Q4 2022 Acadia Healthcare Company Inc Earnings Call

February 28, 2023

Good morning.

And welcome to Acadia Healthcare's fourth quarter and full year 2022 earnings call.

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Yeah.

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I would now like to turn the conference over to Gretchen Homrich. Please go ahead ma'am.

Good morning, and welcome to Acadia <unk> fourth quarter 2022 conference call I'm, Gretchen Homrich, Vice President of Investor Relations for key Yeah. I'll first provide you with our safe Harbor before turning the call over to our Chief Executive Officer, Chris Hunter to the extent any non-GAAP financial measure is discussed in today's call. You'll also find it.

Conciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing yesterday's news release under the investors link.

This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095, including statements among others regarding <unk> expected quarterly and annual financial performance for 2022 and beyond.

Hereby cautioned that these statements may be affected by the important factors among others set forth in <unk> filings with the Securities and Exchange Commission and in the company's fourth quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward looking statements.

At this time for opening remarks, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter.

Thank you rich and good morning, everyone and thank you for being with US today for our fourth quarter 2022 conference call I'm here today, with Chief Financial Officer, David Duckworth and other members of our executive management team.

David and I will provide some remarks about our financial and operating performance for the fourth quarter of 2022 and guidance for 2023. Following our comments, we'll open the line for your questions.

I'm pleased to say that our fourth quarter results and start to 2023 demonstrate that we're executing on the strategy, we presented with favorable results across our key performance metrics.

Throughout the past year, we continued to see strong momentum in our business, reflecting robust demand for our behavioral health care services, we need to continue to commend our dedicated team of employees and clinicians across our operations, who worked tirelessly to meet the needs of those seeking treatment.

For mental health and substance use issues.

Our strong results reflect our ability to effectively operate our 250 facilities across the <unk> network and serve our patients with safe quality care.

During the fourth quarter, we continued to see positive trends in our business with an increase in our same facility revenue of nine 4% compared with the fourth quarter of 2021, including an increase in revenue per patient day of five 2% and an increase in patient days.

<unk> a 4.0%.

Our fourth quarter results marked a strong finish to 2022, and we believe set us up well for 2023.

We are proud of our vitally important work to support expanding patient populations in order to make a positive difference in more communities.

Acadia has created a strong foundation to build upon during a time of unprecedented demand for behavioral health care services.

Our recent 2022 study from Indiana University found that approximately 45% of patients who visit the emergency department for physical injuries and ailments also have mental health and substance use problems that are frequently overlooked.

Kt has established strong relationships with med search hospitals across the country, bringing our experience and expertise to markets, where they are desperately needed. Unfortunately, a greater social awareness of mental health issues and broader acceptance of treatment have made behavioral health care priority with medical professionals and government health.

Care officials.

Acadia is well positioned to address this critical societal need as a leader in providing behavioral health care services across the care continuum.

During the fourth quarter of 2022, we continued to advance our growth objectives across each of our service lines. As we've previously shared we believe our five distinct growth pathways will enable the company to meet this demand and extend our market reach.

I'll briefly update you on our accomplishments related to these five pathways during the fourth quarter on.

The first pathway facility expansions remains a primary driver of our growth as this pathway allows us to efficiently expand services in established markets by utilizing our existing infrastructure and experienced staff.

We added 80 beds to our existing facilities during the fourth quarter, finishing the year with a strong second half performance with 212 bed additions and bringing our total number of bed additions to 290 for the year.

Looking ahead, we expect to add approximately 300 beds through facility expansions in 2023.

Importantly, many of the bed additions in 2023 will open in the first half of the year and are expected to contribute to an accelerating volume growth outlook for the company.

A second important growth pathway is to identify underserved markets for behavioral health care services and develop wholly owned de Novo facilities that bridge this gap and help meet the critical community need an.

In 2022, we opened a 60 bed children's hospital is the first stage of our Montrose behavioral Health Hospital operations in Chicago, We look forward to increasing the pace of our de Novo from opening one per year to two per year in 2023 as we are on track to open our 101.

Bed mantra is adult hospital, and outpatient facility and our 80 bed facility co with shallow valley behavioral health in India, California later this year.

We're excited to announce a new de Novo facility that is slated to open in 2020 for this 100 bed acute care behavioral health Hospital will serve the residents of Mesa, Arizona and surrounding communities.

<unk> Ridge behavioral hospital will offer a full continuum of inpatient behavioral health care services for adult older adult adolescent and child patients. Our groundbreaking is scheduled for next week.

We will continue to pursue additional de novo opportunities and other underserved markets with the goal to develop and open acute and specialty facilities in 2024 and beyond.

We also continued to.

To expand our network of comprehensive treatment center facilities or Ctc's, specifically designed to meet the growing and critical need for addiction treatment, especially for patients dealing with opioid use disorder.

During the fourth quarter, we opened three new de Novo CTC is in Florida, and Delaware, bringing our total to seven new <unk> for the year, which exceeded our goal of at least six ctc's.

As the opioid crisis has continued to escalate across the country. We believe Acadia CTC facilities play a vital role in the communities. They serve with programs that combine behavioral therapy and medication to treat opioid use disorders. Each CTC provides a range of comprehensive subs.

<unk> treatment support services that include medical counselling vocational educational and other treatment services to help our patients progress. We will continue to expand our CTC network and service offerings to meet this essential need with an objective of adding six ctc's.

In the year ahead.

Yeah.

Our third attractive growth pathway is forming strategic partnerships with leading health systems across the country.

We've been fortunate to establish strong relationships with leading national health care providers and Premier healthcare systems, who want to expand behavioral health care treatment options and their respective communities.

We bring the clinical expertise and experience they need to deliver high quality care, while we have an opportunity to leverage the providers market presence and established relationships in the community.

In the second half of 2022, we were pleased to open two new facilities. The first facility was a 90 bed facility with our joint venture partner Covenant Health in Knoxville, Tennessee in August and a second facility was Maple Heights behavioral health, a 120 bed facility, which was opened in December .

With our partner Lutheran Health network in Fort Wayne, Indiana.

Acadia now has 19 joint venture facilities in various stages of development with nine facilities opened in 10 facilities expected to open over the next several years, including two in 2023, we remain encouraged by the strong continued interest from potential partners.

And our JV pipeline.

For our fourth growth pathway, we have maintained a very disciplined focus on M&A opportunities and continue to look for selective acquisitions that complement our growth strategy and are incremental to our financial objectives.

During the fourth quarter, we acquired four Ctc's from Georgia based brand new start treatment centers located in separate suburbs of the Atlanta Metropolitan area, extending Acadia CTC network to 151 locations at the end of 2022, we were.

Remained focused on selectively identifying attractive M&A opportunities that are complementary to our existing geographic footprint and portfolio of service offerings.

We are fortunate to have a strong balance sheet that provides the flexibility to pursue acquisitions as well as make the necessary investments to support our other strategic growth pathways.

For our fifth and final growth pathway, we remain focused on extending the continuum of care across our facilities and identifying additional ways to support patients for.

For example, we are continuing to strengthen our mid level acuity programming, which we most often used to step down our patients after residential treatment.

Since 2019, we have added over 50, PHP and IOP programs, including five in Q4 2022 alone.

We are also continuing to advance our cross referral program.

Including by launching system improvements in Q4, which make it easier for our nurses and clinicians to identify cross referral opportunities and facilitate the referral process itself.

