Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q3 2023 Earnings Call Transcript
Acadia Healthcare Company, Inc. (NASDAQ:ACHC) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good day, and welcome to the Acadia Healthcare Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Gretchen Hommrich. Please go ahead.
Gretchen Hommrich: Good morning, and welcome to Acadia’s third quarter 2023 conference call. I’m Gretchen Hommrich, Vice President of Investor Relations for Acadia. Here with me today are Chris Hunter, Acadia's Chief Executive Officer; and Heather Dixon our Chief Financial Officer. I'll first provide you with our Safe Harbor before turning the call over to Chris. 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 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 Acadia’s expected quarterly and annual financial performance for 2023 and beyond.
You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia’s filings with the Securities and Exchange Commission and in the company’s third quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter, for opening remarks.
Chris Hunter: Thank you, Gretchen, and good morning everyone. Thank you for being with us for Acadia’s third quarter 2023 conference call. Before we discuss the results, I want to note an important recent addition to Acadia's leadership. Last week we announced that Dr. Patrice Harris has been appointed to the company's Board of Directors. Dr. Harris is a Board Certified in Psychiatry and has diverse experience as a private, practicing physician, Public Health Director and Patient Advocate. She served as President of the American Medical Association from 2019 to 2020 where she was the first African-American woman to be elected to this prestigious position. She also served as Chair of the AMA's as Opioid Task Force and on AMA Work Groups devoted to health information technology, sustainable growth rate, and private contracting.
She continues to work in private practice and is Chief Executive Officer of eMed Digital Healthcare, a digital healthcare company she co-founded. Dr. Harris brings deep clinical expertise in areas that are core to Acadia's mission and we look forward to her valuable insights as we continue to execute our growth strategy. Now turning to the results. For the third quarter, we delivered strong financial and operating performance as we continued to see growing demand for our behavioral health services across our four distinct lines of business. With solid execution on our core business combined with sustained execution of our strategy, we are consistently able to meet this demand as well as deliver on our key performance objectives. Top and bottom line growth this quarter was impressive.
We reported year-over-year revenue growth of 12.5%, adjusted EBITDA growth of 13.4% and adjusted EPS growth of 13.8%, excluding income from the Provider Relief Fund recognized in the third quarters of 2023 and 2022. Notably our same facility revenue increased 13% compared with the third quarter last year, with the increase driven by both volume and rate improvements. Similar to what we've experienced throughout 2023, these third quarter results reflect the collective impact of the ongoing focus on our core business and our progress against our growth strategy. In addition to our core financial metrics, we were pleased to see further sequential improvement in our labor trends with 2023 wage inflation decreasing from 7.5% in the first quarter to 6.3% in the second quarter to 5.7% in the third quarter, an improvement of 180 basis points so far this year.
Additionally, recent investments to focus on employee engagement have supported our ability to attract and retain employees in a competitive market. Our most recent employee survey showed notable improvement in engagement. In addition, attrition rates across a number of our clinical positions have declined. We expect further improvement in this trend as we remain focused on employee engagement and continue to share best practices across our 253 facilities. Our team has done an outstanding job in effectively managing our operations as we experienced higher volumes in our current facilities and added more capacity through the continued delivery of our five defined growth pathways. In support of our first pathway facility expansions, we have added 204 beds to existing facilities through the first nine months of the year.
We are on track to meet our objective to add a total of approximately 300 beds to existing facilities in 2023. For our second pathway, we remain focused on developing wholly owned de Novo facilities in underserved markets for behavioral healthcare services. To this end, we're making good progress on opening a newly renovated 101-bed adult hospital and outpatient facility which is part of the Montrose Behavioral Health Hospital in Chicago, Illinois, as well as an 80-bed inpatient hospital Coachella Valley Behavioral Health in Indio, California. Both are expected to open by the end of this year. Our CTC service line continues to expand its industry leading position with 155 locations across 32 States and a flexible suite of service of solutions from traditional OTPs to mobile vans and telehealth solutions.
We opened two new CTC locations in the third quarter, making a total of four CTCs open so far this year. We're on track to open six CTCs in 2023 and are focused on accelerating our growth in the future. Importantly, the need for our services has never been greater. More than 9 million Americans are suffering from opioid use disorder and just last year the country witnessed approximately 110,000 overdose deaths, tragically a record high. Regarding our third growth pathway, we are especially proud of the expanded scale of care we can deliver to communities across the country through relationships with renowned joint venture partners. Early in the third quarter, we opened a 96-bed hospital with our joint venture partner Bronson Healthcare in Battle Creek, Michigan and another 96-bed hospital with our partner Geisinger in Moosic, Pennsylvania.
