Q4 2024 Acadia Healthcare Company Inc Earnings Call
Thank you and good morning yesterday after the market closed we issued a press release announcing our fourth quarter 2024 financial results. This press release can be found in the Investor Relations section of the acuity of health care Dotcom website here with me today to discuss the results are Chris Hunter, Chief Executive Officer, and Heather Dickson Chief Financial Officer.
To the extent any non-GAAP financial measure is discussed in today's call. You will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095, including state.
<unk> among others regarding Acadia is expected quarterly and annual financial performance for 2024 and beyond.
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.
<unk> results may differ materially from the results discussed in the forward looking statements.
Chris: At this time I would like to turn the conference call over to Chris.
Chris: Thank you Patrick and good morning, everyone. Thank you for being with Us for Acadia as fourth quarter 2024 conference call.
Chris: For the fourth quarter, we reported solid financial and operating results capping off another year of growth and progress for Acadia.
Chris: Total revenue increased four 2% over the prior year's fourth quarter to $774 million.
Chris: For the full year, we delivered over $3 1 billion in revenue a seven 7% increase over 2023.
Chris: Same facility patient days grew three 2% in the fourth quarter and remain stable between 3% and 4% in each month throughout the quarter excluding.
Chris: Excluding the impact of a handful of underperforming facilities same facility growth would have been above 5% in the quarter.
Chris: We also benefited from a more stable labor environment in 2024 supported by our initiatives centered around recruitment retention and employee engagement and a strong focus on training in our local markets.
Chris: Working together with our facility operators has helped us attract and maintain talent in a competitive market.
Chris: I'd like to now take a moment to reflect on what drives us forward as an organization and why I remain as confident as ever in our strategy.
Chris: At our core we are a company dedicated to transforming the lives of patients families and those in the communities we serve for the better.
Chris: Our facilities treat many of the most complex high acuity cases, and fill a critical gap in the continuum of care for evidence based specialized behavioral healthcare.
Chris: What sets us apart is our unwavering commitment to putting patient needs first setting a high bar for care standards and compliance and prioritizing quality.
Chris: We back up this commitment by investing heavily in technologies to enhance safety and people and processes to support effective patient care delivery.
Chris: We believe we have led the industry in adopting the latest technology and evidence based practices and attracting the most skilled practitioners in the field.
Chris: Helping us to deliver safe quality care with positive clinical outcomes and patient satisfaction scores.
Chris: For example.
Chris: We are going above and beyond what's required of behavioral health care facilities by investing in electronic medical records, which reduce medication errors improve care coordination support quality and ensure the consistent delivery of evidence based care.
Chris: We have added patient monitoring devices across Acadia is acute facilities, which enhance patient safety and mitigate incident risk.
Chris: We believe we lead the industry in performance metrics in the use of this technology underscoring our confidence that the care delivered at Acadia sets the standard for other providers.
Chris: We have also implemented wearable safety devices for staff that enables improved response times and mitigation of potential risk.
Chris: Our ability to use data has continued to advanced significantly.
Chris: Our integrated quality dashboard now provides real time visibility into over 50 distinct safety patient experience and regulatory compliance related key performance indicators.
Chris: This gives facility leadership real time insight into performance across our hospitals, creating a culture of accountability for quality.
Speaker Change: As CEO of Acadia I continue to remain highly focused on these initiatives and we will continue to prioritize them and expand them when necessary I strongly believe this patient centered approach is driving superior outcomes and patient experience and also unlocking operational effects.
Chris: <unk> across the organization.
Chris: Before I turn it over to Heather to dive deeper into the financial discussion I'd like to provide a progress update on our growth strategy.
Chris: We completed construction on approximately 1300 beds and 2024, including approximately 1100 completed during the fourth quarter.
Chris: 776 of these new beds became operational during 2024, including the opening of four new acute inpatient hospitals.
Chris: In the fourth quarter 577, newly constructed beds became operational including 233 beds to existing facilities and 344 beds from new facilities.
Chris: In the first two months of 2025, we have added an additional 313 licensed beds.
Joint venture partnerships continue to be an important part of our growth strategy. We are fortunate that a growing number of well respected health systems are choosing to partner with Acadia to better serve patients by bridging the gap between physical and behavioral healthcare.
Chris: During the fourth quarter, we opened our 144 bed joint venture hospital with Intermountain Health in Denver, Colorado.
Chris: We also recently opened our 192 bed joint venture Hospital in partnership with Henry Ford Health in Detroit.
Chris: Looking forward, we have a solid pipeline of potential opportunities to work with other leading providers in attractive markets and expect to add between 800 and a 1000 total beds. This year.
Chris: We are proud of this progress, which would not have been possible without the efforts of the over 25000 dedicated employees clinicians and health care professionals, who work at Acadia.
Chris: As communities across the United States continue to face an unprecedented mental health and addiction crisis with rising rates of depression anxiety and substance use disorders and suicide Acadia continues to be committed to expanding access and providing the specialized care and treatment.
That is so desperately needed.
Chris: As we look to 2025 and beyond we remain confident in our strategy and goals, we have set for ourselves.
Chris: At this time I will now turn the call over to Heather to discuss our financial results for the quarter.
Heather: Thanks, Chris and good morning, everyone.
Heather: Our fourth quarter financial performance reflects consistent growth trends across our diversified portfolio of behavioral health service line.