Finally, we continue to fill in service line gaps in our markets. Our previously mentioned acquisition of <unk> in the Atlanta area. For example, complements our existing acute specialty PHP and IOP service lines in that market.

In conclusion, we are well positioned to maintain our strong growth trajectory and meet our development targets for the year, which are adding approximately 670 beds in 2023 through approximately 300 bed additions to existing facilities opening too.

In patient de Novo facilities.

Two facilities with JV partners with more JV announcements to come.

And opening at least six CTC locations.

We're working hard to deliver on our 24 or 2024, and 2025 growth targets as well as strengthening the foundation that these new facilities will become a part of.

As Acadia continues to lead and grow we are committed to creating and implementing best in class solutions that will further enhance the delivery of care and support the patients. We serve as we discussed at our Investor day investments and technology will be a key area of focus for Acadia and <unk>.

'twenty three and beyond.

We are accelerating investments, where we can strengthen our capabilities and lead the industry forward by leveraging technology to increase access to care improve the delivery of care and ultimately support clinical integration and operational efficiencies.

Initially the areas, where we expect to make short term investments include enhancing our infrastructure, which involves improving all of Acadia is technology capabilities across our network of.

A top priority is centered around electronic medical records today, we have manual paper based processes across most of the company.

And the potential for electronic medical records is a significant opportunity for not only Acadia, but also the industry.

As we migrate to electronic records there are significant benefits from both a clinical and financial perspective, we are focused on technology investments across five main categories.

The first is that we will be able to better support our medical teams with respect to patient safety and compliance.

Second we believe these investments will enhance the overall patient experience.

Third we expect improvement in employee satisfaction, which will support recruiting and retention.

For the additional data and analytics capabilities will also help us engage with payers as we are better able to support value based care and identify operational efficiencies and finally, we believe these disciplined investments will drive revenue and margin improvement opportunities for the company over time.

Jim.

As we communicated in December at our Investor Day, we expect to allocate approximately $35 million to $45 million in it investments in the coming year of which 15 million to $25 million is incremental to our historical investment we will continue to evaluate the value drop.

<unk> from these investments and believe that over the four year period from 2023% to 2026 that we could see a total of $75 million to $125 million and dedicated.

Incremental capital expenditures.

We are highly encouraged by the value that this will provide for Acadia as we lead the industry forward and leveraging technology to improve the delivery of care.

As we also noted in December we had planned to add key leadership for this important initiative and we're pleased to add that Laura Groschen joined Acadia as the Companys, New Chief Information Officer in early January .

Laura joined Acadia with over 25 years of experience driving strategic transformation and large healthcare and consumer focused organizations. She most recently served as the business unit CIO of Medtronic, the $30 billion Global Health care solutions company, where she led a team.

Courting information and technology for 'twenty operating units and global business functions across Medtronic locations and 150 countries.

As Acadia CIO, Laura will shape and advance our it strategy as an integral part of our digital transformation and she will drive continued digital transformation across Acadia scaled behavioral health capabilities.

I also want to reinforce our commitment to quality across our operations as we continue to extend our market reach safe and quality care remains the top priority for the patients who seek our help.

I am pleased to announce that we recently added Dr. Nab deep Kang to our management team as our new Chief quality officer for inpatient services.

In this role novel work closely with our Chief Medical Officer, Dr. Mike Genovese.

And we will be responsible for ensuring patient safety and superior quality of care by improving delivery of clinical services and our inpatient facilities novel lead our initiative to provide a robust proactive culture of quality and excellence supported by processes and systems designed to prevent any issue and.

When necessary quickly respond to any adverse events NAV.

<unk> is a clinical psychologist and brings extensive experience in addiction treatment and behavioral health.

So as we look to the year ahead, we remain focused on increasing our pace of growth and capitalizing on expansion across our service lines at the same time, we will look for ways to improve upon the delivery of care, we provide and strengthen our capabilities with the right technology investments and.

Differentiated services that drive improved clinical outcomes.

Across our network of 250 facilities, we have a shared mission to provide high quality behavioral healthcare services and we look forward to the opportunities ahead for Acadia in 2023 and beyond.

At this time I will now turn the call over to David Duckworth to discuss our financial results for the quarter and 2023 guidance.

Thanks, Chris and good morning Lou.

Looking at the fourth quarter, we delivered strong financial and operating results as we successfully delivered on our key performance metrics demonstrating consistent execution of our strategy.

Revenue for the fourth quarter of 2022 increased 13, 8% to $675 3 million.

Compared with $593 5 million for the fourth quarter of 2021.

Our revenue growth includes an increase in same facility revenue of nine 4%.

For the fourth quarter, our adjusted EBITDA was $159 million and adjusted income attributable to Acadia stockholders per diluted share was <unk> 74.

Which includes income of $5 $2 million related to the provider relief fund.

Also related to the American rescue plan payments.

Adjusted adjustments to income for the fourth quarter of 2022 include transaction related expenses and the related income tax effect.

The company also recorded an unfavorable adjustment of $5 $9 million or <unk> <unk> per diluted share to itself insured professional and general liability reserves relating to the settlement or expected settlement of certain prior year claims relating primarily.

To the 2017 to 2018 period.

The estimated accrual for professional and general liabilities is based on historical claims prior settlements and judgments and other factors and actuarial assumptions.

While we could see volatility in this reserve due to our self insured retention level of $5 million. We view this fourth quarter adjustment as a nonrecurring item relating to unique facts and circumstances for certain claims in that 2017 to 2018 period.

From a cost management perspective, we were pleased with our execution throughout 2022.

While we saw higher wage inflation in 2022, including approximately 8% base wage inflation for the fourth quarter we.

We believe it's important to remain proactive in our PE and our volume and reimbursement growth have remained strong.

While base wage inflation is expected to remain higher than the 7% to 8% range in the first half of 2023, we are seeing positive recent hiring trends and we also saw an 8% sequential reduction in premium pay from the third quarter to the fourth quarter.

Of 2022.

Maintaining a strong financial position will remain a top priority for 2023, providing.

Providing us the flexibility and capital to support our growth strategy and future investments.

As of December 31, 2022, the company had $97 $6 million in cash and cash equivalents.

$525 million available under its $600 million revolving credit facility with a net leverage ratio of approximately two one times.

During the fourth quarter. The company completed its repayment of amounts received pursuant to the Medicare accelerated and advanced payment program under the cares Act.

The $45 $2 million of advanced payments received in 2020, the company repaid a total of $25 1 million in 2021 and paid the remaining $21 million in 2022, including $1 2 million in the fourth quarter of 2022.

Hi.

Moving on to our guidance as noted in our press release, we narrowed our previously issued guidance for 2023 as follows.

Revenue in a range of $2 82 to $2 $88 billion adjusted EBITDA in a range of $635 million to $675 million.

Adjusted earnings per diluted share in a range of $3 10 to $3 40.

Interest expense in a range of $80 million to $85 million a tax rate in the range of 25% to 26% dip.

Depreciation and amortization expense in a range of $125 million to $135 million stock compensation expense in a range of $30 million to $35 million.

Operating cash flow in a range of $450 million.

$500 million.

Expansion capital expenditures in a range of $350 million to $400 million.

Maintenance capital expenditures in a range of $40 million to $50 million in <unk>.

Capital expenditures in a range of $35 million to $45 million.

We also established financial guidance for the first quarter of 2023, including revenue in a range of $690 million to $700 million adjusted EBITDA in a range of $145 million to $150 million and adjusted earnings per diluted share in a range of.

<unk> 70 to.

74.

