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Edited Transcript of AAC earnings conference call or presentation 30-Aug-19 1:00pm GMT

Q2 2019 AAC Holdings Inc Earnings Call

Brentwood Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of AAC Holdings Inc earnings conference call or presentation Friday, August 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew W. McWilliams

AAC Holdings, Inc. - CFO

* Michael T. Cartwright

AAC Holdings, Inc. - Chairman & CEO

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Conference Call Participants

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* John Wilson Ransom

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research

* Nicholas Charles Spiekhout

William Blair & Company L.L.C., Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the American Addiction Centers Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

I would now like to turn the conference over to Andrew McWilliams, Chief Financial Officer. Please go ahead, sir.

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [2]

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Good morning, and welcome to our earnings conference call for the second quarter of 2019. I'm Andrew McWilliams, Chief Financial Officer of AAC Holdings.

To the extent any non-GAAP financial measure is used in today's call, you'll find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by following the Investor Relations link to this morning's news release.

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 AAC's expected annual performance for 2019. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in AAC's filings with the Securities and Exchange Commission and in the company's second quarter 2019 earnings release. And consequently, actual operations or results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

For portions of our call, we will be referring to the earnings release supplement that was posted on the Investor Relations section of our website this morning along with the earnings release.

I would now like to turn the call over to our Chairman and Chief Executive Officer, Michael Cartwright.

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [3]

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Thank you, Andrew, and good morning, everyone. Before we start the earnings discussion, I'd like those listening to know that tomorrow, August 31, is International Overdose Awareness Day. Each of our families across the country will be hosting community events meant to raise awareness about overdose prevention and treatment, including the use of Narcan in the case of opioid overdoses. As a company, we always seek this kind of community engagement but especially at a time when opioid overdoses are on the rise and impacting so many in towns across America.

On today's call, I'll be discussing our recent operational highlights before turning the call over to Andrew to walk through our financial results. We will then open it up to your questions.

Though we still have a lot of work to do, overall, I'm extremely pleased with the sequential progress that we've been making this year. As we have been discussing on our previous calls, we have executed several initiatives in sales and marketing, which included leadership enhancements and organizational improvements, which is giving us positive momentum in 2019. Our inpatient census improved 37% at June 30, 2019, compared to December 31, 2018, and our inpatient occupancy was 81% in Q2 versus 69% in Q4.

Also as we discussed on our previous calls, we took measures to implement a series of cost-cutting initiatives. These actions included the consolidation of our Las Vegas and Southern California markets, the sale of our Townsend operation in Louisiana, consolidation of our lab operation and corresponding reduction in our corporate expenses. Our cost-saving initiatives have resulted in approximately a $15 million quarterly reduction in our operating expenses on a year-over-year basis. We're continuing to focus on further reductions in operating expenses and we expect a further reduction in operating expenses of $4 million over the course of the second half of 2019. These cost savings positively impacted our second quarter operating results, and we expect they will continue to have a positive impact on the remainder of 2019.

As previously announced, earlier this year, we launched a process to evaluate our strategic alternatives related to our balance sheet. We are excited about the level of interest in the company and we are currently evaluating numerous initial proposals and engaged in discussions with multiple third-party investment firms. We remain committed to our strategic initiatives to improve the balance sheet and enhance value to all stakeholders by the end of the year. Our goal is to utilize our existing assets to reduce our senior debt by at least $100 million by the end of the year in order to reduce the cost to capital.

Finally, we remain engaged in active discussions with our lenders on our credit agreement and are making progress on reaching an agreement that will resolve our covenant obligations in the near term.

I'm confident that we will reach an agreement that is favorable to all stakeholders.

I will now turn the call over to Andrew to discuss our financial results.

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [4]

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Thank you, Michael. For the second quarter of 2019, total revenue improved 15% to $63 million from $55 million in the first quarter of this year. This improvement in total revenue primarily came from our inpatient treatment facility revenue as a result of improvements in both average daily census and average daily revenue. Average daily inpatient census improved 8% to 802 for the second quarter 2019 from 740 in the first quarter of this year. Average daily inpatient revenue in the second quarter improved 17% to 790 from 674 in the first quarter of this year.

Partially offsetting the increase in inpatient revenue was the decrease in client-related diagnostic services revenue. During the second quarter, client-related diagnostic services revenue was negatively impacted by additional reserves recorded against our accounts receivable.

The cost savings initiatives that we discussed on prior calls related to consolidation of beds and facilities, combined with improvements in corporate SG&A, have resulted in a reduction in operating expenses of almost $12 million or 15% since the fourth quarter of 2018 and a $15 million improvement on a year-over-year basis.

