Acadia Healthcare Company, Inc. (ACHC) Earnings Call Transcript
June 2, 2021
Earnings Call Speaker Segments
Hi. Good morning, and welcome to the 2021 Jefferies Global Healthcare Conference. I'm Brian Tanquilut, I'm the Healthcare services analyst here at Jefferies. Our next presenter is Acadia Healthcare. They're one of the largest behavioral health providers here in the U.S. And joining us this morning are the company's CEO, Debbie Osteen; and the company's CFO, David Duckworth. So with that, Debbie, I'll just throw it back straight to you.
Obviously, COVID is top of mind for a lot of folks. Maybe you can give us an update on how your different business lines are doing? And especially as COVID normalizes, what are you seeing in the market?
Sure, and thank you for having us today. We -- in the first quarter, we saw our trends getting stronger in the middle of the quarter, and that continued through the end of March. But what we've been pleased to see is that, that's continued. And it's continued through April, and now we have visibility around May. So I'll talk about the service lines. Our acute service line has been very stable. And it has really been strong through the last 3 quarters, and that has continued. We have seen the specialty service line, which was impacted by some of the travel concerns and individuals not wanting to get on planes. We've seen that come back. And we've been very pleased to see through April and May that we actually have seen that business and service line exceed our own expectations here internally. I think one of the factors which is obvious and those that have traveled recently, like I have, have really seen people being willing to return to get on airplanes. We have several national specialty programs that do attract across the country, patients that come and will travel a long distance to actually have the specialty care that we provide. So that's been very, very strong for us. The CTC is another service line that we have seen that's been stable throughout the pandemic, but also just increasing with the demand. And I think part of that is due to the opioid crisis, the impact of COVID on individuals, the overdose rates that have just skyrocketed. And so that's been another stable service line. And then the last one is RTC, which is our child and adolescent longer-term business. And it has also remained very stable and continues to be stable throughout April and May. So overall, I think what we've seen and we talked about is the pandemic certainly had an impact on individuals. And it had an impact on really all age groups. And as we think about our service lines and really what we offer here, I think that we've really seen starting -- actually, in May of last year, we were pretty even with 2019. And as we look now at 2021, we're seeing not only that demand, but we're seeing, I think, heightened demand from the pandemic in addition to what was already there before the pandemic started.
I guess that's my next question, Debbie, right? So as I think about -- even before the pandemic, we would have these conversations about how demand, especially on the acute side and on the methadone clinics, right, was really strong. But it feels like the pandemic put behavioral health or mental health more front and center, right? So how do you think that affects the long-term outlook for your business? And then are there any changes that you've noticed because of the pandemic that you think will have lasting impacts on Acadia?
Well, I think it's certainly going through what we all went through last year and even into this year. I think it's really reinforced just the need for mental health services and substance use services. But I think that there have been some positives that have come out of this, and you mentioned one of them, and that is just a focus on mental health. And 1 in 5 individuals before the pandemic had a mental healthy, not all of them were seeking treatment. And I think I saw a report recently that from the Kaiser Foundation that 50% of adults say they still have depression, anxiety that is related to the pandemic. The part of what we've seen, too, is really a reduction in stigma. And that's been a barrier to treatment over the years, and I've been in the business a long time. What I've been pleased to see is there's been so much coverage about the need for mental health. The -- encouraging individuals to seek that help. So I think that's a positive that will be with us. The other thing that I think we've seen and there's been a lot of discussion about, it's just the use of telehealth. And I think that, that is an access point for individuals that might not have been able during pandemic, but now even following the pandemic, to access care in a timely way. And we were encouraged to see the regulatory environment, get better reimbursement, frankly, for telehealth. But I think that's here to stay. We see it as an extension of what we do, not a replacement. But we also see it as a positive, again, back to our national programs. When individuals leave us, we can stay connected with them now. And some of that will depend on what the regulatory environment and reimbursement gets settled with CMS and our other payers. But I do think that's a positive. And I think just overall, as we talked about, child and adolescents, that is the need for mental health. And I've read some very, very troubling reports lately. I mean, that volume for children and adolescents going to ERs, going to children's hospitals is really just exploding. And I do think that we have services ready, and I think other providers do as well. But what we believe is that we have the demand before pandemic, we've seen it increase, but it's going to be sustained. And studies around other pandemics have shown that just suicide rates and depression and other things are long-lasting. So we think that's an element of what we're seeing now. But also just the fact that people feel more willing to seek help.