Heather: We reported $774 million in revenue for the quarter, representing an increase of four 2% over the fourth quarter of last year same.
Heather: Same facility revenue grew four 7% compared with the fourth quarter of 2023, which included patient day growth of three 2% and an increase in revenue per patient day of one 4%.
Heather: As Chris mentioned same facility patient day growth stabilized in that 3% to 4% range for each month in the quarter.
Heather: Our revenue per patient day growth moderated versus the third quarter, primarily due to the timing of supplemental payments.
Heather: Absent the impact of timing pricing trends remained stable as payers continued to place a high degree of emphasis on the behavioral health needs of their members.
Heather: Adjusted EBITDA for the fourth quarter of 2024 with $153 $1 million adjusted.
Heather: EBITDA margin was 19, 8% compared with 22, 8% for the same quarter last year.
Heather: On a same facility basis, adjusted EBITDA was $196 $4 million and adjusted EBITDA margin was 25, 7% in the fourth quarter of this year and 28, 4% for the prior year's fourth quarter.
Heather: During the fourth quarter of 2024, we recorded a $14 million increase to our reserve for self insured professional and general liability claim.
Heather: This adjustment is related to years prior to 2024 and is largely as a result of the unfavorable trends experienced by the broader industry in recent years.
Heather: Startup losses related to new facilities were $11 $2 million in the fourth quarter of 2024 or.
Heather: $6 million year over year increase relative to the fourth quarter of 2023, and a $4 million increase sequentially over the third quarter, a reflection of the step up in the number of newly constructed facilities.
Heather: These quarterly results also reflect a $7 million revenue impact and a $5 million EBITDA impact due to the decision to close the facility in the fourth quarter as a part of our ongoing portfolio management efforts.
Heather: Adjusted income attributable to Acadia stockholders per diluted share was <unk> 64 for the fourth quarter of 2024 and 85 for the prior year period, excluding the income from the provider relief fund in the fourth quarter of 2023.
Heather: Consistent with previous periods adjustments to income for the fourth quarter of 2024 include transaction legal and other costs.
Heather: Loss on impairment and provision for income taxes.
Heather: We continued to maintain a strong financial position throughout 2020 for providing us with the ability to make the right strategic investments to enhance our operations and support our growth strategy.
Heather: As of December 31, 2024, we had $76 $3 million in cash and cash equivalents and $226 $5 million available under our $600 million revolving credit facility with a net leverage ratio of approximately $2 seven.
Heather: Moving onto our outlook for 2025 as noted in our press release, we are providing full year guidance as follows.
Heather: Revenue is expected to be in the range of three three to $3 $4 billion.
Heather: Adjusted EBITDA is expected to be in the range of $675 million to $725 million.
Heather: Adjusted earnings per share is expected to be in the range of $2 50 to $2 80.
Heather: We expect operating cash flow to be in the range of $460 million to $510 million.
Heather: We expect capital spending to be in the range of $630 million to $690 million. This includes approximately $525 million to $575 million and expansion spending related to the construction of new beds.
Heather: Our full year guidance includes same facility patient day growth in the low to mid single digit.
Speaker Change: As Chris mentioned, we continue to focus on improving volume at a handful of underperforming facilities. However, our outlook does not assume a material improvement in the performance and Thats great.
Speaker Change: Were we to see a more material improvement sooner that would represent potential upside to our guidance range.
Speaker Change: As a result full year guidance, therefore assumes an approximate $20 million EBITDA headwind from this small group of facilities.
Speaker Change: Our full year guidance assumes same facility revenue per patient day growth in the low single digits.
Speaker Change: This includes a net year over year change in Medicaid supplemental payments in the range of flat to a $15 million increase.
Speaker Change: This contemplates a range of outcomes related to the new Tennessee program, which the company expects to recognize subsequent to the first quarter of 2025.
Speaker Change: I would also remind you that as called out throughout the last year 2024, EBITDA included approximately $10 million and nonrecurring supplemental payments.
Speaker Change: Full year guidance includes $50 million to $55 million in total startup losses related to newly opened facilities.
Speaker Change: This represents a year over year increase and startup costs of approximately $25 million as compared to 2024, a reflection of the significant increase in the pace of bed growth as well as the timing of new facility openings.
Speaker Change: Full year guidance also includes a year over year increase and professional liability expense of approximately $10 million.
Speaker Change: This increase is it related to recent trends experienced across the industry, including higher reinsurance costs and we believe reflects a more conservative position.
Speaker Change: I would also point out that 2024 consolidated results included approximately $60 million of revenue and $5 billion of EBITDA from facilities that were subsequently exited or a 200 basis point and 70 basis point headwind to 2025 revenue and EBITDA growth respectively.
Speaker Change: <unk>.
Speaker Change: We also issued financial guidance for the first quarter of 2025 as follows.
Speaker Change: Revenue in the range of 765% to $775 million and.
Speaker Change: <unk> EBITDA in the range of $130 million to $135 million.
Speaker Change: First quarter guidance includes the following assumptions.
Speaker Change: Given the large number of beds opened towards the end of 2024 and anticipated in early 2025 startup losses are expected to be disproportionately weighted towards the first half of the year.
Speaker Change: First quarter startup losses are expected to be approximately $20 million, representing an increase of approximately $15 million over the first quarter of 2024.
