also their commitment to keeping our key growth and operational initiatives moving forward, while responding to this unprecedented crisis.

I think they are one of the main reasons that I stand here today optimistic about our company's future.

If you have any additional questions today, please do not hesitate to contact us directly and have a good day.

That does conclude today's conference. We thank you for your participation you may now disconnect.

[music].

Please standby we are about to begin as reminder, this call is being recorded. Please proceed.

Good morning, and welcome to Acadias third quarter 2020 conference call congratulate Hallmark the director of Investor Relations for Acadia will first provide you with our safe Harbor before turning the call over to Chief Executive Officer, Debbie So to.

To the extent any non-GAAP financial measure is 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 yesterday's news release under the investors like.

That's 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 youre.

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 third quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward looking statements the company under.

It takes 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 WCS.

Good morning, and thank you for being with US today for our third 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 third quarter and year.

We will then open the line for your questions.

We were very pleased with our solid financial and operating performance for the third quarter.

Before we get into the results.

I want to thank all of Acadias dedicated employees and clinicians.

For their continued support.

And relentless focus.

On providing the highest quality care to our patients and their families, especially during these challenging times.

We are fortunate.

To have an experienced team across our operations to continue to work tirelessly to execute on our growth strategy and effectively manage costs.

As the global pandemic continues to affect all our lives we.

We are mindful of our critical role as a leading provider of behavioral health care services.

The ongoing uncertainty and economic and societal concerns.

10 years to contribute to the demand for our services, especially for those already struggling with behavioral health and addiction concerns and the added isolation and exciting caused by the pandemic.

Above all our top priority remains supporting our patients with quality care providers in a safe and accessible manner as such we have continued to execute our strategy with solid results and importantly, we are optimistic about the opportunities ahead for a case.

Idea.

Across both the U.S. and the UK operations, we saw strong results driven by solid volumes.

In addition, our revenue per day return to our normal expected range.

During the third quarter, we experienced strong top line growth with revenue was up 7.2% over the prior year, reflecting robust demand for our behavioral health services.

We believe this result is indicative of the intrinsic strength and demand for our services, we have a resilient business model that can respond to a rapidly changing environment.

Acadia is well positioned to address the needs of those seeking treatment for mental health and substance abuse issues and we expect that demand for our services will continue to increase.

In the U.S. This robust demand is demonstrated by our increase in same facility patient days of 4.2% compared to the prior year.

Within our acute service line, we have seen solid volumes attributable to our deep network of referral sources.

This has remained consistent despite the current environment.

Our teams work closely with our patients.

Their families and referral sources to reinforce the message that we have the expertise and capacity to help.

In order to reach our patients we continue to use additional access points.

Tele health capabilities wellness checks and our crisis hotline.

For our specialty service line, we were pleased to see stabilization in our volumes.

By shifting our marketing strategies to focus on local and regional markets, we were able to reach those that need the very specialized services that we provide.

During the quarter. We also saw sequential improvement in our out of state referrals due to patients being more willing to travel.

However, we have not yet seen our referrals return to prior year levels.

Volumes in our RTC service line remained solid in the quarter.

These facilities leverage relationships with state, referring agencies to serve children and adolescents with behavioral conditions.

As a result, we had solid patient day year over year growth throughout the third quarter and we expect that to continue.

In our CTC service line. We also continued to experience strong patient volumes as both demand and coverage trends remain solid.

In the U.S., our same facility revenue per day increased 3.1% in the third quarter as compared to the prior year.

This reflects annual rate increases in our expected range of 2% to 3% as well as normalized CTC reimbursement and improvement in our outpatient revenue.

Excluding the impact from the reversal of the care that income of 18.1 million, our same facility EBITDA margin improved 380 basis points to 29%.

We are realizing measurable improvement in our cost management efforts and operating efficiencies that weve implemented in 2019 and 2020.

We continue to proactively manage staffing and other costs.

Our team did a great job, making timely decision to reduce FDM in response to the declines in volumes.

And as our patients returned at higher volume to our facilities.

We utilize tools implement.

Implemented last year to monitor ft east at the facility level.

Our team is very focused on evaluating every position and determining what expenses are essential.

We have implemented a balanced approach to ensure we have appropriate resources to support our patients.

In the UK same facility revenue increased 2.7% from the third quarter last year.

