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Edited Transcript of AAC earnings conference call or presentation 2-Nov-17 3:00pm GMT

Q3 2017 AAC Holdings Inc Earnings Call

Brentwood Nov 6, 2017 (Thomson StreetEvents) -- Edited Transcript of AAC Holdings Inc earnings conference call or presentation Thursday, November 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew W. McWilliams

AAC Holdings, Inc. - CAO

* Kirk R. Manz

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, Equity Research and Director of Healthcare Research

* Ryan Scott Daniels

William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the AAC Holdings Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

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

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Good morning. I'm Andrew McWilliams, Chief Accounting Officer of AAC Holdings, and I'd like to welcome you to our third quarter 2017 conference call.

To the extent any non-GAAP financial measure is discussed in today's call, you will 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 the Press Releases and viewing yesterday afternoon'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 financial performance for 2017 and beyond.

For this purpose, any statements made during this call that are not statements of historical fact 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 third quarter 2017 earnings release. And consequently, actual operations and 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.

At this time, I'll now turn the conference over to our Chairman and Chief Executive Officer, Michael Cartwright, for opening remarks.

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

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Good morning. In addition to Andrew, I'm here today with our Chief Financial Officer, Kirk Manz, and other members of our Executive Management team. Kirk, Andrew and I each have some remarks about the third quarter. After that, we'll open the line for your questions.

We have been working hard to ensure we meet our expectations for 2017. As always, our first priority is to ensure that we remain committed to providing exceptional clinical quality to all of our clients. I'm proud of the continuous investments we are making in our training programs, technology and diagnostic testing services to ensure that we are delivering what we believe is the highest clinical care in the addiction industry.

Q3 was another solid quarter for us. Building upon the improvements we made in Q2, we made substantial gains in revenue and profitability. Most importantly, we materially improved collections in Q3. And I'm happy to report that we had a record collections quarter in Q3, with $75 million in collections, up $7.3 million or 11% from Q2. DSOs have now dropped to 106 days, a 10-day improvement since Q1.

In the third quarter, we were able to complete the consolidation of our operations in South Florida and Southern California, which we anticipate will drive improved operating efficiencies in those markets. I am also pleased that we were able to sign the agreement to acquire AdCare in the third quarter. We believe that AdCare will be a transformative acquisition for us and will help us drive continued growth in 2018 and beyond.

Now on to some of the operating stats for this quarter. At the end of the third quarter, and after successfully consolidating South Florida and Southern California operations, we had 971 residential beds and 373 sober living beds. Residential client admissions were 3,057 in the third quarter. Our total average daily census for the third quarter was 974, up slightly from the previous quarter. Average daily residential census was 755 in the third quarter, while sober living census increased to 219.

Our total episode length of stay remained consisted at 28 days. We had 18,491 outpatient visits in Q3, up 21% from the prior year period. Outpatient business growth has been driven by the growth of our sober living census. In terms of other developments, I am pleased to announce that our leased hospital detox unit with 36 beds in New Orleans is now open and taking clients and an additional 48 sober living beds became operational at our Oxford Treatment Center.

We are making progress on the Resolutions Arlington construction, which we hope to conclude by mid-year 2018.

We are pleased to announce a new board member, Larry Cash, who joined us this week. We are thrilled to have Larry join our board. His experience within the healthcare industry as a former Chief Financial Officer for Community Health Systems, where he helped grow the company from $700 million in sales to revenue of $18 billion, complements the expertise of our board. We will draw on his insight and long track record in the acute care setting as we expand into Medicare and Medicaid in 2018.

Let me now turn the call over to Kirk Manz to talk more about the AdCare transaction and our recent financing activities.

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Kirk R. Manz, AAC Holdings, Inc. - CFO [4]

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Thanks, Michael. We're very excited about the AdCare acquisition. AdCare represents an opportunity to continue to diversify our business by geography, payer mix and service lines. It gives us a strong presence in New England, one of our largest referral markets.

AdCare adds Medicare and manage Medicaid into our payer mix and expands our commercial contracted beds. In addition, it bolsters our service lines on both the high and low acuity spectrums by providing us with a licensed hospital in Massachusetts and a strong outpatient presence in New England.

On an annualized basis, we expect AdCare will increase our revenue by approximately $50 million and our adjusted EBITDA by approximately $11 million after adjusting for approximately $2.8 million of anticipated cost synergies.