Speaker Change: First quarter guidance assumes a net decrease in Medicaid supplemental payments of approximately $10 million to $15 million.
Speaker Change: As a reminder, 2024 first quarter results included $7 million and nonrecurring supplemental payments.
Speaker Change: I would also note that first quarter 2024 consolidated results included approximately $25 million of revenue from facilities that were subsequently closed representing a 300 basis point headwind to first quarter growth.
Speaker Change: Facility closures are expected to be a headwind to year over year EBITDA growth of approximately $5 million in the first quarter.
Speaker Change: Finally for modeling purposes, I would remind you that last year's first quarter had one extra day compared to this year's first quarter.
As always the company's guidance does not reflect the impact of any future acquisitions divestitures transaction legal and other costs are nonrecurring settlement expense.
Speaker Change: Before we move on to Q&A I would like to talk briefly about the outlook beyond 2025, and the significant tailwind for this business over the next few years.
Speaker Change: We materially accelerated the pace of new bed growth in 2024, and we expect to add another 800 to 1000 beds and 2025.
Speaker Change: This means we will have roughly 16 to 1800, new beds that we expect to go from generating startup losses to a positive EBITDA contribution over the course of 2026 and beyond.
Speaker Change: At the same time startup losses from new facilities are expected to decline beyond 2025.
Speaker Change: Therefore, we see an inflection point in earnings growth in 2026, and expect 2026 EBITDA growth to be towards the high end of the long term outlook range provided with our press release yesterday.
Speaker Change: We anticipate the benefit of accelerating EBITDA growth combined with a decline in capital spending will drive the company towards meaningful free cash flow generation.
Speaker Change: As a reminder, a little over $100 million of our annual Capex is related to maintenance and it spending or about 2% to 3% of revenue with the remainder going towards the construction of new beds and CTC facilities.
Speaker Change: As such we anticipate a material reduction in capital expenditures relative to our current quarterly run rate later this year and again in 2026 as the pace of bad construction moderates from their recent highs.
Speaker Change: Over the three years, beginning 2026, we expect revenue growth of 7% to 9% and EBITDA growth of 8% to 10% we have excellent visibility into this level of growth as we moderate the pace of our bed additions to six to 800 beds per year still well above our historical pace of.
Speaker Change: Annual bed growth.
Speaker Change: Moderating the pace of that growth will allow us to unlock more of the embedded EBITDA and free cash flow generating power of the record setting beds added throughout 2024 and 2025.
Speaker Change: Going forward, we believe the pace of investment in new bed growth strikes the right balance between investment and the growth of the business and the generation of free cash flow.
Speaker Change: In summary, we believe we can continue to invest to meet growing demand and to drive a healthy pace of top and bottom line growth, while returning to free cash flow positive by the end of 2026.
Speaker Change: We believe this more balanced approach to growth and free cash flow generation will also provide the company increased flexibility going forward when it comes to capital deployment.
Speaker Change: Finally as noted in our press release, our board of Directors has authorized a new $300 million share repurchase program repurchases will be made in accordance with the applicable securities laws and are subject to market conditions and other factors.
Speaker Change: With that operator, we are ready to open the call for questions.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys in the interest of time, we kindly ask please limit yourself to one question and one follow up.
Speaker Change: Withdraw your question at any time, you May Press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Moderator: Today's first question comes from Whit Mayo with Leerink partners. Please go ahead.
Whit Mayo: Hey, Thanks, maybe Heather to follow up on that last comment obviously, you have a lot of capital commitments. This year guidance implies you're burning maybe $180 million of cash the interest expenses up presumably not might include some incremental debt required to fund the growth. So what are their financing plans this year.
Whit Mayo: And can you give us an idea on preliminary sources and uses of cash next year like how much exactly will the growth capex in Sydney be down in 2026.
Whit Mayo: Hi.
Whit Mayo: Thanks for the question, Yeah, just to give you a little bit of.
Whit Mayo: Information in regards to the financing option that you mentioned if you look at our 10-K, you will see a disclosure included regarding the refinancing that we are just about to wrap up.
Whit Mayo: It mentioned that we have refinanced the existing bank facilities and also that we will be upsizing our revolver.
Whit Mayo: About $1 billion that is that is contemplated and and what's disclosed in the 10-K and there should be more coming about that shortly.
Whit Mayo: Terms of free cash flow and how we think about that we have.
Whit Mayo: Messaged in you would have seen in our our disclosures that came out in the press release that we expect to see cash.
Whit Mayo: Cash flow to be back to cash flow positive by the end of 2026 and that is largely a result of a couple of things. The first would be the EBITDA contribution that we expect to see beginning in 2026 and that is as you know the result of a couple of things one the contribution.
Whit Mayo: From the new beds that we have been adding those should start to really generate nice EBITDA in 2026, and two the cessation of the elevated level.
Whit Mayo: Costs associated with the pre opening of those facilities. So those two things and confluence should generate operating cash flows at a nice rate and addition, youll see that capex will come down as well.
Whit Mayo: The high watermark for Capex sort of came to the end of 'twenty four and we'll continue with that rate in the beginning of 'twenty five as we continue to have that high pace of beds opening but that should moderate and then start to decline in the back half of 'twenty five and then continue to decline in 2026.
Speaker Change: Is there a number that you can share within a range for how much the capex is going to.
Speaker Change: Decline next year.