Reflecting a 2.8% increase in revenue per patient day, and flat year over year patient day volumes.

We saw a monthly sequential improvement throughout the third quarter and our volumes surpassed pre covert levels in early July which we were pleased with.

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 well positioned to meet this need across our service lines.

We were also pleased to see sequential improvement in our third quarter labor cost in the UK.

Total labor cost as a percent of total revenue improved 240 basis points.

To 68.2% for the third quarter of 2020.

From 70.6% in the second quarter and was flat as compared to the third quarter a 2019.

Agency labor as a percentage of total labor cost improved from 13.5% in the third quarter of 2019% to 12.7% in the third quarter of 2020.

During the quarter, we also finalize negotiations with the NHS and local payers for our rate increases for the fiscal year.

We received an average rate increase of 2.8% across all of our service lines.

We believe this demonstrates support for the important care that we are providing their patients.

As we recently disclosed we have relaunched the formal process regarding the potential sale of our UK business.

Our objective continues to be maximizing value for our shareholders.

Consistent with market practice for UK transactions of this nature and in conjunction with our advisors we.

We have solicited and have now received non binding offers.

To acquire our UK business from multiple bidders.

As we continue to work with our financial and legal advisors, we will update the market on the sales process when.

And as we determine it is appropriate.

We continue to make strategic investments in our future growth in the U.S.

Expanding our market reach through bed expansions and additional service opportunities.

For the first three quarters of 2020, we have added 206 beds to our existing facilities in the U.S. and.

And we expect to add approximately 100 beds in the fourth quarter.

As part of our strategy. We have continued our strong track record of partnering with health systems and hospitals across the country, which.

Which is created important growth opportunities for Acadia.

Along with our joint venture partner Tower Hill, we opened 144 bed behavioral health facility.

In reading, Pennsylvania in July.

We expect to open a new joint venture hospital with Ascension Saint Thomas in Nashville during 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.

Going forward we.

We believe Acadia will play a critical role.

In meeting the needs of many people who are struggling with the uncertainties related to the pandemic.

We will continue to focus on our primary objective.

To deliver the highest quality of patient care as we extend our market reach and advance our position as a leading 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 good morning Red.

Revenue for the third quarter was 833.

$3 million compared with $777.3 million for the third quarter of 2019.

Results for the third quarter of 2020 include a reversal of $80.1 million in other income recorded in the second quarter of 2020 related to the provider relief fund established by the cares Act.

The company's decision to reverse this income was based on additional guidance issued by HHS.

These distributions are recorded in other accrued liabilities on the company's balance sheet at September 32020, pending the company's final review of HHS guidance.

Excluding the impact from the reversal of the Cures Act income of $18.1 million. The company's consolidated adjusted EBITDA for the third quarter of 2020 was $177.5 million or 21.3% of revenue.

Adjusted income attributable to Acadia stockholders for the third quarter of 2020 with $60.3 million or 68 cents per diluted share excluding a loss on impairment of $20.2 million transaction related expenses of 8.5 million.

Dollars and an income tax of that.

Effect of adjustments to income.

$5.4 million.

Okay.

I'd like to give you some additional perspective into our strategic focus on managing costs and improving margins.

Debbie said, we are pleased with the steps we have taken the past 18 months to streamline our operations, while continuing to make strategic investments.

Our cost savings initiatives implemented following our strategic review last year are on track.

Evidenced by our results for the third quarter.

We recognized $4.6 million of savings in the third quarter relating to the 2019 and cost savings initiatives and we are on track to achieve a run rate of $20 million by the end of the year.

Turning to our balance sheet, our balance sheet remains strong with ample liquidity and capital to invest in and continue to grow our business.

At September Thirtyth 2020, we had approximately $339 million in cash and cash equivalents.

And full availability under our $500 million revolving credit facility.

Our cash position reflects a third quarter with robust operating cash flows of $207 million.

Our increase in cash was driven by our strong earnings growth positive working capital trends and benefits from the carriers that.

From a capital structure perspective, we improved our debt maturity profile with two recent transactions.

As mentioned on the second quarter call, we issued $450 million, a 5.5% senior notes due 2028.

The net proceeds from this offering were used to redeem the senior notes that were due in 2021 and 2022.

In October we finalized the issuance of $475 million of 5% senior notes due in 2029 and use the net proceeds to prepay outstanding borrowings under our existing term loan b facility due 2022.