The transaction purchase price is $85 million, of which we are financing $10 million with a seller note, $5 million with AAC stock, $5 million in cash, and $65 million in anticipated Term Loan B debt. Regarding the Term Loan B debt, we worked with Crédit Suisse to complete the successful debt offering and secured committed financing in October. As part of the offering, we increased our revolver to $55 million of borrowing ability, with the addition of Deutsche Bank to our credit group.

We also completed a $25 million sale leaseback of certain of our sober living and outpatient properties earlier in the quarter with MedEquities, a publicly-traded REIT. We used the proceeds to pay off our revolver balance and increase cash on our balance sheet.

As of quarter-end, we had $16.4 million of cash on hand, and an undrawn revolver of $55 million, giving us over $70 million of liquidity. Our debt decreased to $210 million, giving us an effective leverage of 3.65x, with a leverage covenant of 5.25x.

I will now turn the call over to Andrew for some additional color on our financial performance.

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

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Thanks, Kirk. Average daily residential revenue, which excludes diagnostic services, was $925 compared to $624 in the prior period. The increase in our residential ADR is the result of improved billing and collections activity and an increase in the percentage of client days at higher levels of care at our residential treatment facilities. As a percentage of residential treatment facility services revenue, we experienced a 32% increase in detoxification and residential services compared to the prior year period.

Average revenue per outpatient visit, which again, excludes diagnostic services, increased to $437 from $329 in the prior year period. The increase in our average revenue per outpatient visit was also due to improved billing and collection activities.

Client-related diagnostic services revenue was reduced to 7% of client-related revenue from 22% in the prior year period, which was due to previously anticipated lower reimbursements combined with a shift in the mix of client-related diagnostic services from higher-cost tests to lower-cost tests.

Revenue per admission increased to $25,498 in the quarter from $21,022 in the prior year period due to increases in the average daily residential revenue and average revenue per outpatient visit.

Income from operations was $4.7 million, up from a loss of $2.7 million in the prior year period. As Michael previously noted, collections improved by 11% in Q3 compared to Q2. Also, this is the first quarter we have had since going public where receivables decreased and revenue increased in the same reporting period.

Cash flows provided by operations were $5.6 million for the quarter due to improved collections. We now have 3 quarters of back-to-back positive cash flows from operations of $4 million or more.

Adjusted EBITDA was $14.9 million or 18.6% of revenues. EPS was $0.03 for the quarter compared to a loss of $0.11 in the prior year period. Adjusted EPS was $0.12 for the quarter compared to $0.19 in the prior year period.

We are reaffirming our prior guidance. Please refer to our earnings release for more details. I will 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) Our first question comes from Ryan Daniels of William Blair.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [2]

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If I look at the guidance, quick question there. Taking your year-to-date sales and EBITDA, it would suggest at the midpoint that you actually anticipate a decline in sales and EBITDA in Q4. So I wanted to see: Number one, if that's just conservatism; or number two, if you do anticipate some decline with seasonality, holidays, et cetera?

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

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I don't see any decline, Ryan. I started the guidance out at the beginning of the year and I feel very confident that we'll end the year with the guidance that we laid out, maybe a little bit above that. But I'm always conservative, you know that.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [4]

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Okay, that's helpful. And then update on the business development team. I know that was a priority earlier this year, driving hires there and trying to expand your referral sources. So I'm curious, number one, how that's progressing; and then number two, maybe with AdCare coming into the mix, if that changes the outlook at all over the strategy?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [5]

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No, the strategy is coming along. I will say for the first 9 months of the year, my 100% focus has been on operations. And you can kind of see that in the results. Starting in February, we worked on rightsizing the business, with condensing some of our operations in both Florida and California. And we hyper-focused on our DSOs and what we could do. Because what we found is, in terms of the billing processes, like we had talked about earlier in calls, with the lab, that now charts are being required, medical records are being required. So we put systems in place at facilities, and that just takes time. So a lot of energy and focus for the first 9 months of the year has been on improving operations. And you've seen that through better efficiencies. You take a look at some of our line items, like salaries, benefits and wages or marketing expenses, kind of year-over-year, and you see that we've tightened down on some of those key areas. And I also said that I would in the back half of the year really get hyper-focused on sales and marketing. And so you can anticipate going through the fourth quarter and the first quarter next year that we're starting to make some of those exact same efficiencies and building out some of that team in those areas as well.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [6]

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Okay. Do you anticipate ADC and effective utilization will start to see an uptick? I know we've seen that actually coming down the last few quarters, despite admissions being reasonably solid.