This is the first of two hospitals we will be opening with Geisinger in the state. We anticipate breaking ground in early 2024 on the second hospital in Danville, Pennsylvania. We are also pleased to highlight that this week we broke ground on our previously announced behavioral health hospital with joint venture partner ECU Health, Eastern North Carolina's premier health system. This new hospital will expand our acute service line into the North Carolina market and will serve as a destination academic site, training students and residents from the ECUs Brody School of Medicine. We look forward to working together with these premier health systems to provide quality behavioral healthcare in their respective markets. With our clinical expertise and standing as the leading pure-play provider of behavioral healthcare services, Acadia remains an attractive partner for health systems who want to expand behavioral healthcare treatment options in their respective communities.
Working together, we have a shared commitment to provide access to quality care and support the critical need in the community. Today, Acadia's 20 joint venture partnerships represent a combined total of 21 hospitals with 11 hospitals already in operation and 10 hospitals expected to open over the next several years. In addition, we recently broke ground on a second hospital with an existing JV partner, which we will announce in the next several months. This will be our second partnership with two hospitals in different markets demonstrating the value of these collaborations to both our partners and to us. The pipeline for potential partners remains robust and joint ventures will continue to play an important role in Acadia's future growth.
With respect to our fourth growth pathway, we are focusing on identifying acquisitions that support our growth objectives and meet the criteria of our capital allocation strategy. During the third quarter, we announced a definitive agreement to acquire Turning Point Centers, a specialty provider of substance use disorder and primary mental health treatment services that cares for patients in the Salt Lake City, Utah metropolitan market. This acquisition will allow us to operate the 76 beds in their current facilities and over time add an additional 48 beds to the operation. We expect to close this transaction by the end of 2023. As you know, extending the continuum of care is our fifth and final growth pathway. One of the key focus areas of this pathway is expanding partial hospitalization programs or PHP and intensive outpatient programs or IOP that can provide four to six hours of care per day.
We believe the impact of PHP-IOP on the clinical outcomes of our patients can be significant for multiple reasons. First, the vast majority of our acute and specialty patients are indicated for PHP-IOP as a step down therapy post discharge as they transition back to the community. Second, PHP-IOP has a strong record of positively affecting post discharge health outcomes. And lastly, we believe there's a clinical opportunity for a larger share of our patients to access and appropriately utilize PHP-IOP. To support this goal we will continue to expand our PHP-IOP offerings across facilities, including three new programs in the third quarter and 26 programs through the first nine months of the year. Through each of these five growth pathways, we are well positioned to maintain our growth trajectory and meet our stated development targets for calendar 2023 as follows; adding 670 beds through approximately 300 bed additions to existing facilities, of which already we've already added 204 beds here to-date, opening two inpatient de Novo hospitals, Montrose Behavioral Health Hospital and Coachella Valley Behavioral Health, which we expect to complete by year end, opening two hospitals with JV partners, which we completed early in the third quarter and then opening six CTC locations of which we have already opened four this year.
Looking ahead to 2024, we have significant opportunities for further growth through our defined pathways and consistent with what we shared in our first ever Investor Day a year ago at Carnegie Hall in New York. With respect to our joint ventures, we look forward to continued progress into 2024 with projects that are already underway. We would like to preview a few highlights. First, together with our partner Henry Ford Health, one of the nation's premier academic and integrated health systems, we will open a 192 bed joint venture inpatient behavioral health hospital serving the Metro Detroit area. Second, together with one of the premier health systems in Colorado, Intermountain Health, we will open a 144-bed in patient behavioral health hospital which will serve Denver area residents.
This hospital will expand our acute service line into Colorado and as previously mentioned, we expect to announce a second hospital with an existing joint venture partner in the next several months which has already begun construction. We expect these facilities to open in 2024. In addition to these JV facilities, we have several de Novo facilities that will begin to care for patients in 2024 as well. As we previously announced, we plan to open a 100-bed acute behavioral health hospital in Mesa, Arizona, Agave Ridge Behavioral Health. Additionally, we recently acquired a building on 10 acres of land that will allow us to expand our specialty services in Florida. This convertible facility near Tampa is expected to open its first 20 beds in the second quarter of 2024 and includes plans to expand this facility to 80 beds in the future.