Now, it's really sad, but it's good to know that there are companies like you guys that are out there to help address the problem. David, I guess I'll pass it on to you next. On your Q4 call, you gave some long-term guidance ranges. And I don't think -- just for the benefit of people who were not in the call were -- have not looked at that or revisiting the Acadia story. If you don't mind just laying those growth targets or long-term targets for us. And how do you think we can get to achieving them?
Sure, Brian. We did in our fourth quarter call in February, provide our guidance for 2021, as we normally do. And we also provided a longer-term earnings growth target for the company, which was 10%, and also provided some commentary as to how we get to that. And Debbie walked through the strong demand we're seeing, pre-pandemic and continuing through the pandemic. And so let me walk through the demand of the different growth pathways that are a big part of how we get to that 10% and a few other components. There's really 3 main components. It's our volume growth, the strong rate growth and stable reimbursement environment we're in as well as the margin improvement that we've seen, and we expect to continue to see. But first, starting with our volume growth. We do expect volume to continue to grow across our 4 service lines. And we have different growth pathways as to how we see that growth in each of our service lines. Facility expansions in our existing markets has always been a key part of the growth for the company. We do expect to add around 300 beds to existing facilities this year. We've done historically around that level and expect that to continue. That is a strong opportunity for the company. It's a high-return because on those bed additions we are able to leverage the cost structure that we already have built at our existing facilities, and we expect that to continue. The joint venture opportunity that we have been talking about for many years has really accelerated, and we have strong visibility now into what next year looks like and what the following year looks like. And we've had several announcements recently around those joint ventures. Those will be a part of our volume growth as well. And then there's a number of markets that we believe will have de novo opportunities. Around in 100 markets in the U.S., we believe, are underbedded right now within the acute service line. The CTC service line continues to need more facilities. And so we believe that de novo opportunity will continue, especially for our acute and CTC service lines. We do think that volume growth -- if we think about that 10%, the volume growth is 4% to 5% sort of at the base level. The reimbursement environment that we are in continues to be stable, and we are diversified across payers in 40 different states. And then also just seeing a strong service line diversification. 2% to 3% is our revenue per day growth expectation, that is also part of that 10%. And then margin improvement, we've talked a lot about the opportunities that have been identified in 2019 and in 2020, and we've seen great margin performance from those initiatives. A number of those were identified in 2019 as part of a strategic review. And then as we went through last year, I think we really saw the benefit of the tools and the dashboards that we have put in place as a company to really align the cost structure that we have with the volumes we see. And our operating teams have just done a tremendous job maintaining a lot of discipline and focus on that cost management. So that has been sustained, and we expect that to be sustained going forward. And the volume growth gives us the opportunity to continue to improve our margins and leverage the cost structure that we have. So volume growth, the strong reimbursement environment we're in and the margin improvement are all part of that 10% target. And again, we're really pleased with the service lines we have and the different pathways that we have for growth in getting to that target.
David, just to clarify, that 10% is -- I mean, the way you describe it, it is organic, right? So that's all internal?
That's a good point, Brian. That is all the organic growth initiatives. There is a fourth pathway of growth, which would be M&A, but that would be incremental to the 10% growth.
So I guess I'll perfect tee up for Debbie. Obviously, you've delevered the balance sheet. You're generating very good cash flows now. I think on the last earnings call, David, you talked about what your thoughts were on optimal leverage or where you can push leverage to. So as we think about that M&A angle, I mean, it's always been a part of the Acadia story, how are you thinking about deploying capital there? What areas are of interest? And then I guess going back to the early Acadia days, the deals were more tuck-in in nature rather than the big chunky deals. I mean, how do you balance that strategy Debbie, choosing between bigger platforms versus one-off tuck-in acquisitions?