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

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You will. You'll see that. I feel, actually, very pleased with Q3, considering all the noise we had going on in the system between South Florida and the hurricane. We have 3 facilities down there that we were navigating through, as well as what we were dealing with at Sunrise in New Jersey. So I think that you'll definitely see an uptick in ADC and we feel confident that we'll end the year as we've laid it out earlier. And we're going to go into a very strong 2018.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [8]

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Okay. And then final question and then I'll hop off. Just on DSOs, obviously very good collection process, nice to see that going down. Anymore thoughts on where we might see that settle at year-end? Or into 2018?

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Andrew W. McWilliams, AAC Holdings, Inc. - CAO [9]

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Yes, consistent with -- well, first off I'd like to say that we're very pleased with the collections that we had in the third quarter. Collections improved $7.5 million or 11% in the quarter. We've got a 7-day improvement in DSOs this quarter and a 10-day improvement since Q1. Consistent with what we said last quarter, where we said we believed that we can get the DSOs to -- closer to 100, in the first half of '18, we still feel very good about that. And very pleased where collections are at quarter-to-date, this quarter as well.

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Operator [10]

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Our next question comes from John Ransom of Raymond James.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD, Equity Research and Director of Healthcare Research [11]

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Just some modeling stuff. Revenue per day and revenue per outpatient is way up over our model, census is way off on our model. So is this the new normal or is there something -- I know you're doing more detox in California, which would raise the revenue per day. But I'm kind of struggling to understand why the underlying dynamics are just changing so much. The overall answer's the same, but how we get there is changing pretty dramatically. So maybe you could help us with the big uptick in the effective yield on both inpatient -- on resident and outpatient?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [12]

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Yes, John, I mean, certainly, we could spend some more time with you on your model and try to help you get there. I don't feel like it's off on our model. I feel like that we've done exactly what we said we would do at the beginning of the year. And it's flowed through very similar to the way we thought it would. Laguna we knew would be a big driver earlier in the year. And that's been a big driver of a lot more detox days, higher revenue per day on the ADC. So we kind of saw that on our end, so -- I know we don't compare models a lot -- we don't sit down side-by-side and compare models. But we certainly can help bridge you offline if you'd like to. Because I certainly think that we had a great year and are going to end the year exactly with what we laid out, maybe a little ahead of schedule.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD, Equity Research and Director of Healthcare Research [13]

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Great and then my other question is what's a good number for affective bed count in the fourth quarter? I know you had some offline -- some one-time offline stuff. What's your effective bed count in 4Q?

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [14]

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On the effective bed count, kind of at the end of the fourth quarter, it's going to be fairly consistent with what we have laid out at the end of third quarter.

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Kirk R. Manz, AAC Holdings, Inc. - CFO [15]

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943, John in the third quarter -- excuse me, yes, 949.

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [16]

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Yes. The only thing that's really -- that would be adding to that in a very minor amount would be the Townsend, New Orleans, where we leased that additional 36 beds at the hospital. You could see a few incremental beds coming out as effective from that, but that's about it in the fourth quarter.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD, Equity Research and Director of Healthcare Research [17]

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Yes, and I'm sorry. One other one from me. The bad debt expense, is that a good run rate? I know that's mechanically calculated with aging receivables but how do we think about that bad debt number going forward as well?

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

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In the fourth quarter, I think, the run rate as a percentage of revenue, is a good number for the fourth quarter. As collections continue to improve, you'll start to see improvements in the agings and as that occurs, the bad debt expense as a percentage of revenue will start to go down. But that takes a little bit of time to kind of flush through the aging buckets and et cetera. So for the fourth quarter, I think the run rate that we have in the third quarter is a pretty good estimate.

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Michael T. Cartwright, AAC Holdings, Inc. - Chairman & CEO [19]

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Thank you, John. And thank you for everybody being on the call today. We felt like we're executing the year as planned. Lot of hard, hard work from our staff around American Addiction Centers. I want to say thank you very much for all the team effort that we've had this year. Look forward to our next call. Thank you very much.

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Operator [20]

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