The improvements in revenue and operating expenses had a positive impact on adjusted EBITDA. On a sequential basis, adjusted EBITDA went from a loss of $12 million in the fourth quarter of 2018 to a loss of $6.5 million in the first quarter of 2019 to positive adjusted EBITDA of $3 million in the second quarter of 2019. This represents a $15 million or 125% improvement in quarterly adjusted EBITDA since the fourth quarter of 2018. Overall, as Michael mentioned earlier on the call, while we still have a lot of work to do, I'm pleased with the sequential momentum so far in 2019.

Turning to our 2019 guidance, our full year guidance has revenue in the range of $255 million to $275 million and adjusted EBITDA in the range of $16 million to $21 million. Taking into account actual results through the first half of 2019, this implies revenue of $137 million to $157 million and adjusted EBITDA of $20 million to $25 million in the second half of 2019.

I wanted to spend a few minutes bridging our second half 2019 adjusted EBITDA guidance of $25 million, which is detailed on Slide 7 and 8 of the earnings release supplement that we referenced earlier on this call. In the second quarter of 2019, adjusted EBITDA was $3 million, which on a run rate basis is $6 million for the second half of 2019. There is an additional $7 million of adjusted EBITDA, which is expected to come from census improvement in the second half of 2019. The census improvement assumes about a 4% increase in average daily census in the second half of 2019 coming off of Q2 of 2019. As referenced on Slide 5 of the earnings release supplement, through July 2019, we already have experienced a 2% increase in average daily census.

We expect another $8 million to come in the form of increased revenue from client-related diagnostic services. As I mentioned earlier on the call, we reported additional reserves through outstanding accounts receivable for client-related diagnostic services, which totaled $4 million in Q2 of 2019. As this is not expected to reoccur in the second half of 2019, this results in an incremental improvement of $8 million over the remainder of 2019.

The final component of the bridge to get to the $25 million of adjusted EBITDA in the second half comes from additional operating expense reductions totaling $4 million. These are from a combination of vendor spend reductions and rationalization and decreases in salaries, wages and benefits. I would also point out, through July 2019, we've already experienced operating expense reductions from Q2 2019 that gives us insight into operating expenses in the second half of 2019.

This concludes our prepared remarks. I'll now turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from John Ransom of Raymond James.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [2]

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If you hit your $20 million-ish back half EBITDA, what does that imply for free cash flow?

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [3]

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That's a good question. So if you think about the free cash flow, I'm really expecting cash uses in -- to be pretty neutral from an AR and AP standpoint. And then if you really think -- if you go and take a hard look at what the adjustments were to get to adjusted EBITDA, those aren't really expected to reoccur, such that really the -- that back half EBITDA is really expected to convert mostly into cash. So if you take that kind of, I'd call it, $12 million or so, you back out maintenance CapEx of about $1 million or so and then back out cash for interest and principal payments, you'll see that that's a pretty neutral, even cash flow. At the end of the day, it will come in right at even.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [4]

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What's the -- just the cash interest expense in the back half of the year, what are you thinking about this?

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [5]

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It runs about -- it's about $8 million a quarter.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [6]

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Okay. Got you. And then secondly, I know you got a lot of moving parts and a lot of things to think about, but do you have a ballpark estimate of when you might get to some resolution with your covenant issue?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [7]

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We're working on it every day, John. I mean I think our banks have been extremely supportive. They see the trajectory that we're making. I think we see the trajectory we're making, there's both sides of it. Part of it hinges on us unlocking some of the value of the real estate, which we've been actively working on. We're looking at all proposals, and so we certainly want to get this resolved as soon as possible.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [8]

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Okay. But no firm date yet? And Andrew, last question from me is let's say you were to get a $100 million sold, how should we think about the trade-off between rent expense and interest expense in that transaction? In other words, what will be the delta? I'm assuming you're not going to do this. You're going to lower -- you're going to get something other than the interest rates you're paying. But any idea you had on sort of cap rate? And I know you're also thinking about selling Ringwood, which wouldn't come with a lease to it as well. But how should we think about the improvement in the -- below the line, if you can get this done?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [9]

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Big picture, definitely, we'll reduce the cost of capital, John. The $30 million that we have is pretty high-interest loan and then it drops from there. So I think it's hard to predict exactly what it'll be, but I'm happy to do an offline conversation with you and go -- walk through an exercise of multiple scenarios. But it certainly will bring down the cost of capital or it wouldn't make sense for management to do it.

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [10]

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Yes. I think, John, we're, obviously, very focused on that. It's got to be improvement in cost of capital and it's got to also be a long-term solution as well. Escalators, we'd be very focused on making sure that we're appropriately taking into account escalators as we thought about the cost of capital.