The company's guidance does not include the impact of any future acquisitions divestitures transaction related expenses or the recognition of any additional provider relief fund income.

With that Joe we are ready to open the call for questions.

We will now begin the question and answer session.

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We ask that you please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

And our first question will come from a J rice with credit Suisse. Please go ahead.

Thanks, Hi, everyone.

I know at the Investor Day, and then in your comments today, you've talked about a little bit about the potential acquisition pipeline. That's out there for you I wondered if you'd.

To expand a little more on what Youre seeing.

It seemed like there's a lot of JV and potential acquisition opportunities coming out of the pandemic is that still there and is there any opportunity you think.

This year as you look out for larger deals.

Any of those potentially out there.

Yeah. Thanks, Thanks, a J this is Chris and I'll start.

We continue to feel very optimistic about the M&A pipeline, which is clearly one of our important growth levers for 2023.

I would say that we have done extensive work and looking at the under bedded markets and really targeting the Msas, where we believe we have the most upside potential over time.

So we have we're always looking to find ways to.

Optimally deploy capital whether that is doing more jbs doing de novo's, clearly looking at M&A and.

Right now we feel very good about the pipeline that we have on the M&A front.

It will also that we have some confidence that valuations are slightly slightly softening as we're heading here into the new year I would say to your question on the JV front.

We also feel very strong about the pipeline there are existing JV announcements are expected to take us from our current acute states of 21, plus Puerto Rico into three additional states, Colorado, Minnesota, and North Carolina, and then the pipeline of near term deals.

On the JV front are expected to take us into two additional states and I think really just strengthen our geographic footprint. Overall, so we feel very good about the pipeline that is building in these msas on the JV front, certainly with de novo's and definitely with M&A as well.

Okay, Great and maybe my follow up.

Obviously, the nine 4%.

Revenue increases a robust number I wonder if you could give us a little flavor for across the individual segments was that a consistent rate of growth or was there much variation across your key business lines.

Yes, a J we were we were pleased with the same facility revenue performance in the quarter, which included another strong quarter of revenue per day growth and our strongest quarter of the year from a volume perspective, and as we look at that by service line we saw.

All incredibly strong performance demand volume pricing.

Really across all of the service lines, but we would highlight acute specialty and the CTC business. All saw a very strong quarter RTC also performed well very stable.

There are fewer investments going into that service line, but the facilities we have.

<unk> had a very good 2022 in the fourth quarter, but acute specialty in CTC really led the charge in terms of revenue growth for the quarter.

I will now.

For 'twenty three we really continue to expect strong patient day growth of 4% to 6% for the year and I would say that the volume is supported by three things. The first is just our strong demand that continues the second would be the important capacity additions that we've seen and that we just.

<unk> in the second half of 'twenty two that will continue into two early 'twenty three and then the third is just the improved performance that we're starting to see from optimizing our marketing and admissions processes. So it's early in the year.

But so far into the quarter, we're seeing record census, and patient day growth that we really think the higher end of the 4% to 6% that we're projecting for the year.

Okay, great. Thanks, so much.

And our next question will come from Whit Mayo with SBB Securities. Please go ahead.

Hey, thanks.

Maybe for David or actually more for <unk>.

Chris when you guys look at the capital.

That you are deploying have you changed at all or refined how you measure returns on capital I'm just wondering how.

The returns have changed on these deals and what your minimum hurdle rates are today and it might just be more helpful to frame from like a cohort perspective, how capital returns or tracking.

We always to refine how we think about allocating capital across our growth pathways across our service lines and.

Haven't necessarily changed how we think about our targets.

Certainly like a lot of companies would say our weighted average cost of capital and the cost of debt has increased slightly but from our perspective.

We are always built in kind of a higher threshold that we target in our transactions such that we haven't had to significantly change how we think about that capital allocation.

We continue to think that.

Our existing facility expansions are our most attractive opportunity.

And then as we think about de Novo's and as we think about joint ventures, and even M&A opportunities we have.

The deal specific analysis that we'd look at.

But across those growth pathways, we're still seeing good opportunities.

That exceed the hurdles that we have in place across a number of different metrics IRR.

We look at <unk>, we look at our EBITDA multiple not only at the time that we make an investment but over the course of the investment as we hope to grow earnings.

That's an M&A deal or do.

<unk> joint venture facility. So no major changes of course as we projected out in December there.

There are many joint venture projects that we think will be tremendous for the company that we're working hard to bring online and Brian Good EBITDA growth for the company at.

At strong returns, but we think all pathways will have activity that is going to be attractive.

We get the question a lot around redetermination.

I presume that most of your Medicaid is in the adolescent population and many of those that would lose traditional Medicaid coverage meters flip into chip. It might just be helpful to hear some of the work that you guys have done internally and how you might be thinking about how that plays out over the course of 2023.

<unk>.

Yes.

We've been focused on this topic.

As it's certainly been out there and now is I guess closer to being implemented across the different states than it was as we thought about the potential of it happening over the course of last year, but we've had a lot of time to plan as we've as we've talked about previously.

We really view.

Mental health coverage is essential and think that many states and payors would intend to continue to provide coverage.

But of course, we want to help all of our Medicaid patients navigate what that means for them, whether it's an administrative process that they go through.

Re enroll in their Medicaid plans or find some other product our focus has been on educating our patients.

Our facilities our operations leaders are revenue cycle leaders have done a tremendous job just planning for that and communicating what to expect as we move into the second quarter.

We will continue to monitor the potential impact of course, there are patient populations as you mentioned the child and adolescent population.

I think is less likely to have a disruption and we will have a longer period of time, where they can stay enrolled in Medicaid.

But we want to help all of our patients just navigate what it means for their coverage through the year and the team has done a nice job preparing.

Okay. Thanks, guys.

Our next question will come from Kevin Fischbeck with Bank of America. Please go ahead.

Okay, great. Thanks, I just wanted to follow up on some of your labor comment because I think last quarter, you had talked about kind of 5% to 7% wage growth. It seemed a little bit optimistic that you would see some moderation in that number over time back to the 3% to 4% number. So just wanted to get any more color on kind of why it was.

So much higher in Q4, when most of the companies seem to be saying that they're seeing some progress on labor.

Yes, Kevin we did see 5% to 7% over the first three quarters of the year, the third quarter was around that 7% level.

The fourth quarter as we isolate just base wage inflation, we were around 8%, which we view as pretty similar.

To the 7% that we saw in the third quarter.

We do want to remain proactive with our pay so we're seeing an improved environment as we look at just our recruiting metrics as we look at our net new hires which improved throughout the fourth quarter and in January in the weekly data that we have for February .

And so we're seeing some positive signs of improvement we do have for the company. Our annual Merit increase process that happens either in January for two thirds of the company or in April for the other third of the company and we want to remain committed to that and stay in.

The right place from a PE perspective across our markets.

So we have moved forward with that and partially because of that expect wage inflation to stay in that 7% to 8% range through the first half of this year.

But with some of those positive.

Metrics that we're seeing with the improvement that we mentioned and premium pay that we saw in the fourth quarter. We're seeing some positive signs and think as we look out at the second half of the year.

We'd see wage inflation in our outlook reflects wage inflation.

Dropping back down below the 5% level.

We'll ultimately see if it returns to more of the 3% to 4%. The company saw for a number of years in the industry solve for a number of years.

But for now second half of the year, we think we would moderate at that point to less than 5% on a base wage inflation and then premium pay we think continues to improve throughout the year.

Okay, I think last quarter, you kind of broke out some of the labor pressure from things like Centerpoint.