Together these initiatives relating to expense and cash management and our capital structure have put us in a strong financial position for 2020 and beyond.

We will continue to make strategic investments in the business, while aligning our cost to meet the ongoing needs of our patients.

Turning to our financial guidance as noted in our press release, we are providing guidance for the fourth quarter as follows right.

Revenue in a range of $810 million to $835 million.

Adjusted EBITDA in a range of 160 million to $165 million and adjusted earnings per diluted share in a range of 68 cents to 72 cents.

While we remain cautious regarding factors that could impact our November and December results, our fourth quarter guidance represents managements expectations, given the positive revenue and cost trends, we are seeing in our us and our UK operations.

We believe the essential nature of the services, we provide combined with strong demand.

Will drive growth for the remainder of the year and beyond.

This concludes our prepared remarks. This morning, I will now ask Lauren to open the floor for your questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad if you.

We are using a speaker phone. Please make sure your mute function is turned off.

Not to reach our equipment. Please limit yourself to one question and one follow up.

That is star one question.

For just a moment to allow everyone an opportunity to signal.

Well take our first question from Brian Tanquilut with Jefferies.

Hey, good morning, Congrats on a very good quarter I.

I guess my first question is just on the recovery of volumes it sounds like you've seen a good bit of recovery, but we're not quite back to.

Recall good levels.

Theres still some disruption so.

Is it right to think that the strong growth trends you saw in Q3 should carry over into Q4 and.

The 2021, and how are you thinking about just.

The market share gains and secular growth that the.

Industry is going to see as we go into next year.

Well, Brian we did have very strong volumes across all of our service lines and I think my comment about pretty Cove. It really relates more to those patients that travel for our specialty services, but overall in the acute.

Area, we saw very robust volume it is far exceeding where we were last year and certainly pre covance. We also I think throughout this had maintained very consistent volumes in the RTC business as well as CTC, which is continuing to grow in volume.

And also had some favorable.

Payer trends, which I mentioned in my remarks, but I think overall our visibility is we are now almost through October and we've continued to see improvement in the census in both us and the UK.

And I think we actually hit the highest census in the history of Acadia in October so.

So we believe that because of this strong demand trends and really just the fact that we have such diversity and the service lines that this is going to continue into 2021.

I think as we read about individuals that are suffering from anxiety and depression and other.

Other.

Suicide attempt I mean, it's just exploding.

And I think that we're seeing those trends now, but I do think they are going to continue to be.

Yes in to 2021 as as people cope with this and with the resurgence I think that just added to the the demand and so we feel good that all of our service lines are really seeing this demand and I think that's what's reflected in the third quarter.

Now that makes sense and then just on the UK sale process. Thanks for the color you gave us I guess the question that I have is.

What else is there.

Left to do in the process.

There anything you can share with us the timing.

Well, we're going to move as quickly as possible and as I mentioned in our our remarks.

We do have initial bids that have been submitted.

We're not going to be commenting on detail around that but I will say that there is continuing to be you know.

A lot of interest in Priory and certainly.

We have buyer interest that remained strong and so we'll be giving more detail as is appropriate around timing and also just.

How this is progressing.

All right awesome. Thank you.

Thank you our next question.

Next question comes from Ralph Jacoby with Citi.

Thanks, Good morning, just hoping you'd give a little more of the underlying assumptions I guess for the fourth quarter our guidance at this point both in terms of sort of the maybe the volume and pricing side of the equation and then if you're willing at all to give sort of early thoughts on 2021 sounds like you are pretty optimistic around some of the growth opportunity.

So how how do we frame that or think about that from a modeling perspective offer.

Off of either the 2020 baseline or maybe 2019.

Yeah.

Yes, Ralph first of all on our fourth quarter guidance, we are projecting mid single digit revenue growth and EBITDA growth of more than 10% on a consolidated level on a year over year basis and the key trends underlying this guidance includes a continuation of the revenue trends, we're seeing in our USA segment.

With volumes, increasing 3% to 4%.

Obviously, potentially even stronger, but we do have some seasonality that we deal with in the fourth quarter and just cautious approach that we are taking around the resurgence.

We see revenue per day trends continuing to be positive and have a range of around 2% to 3% for revenue per day growth.

In the U.S., we also expect to see an ongoing contribution.