Speaker Change:
Speaker Change: I don't want to provide guidance on 2026 at this point.
Speaker Change: But we would expect the run rate of Capex to come down materially over 25% and then again into 2026, I mean, maybe ballpark around $100 million.
Speaker Change: Okay.
Speaker Change: And then the follow up here just the first quarter guide implies that youre going to earn I think like 18% of the full year, which is certainly a question that we're getting can you just maybe help us think through a bridge from the from.
Speaker Change: From the first quarter to the full year.
Speaker Change: There should be more supplemental dollars in the back half your startup losses, maybe an expectation that growth is better just any numbers around that too to free.
Speaker Change: <unk> kind of the walk forward would be helpful. Thanks.
Speaker Change: Okay.
Speaker Change:
Speaker Change: Yeah, Let me, let me take that and hopefully I'll hit all the pieces that you were looking at so.
Speaker Change: You can see in the first quarter and certainly the full year guidance that the first quarter is expected to contribute less.
Speaker Change: To the full year than what we would see in a typical year, but we would also anticipate the second quarter is likely to be less than typical as a percentage of the full year as well due to similar timing factors looking year over year.
Speaker Change: That's largely driven by a couple of things first the startup costs that we've been talking about and then also the timing of supplemental payments.
Speaker Change: We expect the first quarter to be the high watermark for startup losses with about $20 million in total start up losses for the quarter out of the $50 to $55 million that we're guiding to for the full year. So think about roughly 35% to 40% of the full year startup costs landing in the first quarter alone.
Speaker Change: Startup costs are expected to taper down over the course of the year. So the second quarter is also likely to be elevated.
Speaker Change: But again that depends on the timing of several factors, which are hard to predict with any precision.
Speaker Change: The other swing factor I would mention which is related to the quarterly cadence for supplemental payments the net supplemental payments.
Speaker Change: <unk> the associated taxes.
Speaker Change: It can be lumpy and as you know hard to predict with precision, but what our our guidance assumes is that first quarter supplemental payments will be down about $10 million to $15 million year over year, but they will be up for the full year. So I would suggest for modeling purposes assume second quarter net supplemental payments are down year over year as well.
Speaker Change: Okay. Thanks.
Brian <unk>: The next question is from Brian <unk> with Jefferies. Please go ahead.
Speaker Change: Hey, good morning, maybe another just to drill down into some of the comments you made on the longer term growth algorithm of growth outlook.
Speaker Change: I mean, as we think about 10% bed adds the past few years.
Speaker Change: Soft comps in 2025, and I know you said high end of the range in 2006, so shouldnt that be higher than that 8% to 10% range number one and how should we be thinking about that.
Speaker Change: Margin and pricing assumptions that you have post.
Speaker Change: Post 2025.
Speaker Change: Yes, hi, thanks for the question.
Speaker Change: I'll, just maybe start by reiterating a couple of things.
Speaker Change: The revenue growth at 7% to 9% for the several years beginning in the beginning after this year, an EBITDA growth of 8% to 10%. So to your question about how should we feel about margin and margin expansion disappoint out the delta in those two numbers that we have headlines.
And I'll just point out one more thing we would expect 2026th to be at the high end of that range.
Speaker Change: Based on all the things that I just talked to in response to <unk> question.
Speaker Change: A little bit more granularity, we'd expect volume growth to be in the mid single digit range on average and that pull then the beds that we're adding of course.
Speaker Change: To answer that question that you asked but as we said in the past we would expect average rates to normalize back towards the historical low to mid single digit range at some point in the future and our long term outlook assumes that we see.
Speaker Change: Growth in that area.
That doesn't mean that we won't have years, when we outperform as I mentioned 2026, we're going to be at the high end of that range, but our base case assumes that we see a more normalized growth rate then that's a prudent approach and leaves room for conservatism and for us to outpace that.
Speaker Change: Maybe just stepping stepping back a little bit higher level that was a lot of granular detail I just want to say a couple of things about the long term guidance nothing has changed with how we're thinking about the opportunity here. The strategy that we have in terms of meeting that significant met demand.
Speaker Change: It is the same we will continue to expand capacity and we will we will continue to meet that need but what we're doing today is taking a more balanced approach and that's balancing capex bed growth and free cash flow.
Speaker Change: We can still add beds at a much faster rate than the company has historically done and drive top and bottom bottom line growth at the same time.
Speaker Change: To be clear our growth strategy remains primarily focused on deploying capital efficiently towards growth and expanding the footprint of the business to meet those needs.
Speaker Change: And I'm, not suggesting any sort of shift away from that with this long term guide.
Speaker Change: But we also recognize the opportunity to moderate the pace of spending stayed out the bad growth a bit and then unlock more of the free cash flow power embedded in the business. As these beds continues to ramp as we've been talking about and that's going to give us the ability to be more opportunistic from a capital allocation perspective.
Speaker Change: So that that's a reflection with refreshed look is it reflection.
Speaker Change: As we look back and look forward and making sure that we're being appropriately prudent when we're building our assumptions and putting targets in the market.
Speaker Change: So maybe just to summarize I've set a lot it's really a combination of those two things I would add that we have a high level of confidence in this growth outlook and our visibility is supported by the significant embedded EBITDA power from the thousands of beds that we've been adding.
Speaker Change: I appreciate that and then my follow up is I think about Q1, there's a lot of chatter about weather and weather.