Is there anything like that kind of skewing the metrics at all from ramp up of.

Newly opened facilities I guess is labor.

Sourcing at all.

Our headwinds of volume growth are you, having a hard time staffing or is it just you can staff. It just have to pay up for it.

Yes.

I appreciate the question on the metrics, we would say as you look at our labor metrics.

Including salaries wages and benefits as a percentage of revenue.

Did have.

A $4 million of pickup that we recorded and highlighted in the fourth quarter of last year relating to the direct payment program in the state of Florida, and so that did lower our <unk> metric by 30 basis points and then of course, depending on what metric you're looking at here in the fourth quarter of this.

This year if its margin it's.

Impacted by the AR reserve adjustment that we highlighted so we do have.

Some adjustments that need to be made as you think about the year over year metrics.

Given that and within that we would say our same facility.

The group is performing very well is stable year over year and is seeing margin improvement year over year, but there are three new facilities that we've opened in the second half of 2022.

That do carry a much higher labor load as their volume and revenue ramps. So that did have an impact on both the SW metric as well as our margin.

Centerpoint.

Perform.

Well in the fourth quarter, we saw that just the team overseeing their integration do a fantastic job throughout the year, bringing improvements to the performance of that acquisition, but it did also have an impact on our margin.

As from the acquired date and even in the fourth quarter that business has a lower margin at the company average. So there is a few items like that that did impact our labor metrics and some investments we've made at the corporate level.

Which.

Having a positive impact of that on the company as we move into 2023 also are reflected in that <unk> and in the margin.

Great. Thanks.

Our next question will come from Andrew Mok with UBS. Please go ahead.

Hi, Good morning, Chris you mentioned, some new investments and facility openings in your prepared remarks, but it wasn't entirely clear to me what changed versus the previous outlook can you help us better understand what specifically is driving the higher revenue outlook for 2023, and why that's causing a narrowing of EBITDA range at this stage. Thanks.

So Andrew just to clarify youre looking for more detail on the it investments.

Yes, just the 2023 revenue outlook versus the previous outlook you gave at the Investor day and.

And why that's causing a narrow range of the EBITDA range at this stage.

Yes, Andrew we of course did provide initial guidance and this is David we provided initial guidance in December .

Earlier than the company typically provides our guidance.

We did as we updated that guidance in February really viewed.

Now range as a tightening of what we provided in December .

Since December .

As we've gone through.

And finalized our budgeting process as we have also seen trends through the fourth quarter and the start that we've had to Q1, we did increase our revenue outlook.

And the key driver of that is that we see our volume accelerating.

We've talked about the 4% same facility volume growth for the fourth quarter.

Now accelerating for 2023 to a range of 4% to 6% and we are starting Q1 at the high end of that 4% to 6% range. So we're really pleased with the volume outlook and it is slightly stronger than what we had projected in December given.

Some of those strong trends to start the year.

EBITDA outlook, we do believe that that incremental volume drives incremental EBITDA as well.

But our view is for now given the it's early in the year, we just tightened our EBITDA range, but kept the midpoint, where it was and of course things like wage inflation.

Have also been factored in just the updated view around that compared to projections that we had in December .

Hopefully that helps.

Got it that's helpful and then on the Capex I think it's been about two years in a row now where you've cut the growth capex about $85 million lower versus initial expectations with the step up in growth Capex of $375 million. This year, what's your confidence level in getting that completed this year.

Well, it's a good question because as we've talked about throughout 2022.

We have been looking forward to breaking ground across all of those new facilities that we've had in the pipeline just ready to start construction and work towards the opening of those new joint ventures, and other facilities and didn't have as much visibility a year ago as we talked about.

Our capex guidance as we feel like we have today there are a number of projects.

Have have now broken ground and at that point, we do have higher visibility and have a higher confidence level and so we're expecting for that step up.

To occur and that's reflected in our guidance.

And we will continue to provide an update as to the timing of those projects, but we're glad to be at this moment, where we feel like we have higher visibility because the opportunity we have to get those facilities open and bring them into the company. We think is a key driver for our results two to three years from now.

So.

I am not going to give you a <unk>.

<unk> confidence level, but we do have much higher visibility today, given that we've broken ground across many of those projects.

Great. Thanks for all the color.

Yes, Thanks, Andrew.

Our next question will come from Gary Taylor with Cowen. Please go ahead.

Hi, good morning.

I have question I noticed in the release and you talked about this at Investor day, a little bit about.

The opportunity to add the intense outpatient programs at some of your Ips. So.

The question was how many of your Ips have all three are also include partial hospitalization and the intense outpatient.

Programs and is there a way to sort of size.

The remaining revenue opportunity.

Either per facility or just for the total company to build out those.

Stepped down programs across all of the acute hospitals.

Yeah. Thanks, Gary for the question. This is Chris So I would say a majority of our acute facilities certainly have the opportunity for step down programs and Thats something we havent disclosed the exact number.

Clearly that is a focus of our clinical team led by our Chief Medical Officer, Mike Genovese.

As we're trying to continue we've added obviously that fit the growth pathway around PHP and IOP also looking to enhance the cross referral opportunity within the company as well.

But David anything you'd want to add on <unk>.

Jeff down programs no we have seen a number of new programs opened over the years and our team has done a nice job.

Really looking at.

Where our patients are coming from.

Where we might be deflecting patients based on the level of care thats appropriate for them and where they might be stepping down and really using that to open new programs and it also informs our de Novo strategy just as we think about where we might have service gaps so happy to bring on a number of new programs.

At our existing facilities, but it's also.

Being informed and useful as we think about that.

<unk> growth and other opportunities, where the company might need to add capacity.

Could I just do a quick follow.

You give us a sense of you have an IPF that doesn't have those two step down programs you have in IPF.

<unk> has kind of mature step down programs.

As the revenue differential is 10% higher 20% higher can you give us any sort of sense on what those steps down programs add to the facility profile.

We are probably the ball parking it right now, but I think that 10% range is probably about right.

Depending on the size of their program.

In some cases the facility could have a strong.

Graham it's not only stepped down it's also capturing other.

Patients in that market that may just need a different level of care. So it does vary by facility, but 10% may be the right estimate.

Thank you.

Thanks Kerry.

Our next question will come from Peter Chickering with Deutsche Bank. Please go ahead.

Hi, there you've got Kieran Ryan on for Peter Thanks for taking the question.

I was just wondering if you could maybe break out the SMB impact in <unk> from the onetime reserve adjustment.

And then I have a quick follow up after that.

Yeah.

Yes.

<unk>.

As we think about the SW be impact from the reserve adjustment.

<unk> adjustment, where on our P&L was actually in.

Other operating expenses, which is where we have our interest expense.

And so just thinking about it more from a margin perspective and other operating expenses.

That that metric as a percentage of revenue for the fourth quarter was 13, 9% and without that reserve adjustment would have been 13.0%.

So that's the impact that it had on that line item.

<unk>.

About.

<unk>, 9% impact on margin as well.

That's helpful. Thank you and then just on the 2023 EBITDA outlook could you just are you able to break out how much of the change there is due to disc.

Discretionary investments and facility openings versus just the wage pressure, which seemed kind of holding in pretty high there and <unk> in the high single digits.

Yes, I mean, our expectation continues to be for those new facilities, which do carry some startup losses in the near term.

But are an important driver of longer term value creation and earnings growth for the company, but our expectation for 2023 is that those new facilities would still be in the $15 million to $20 million range in terms of where theyre startup losses should run that always.