Well, I think, as you said, Acadia has had a long history of executing well on M&A. And I do think that we have a lot of opportunity there. I think the pipeline is very strong. And it's really strong for -- as you mentioned the tuck-ins. I mean, we just announced the Vallejo acquisition in California. It's an example of an opportunity to enter into a market. We do have facilities close, so we think there are synergies there, but then also the ability to expand beds to also improve financial performance by looking at it from our lens. And I think that we're looking at, I think, all opportunities. We probably would focus more on acute and the CTC service line in specialty than we would on RTC. But I do think that as we look at it, we want to make sure it fits our framework which we have been very disciplined about. And I think that -- what's very positive now is we do have flexibility, our leverage is below 3. We do think that we will have opportunity in not just the smaller, but perhaps some of the platforms that may come to market. We have good visibility around those, Brian. And I do think the team here has been in the business a long time, and I think that we know what's out there, but we also want to make sure it fits us financially, it also fits us strategically. And so we would evaluate through that from that perspective. We'd also look for opportunity to enter perhaps a new geography that we're not in. We think that might be a good opportunity where perhaps a joint venture or a de novo doesn't make as much sense. I do think there are operators that have had a lot of impact over the last year from the pandemic. And some because they didn't have the infrastructure that we're fortunate to have, have not fared as well. So it's an opportunity for us to look at that. But also, I think just over the next few years, it will be something that we will be very, I think, thoughtful about but also we're very interested in M&A and making sure that we continue that growth pathway.
Got you. Now that makes a lot of sense. You mentioned joint ventures, Debbie, and we've seen a lot more JV announcements out of you guys in the last 2, 3 years, right? It's interesting thinking about when Acadia started, I guess, even when you were at UHS, right, the joint ventures were not key to the strategy. So what has changed? And what does the joint venture approach bring you that a de novo or an M&A strategy does not bring to the table?
Well, I think there's some real positives with our partnerships. And you're right, we have seen an acceleration. Each one is different and each one is a process that we go through. And they're all very individualized and we really approach it as tailoring what our partner wants. But as we look at the possibility of a joint venture, one of the key things is it allows us to go into a market, into a community with a strong provider. And these are important health systems. They have many times more than one facility. Not always, but in many cases, they do. And it allows us to go in with this partner. We can take advantage of their presence in the market. I think the ramp-up is quicker. And frankly, we are able to leverage their payer rates in most situations. We also have the staff, and many times, the joint venture partners have beds. And then we'll fold those into the partnership. Again, it's not 100%, but in most cases, they do. And with that comes the staff, but also just that market presence, the reputation of the partner. And we believe that in the case of a de novo, where you might say there's not really a strong partner, it's very diversified with referrals. With the case of a partnership, we do see that strong partner. And it just -- it gives us the ability to really work with them and to ramp up faster than we would have. Most of the processes are competitive, and we have been pleased to be chosen by some very prestigious systems. And we now have 7 partnerships in place. We have 5 more that we've announced. But we also have several LOIs. And the way it works, Brian, is after you're chosen and we go into this process together, an LOI is signed and then we move to purchase the partnership agreement. And when that's done, we do announce the partnership. So I'm pleased that we have several more that will be coming. And I think our track record is very strong, and they always call our references, many visit our facilities and our partnerships. And so we're proud of what we have. But we think with population how risk value-based contracting that's coming. I think we're going to be in a good position to work with these partners.
Now that makes a lot of sense. And then, Debbie, just to the point you made about some of the prestigious hospitals that you're partnering with. And some of these are multi-state groups, or I mean I know you're partnering with Ascension here in Nashville. What are those discussions like to expand beyond the existing one? I mean does the Nashville JV open the door for you to go into other Ascension markets, I guess, is the question?