Speaker Change: Fire issues in California or snowstorms.
Speaker Change: Just curious what youre seeing in terms of that and then.
Speaker Change: Kind of like if you can share the same store assumptions that you've baked into the Q1 guide.
Speaker Change: Curiosity.
Speaker Change: Why don't I, just maybe give you a little bit of color on the bridge in general just to address that and then any sort of knock on questions here just for clarity so for Q1.
Speaker Change: I'll start with startup costs I mentioned this but I'll just reiterate in terms of Q1, specifically here to be complete we expect about $15 million and higher start up costs versus the first quarter of 2024, and we expect that to meet the high watermark for the year.
Speaker Change: In terms of supplemental payments, the first quarter will be down around 10% to $15 million year over year due to timing and recall that we had $7 million in out of period payment in the first quarter last year.
Speaker Change: We mentioned in our press release that we had a facility closure right at the beginning of Q1, that's about a $5 million drag.
Speaker Change: Q1 2025.
Speaker Change: And then.
Speaker Change: Coming to your point on on volume.
Speaker Change: Our 25 outlook does not.
Speaker Change: Assume a material improvement on those handful of facilities that we've previously talked about and it's difficult for us to put an estimate on the timing for the turnaround of a small group of facilities and so we believe it's more prudent to take a conservative approach when we are setting guidance.
Speaker Change: 2025, as a result of that as soon it was roughly a $20 million EBITDA headwind for the full year from that handful of underperforming facilities.
Speaker Change: And just that directly to your question, it's not specifically related to fires or any of the other event. There. There is in a normal seasonality with weather of course always in Q1, but nothing that I would call out here. It's just focused on those two facilities.
Speaker Change: One point on that the year over year headwind would be spread over the first three quarters of the year just as a reminder, because the fourth quarter would already have been impacted in 2024, and so we should see a tailwind as we comp over the fourth quarter of 24 results.
Speaker Change: So that's a total of 20 in the year, but really distributed to the first three quarters and then starting in Q1.
Speaker Change: One last thing that we haven't talked about that al just mentioned for completeness isn't going through the bridge for Q1 is.
Speaker Change: Professional liability expense.
Speaker Change: You would've seen that we took a charge in Q4 and we're also assuming in the guidance for 2025, an incremental $10 million year.
Speaker Change: Year over year for the full year, so obviously theres going to be a piece of that in Q1 as well.
Speaker Change: That's just a reflection of what we believe is a more conservative approach to reserve claims this year.
Speaker Change: Awesome. Thank you.
AJ Rice: The next question comes from AJ Rice with UBS. Please go ahead.
Speaker Change: Thanks, Hi, everyone.
Speaker Change: So in Q4 I think the revenue.
Speaker Change: Per day moderated.
Speaker Change: One 7% had been $3 exiting Q3, which is more like what it was for the full year and you're calling out.
Speaker Change: Low single digit pricing.
Speaker Change: Growth for 'twenty five.
I am just trying to understand I know, there's some moving parts and maybe that's impacting more than is apparent.
Speaker Change: <unk>.
Speaker Change: Is that something youre seeing rates come down on the Medicaid side on the commercial side or otherwise our rate growth rather moderate or are you.
Speaker Change: Just giving yourself the leeway that it could moderate.
Jay: Yes, Hi, Jay Thanks for the question.
Jay: Maybe I'll just go through a little bit of detail on on the rate and what were thinking about when we go through guidance.
Jay: First I just want to I know I've said it a couple of times that I think it bears saying again.
Jay: Five guidance assumes supplemental payments will be flat to up $15 million for this year. So the.
Jay: 25 guidance essentially assumes we will get a little less of a tailwind relative to the years past.
Jay: The timing and the magnitude of those payments.
Jay: It can be very difficult to predict and if that improves and we have more visibility or timing.
Speaker Change: Chip then we will see.
Speaker Change: Syed and that could be.
Speaker Change: That's a positive swing factor for us and the reported revenue per day.
Speaker Change: And the second thing I would say is given the noise on the policy front. We believe it's prudent at this early point in the year.
Speaker Change: Right and more conservative approach and our thinking about rate updates given the broader environment.
Speaker Change: There is nothing specific on the horizon that we're seeing is concerning but we have taken a slightly more cautious approach as we think about 2025, given the level of uncertainty on the policy front.
Speaker Change: If this level of conservatism for its unnecessary than rate growth could wind up closer to the mid single digit range.
Speaker Change: Finally, just to round it out from an overall rate perspective, we're assuming the commercial rate environment remains stable.
Speaker Change: Okay, and then for my follow up.
Speaker Change: Looking at the different margin dynamics.
Speaker Change: Again, Theres a lot of moving parts I think fourth quarter. You were 19, 8% that gave you the full year EBITDA margin about $22 five.
Speaker Change: Thanks for the lineup five years prior to that you had been more like 23.3.
Speaker Change: I look at it.
Speaker Change: Peel away, what you are saying about liability and those cluster of facilities that are underperforming what are you assuming in 'twenty.
Speaker Change: Yet your core portfolio does margin stable is it down.
Speaker Change: If I look at the implied growth going out a couple of years I think you sort of back of the envelope get to about 21, 5% for 28, which is below the five year prior or are you thinking.
Speaker Change: Okay.
Speaker Change: The margin of the last five years, it's probably higher than youre going to see for quite a while so essence of it.