From both the cost savings initiatives identified in 2019 as well as the cost management actions that weve implemented in 2020, So believe that our margin will reflect on.

All of those initiatives and in the UK segment expect to continue to see sequential improvement, which we've seen recently in both the census, and the pricing as well as the the labor cost trends over the past several months all of those match.

Metrics in the UK have improved and we expect to continue to see that as I mentioned, our guidance does reflect seasonality that we typically see in the fourth quarter, but.

But we do have a very positive outlook for the quarter.

We will provide more thoughts around 2021 in February as we typically do.

But we as Debbie mentioned a minute ago, we think that the trends the demand the volume growth opportunities that we have going into next year, we'll continue.

Okay, All right fair enough and then just just follow up on.

I guess, how how are you finding the labor backdrop at this point, maybe specifically in the us any staffing challenges and maybe wage rate increases you're having to give kind of in this environment. Thanks.

Sure I mean, we really have not had any significant disruption or change in the availability or really the cost of our staffing I think that certainly we are closely monitoring the health.

Our employees that we want to ensure we have the right staff available, but we haven't had an issue around that I think that certainly in the UK. The number of the self isolating employees. There. It peaked at the end of March early April So we've continued to add.

C. A lot lower levels of that and I think they've been able to manage the staffing there and we certainly have here in the US we do think that.

The I think just general economic environment.

In the us and UK might provide some opportunities for us to access perhaps staff that had not been in the industry I know in the UK. They have started a preceptor program for staff that are not trained in healthcare, but come from other industries, they're turnover is down.

Alan.

And we have the same I think focus here in the US is just to really utilize those individuals that might seek employment in our industry and make sure that we are using them appropriately, but overall, we really haven't seen disruption there.

Okay very helpful. Thank you.

Our next question comes from Peter Chickering with Deutsche Bank.

Good morning, guys. Thanks for taking my questions. A couple of questions for you here on U.S. demand you talked about seeing strong demand across all segments.

You talked about what you're seeing on geographic areas that you are seeing spikes or or weaken season. There is that that are that have cobot or don't have covered I'm just curious how covance and packaging are for core business.

Yes, I think that we've.

Going through this now for several months and I think that the staff out in the field and the leadership in the field have really done an amazing job of UBS.

As handling.

All that might come in if we suspect that they.

Have co Budd, we isolate them and then we are putting them on another unit if they are diagnosed.

With the positive test.

But they are continuing treatment and I think certainly if their medical symptoms become more severe we would move them out of our setting, but but overall, we've continued to see a flow of patients we haven't stopped admissions.

There may be I know there are a few of our higher volume substance use facilities that.

More covert and so there was a little slowing of admissions, but no. One was stopped from coming into the hospital. We just wanted to make sure. We are very cautious and careful about how we handled those patients and it varies really right now with some of just the resurgence and there.

May be a market.

That has resurgence and then that seems to ease.

We're being very focused on just making sure we're keeping access to our services because we feel like that's more important than ever now.

Okay, and then on the UK revenue for pricing was was strong it looks as though it could have been some higher admissions due to the lower.

Due to the lower length of stay that is how do we think about higher short term admissions the UK and its impact on margins.

At the same time on the MHS pricing Tom its a 2% is that for 2021.

And then also on the UK intangible share was to high speed, you've gotten so far for that business.

Okay.

[laughter].

Good try there.

Yes, [laughter], let's start with the first part of that question.

The UK revenue per day, we talked earlier in the year about given the pandemic.

There being some interim rate increases with our payers. There. So it has been a process to work through the negotiations for what we typically receive in April and that 2.8% that we.

Have now received on an average basis across our payers that is the 2020 rate increase that is around the level of our 2019 rate increase and it is really in the range of the 2.5% to 3% expectation that we have going forward, but that does represent our 2020 increase.

From a volume perspective, we did see a strong recovery in our shorter length of stay services that.

That is reflected in our commentary around getting back to our pre co bid volumes early in the third quarter and Thats reflected in strong year over year patient days, considering those managing through the pandemic the impact that we saw in the second quarter. We are very pleased with the UK volume.

It's really across all of the service lines and think we are well positioned for the continuing demand in the UK.

I'll take your last time.

Thanks, My last question, we're not going to provide an update on any detail around the initial bids, but I'll just again say that our objective is to maximize value and that's what we're focused on that we will provide additional updates when its appropriate okay. And then because you want to add to that we'll let me ask.