Depends on just the timing and number of new facilities that we have.

But that $15 million to $20 million continues to be our estimate.

For annual startup losses of our new facilities.

Thank you.

And our next question will come from John Ransom with Raymond James. Please go ahead.

Hey, good morning, just a couple on reimbursement.

And then a follow up so if we're looking at apples to apples just pure rate.

2023 over 2022, how should we think about just the pure rate updates affecting your revenue per day percentage growth.

Yes, John we have.

<unk>.

I would say compared to December we have.

More positive outlook around reimbursement of course, we always go in.

With expectations for rate increases in the mid single digit range. It's what we've seen throughout 2022 and based on inflation and other factors expect to see that.

For most of our payers going forward, but want to remain cautious.

Just knowing.

We have a lot of different payers that we contract with but as we have more recently just thought about what the year looks like from a revenue per day perspective.

We are expecting on average 3% to 5%.

I do feel like in the early part of the year, we have a higher level of visibility that we should sustain.

Growth in the higher end of that range, so closer to that 5% other.

The reason for that is a lot of our contracting with Medicaid plans.

Over 75% actually of our Medicaid revenue is contracted in the second half of the year.

Which means as we go through the first part of this year.

We can see the rate increases that we've received over the second half of the year that carry into the first half of this year and then the focus is on.

Renegotiating with those payers in advance of next year's contract date, So do feel like we have higher visibility now.

We saw a lot of success across our different facilities markets and payers throughout 2022 and hope that that continues in the mid single digit range and have visibility, we think that it will through the first part of the year.

No more caution just built into the second part of the year, where we may see it at the lower end.

But we'll obviously stay focused on that I think we still have opportunities just building some some caution into our outlook for the later part of the year.

And John I would just add that to.

To David's point, we have a very strong corporate managed care team that I think has continued to just build and enhance really good relationships with payers across the board and.

And has for a number of years.

We've chosen to invest in that team and I think that really factors into.

Some of the comments that David made but we do want to be cautious about how all of this comes together and just the overall impact for the company in total.

Okay.

And my follow up is.

Yeah.

In theory as you talk to your <unk>.

Commercial and Medicaid partners about value based kickers.

Using the baseball analogy kind of where are you and then just in theory.

What would that look like for behavioral because we're not used to it being very common in your world.

Yes, so to use your baseball analogy, John I would say were.

We're approaching first space.

The early very early innings here.

There.

We want to be in a position strategically and we're doing so with these it investments that we're prepared to move at the pace that the industry will move on on behavioral health. It's one of the major reasons that that we feel so strongly about.

Getting all this infrastructure in place, making sure that we are able to capture data and that we can ultimately compete on the quality of the clinical outcomes that we're achieving relative to our competitors.

But I think in terms of value based programs. It depends on the payer and we certainly are seeing some interest from payers here in the early stages.

The.

They are willing to provide us with some incentives usually it's around.

Readmissions.

<unk> success successfully preventing readmissions, but there are other factors that will probably be added to that over time, but these contracts right now that we're seeing are just much more upside only contracts we are not seeing it.

Any contracts or any any interest right now in downside risk for certainly any move to full capitation. So that's why I would say, we're still approaching first space.

And if we accelerate our pace here to second or third will be ready given the investments that we're making and that is how we want to position ourselves to move at that pace.

So Chris to be clear baseball, you're supposed to talk about earnings basis, but that's okay al I get a second and again right.

Sure.

Tried to give you both.

Alright, thanks, so much.

This concludes our question and answer session.

I'd like to turn the conference back over to Chris Hunter for closing remarks.

Well. Thank you before we end the call I just want to thank again, our committed facility leaders clinicians and approximately 23000 dedicated employees across the country, who have just continued to work tirelessly to meet.

The needs of patients in a safe and effective manner.

Thank you all for being with US This morning and for your interest in Acadia and if you have any additional questions. Today. Please don't hesitate to contact us directly have a great day everyone.

Okay.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

[music].

Good morning.

And welcome to Acadia Healthcare's fourth quarter and full year 2022 earnings call.

All participants will be in a listen only mode.

Should you need any assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note that this event is being recorded today.

I would now like to turn the conference over to Gretchen Hummer. Please go ahead ma'am.

Good morning, and welcome to Acadia <unk> fourth quarter 2022 conference call I'm, Gretchen Homrich, Vice President of Investor Relations for Acadia I'll first provide you with our safe Harbor before turning the call over to our Chief Executive Officer, Chris Hunter and to the extent any non-GAAP financial measure is discussed in today's call. You'll also find it.

Reconciliation of that measure to the most directly.

Terrible financial measure calculated according to GAAP on our website by viewing yesterday's news release under the investors link.

This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding <unk> expected quarterly and annual financial performance for 2022 and beyond.

I hereby cautioned that these statements may be affected by the important factors among others set forth in <unk> filings with the Securities and Exchange Commission and in the company's fourth quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward looking statements.

At this time for opening remarks, I would like to turn the conference call over to our Chief Executive Officer, Chris Hannah.

In December we held our first ever Investor Day at Carnegie Hall in New York, and we're appreciative that so many of you joined us in person and through our webcast. It was a great event and we appreciate your support I am pleased to say that our fourth quarter results and start to 2023 demonstrate that we're executing.

On the strategy, we presented with favorable results across our key performance metrics.

Throughout the past year, we continued to see strong momentum in our business, reflecting robust demand for our behavioral health care services, we needed to continue to commend our dedicated team of employees and clinicians across our operations who've worked tirelessly to meet the needs of those seeking treatment.

For mental health and substance use issues.

Our strong results reflect our ability to effectively operate our 250 facilities across the <unk> network and serve our patients with safe quality care.

A 4.0%.

Our fourth quarter results marked a strong finish to 2022, and we believe set us up well for 2023.

We are proud of our vitally important work to support expanding patient populations in order to make a positive difference in more communities.

Acadia has created a strong foundation to build upon during a time of unprecedented demand for behavioral health care services.

Acadia has established strong relationships with med search hospitals across the country, bringing our experience and expertise to markets, where they are desperately needed.

Unfortunately, a greater social awareness of mental health issues and broader acceptance of treatment have made behavioral health care priority with medical professionals and government health care officials.

Acadia is well positioned to address this critical societal need as a leader in providing behavioral health care services across the care continuum.

I'll briefly update you on our accomplishments related to these five pathways during the fourth quarter.

On the first pathway facility expansions remains a primary driver of our growth as this pathway allows us to efficiently expand services in established markets by utilizing our existing infrastructure and experienced staff.

Looking ahead, we expect to add approximately 300 beds through facility expansion in 2023.

Importantly, many of the bed additions in 2023 will open in the first half of the year and are expected to contribute to an accelerating volume growth outlook for the company.

Bed mantras adult hospital, and outpatient facility and our 80 bed facility co is shallow valley behavioral health in India, California later this year.

Gov, a ridge behavioral hospital will offer a full continuum of inpatient behavioral health care services for adult older adult adolescent and child patients. Our groundbreaking is scheduled for next week.

We will continue to pursue additional de novo opportunities and other underserved markets with a goal to develop and open.

And specialty facilities in 2024 and beyond.

We also continued.

During the fourth quarter, we opened three new de Novo CTC is in Florida, and Delaware, bringing our total to seven new <unk> for the year, which exceeded our goal of at least six ctc's.

Since used treatment support services that include medical counselling vocational educational and other treatment services to help our patients progress. We will continue to expand our CTC network and service offerings to meet this essential need with an objective of adding six ctc's.