Speaker Change: The assumption for the underlying portfolio actually.
Speaker Change: The call outs for 25 and.
Speaker Change: Is the assumption.
Speaker Change: Margin in the last five years is a couple of hundred basis points higher than whats you are likely to get to even a couple of years from now.
Jay: Okay Jay.
Jay: Let me, let me try to answer that so.
Speaker Change: I would point to a couple of things at a very high level. Let me just talk about a couple of things you talk about Q Q4, 2004, and two the impact full year and then moving into 'twenty five what do we expect and pointing to specifically that margin compression Q4 margin compression was very.
Specifically, a result of two things that was the additional reserve for the professional liability reserve.
Speaker Change: And the closure of facility in the quarter. So that's what drove that and obviously it impacted the full year as well as we think about 2005 I would just point out to a couple of things I won't belabor this but we'd have to startup cost and we have the continuation of the professional liability.
Speaker Change: <unk> expense that we are assuming a higher rate for 2025, that's about $10 million over 2024, and then when we look at volume, we're not expecting a material improvement as I said in those facilities.
Speaker Change: And we're just trying to be prudent.
Speaker Change: <unk> approach when we set the guidance.
Speaker Change: That is giving us about a $20 million headwind to EBITDA for 2025.
Speaker Change: If those items that I'm, calling out improve.
Speaker Change: Then we will have upside and we will have a tailwind as we move throughout the year.
Speaker Change: Just felt it was better to be more cautious at this point.
Speaker Change: To your question of what's the underlying business look like from a margin perspective, we see that as stable. Its just these few things that we're calling out specifically on top but the underlying business. We see is continuing to be stable in the range that we've seen historically.
Speaker Change: Okay Alright.
Speaker Change: Thank you.
Speaker Change: The next question comes from Ben Hendrix with RBC capital markets. Please go ahead.
Speaker Change: Hey, Thank you very much last quarter, you talked a lot about depressed referral activity on the back of some difficult press headlines last year can you give us an update on how your referral activity has progressed across your various service lines.
Speaker Change: Into 2025, and then how should that impact the pacing we should expect through the year of your low to mid single digit same store volume growth that you've you've put into your guidance. Thanks.
Speaker Change: Hey, Thanks, Brian This is Chris why don't I start and maybe Heather can add some commentary as well I would say just on the referral source front that we just continue to be very engaged with outreach to our external stakeholders, including all of these key referral sources and other important partners we have.
Speaker Change: Have been very very intentional about consistent outreach really to correct any of the misunderstanding that were created from the media.
Speaker Change: And as we've consistently emphasized for them the quality of the care that we provide the substantial investments that we're making in safety and compliance and quality over.
Speaker Change: Over the last two years and that we continue to make we think that that is resonating. We have put particular focus on ensuring that our most important referral sources do understand the facts and.
Speaker Change: We've.
Speaker Change: Clearly put some commentary on our website that I think has a lot of detail, but has been very well received.
Speaker Change: And so when you just look across our entire facility based referral issue continues to be less and less of a challenge and it allows us to focus on the smaller number of facilities.
Speaker Change: Heather referenced are still performing below our expectation.
Speaker Change: Right now so Heather anything you would add.
Speaker Change: Yes.
Speaker Change: Maybe it's a double down on a couple of things there Chris.
Speaker Change: We talked about back in January that the majority of that headwind that we're coming from.
Speaker Change: <unk> facilities and that began in Q4 as Chris mentioned.
Speaker Change: We are just continuing to work through the process and turning around the small group of facilities, but I would just.
Speaker Change: As well that you know in the portfolio a portfolio of this size in any period, we're going to have some that over performance on that underperform and we spent the last several months just really getting to understand the referral pattern issue and mitigate it where appropriate and we're at a point now where if you look across our entire book of business, we feel good that way.
Speaker Change: Barrels are not a widespread issue.
Speaker Change: But as I noted we're focused on the small number of facilities that are performing below our expectations.
Speaker Change: Thank you.
Operator: The next question comes from John Ransom with Raymond James. Please go ahead.
John Ransom: Hey, good morning.
John Ransom: As we look.
<unk> 26, and beyond the mix of <unk>.
John Ransom: It's crept up in terms of de Novo's versus facility adds what does that look like in the out years.
John Ransom: Yes.
Speaker Change: Hi, John Good morning, as we look out in the out years I think will can will continue to be focused on de novo.
Speaker Change: Some of those JV partners just based on the pipeline that we have as well, but I would say de novo facilities heavily focused in the acute space.
Speaker Change: So our math is that the construction costs have gone up probably a third.
Speaker Change: So.
Speaker Change: The plan was laid out by the old management team in 'twenty one.
Speaker Change: Unless the returns have improved it looks like to us like the EBIT returns are above.
Speaker Change: Maybe 10% range.
Speaker Change: So I just didn't know if there a rethinking of the de Novo math.
Speaker Change: So all of these projects still make sense in light of the current environment.
Speaker Change: So.
Speaker Change: No no I don't think there's anything anything there to talk about in terms of the profitability or the returns expectations for those facilities. I mean, it's clear that we have multiple options of how to deploy capital and we see it.
Speaker Change: We apply a very rigorous approach that we've talked about many times before we are constantly looking at those returns we're making sure that we have our models updated for the right information and we continue to see the benefit from those those hospitals.