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Operator [11]

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And our next question today comes from Ryan Daniels of William Blair.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [12]

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This is Nick Spiekhout in for Ryan. Going on the strategic alternatives, so is that something that you're planning on kind of finishing within the year? And then, I guess, we're mostly through Q3, so I'm more targeting kind of Q4 for that.

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [13]

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Correct. We've been at it since early summer and we've had great conversations and discussions. And they continue to get better as our trajectory gets better, and we certainly plan on conducting a transaction before the end of the year.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [14]

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Okay. Cool. Perfect. And then just kind of going on the cost initiatives. It looks like salary and wages have been coming down a bit, but then professional fees kind of made up for a little bit of that chunk. Should we expect salaries kind of to come down a little bit? Or are we going to kind of reach a steady state here?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [15]

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I think from a salary, wages and benefits, we're probably stable where we are. We've definitely done a lot of cutting. Really appreciate our staff. They worked really, really hard this year in terms of being more efficient in how we deliver care. And so I mean I think we're very stabilized there. It's really vendor spend and looking at other ways that we can just be smarter as a company to reduce our overall spend.

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [16]

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And keep in mind the trajectory of Q2. So when you think about Q2 to Q3, I would expect some reduction there, but that's more from the momentum that you saw inside of the quarter headed towards June 30 versus April 30 as well.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [17]

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Got you. And does that kind of explain the uptick quarter-over-quarter in professional fees? Kind of you're putting a little bit more in there as you've kind of reduced the headcount type of thing.

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Andrew W. McWilliams, AAC Holdings, Inc. - CFO [18]

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No. No, I wouldn't quite think about it that way. I think it's important to take a look at some of the adjusted add backs that we had inside the quarter because a lot of those -- there were certain add backs nonrecurring events that occurred in professional fees that are naturally going to bring that down from that component.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [19]

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Okay. Great. And then, I guess, any color on kind of your marketing initiatives? I know your census is improving. I guess if you could just talk a bit about successes there or wins that you've seen since last quarter?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [20]

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Yes. I mean I think Stephen Ebbett has been an incredible addition to our management team. He's just incredibly smart at SEO and web traffic and really just understanding all of our different web assets. I think our biggest challenge was last year when Google did the algorithm update and we wanted to make sure that we understand that well. I think Stephen and his team has done a phenomenal job on that. We also wanted to really start doing a lot more localized marketing with our facilities and utilize the great business development team that we have across the United States more effectively by partnering with the facilities. So we're starting to see a lot more local referrals than we used to see. And then in our call center, we're starting to get our mojo back and get our conversion ratios back up. So all things are heading in the right direction on the sales and marketing front. We feel very good about that.

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Operator [21]

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And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Michael Cartwright for any closing comments.

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [22]

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Thank you very much. I do appreciate you all listening today. Reflecting on this year, July 1 was my 24th year being the CEO of an addiction treatment company. And I have to say, this has probably been one more challenging year starting in the back half of last year, losing about 30% of our revenue and then trying to come back out of that. And people ask me all the time, "How do you sustain your excitement about helping people with drug treatment and running a company like this, especially in a challenging environment?" And I have to say, I couldn't do it without a very, very supportive Board of Directors, very supportive management team and the hardworking doctors, clinicians, nurses every day. And when I go out into the facilities and get to spend time with the patients and actually hear the stories from the patients of what we do, it just energizes me. It reminds me every day of why I became an icon drug counselor, why I lead this company and why I'm trying to change the trajectory of how we treat people with drug and alcohol problems.

And so I just want to read you a letter from a patient of ours because we would see countless stories like this. "About a year ago, you treated my husband. I wanted to reach out to you today because we're getting close to his first year of sobriety, and I wanted to thank you. My husband came back to us a different person. He was optimistic about what the future held for himself and his family. For the families of people struggling with addiction and mental illness, we often lose hope. I was hopeful AAC would be able to help my husband and our family, but I knew we were facing an uphill battle. The work that you do is so important for families just like us, a wife and a son who just wanted their husband and dad back. My husband is able to do basic things again, like have a conversation, remember to take the garbage out, have dinner with his family. This all sounds so small, but for us, it was life-changing. The work continues, but he is committed and so are we. All of you make such a difference, and I hope that you know that."

Again, this is just one example of the impact we're having on thousands of lives and families across America. I know that as a AAC shareholder, stockholder, it's been a really tough year, but if you think about what we do on a daily basis and how many people we help every single day, every single month, every single year, it's amazing to get to do what we do. And so I just want to thank all the staff that are out there working really hard to make us a great company, and I promise you, we're on the right trajectory and we plan on having a great back half of 2019 into 2020. Hope you have a good day.

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Operator [23]

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And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.