One more follow up one fourth quarter margins looks to be a step down versus what we saw in third quarter. Excluding return the cures act it looks to be about 30.6 basis points.

That is right sort of sequential decline I guess curious from a margin perspective, what do you guys sort of assuming deferred in fourth quarter than you saw in the third quarter again, excluding the cures Act.

Yes, the we do project a strong margin in the fourth quarter. If you think about our US business, we see a 200 basis point type improvement over the fourth quarter of 2019.

We did experience some seasonality and we have a just a little bit of caution.

Thinking about potential resurgence and the effect it may have been different markets.

So that's.

Thats the the margin Peto does continue to show the year over year improvement that we reported in the third quarter.

Great. Thanks, so much guys this quarter.

Thank you.

And our next question comes from Kevin Fischbeck with Bank of America.

Hi, Good morning. This is Joe on I got you actually for Kevin today. Thanks for taking the question. So so first first one or two quick one on the follow up so did I hear right.

You talk about outpatient.

Bonds also coming back right.

Yes.

We did see an increase in outpatient China.

It's not at the level that we have been but it's much better than it was in the second quarter.

Okay that makes sense because that could hurt you are saying that it was across across business lines I just want to confirm that.

Then on.

I guess on another piece of the pricing outlook, So I know.

The last quarter call you mentioned that you have not seen anything on the Medicaid push it but anything changed there or anything else.

Got you watching any particular states.

No. We are not aware of at this point any changes or rate cuts.

On the states. We there was one state that we have one facility, which was Nevada and they recently cut their rates by 6% but.

But we were excluded from those cuts as a mental health provider and I think this really demonstrates the support from from the state and also just a recognition of the value of the services, especially right now we are monitoring each state that we're in we're in 40 states and.

And but we believe that with our diversity and just that the climate in general and then I think the increased demand that we believe payers are going to be supportive of of our services and the payments.

Okay and if my also if I can follow up on the commentary about the strength you've seen October and also the question about labor you say, you're not seeing any pressure but.

You know if you're talking about the outlook of.

Increased demand given the results of the depending on how people shrugging with that are you.

Anticipating you would have enough labor to serve this demand or are you preparing for some sort of spiking in the cost because you know kind of the increased demand.

Hi.

We have a lot of experience and a strong track record just adding beds opening new facilities and being able to appropriately add staff based on the volume growth that we see so we are not anticipating any challenges there is a.

Because of the team and we have a strong record on just being able to recruit and staff for our growth.

Okay. That's great and then on the last question on the UK, which you you said. It you are you also seeing a pretty positive trends.

Sir.

And in the past you talk about the retooling of bad So I don't know if there's anything that's happening there or it's been largely complete I suspect you know with a with a pandemic I'm sorry.

There's probably some disruption maybe to the process so any kind of update on that thank you.

Well, we are continuing with our re tooling and we're on track to reopen the majority of our beds that we talked about by the end of the year I think these bad that we have opened throughout the year are being used and I think that we're going to continue.

You to see the positive comp.

Contribution from those retooled bed I.

I think that as in a jazz is starting to see the surgeon and more demand we are utilizing the retool beds as well as certainly does the existing beds that we have but.

I think one of the I think strong messages that NHS is given is they are willing to actually back those beds with block contract. So they are paying for bad.

Without regard to whether a patient is in them and I think part of that is really insurance and really copper for them that as demand is growing and it certainly is in the UK that they have that available. So we think our retooling is very timely and we're on track for what we had said we were going to.

I do.

Great. Thank you so much.

Uh huh.

Our next question comes from John Ransom with Raymond James.

Hey can you.

Hi can you hear me.

Yes. Good morning, good morning, Alright, Little Little I've got these fancy new wireless headset.

Thanks, and I'm terrible it operating EPS wise or whatever.

Sure.

I'm not going to go Ido and ask yourself, you want to answer but.

Maybe if I could ask on the U K are you.

Finish, but what's the thing beds and is this should we understand your comments as you've gotten pulmonary beds and now we're into kind of data revenue diligent.

Oh, Yeah. We we have received the non binding offers and are moving forward through the process and don't really have much of an update other than that John regarding timing and where we stand on.

On valuation.

Do you expect to receive any more offers you got me offers you expect to get worked through that process. So that's the way we're thinking about what you said.