This specialty facility will treat patients recovering from substance use disorders. And finally, we'd like to highlight our new acute care behavioral health facility in Madison, Wisconsin. While Acadia has a presence in the state with our 14 CTCs and a specialty SUD residential treatment program, our 120-bed acute care hospital represents an important new market entry for Acadia's acute de Novo growth. As we continue to extend our market reach, safety and quality care remain our top priorities in every aspect of patient care. We're committed to implementing the right training and leadership development along with the right technology to ensure we're delivering the best possible outcomes for our patients. We have made significant technology investments this year to deliver strong clinical outcomes and further drive efficiencies in our business.
Our recent investments in electronic medical records and patient monitoring technology are yielding early benefits and support our medical teams with respect to patient safety and compliance. We are extremely proud of the work that we are doing and our progress to date in 2023. Across the company, our dedicated employees and clinicians are addressing the nation's critical need for safe quality treatment for mental health and substance use issues. We are well positioned to leverage our scale and expertise and continue to reach more patients and their families who desperately need our help. At this time, I will now turn the call over to Heather to discuss our financial results for the quarter and 2023 guidance.
Heather Dixon: Thanks, Chris and good morning everyone. Our third quarter financial performance reflects the continued favorable growth in our business in 2023. We achieved solid top line growth with $750.3 million in revenue for the quarter, up 12.5% over the third quarter of last year. The company recorded income related to the Provider Relief Fund established by the CARES Act of $4.4 million during the third quarter of 2023 and $7.7 million during the third quarter of 2022. Excluding income from the PRF for both periods, adjusted EBITDA for the third quarter of 2023 increased 13.4% to $175.9 million compared with $155.1 million for the third quarter of 2022. Adjusted income attributable to Acadia stockholders per diluted share was $0.91, up 13.8% for the third quarter of 2023 compared with $0.80 per diluted share for the third quarter of 2022.
Adjustments to income for the third quarter of 2023 include the impact of the cost of legal settlements, transaction related expenses and the related income tax effects of all items. During the third quarter, we evaluated our professional liability reserves, including an acceleration of our periodic actuarial review. While we perform this review process each year and adjust our reserves accordingly. The timing is usually during the fourth quarter. Given the heightened activity and level of discussions regarding litigation reserves, we believe that it was prudent to accelerate that review to the third quarter. As a result, we recorded an adjustment to increased professional and general liability reserves by $5.2 million. After seeing increases in the last two years in the form of reserve adjustments, we are not anticipating a meaningful increase in this line item moving forward.
Acadia has maintained a strong financial position which provides us the flexibility to deploy capital to support our organic growth strategy as well as fund potential acquisitions and future investments. As of September 30, 2023, we had $99.6 million in cash and cash equivalents and $520 million available under our $600 million revolving credit facility with a net leverage ratio of approximately 2 times. Before turning to our guidance, let me briefly touch on the settlement agreements we described in the 8-K filed earlier this week relating to three lawsuits involving the company's former Desert Hills facility. As noted in that 8-K, soon after the settlements are approved by the court, Acadia will pay an aggregate $400 million in exchange for a full release and discharge of all related claims.
We believe these settlement agreements are a positive step forward and remove uncertainty and future expense associated with the three cases. We currently intend to pay the settlement funds from a combination of insurance, cash on hand and existing credit lines and expect the entire settlement amount less any portion covered by insurance to be tax deductible. We look forward to turning all of our attention to the continued execution and delivery of the best possible care for our patients, families and communities we serve. And as you can see from the updates to our guidance, our growth in this respect is strong and is expected to remain so. In fact, as noted in our press release, we have increased our full year expectations for revenue, which are now expected to be in the range of $2.9 billion to $2.92 billion.
Also excluding income from the PRF adjusted EBITDA is now expected to be in the range of $655 million to $675 million and adjusted earnings per diluted share are now expected to be in the range of $3.33 to $3.43. Please refer to our press release for all other metrics. As a reminder, the company's guidance does not include the impact of any future acquisitions, divestitures, transaction related expenses or the recognition of additional Provider Relief Fund income. With that, operator, we're ready to open the call for questions.
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