In the year ahead.

Sure.

Our third attractive growth pathway is forming strategic partnerships with leading health systems across the country.

In the second half of 2022, we were pleased to open two new facilities. The first facility was a 90 bed facility with our joint venture partner Covenant Health in Knoxville, Tennessee in August and the second facility was Maple Heights behavioral health, a 120 bed facility, which was opened in December .

With our partner Lutheran Health network in Fort Wayne, Indiana.

Acadia now has 19 joint venture facilities in various stages of development with nine facilities opened in.

10 facility is expected to open over the next several years, including two in 2023, we remain encouraged by the strong continued interest from potential partners and our JV pipeline.

During the fourth quarter, we acquired four Ctc's from Georgia based brand new start treatment centers located in separate suburbs of the Atlanta Metropolitan area.

Extending Acadia CTC network to 151 locations at the end of 2022.

We remain focused on selectively identifying attractive M&A opportunities that are complementary to our existing geographic footprint and portfolio of service offerings.

We are fortunate to have a strong balance sheet that provides the flexibility to pursue acquisitions as well as make the necessary investments to support our other strategic growth pathways.

For our fifth and final growth pathway, we remain focused on extending the continuum of care across our facilities and identifying additional ways to support patients.

For example, we are continuing to strengthen our mid level acuity programming, which we most often used to step down our patients after residential treatment.

Since 2019, we have added over 50, PHP and IOP programs, including five in Q4 2022 alone.

We are also continuing to advance our cross referral program.

Including by launching system improvements in Q4, which make it easier for our nurses and clinicians to identify cross referral opportunities and facilitate the referral process itself.

Finally, we continue to fill in service line gaps in our markets. Our previously mentioned acquisition of <unk> in the Atlanta area. For example, compliments our existing acute specialty PHP and IOP service lines in that market.

Patient de Novo facilities.

Two facilities with JV partners with more JV announcements to come and opening at least six CTC locations.

We're working hard to deliver on our 24 or 2024, and 2025 growth targets as well as strengthening the foundation that these new facilities will become a part of.

As Acadia continues to lead and grow we are committed to creating and implementing best in class solutions.

Solutions that will further enhance the delivery of care and support the patients we serve.

We discussed at our Investor day investments and technology will be a key area of focus for Acadia in 2023 and beyond.

Initially the areas, where we expect to make short term investments include enhancing our infrastructure, which involves improving all of the <unk> technology capabilities across our network of.

<unk> top priority is centered around electronic medical records today, we have manual paper based processes across most of the company and the potential for electronic Medical Records is a significant opportunity for not only Acadia, but also the industry.

As we migrate to electronic records there are significant benefits from both a clinical and financial perspective.

We are focused on technology investments across five main categories.

The first is that we will be able to better support our medical teams with respect to patient safety and compliance.

Second we believe these investments will enhance the overall patient experience.

Third we expect improvement in employee satisfaction, which will support recruiting and retention.

John .

We will continue to evaluate the value derived from these investments and believe that over the four year period from 2023 to 2026 that we could see a total of $75 million to $125 million and dedicated.

Incremental capital expenditures.

We are highly encouraged by the value that this will provide for Acadia as we lead the industry forward and leveraging technology to improve the delivery of care.

As we also noted in December we had planned to add key leadership for this important initiative and we are pleased.

To add that Laura Groschen joined Acadia as the Companys, New Chief Information Officer in early January .

Information and technology for 'twenty operating units and global business functions across Medtronic locations and 150 countries.

I also want to reinforce our commitment to quality across our operations as we continue to extend our market reach safe and quality care remains the top priority for the patients who seek our help.

I am pleased to announce that we recently added Dr. Nab deep Kang to our management team as our new Chief quality officer for inpatient services.

In this role novel work closely with our Chief Medical Officer, Dr. Mike Genovese.

And we will be responsible for ensuring patient safety and superior quality of care by improving delivery of clinical services and our inpatient facilities novel lead our initiative to provide a robust proactive culture of quality excellence supported by processes and systems designed to prevent any issue and.

When necessary quickly respond to any adverse events.

<unk> is a clinical psychologists and brings extensive experience in addiction treatment and behavioral health.

And differentiated services that drive improved clinical outcomes across our network of 250 facilities. We have a shared mission to provide high quality behavioral healthcare services and we look forward to the opportunities ahead for Acadia in 2023 and beyond.

At this time I will now turn the call over to David Duckworth to discuss our financial results for the quarter and 2023 guidance.

Thanks, Chris and good morning.

Looking at the fourth quarter, we delivered strong financial and operating results as we successfully delivered on our key performance metrics demonstrating consistent execution of our strategy.

Revenue for the fourth quarter of 2022 increased 13, 8% to $675 3 million compared with $593 5 million for the fourth quarter of 2021.

Our revenue growth includes an increase in same facility revenue of nine 4%.

For the fourth quarter, our adjusted EBITDA was $159 million and adjusted income attributable to Acadia stockholders per diluted share was <unk> 74.

Which includes income of $5 $2 million related to the provider relief fund.

Also related to the American rescue plan payments.

Adjusted adjustments to income for the fourth quarter of 2022 include transaction related expenses and the related income tax effect.

The company also recorded an unfavorable adjustment of $5 9 million or <unk> <unk> per diluted share to itself insured professional and general liability reserves relating to the settlement or expected settlement of certain prior year claims relating primarily.

To the 2017 to 2018 period.

The estimated accrual for professional and general liabilities and is based on historical claims prior settlements and judgments and other factors and actuarial assumptions.

From a cost management perspective, we were pleased with our execution throughout 2022.

While we saw higher wage inflation in 2022, including approximately 8% base wage inflation for the fourth quarter.

We believe it's important to remain proactive in our PE and our volume and reimbursement growth have remained strong.

Of 2022.

Maintaining a strong financial position will remain a top priority for 2023 <unk>.

Providing us the flexibility and capital to support our growth strategy and future investments.

As of December 31, 2022, the company had $97 $6 million in cash and cash equivalents.

$525 million available under its $600 million revolving credit facility with a net leverage ratio of approximately two one times.

During the fourth quarter. The company completed its repayment of amounts received pursuant to the Medicare accelerated and advanced payment program under the cares Act.

<unk>.

Moving on to our guidance as noted in our press release, we narrowed our previously issued guidance for 2023 as follows.

Revenue in a range of $2 82 to $2 88 billion adjusted EBITDA in a range of $635 million to $675 million.

Adjusted earnings per diluted share in a range of $3 10 to $3 40.

Interest expense in a range of $80 million to $85 million a tax rate in the range of 25% to 26% dip.

Depreciation and amortization expense in a range of $125 million to $135 million stock compensation expense in a range of $30 million to $35 million.

Operating cash flow in a range of $450.

$500 million.

Expansion capital expenditures in a range of $350 million to $400 million.

Maintenance capital expenditures in a range of $40 million to $50 million and cash.

Capital expenditures in a range of $35 million to $45 million.

<unk> 70 to.

74.

The company's guidance does not include the impact of any future acquisitions divestitures transaction related expenses or the recognition of any additional provider relief fund income.

With that Joe we are ready to open the call for questions.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

We ask that you please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

And our first question will come from a J rice with credit Suisse. Please go ahead.

Thanks, Hi, everyone.

I know at the Investor Day, and then in your comments today, you've talked about a little bit about the potential acquisition pipeline. That's out there for you I wondered if you'd.