We're not providing more specific updates on what we commented on earlier.

All right.

Taking about 2021.

If we adjust for seasonality.

For for Q.

What else what other things should we think about in terms of a jumping off point for next year.

I guess, you've had 20 million of cost cuts. So shall we say, maybe 10 million kind of net new and 2021 anything else that we should look at Fourq you as we think about 21.

Just as we get our preliminary numbers out there.

All right, John I think that assumption around the savings realized this year $10 million is there.

And we think that will be reflected in the first half of next year, because we have achieved a lot of that by the second half of 2020.

Other than that it will obviously be an interesting comparison as well.

Next year, but I think that.

Positive trends will continue as we said earlier.

Right.

So as we think about your short stay you execute business traditionally.

You are right.

Our Mercy Roes were big sources of referrals from a New York visits are down some 20% and yet your your numbers are up so is it that the mental health cases are still presenting at the arc or have you diversified your referral sources, just because obviously your numbers are up the yards down and I'm just trying to square the circle about where the specialist might become.

Okay.

Sure I mean, we have seen really our E. R referrals returned to normal.

So I guess, if we think about that there are patients that are needing mental health and substance use services.

Going to the E R, but weve also diversified our referral.

Sources in end markets that we think have served us well through this but on the other hand, we've really seen a return to normal of most of the referral patterns and I think individuals that might have been afraid or during to stay at home orders did not seek care. They are they are seeking care.

And they are going to the E ours, and we are getting referrals at a normal level.

Great.

Last one for me David US again, as we think about 21 is there any reason to think that.

Your capital expenditure.

Hey, that's a rhythm split would be changed at all because of that or other factors. So should we still kind of layer on the same amount of growth capex that you've been doing over the past few years.

So we do think you should layer in a similar number we are going through our detailed project by project projection right now in connection with our budget.

We'll have more guidance around that in February we do see a growing opportunity around our joint ventures and partnerships.

And so thats one thing that we will be looking at that potentially could grow but for the most part it is a similar level of investment as what we've seen this year.

Great. Thanks, so much.

Thanks, Joe Thank you.

Well take our next question from Gary Taylor with Jpmorgan.

Hi, good morning, great quarter, any cares that assumption in your fourth quarter guidance.

During the quarter, we are finalizing our review of the guidance that has been issued in September and October.

We do not have an assumption of the fourth quarter that any of that would be recognized.

And then just thinking about the fourq to seasonality you're talking about I know, it's been asked about a little bit there is a bigger.

Yep down sequentially than we've typically seen in your EBITDA and I think.

Margins up 330, or 300 basis points. This quarter. Your your midpoint for Fourq implies up about half of that year over year.

Is there anything else you can see explicitly call out is it just the.

You know the thought it looks like you're looking for 5% to 7% same store revenue growth slowed so potentially a little softer or is that just the primary driver of that.

Margin performance Stepdown for for Q.

Silver these end markets that could see some.

Some disruption from a resurgence.

So we want to be cautious around the volumes and other projections as we think about November and December.

But obviously, we've seen strong trends in recent months and we do expect that to continue so it is seasonality and some element of us being cautious around the resurgence.

I could just one more quick one it seems over the last few years as revenue growth has been slower margins had had declined.

For.

Four years or so in a row is there a level just rule of thumb level on on same store U.S. revenue growth said that you need to be to drive margin improvement. So.

Four or 5%, you're pretty or higher you're pretty comfortable you're driving margin improvement is there any rule of thumb you throw at us.

Currency and are able to leverage the fixed cost structure as we grow our volumes and so really only need revenue growth to be in that 2% to 3% range and above that.

We do expect margin improvement and we've seen that obviously in the third quarter as the revenue growth has been stronger we have seen strong margin improvement from that volume growth.

Thank you.

Thanks, Gary.

Our next question comes from AJ Rice with credit Suisse.

Hi, everybody.

Just first.

I know that's been discussion over time about what the.

Long term targets are for.

Capital structure any updated thoughts on the amount of leverage that you are comfortable with the long term.

Well I think we were trading this quarter.

Yes, we've seen this quarter something we've talked about before around just the investments that we've made over the last several years contributing to earnings growth is that helping us lower our leverage.

We saw that in the third quarter and.

During a target yet Asia.

Okay.

Obviously, there's been a lot of discussion about.

How long how deploying that.