Speaker Change: Votes that were adding and we havent seen nice returns over the last several years, we've seen rate improvement and we've seen that really contribute to volume and I think we will we will see that in a big way in 2026, whenever we see whenever we see that happening so whenever we see the cost of <unk>.
Speaker Change: Construction.
Speaker Change: <unk> rates going up in some pockets.
Speaker Change: That's what we feel confident about the rate growth that has kept up with that construction cost at the same time. So from a returns perspective, we still feel good about those returns.
Speaker Change: Okay. Thank you and just two more quick ones for me.
Speaker Change: The MH business slowed a bit in the quarter.
Speaker Change: We're seeing mid single digit.
Speaker Change: Growth.
Speaker Change: Number one.
Speaker Change: And then number two just going back to the question on referral patterns in underperforming facilities are the ones that are left are these mostly in the markets that were the subject of the media scrutiny or are there other markets. Thank you.
Speaker Change: Okay.
Speaker Change: So that that business as you will recall has grown substantially.
Speaker Change: Over the past 12 to 18 months, maybe even 24 months and that is that experienced great great growth.
Speaker Change: The growth rates, we have expected would come down just as a comp over the prior years because of that significant growth.
Speaker Change: There is.
Speaker Change: A lot of strength in that business, we continue to see record volumes associated with that business.
Speaker Change: There's nothing I would point to apart from just the normal.
Speaker Change: Growth pattern as we comp over periods of significant growth.
Speaker Change: We still see that as a strong business and we think about it as a mid single digit grower for future periods.
Speaker Change: Yes.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from Matthew Gillmor with Keybanc. Please go ahead.
Matthew Gillmor: Hey, Thanks for the question so for the underperforming facilities that you've called out can you, maybe just give us a sense for what youre doing on the ground to improve.
Speaker Change: The results there.
Speaker Change: Yes, Thanks, Matt I would start with healthcare is local so for us it really starts with the comprehensive review of the competitive landscape. We look really closely at the programming that individual facility and then we.
Speaker Change: Really dig in and make an assessment on <unk>.
Speaker Change: Specific facility, we're going to look at a number of very specific factors. So one would be we will look at the business development function will look at the current funnel, we will get the referral sources.
Speaker Change: Identify any gaps in coverage and clearly worked with the team you don't want to plan. There we're going to look really closely at admissions and that can include.
Speaker Change: Inquiries it can look at deflections, and what's going on there.
Speaker Change: We're going to do an assessment of the leadership team not only the quality of the team, but also any staffing needs and gaps related to that team.
Speaker Change: We will look at technology, we've obviously invested heavily but we want to ensure that there is adherence and really strong adoption of the platforms that we've put in place from the remote monitoring technology to the EMR to the patient safety and specifically.
Speaker Change: The comprehensive quality dashboards that we put in place as well so we want to make sure that that is also in place and then the final thing I would say is maybe just the physical plant.
Speaker Change: We would even look at are there any facility improvements that.
Speaker Change: Would be an impediment. So it's a comprehensive suite of things that we're looking at working very closely with our operational leadership and getting very granular on the ground level.
Speaker Change: Got it and then as a follow up.
Speaker Change: Should we think about the drag from those facilities, assuming there is no improvement over the over the near term, but that would be a 2% drag kind of consistent with what you saw in the fourth quarter.
Speaker Change: Yes, that's about the right ballpark that.
Speaker Change: Okay. Thank you.
Scott Fidel: The next question comes from Scott Fidel with Stephens. Please go ahead.
Scott Fidel: Hi, Thanks, good morning.
Scott Fidel: First question just wanted to.
Scott Fidel: Get your update around I know that you had talked about.
Scott Fidel: In the last few quarters that.
Scott Fidel: Ultimately you saw sort of the volumes.
Scott Fidel: Start to moderate a bit that you would have flexibility to potentially flex down.
Some of the labor staffing related cost.
Scott Fidel: The full year guidance does assume a bit lower.
Scott Fidel: <unk> frame around it.
Scott Fidel: So just curious sort of how are you guys thinking about that that option or labor doesn't seem like you add much.
Scott Fidel: And then the guidance around that but was hoping to get your your sort of breakout of some of the.
Scott Fidel: Options, you have around flexing down cost potentially.
Speaker Change: Yeah, Hi, thanks for the question.
Speaker Change: That's a good question if you recall in Q4, when we brought the guide down related to the pressure that we were seeing we brought the EBITDA guide down disproportionately higher than the revenue guide and that implied about a $15 million EBITDA headwind.
Speaker Change: For Q4 of 24.
Speaker Change: As we think about 2025, we are anticipating for that same small group of facilities.
Speaker Change: $20 million of a headwind built into 25. So to your question of have we started to focus on.
Speaker Change: Cost levers and right sizing the cost structure, yes.
Speaker Change: $15 million for one quarter alone versus $20 million for the full year is factoring in the cost measures that we're taking and the things that we're doing in relation to those facilities.
Speaker Change: Just as a reminder, we have not built in any upside expectations from a volume perspective for that handful of facilities for the year, but if those facilities were to begin to turn around and and the volume.
Speaker Change: Improved that would of course be upside and a tailwind for us as we move throughout the year, but at this point because the timing is hard to predict on those facilities or any facility that we're working on we thought it was more prudent to take a cautious approach.
Speaker Change: Okay.