Well, I mean, we would certainly -- that is something that we'd like to see happen. And I think we take these individually. I think that there is management in regions that either within Ascension, which has a huge footprint, we do have legs. And -- but they talk to each other. And so what we have to do is prove what we can do. And you mentioned Nashville, that's an example. So as we prove that, we think that gives us an entrée into additional opportunities within the bigger systems. And I think that certainly in California with the Advent is we -- I went there, I met their leadership and I think they're also interested in what more we can do. And so it does give us a chance. But we have to prove ourselves. We have to make the one work. But as we do that, we have opened, I think, more markets and more possibilities to expand the partnerships.
Now that makes a lot of sense. David, shifting gears a little bit. I think one of the key concerns for investors right now across health care, not just for you guys, right, is labor or just broad inflation. What are you seeing on your side of things? And we hear a lot about nurse burnout or clinician burnout. Is that an issue that we need to be thinking about as well?
Well, for us, we have always been focused on labor. It is a significant portion of our cost structure. We have always been able to hire the staff to meet the demand that we see. And as you know, we've been growing. And so we've always been focused on having the right staff. And so we've seen good results with that and continue to stay focused on it across our 40 states. And it can be a challenge, but it tends to be very isolated, very market specific. And really, we've been able to dedicate resources to it at the local level, and to our corporate recruiting team and other resources that we bring to a local market to really improve our positioning, where we do see a challenge. We are willing, if there's a challenge to use our current employees for overtime or even to use agency labor. That agency labor has been pretty small as a percentage of our total staffing resources that we need. It's around 2% of our total staff and has actually improved a little bit compared to a year ago. So I think we've seen a great result, a real stable labor environment with the recruiting and retention focus that we brought. In terms of wage inflation, I think we've always focused on remaining competitive in our markets. We will continue to do that. We have not seen a significant change or a disruption in our staffing or in our cost so far. But as we've always done, we will remain focused on it. But again, very pleased with the job that we've done historically at the local level and with the corporate recruiting and retention resources that we bring to our facilities.
And I'll just add, Brian, it's not just recruiting, it's keeping the people to recruit, as you know. And so we -- even despite the pandemic, we stay very focused on what do we need to do make sure people come on, they're onboarded, and we're able to retain. And our turnover has been very stable, which I think is an accomplishment with all the crisis and just all the stress. Our workers really have done an outstanding job to take care of patients. And so we're pleased that we have a stable workforce.
Now that makes sense. I guess last question for me, Debbie, I mean we talked a little bit about -- David talked about the good rate environment out there. As we think about the regulatory outlook for behavioral health and all the funding that has been proposed or it has already been legislated, are you seeing any of that flow through yet? Or I guess, another way I would ask it is, how are you expecting that to show up? And we're looking at this big settlement with the distributors on opioids, is that an opportunity for incremental funding for addiction treatment?
I think it will be, Brian. I think that it's very state specific. What we've really done is try to stay connected with the state. We do that through our staff, but also through our lobbies. And I think that the key is going to be -- there's going to be funding that's certainly coming from Washington, but also from these settlements. And I think that what we've already seen with grants of the banks that we participate in is the ability to open new CTC clinics. We'd use those funds to do that. And I think that just from what I've seen so far from the administration, they're focused on making sure that mental health is front and center, enforcing parity. And I think that put some teeth behind that with requiring some reporting that our payers have to provide to them. But just overall, Medicare is now funding MAT services, Medicaid has been mandated as of October of last year. So we think that's positive, but then just for our other service lines as well. We feel good about the collaboration we had with our payers. They know what we do is important. And they've been willing to step forward. And we've also offered programs that they feel that they're individuals that are part of their plans, what. So it's been -- I think it's favorable, and we're going to see, I hope, more of that coming through as people recognize the demand that's out there.
Yes. Thank you for the time today, Debbie and David. It sounds like everything is exciting, and you're in a good spot, and you are a solution to the problems we're seeing today in the U.S.
Thank you, Brian.
All right. Appreciate it. Thanks, guys.
Thanks.
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