In the behavioral area you guys as Youre talking about it sounds like it's.

To support the existing services in some ways that you provide but I wonder.

Are you looking at anything where that might be a growth Avenue.

Pursue.

Outpatient more are you getting any discussions with third party tele health companies that are interested in working with the share along those lines.

Sure I mean, we as you said, we see Tele health is not a replacement for the inpatient part of what we do it is a good access point and we've used it for that with with patient engagement I think that the regulatory changes and reimbursement change.

Ranges that have been made and look like they're going to at least the in place at the end of this year I think have been favorable. So we have looked at how we can expand the use of tele health A.J. with our partial in our outpatient programs and we're doing that now.

I do we are already collaborating with some out outside vendors for Tele health. We also have internal capabilities around that which we've expanded certainly with the pandemic, but but I think that you know as practitioners as well as patients get more comfortable and I think they have we.

That is a growth area for what we're doing and primarily for the partial on outpatient but also for assessments and then even you know we're using it right now for visitation those that can't come into the facility, but I think it is an area that can.

Now that reimbursement changes have started to reflect the importance of it we plan to use that and we're open to collaboration we're already doing that now and we think it makes sense.

Okay, maybe I'll slip one more in if I could just so.

Shortfalls on some of the other question.

Like 40 States are you seeing clearly.

Co concern Jayson, then kogut easing and obviously how.

Communities responding to those surgeons has evolved over the last six or seven months.

Do you see at this point, where there is a surgeon community because you're sort of using that as one of the cautionary comments about the fourth quarter.

See surges in a community really impacts the business or is it now people are sort of just a bag.

Back to at least health care utilization as usual and it really when there is a mini surge in a community really don't see that much impact anymore can you just give us a little flavor for given.

Given you've got a pretty wide.

Well I think A.J. that is we have had market that have seen more cases that our patients are still coming to our facilities for for treatment I think where we have really focused on this is how we manage them when they are in the facility.

And making sure that we are appropriate with you know isolating patients as necessary, having the right unit for Covance patients as opposed to those that don't have covered but I do think you know when we talk about resurgence and caution.

I would say that's more around just the referral networks, we don't anticipate that happening, but we also want to make sure that we're being conservative because we don't have control over that we've done a lot of things and I think we've learned a lot. The facilities know what to expect I think they're focused on very quickly adapting.

The referral outreach and also just how the sales and marketing approach is working we've got that platform that weve used it's given us a lot of visibility. So I think overall as we see cases go up we haven't seen that really interrupt our business other than just managing within.

And the facility.

Interesting, okay, all right. Thanks, a lot.

Thank you.

And as a reminder, please limit yourself to one question with one follow up our next question comes from Whit Mayo with yes.

Hey, Thanks. Good morning, we've we've seen this interesting trend begin to develop for maybe a quarter and a half now where coal that is beginning to actually drive.

Ill wins for certain providers. So that you have no t. any expense your malpractice is probably down workers comp down self insured costs down.

Then there's the offset with increased TV the supplies to support your.

Your your field and I guess I'm just wondering do you think the coal that was a tailwind for you and that's in the third quarter. What do you net those two together, but we also have to.

Cluster. So I'm just wondering if the coal the tailwinds actually offset the headwinds at this point and should we be thinking that maybe some of those expenses leak back into the business next year.

We do not believe on a net basis.

There are a lot of moving pieces and some savings and some incremental cost as you mentioned on a net basis, we do not think theres a significant tailwind that we're seeing here I mean, obviously the volume into demand. We do think we'll continue partially because of what people have been.

But from a cost perspective.

Net changes what is essential for us to add back.

From a travel perspective for example, as we think about next year.

But you know I don't think Theres any significant amount that we would highlight for you at this point and I'll just add that I think a lot of our efforts around the expense management have been focused on making sure we're matching volume with our staffing and primarily in the benign.

On clinical areas, but we have taken the opportunity through this to really step back and say what is essential.

Do we need some of the travel costs that you know previously we had done in marketing and even through some of the the travel to our advance and looked at virtual solution.

Solution. So I do think going forward that we will be changing some of the way, we do things and there will be I think you know some return of perhaps health claims and and I think that as we get back to normal, which I'm not sure when that will be but I think that most of our impact on expenses has been around just me.

Managing the flow of patients and making sure that we're being very careful and prudent about our staffing.