To expand a little more on what Youre seeing.

It seemed like there's a lot of JV and potential acquisition opportunities coming out of the pandemic is that still there and is there any opportunity.

This year as you look out for larger deals.

Any of those potentially out there.

Yeah. Thanks, Thanks, a J this is Chris and I'll start.

We continue to feel very optimistic about the M&A pipeline, which is clearly one of our important growth levers for 2023.

I would say that we have done extensive work and looking at the under bedded markets and really targeting the Msas, where we believe we have the most upside potential over time.

So we have we're always looking to find ways to.

<unk> deploy capital whether that is doing more jbs doing de novo's clearly looking at M&A and right now we feel very good about the pipeline that we have on the M&A front and I feel also that we have some confidence that valuations are.

Slightly slightly softening as we're heading here into the new year I would say to your question on the JV front.

On the JV front are expected to take us into two additional states and I think really just strengthen our geographic footprint. Overall, so we feel very good about the pipeline. That's building in these msas on the JV front, certainly with de novo's and definitely with M&A as well.

Okay, Great and maybe my follow up.

Obviously, the nine 4% revenue increase is a robust number I wonder if you could give us a little flavor for across the individual segments was that a consistent rate of growth or was there much variation across your key business lines.

A J we were we were pleased with the same facility revenue performance in the quarter, which included another strong quarter of revenue per day growth and our strongest quarter of the year from a volume perspective, and as we look at that by service line.

So incredibly strong performance demand volume pricing.

Really across all of the service lines, but we would highlight acute specialty and the CTC business. All saw a very strong quarter RPC also performed well very stable.

There are fewer investments going into that service line, but the facilities we have.

<unk> had a very good 2022 in the fourth quarter.

But acute specialty in CTC really led the charge in terms of revenue growth for the quarter.

And I would just add.

But so far into the quarter, we're seeing record census, and patient day growth that we really think the higher end of the 4% to 6% that we're projecting for the year.

Okay, great. Thanks, so much.

And our next question will come from Whit Mayo with SBB Securities. Please go ahead.

Hey, thanks.

Maybe for David or actually more for Chris When you guys look at the capital that you're deploying have you changed at all or refined how you measure returns on capital I'm just wondering how.

The returns have changed on these deals and what your minimum hurdle rates are today and it might just be more helpful to frame from like a cohort perspective, how capital returns or tracking.

We always to refine how we think about allocating capital across our growth pathways across our service lines.

And.

<unk> necessarily changed how we think about our targets.

Certainly like a lot of companies would say our weighted average.

<unk> cost of capital and the cost of debt has increased slightly but from our perspective, we've always built in kind of a higher threshold that we target in our transactions such that we haven't had to significantly change how we think about that capital allocation.

We continue to think that.

Our existing facility expansions.

Our most attractive opportunity.

And then as we think about de Novo's and as we think about joint ventures, and even M&A opportunities we have.

The deal specific analysis that we'd look at.

But across those growth pathways, we're still seeing good opportunities.

That exceed the hurdles that we have in place across a number of different metrics IRR.

We look at <unk>, we look at our EBITDA multiple not only at the time that we make an investment but over the course of the investment as we hope to grow earnings.

That's an M&A deal or.

De novo or a joint venture facility. So no major changes of course as we projected out in December .

There are many joint venture projects that we think will be tremendous for the company that we're working hard to bring online and Brian Good EBITDA growth for the company at.

At strong returns, but we think all pathways will have activity that is going to be attractive.

We get the question a lot around redetermination.

I presume that most of your Medicaid is in the adolescent population and many of those that would lose traditional Medicaid coverage may just flip into chip. It might just be helpful to hear some of the work that you guys have done internally and how you might be thinking about how that plays out over the course of 2023.

<unk>.

Yes.

We've been focused on this topic.

We really view.

Mental health coverage is essential and think that many states and payors would intend to continue to provide coverage.

But of course, we want to help all of our Medicaid patients navigate what that means for them, whether it's an administrative process that they go through.

Re enroll in their Medicaid plans or find some other product.

Our focus has been on educating our patients our facilities. Our operations leaders are revenue cycle leaders have done a tremendous job just planning for that and communicating what to expect as we move into the second quarter.

We'll continue to monitor the potential impact of course, there are patient populations as you mentioned the child and adolescent population.

That I think is less likely to have a disruption and we will have a longer period of time, where they can stay enrolled in Medicaid.

But we want to help all of our patients just navigate what it means for their coverage through the year and the team has done a nice job preparing.

Okay. Thanks, guys.

Our next question will come from Kevin Fischbeck with Bank of America. Please go ahead.

So much higher in Q4, when most of the companies seem to be saying that they're seeing some progress on labor.

Yes, Kevin we did see 5% to 7% over the first three quarters of the year, the third quarter was around that 7% level.

Fourth quarter as we isolate just base wage inflation, we were around 8%, which we view as pretty similar to.

To the 7% that we saw in the third quarter.

The right place from a PE perspective across our markets.

So we have moved forward with that and partially because of that expect wage inflation to stay in that 7% to 8% range through the first half of this year.

But with some of those positive.

We'd see wage inflation in our outlook reflects wage inflation.

Dropping back down below the 5% level.

We'll ultimately see if it returns to more of the 3% to 4% that the company saw for a number of years in the industry solve for a number of years.

For now second half of the year, we think we would moderate at that point to less than 5% on a base wage inflation and then premium pay we think continues to improve throughout the year.

Okay, I think last quarter, you kind of broke out some of the labor pressure from things like Centerpoint.

Is there anything like that kind of skewing the metrics at all from ramp up of.

Newly opened facilities I guess is labor.

Sourcing and all.

Our headwinds of volume growth are you, having a hard time staffing or is it just you can staff, we just have to pay up for it.

Yes.

I appreciate the question on the metrics, we would say as you look at our labor metrics.

Including salaries wages and benefits as a percentage of revenue.

Did have.

This year if its margin it's.

Impacted by the AR reserve adjustment that we highlighted so we do have.

Some adjustments that need to be made as you think about the year over year metrics.

Given that and within that we would say our same facility.

The group is performing very well and stable year over year and is seeing margin improvement year over year, but there are three new facilities that we've opened in the second half of 2022.

Do carry a much higher labor load as their volume and revenue ramps. So that did have an impact on both the SWA metric as well as our margin.

Enter point.

Form.

As from the acquired date and even in the fourth quarter that business has a lower margin that the company average. So there's a few items like that that did impact our labor metrics and some investments we've made at the corporate level.

Which.

Having a positive impact of that on the company as we move into 2023 also are reflected in that <unk> and in the margin.

Great. Thanks.

Our next question will come from Andrew Mok with UBS. Please go ahead.

So Andrew just to clarify youre looking for more detail on the it investments.

Just the 2023 revenue outlook versus the previous outlook you gave at the Investor day.

And why that's causing a narrowing of the EBITDA range at this stage.

Yes, Andrew we of course did provide initial guidance and this is David we provided initial guidance in December .

Earlier than the company typically provides our guidance.

We did as we updated that guidance in February really viewed now range as a tightening of what we provided in December .

I'll say since December .

As we've gone through in.

And finalized our budgeting process as we have also seen trends through the fourth quarter and the start that we've had to Q1, we did increase our revenue outlook.

And the key driver of that is that we see our volume accelerating.

We talk about the 4% same facility volume growth for the fourth quarter.

Now accelerating for 2023 to a range of 4% to 6%.