Speaker Change: My follow up I.
Speaker Change: I wanted to know whether as you announced.
Speaker Change: Our the board announced the $300 million expansion of the buyback program.
Speaker Change: Whether there is any type of.
Speaker Change: Methodical.
Speaker Change: Inputs or sort of framing that that youre going to be approaching this around.
Speaker Change: In terms of sort of like.
Speaker Change: Like a maximum leverage.
Speaker Change: Target that you'd be willing to go to.
Speaker Change: To fund buybacks as comparative comparing against sort of the current.
Speaker Change: Valuation and pressure in the stock and then on that front, maybe if you want to just.
Speaker Change: Give us some clarity around what youre thinking would be the maximum leverage.
Speaker Change: Given the increase in the revolver.
Speaker Change: That you have.
Speaker Change: Testable to fund.
Speaker Change: I'll start with the negative free cash flow and the <unk>.
Speaker Change: Projects that you have until you get to 'twenty six well ask Jeff is expected to improve.
Speaker Change: Okay.
Speaker Change: Thanks, Scott. This is Chris I'll go ahead, and start and see if Heather wants to add anything I would just start by saying I mean, we have this authorization that's been approved by the board in place and it was clearly deliberately put in place to utilize and we're planning to do so.
Speaker Change: We're not going to comment on any specific timeline, but I think right now from a leverage standpoint, and Heather can chime in we would expect to naturally delever as EBITDA grows over the next few years and we talked about anticipating an inflection point with respect to free cash flow in 2006 and so.
Speaker Change: What would you add from there.
Heather: That's the exact point that I would add you know if we think about to your point of effectively when and how would we fund and think about actually being in the market and in terms of leverage we have a comfortable leverage ratio and we are expecting that to come down naturally to chris's point with <unk>.
Speaker Change: About 26, being a significant growth year for us from an EBITDA perspective, and that will naturally bring that leverage back down and then we think even beyond that what do you think about the capex reduction that's going to bring that leverage down as well and so given that we would be comfortable looking at taking up leverage.
Speaker Change: In order to to fund.
Speaker Change: We need to do from a share repurchase perspective, just given the cash flow power in the business, we'd see comfort there.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from Andrew Mok with Barclays. Please go ahead.
Andrew Mok: Hi, Good morning, obviously, a lot of attention on state directed payments lately I think you can appreciate that investors want to understand the risks to get comfortable.
Andrew Mok: Around that area of concern. So can you disclose your total exposure to state directed payments for us for 2024.
Andrew Mok: Yes, sure Hi, Andrew Good morning.
Andrew Mok: We'd be happy to so the total growth supplemental payments would be less than $200 million and that's of course before the provider taxes that we pay and to those programs.
Andrew Mok: Okay. So about two thirds of that is a good ballpark to think about in terms of net benefit.
Andrew Mok: I just wouldn't I wouldn't expect ours to be any different than that for the rest of the industry. That's critical path.
Andrew Mok: Okay.
Andrew Mok: And then I'm still struggling to understand how there could be such a significant drop off in revenue per patient day for mid to low single digit mid single digit to low single digits.
Andrew Mok: Especially when I think about fiscal year 'twenty five rates carrying into the first half of calendar year 'twenty five in state supplemental being up overall, it seems like you're kind of pointing to state supplemental as being the area of conservatism, but that seems to go against the philosophy of booking six quarters of Tennessee State.
Andrew Mok: State directed payments are up overall, it feels like Theres, a moderation in either core rate or CTC revenue is there anything you can share that how it might help reconcile this comment.
Andrew Mok: Yeah, Let me, let me hit on a couple of things first we've talked about supplemental payments that in prior years they've been.
Andrew Mok: A nice.
Andrew Mok: Nice tailwind for us in that it will be less of a tailwind certainly compared to the relative.
<unk> years.
Andrew Mok: The second thing that I will just reiterate is that we feel that there is that it's the right thing to do to just be prudent at this point in the year, just just given everything that all the noise that we're seeing we feel like it's better to take a conservative approach and certainly there will be upside there.
Andrew Mok: If our conservative conservative approaches.
Andrew Mok: And to the proven wrong and then just directly to your question regarding CTC service line delivered.
Andrew Mok: Above trend growth, obviously in 'twenty three in early 'twenty, four and that was a tailwind of about 100 basis points to our growth in the early part of 2024 from a rate perspective.
Andrew Mok: And that's just naturally as the growth rate moderates over the prior year comps, we would see that become less of a tailwind.
Andrew Mok: 25, we wouldn't expect that service line to the immaterial swing factor in either direction. It's just not the tailwind that we had early in 2024.
Andrew Mok: Thank you. This concludes our question and answer session.
Hunter: I would now like to turn the call back over to Mr. Hunter for closing remarks.
Hunter: Thank you in closing I want to again, thank our committed facility leaders clinicians and over 25000 dedicated employees across the country, who have continued to work tirelessly to meet the needs of patients in a safe and effective manner, we have a strong foundation and a proven.
Hunter: Strategy for driving growth and delivering greater value to both the patients we serve and our shareholders.
Hunter: You for being with US this morning and for your interest in Acadia have a great day.
Hunter: The conference has now concluded. Thank you for your participation you may now disconnect your lines.
Hunter: Yeah.
Hunter: [music].
Hunter: Yes.
Hunter: Yes.
Hunter: [music].