No that's super helpful and just one follow up is.

Are you seeing any notable changes in how the payers are responding to you guys just I'm curious around denials pre off any.

Anything that may have impacted length of stay the adjudication process. Just curious on any observations you have with do you.

Any headwinds or Tailwinds, you feel like you're seeing from what payer perspective. Thanks.

I mean, I think that we really haven't seen much of a change there when I mean, they're still requiring medical necessity, we make sure that that's in place as we admit patients but.

As I look at payer behavior, I don't see any big difference there and I think that you know are linked to stay increase as we looked at it there wasn't any one.

Factor there, it's been pretty stable across all of our service lines and so I think that.

Certainly they've been very collaborative with us as we've gone through the pandemic and they're trying to make sure. There are patients that are part of their plans get taking care of but I wouldn't identify anything that's changed theres still focused on making sure that patients are getting appropriate care for the appropriate length of stay.

I figured thank you.

Our next question comes from Matthew Gilmore with Baird.

Hey, Thanks, I just had a quick clarification I think Debbie made a comment about record census levels in October that does that mean that was the best ever census level for the company during October or just a record for an October month.

It's actually the best.

Insists that Acadia has had in the U.S. So it's a record that was set for highest senses for the company.

Okay.

And would you just to follow up on that would be.

Is that unusual in the sense that.

Yes, maybe September rate normally a better month in October or is that.

January kind of what you'd expect sequentially, maybe with the bat adds to perhaps contributing to that.

Yes, you're right the bed additions have helped us in our operations team has done a great job, bringing beds online this year new facility online in July.

October does typically have a strong since this month and so it's a month as you think about other months of the year, where we expect a strong census, and we're very pleased to achieve that high number during the month and have seen strong performance from across.

The service lines to help us achieve that at.

And I'll just add that you know with our de Novos that we have put in place and also just as David said bed additions.

We have been pleased that those pads have been ramping at our expectation and some above our expectation. So I think all those factors go together with just where we were able to to actually end up we still got a few days left in October not many one.

But I think across the service lines, we've certainly seen some some Barry I think strong numbers around Q as well as specialty returning to kind of normal ranges. So all that adds up what the rpcs as well certainly to the strong number of them that we saw.

On October.

Okay, great. Thanks, a lot.

And well take our next question from Ryan Daniels with William Blair.

Hey, guys make speak out in for Brian. Thanks for squeezing me in you you mentioned in the us that referral kind of distribution Thats basically back to normal at this point is that similar in the UK and then as any of the strength.

Kind of as a result of backlog filling or do you think most of those potentially shaking out at this point.

Well I think in the UK there was the dynamic in the in March.

March and April and even into May where the commissioners were redeployed for med surge.

Services and I think as that happened. There were also case managers in the UK that were also redeploy for med surge and I think that that had some interruption as well as the stay at home orders, which were in place in the UK, we have seen the commissioning process.

Return to normal.

And as they have returned to normal there are patients that are being sent obviously to our our facilities in the UK I think that you know theres a combination of individuals that that need this care that perhaps might is delayed but I also believe that just there is a strong demand.

Even without the pandemic that we've talked about before if you add then the pandemic and the anxiety and depression, I think that bodes kind of.

I guess have impacted us not just in the UK and the US where people are coming in that perhaps wouldn't have had an issue prior to the pandemic. But then we're also seeing patients that have had longstanding issues and frankly, there you know they become more acute as they've gone through this pandemic.

Great that makes sense and then you talked about kind of Capex for 2021.

Looking at slide 20 per bit a good estimate would that be the case to for kind of bed ads for 2021 kind of like a similar level to 2020.

Got you great all right. Thanks, guys congrats on the quarter. Okay. Thank you.

Thank you.

And there are no further questions at this time I'd like to turn the conference back to Debbie steam for any additional or closing remarks.

Well, thank you again for being with US today and for your interest in Acadia healthcare I am very grateful to our field and corporate leaders for their resiliency.

And also their commitment to keeping our key growth and operational initiatives moving forward, while responding to this unprecedented crisis.

I think they are one of the main reasons that I stand here today optimistic about our company's future.

If you have any additional questions today, please do not hesitate to contact us directly and have a good day.

That does conclude today's conference. We thank you for your participation you may now disconnect.

Q3 2020 Acadia Healthcare Company Inc Earnings Call

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