And we are starting in Q1 at the high end of that 4% to 6% range. So we're really pleased with the volume outlook and it is slightly stronger than what we had projected in December given some of those strong trends to start the year.

The EBITDA outlook.

We do believe that that incremental volume drives incremental EBITDA as well.

But our view is for now given it's early in the year, we just tightened our EBITDA range, but kept the midpoint, where it was and of course things like wage inflation.

Have also been factored in just the updated view around that compared to projections that we had in December .

Hopefully that helps.

Got it that's helpful and then on the Capex I think it's been about two years in a row now where you've cut the growth capex about $85 million lower versus initial expectations with the step up in growth Capex to three $375 million. This year, what's your confidence level in getting that completed this year. Thanks.

It's a good question because as we've talked about throughout 2022.

Our capex guidance as we feel like we have today there are a number of projects.

That have have now broken ground and at that point, we do have higher visibility and have a higher confidence level and so we're we're expecting for that step up.

To occur and that's reflected in our guidance.

So.

I am not going to give you a <unk>.

<unk> confidence level, but we do have much higher visibility today, given that we've broken ground across many of those projects.

Great. Thanks for all the color.

Yes, Thanks, Andrew.

Our next question will come from Gary Taylor with Cowen. Please go ahead.

Hi, good morning.

I have question I noticed in the release and you talked about this at Investor day, a little bit about.

The opportunity to add the intense outpatient programs at some of your Ips. So.

The question was how many of your Ips have all three are also include partial hospitalization and the intense outpatient.

Programs and is there a way to sort of size.

The remaining revenue opportunity.

Either per facility or just for the total company to build out those.

Stepped down programs across all of the acute hospitals.

Clearly that is a focus of our clinical team led by our Chief Medical Officer, Mike Genovese.

As we're trying to continue we've added obviously that fifth growth pathway around PHP and IOP also looking to enhance the cross referral opportunity within the company as well.

But David anything you'd want to add on on Step-down program now we have seen a number of new programs opened over the years and our team has done a nice job.

Really looking at.

Where our patients are coming from.

At our existing facilities, but it's also.

Being informed and useful as we think about that.

Novo growth and other opportunities, where the company might need to add capacity.

Can I just do a quick follow.

You give us a sense of you have an IPF that doesn't have those two step down programs you have in IPF.

<unk> has kind of mature step down programs.

As the revenue differential is 10% higher 20% higher can you give us any sort of sense on what those steps down programs add to the facility profile.

We are probably the ball parking it right now, but I think that 10% range is probably about right.

Depending on the size of their program.

In some cases the facility could have a strong program thats not only stepped down it's also capturing other.

Patients in that market that may just need a different level of care. So it does vary by facility, but 10% may be the right estimate.

Thank you.

Thanks Kerry.

Our next question will come from Peter Chickering with Deutsche Bank. Please go ahead.

Hi, there <unk> got Kieran.

Thanks for taking the question.

I was just wondering if you could maybe break out the SMB impact in <unk> from the onetime reserve adjustment.

And then I have a quick follow up after that.

Yes.

As we think about the SW be impact from the reserve adjustment.

That adjustment where on our P&L was actually in other.

Other operating expenses, which is where we have our interest expense.

And so just thinking about it more from a margin perspective and other operating expenses.

That that metric as a percentage of revenue for the fourth quarter was 13, 9% and without that reserve adjustment would have been 13.0%.

So that's the impact that it had on that line item.

<unk>.

<unk> had about.

<unk>, 9% impact on margin as well.

That's helpful. Thank you and then just on the 2023 EBITDA outlook could you just are you able to break out how much of the change there is due to <unk>.

Discretionary investments and facility openings versus just the wage pressure, which seemed kind of holding in pretty high there and <unk> in the high single digits.

<unk>.

Yes.

Our expectation continues to be for those new facilities, which do carry some startup losses in the near term.

But.

An important driver of longer term value creation and earnings growth for the company, but our expectation for 2023 is that those new facilities would still be in the $15 million to $20 million range in terms of where theyre startup losses should run that always depends on just.

The timing and number of new facilities that we have.

But that $15 million to $20 million continues to be our estimate.

For annual startup losses of our new facilities.

Thank you.

And our next question will come from John Ransom with Raymond James. Please go ahead.

Hey, good morning, just a couple on reimbursement.

And then a follow up so if we're looking at apples to apples just pure rate.

2023 over 2022, how should we think about just the pure rate updates affecting your revenue per day percentage growth.

Yes, John we have a.

<unk>.

I would say compared to December we have.

More positive outlook around reimbursement of course, we always go in.

With expectations for rate increases in the mid single digit range. It's what we've seen throughout 2022 and based on inflation and other factors expect to see that.

For most of our payers going forward, but want to remain cautious.

Just knowing.

We have a lot of different payers that we contract with but as we have more recently just thought about what the year looks like from a revenue per day perspective.

We are expecting on average 3% to 5%.

I do feel like in the early part of the year, we have a higher level of visibility that we should sustain.

Growth in the higher end of that range, so closer to that 5% other.

The reason for that is.

A lot of our contracting with Medicaid plans.

Over 75% actually of our Medicaid revenue is contracted in the second half of the year.

Which means as we go through the first part of this year.

We can see the rate increases that we've received over the second half of the year that carry into the first half of this year and then the focus is on.

Renegotiating with those payers in advance of next year's contract date, So do feel like we have higher visibility now we.

A little more caution just built into the second part of the year, where we may see it at the lower end.

But we'll obviously stay focused on that I think we still have opportunities just building some some caution into our outlook for the later part of the year.

And John I would just add that to.

To David's point, we have a very strong corporate managed care team that I think has continued to just build and enhance really good relationships with payers across the board and.

And has for a number of years.

We've chosen to invest in that team and I think that really factors into.

Some of the comments that David made but we do want to be cautious about how all of this comes together and just the overall impact for the company in total.

Okay.

And my follow up is.

Yes.

In theory as you talk to your <unk>.

Commercial and Medicaid partners about value based kickers.

You used the baseball analogy kind of where are you and then just in theory.

What would that look like for behavioral because.

We're not used to it being very common in your world.

Yes, so to use your baseball analogy, John I would say were.

We're approaching first space.

Early very early innings here.

There.

But I think in terms of value based programs. It depends on the payer and we certainly are seeing some interest from payers here in the early stages.

The.

They are willing to provide us with some incentives usually it's around.

Readmissions.

<unk> success.

<unk>, preventing readmissions, but there are other factors that will probably be added to that over time, but these contracts right now that we're seeing are just much more upside only contracts we are not seeing.

Any contracts or any any interest right now in downside risk for certainly any move to full capitation. So that's why I would say, we're still approaching for space and if we accelerate our pace here to second or third will be ready given the.

The investments that we're making and that is how we want to position ourselves to move at that pace.

So Chris to be clear baseball, you're supposed to talk about earnings basis, but that's okay I get it secondhand again right.

Sure.

Tried to give you both.

Alright, thanks, so much.

This concludes our question and answer session.

I'd like to turn the conference back over to Chris Hunter for closing remarks.

Well. Thank you before we end the call I just want to thank again, our committed facility leaders clinicians and approximately 23000 dedicated employees across the country, who just continue to work tirelessly to meet the needs of patients in a safe and effective manner I want to thank you.

All for being with US this morning and for your interest in Acadia and if you have any additional questions. Today. Please don't hesitate to contact us directly have a great day everyone.

Okay.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Q4 2022 Acadia Healthcare Company Inc Earnings Call

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