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Edited Transcript of ACHC earnings conference call or presentation 28-Feb-20 2:00pm GMT

Q4 2019 Acadia Healthcare Company Inc Earnings Call

PEABODY Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Acadia Healthcare Company Inc earnings conference call or presentation Friday, February 28, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Duckworth

Acadia Healthcare Company, Inc. - CFO

* Debra K. Osteen

Acadia Healthcare Company, Inc. - CEO & Director

* Gretchen Hommrich

Acadia Healthcare Company, Inc. - Director of IR

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Jason Michael Plagman

Jefferies LLC, Research Division - VP

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

* John Wilson Ransom

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

* Matthew Richard Borsch

BMO Capital Markets Equity Research - Research Analyst

* Nicholas Charles Spiekhout

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

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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As a reminder, this call is being recorded. Please proceed.

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Gretchen Hommrich, Acadia Healthcare Company, Inc. - Director of IR [2]

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Good morning. And welcome to Acadia's Fourth Quarter 2019 Conference Call. 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 2020 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 Acadia's filings with the Securities and Exchange Commission and in the company's fourth quarter news 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, for opening remarks, I would like to turn the conference call over to Chief Executive Officer, Debbie Osteen.

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [3]

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Good morning. And thank you for being with us today for our fourth quarter and year-end 2019 conference call. I'm here today with Chief Financial Officer, David Duckworth, and other members of our executive management team. David and I will provide some remarks about our financial and operating results for the fourth quarter and year. We will then open the line for your questions.

Our results for the fourth quarter were in line with our expectations. We achieved overall revenue growth of 4.9% over the fourth quarter of 2018, reflecting our continued focus on growth initiatives, both through service expansion at our existing facilities and additional bed capacity. On a same facility basis, overall revenue was up 4.5% in the fourth quarter of 2019 compared with 2018.

Our U.S. facility showed solid improvement across key metrics. For the fourth quarter, U.S. same facility revenue increased 5.5%, with a 2.4% increase in patient days and a 3% increase in revenue per patient day compared with the prior year period. U.S. same facility EBITDA margin increased 30 basis points to 25% compared with 24.7% for the fourth quarter of 2018.

Regarding the specific facility issues that affected our results in the third quarter, we believe that we have addressed the issues with the action plans that have been implemented by our operations team during the fourth quarter. We are very pleased with the progress that has been made, which is in line with our expectations. David will provide additional details on the fourth quarter impact and 2020 expectations for these facilities.

During the fourth quarter, we added 171 beds, including 150 beds in the U.S. and 21 beds in the U.K. For the full year, we added 585 beds to existing and new facilities. Moving forward to 2020, we expect to add approximately 600 beds to existing and new facilities in the U.S. We are excited about these opportunities to expand capacity in our markets, which adds beds to 10 states across all service lines. 2020 presents an opportunity to add the highest number of beds to our U.S. facilities in the last 3 years.

We also continue to work on our partnership strategy. We have a strong track record of partnering with health systems and hospitals across the country. We have 5 joint ventures operating and 3 currently in development. Our integration team has received increased interest from health systems who would like to partner with us. We now have a robust pipeline of approximately 30 projects.

The market remains strong and the value proposition to our provider partners is very compelling. Acadia is collaborating with health system partners nationwide to improve integration of behavioral health care throughout their organization as they focus on population health initiatives and improving clinical outcomes for their patients. We look forward to opening a new joint venture hospital with Tower Health in Reading, Pennsylvania, planned for the second quarter and a new joint venture hospital with Ascension Saint Thomas planned for the fourth quarter. We also expect to open a de novo facility in Cincinnati, Ohio, planned for the fourth quarter of 2020. We are excited about these and other opportunities ahead for Acadia to meet the growing demands in the market, better serve the needs in the local community and advance our position as a leading operator of behavioral health care facilities.

Additionally, we have seen new opportunities and pathways to grow in our CTC service line. We plan to open 6 CTC de novos in 2020 to expand our footprint into new markets that are underserved. As of January 1, Medicare expanded coverage to include opioid treatment programs. While it is too early to size the full benefit, we expect that this will drive volume growth by treating new patients and allowing improved coverage and access for dual-eligible patients. As you can see through our JV activity, new bed expansion and de novo activity, the growth opportunity in behavioral health services remains robust, and Acadia is well positioned to capitalize on these multiple pathways to grow revenue and profitability.

Throughout the quarter, we have continued to make progress in achieving the savings generated through the operational initiatives outlined in the strategic review update we provided last May. We remain focused on implementing these initiatives to improve operational efficiencies throughout our operations. We believe we will achieve approximately $20 million in annualized cost savings by the end of 2020, which is in line with our original announcement in May of last year. As previously mentioned, most of the savings will be in procurement, which will impact supplies and other operating expenses.

We have successfully completed a conversion of our contracted GPO in early February. Our new GPO will provide additional resources and closer alignment to drive the identified cost savings. As we continue to implement initiatives throughout the year, we expect a gradual ramp to the full run rate savings amount of $20 million by the end of the year. Because the facilities have done a fantastic job implementing the initial changes, we are very pleased with our progress to date and look forward to realizing the incremental benefits of our strategy while we continue to support our patients with the highest quality of care.

The performance of our U.K. facilities was in line with our expectations. For the fourth quarter, same facility revenue was up 2.7%, consisting of a 4.7% increase in revenue per patient day, driven by our rate increases from the NHS and local payers and higher reimbursement related to an increase in the acuity of our patients. The increase in revenue per patient day was partially offset by a 2% decrease in patient days, which is related to the retooling efforts we discussed on previous calls. Same facility EBITDA margin was 16.1%, consistent with our expectations.

Operationally, the U.K. business continues to demonstrate stability. The team in the U.K. remains focused on operating the business as our process of assessing strategic alternatives continues. As we have previously discussed, the demand for our services in the U.K. has been consistent. Priory continues to receive referrals for the highest levels of acuity across all divisions and continuously reviews our services to ensure this market need is safely met.

At the end of the year, we had approximately 150 beds off-line for retooling. We have a detailed time line for each project, and we're working diligently to reopen the beds on schedule. We believe there is a real long-term benefit from retooling that will add value to our operations. With the beds that we've retooled, we have already seen good results and believe this will contribute to our future growth. We will continue to work with the NHS and other referral sources to identify areas in which we can help meet their demands and believe we are well positioned across our service lines.

I would like to update you on our strategic review and potential sale of the U.K. business. As we announced last year, the Board has engaged a financial adviser to run a process to explore the sale of the entirety of our U.K. business. The formal process was launched in January 2020, following the U.K. elections and preliminary discussions with prospective buyers at the end of last year. Consistent with market practice for U.K. transactions of this nature and in conjunction with our advisers, we solicited and now have received initial nonbinding offers to acquire our U.K. business from multiple bidders. We are currently in the second phase of the sale process, during which interested bidders will receive proposed transaction documents and complete their confirmatory due diligence. We expect to complete the sale of our U.K. business in the second quarter or early in the third quarter of 2020 if, as a result of our sales process, we receive a final firm offer that our Board determines maximizes value for our shareholders.

Lastly, before I turn the call over to David, I'd like to set the stage for 2020. We will continue to focus on quality in everything we do, whether it is maintaining exceptional standards and patient care across our network, investing in new beds or acquiring hospitals to serve the critical needs in our society or aligning ourselves with the premier joint venture partners around the U.S. We are pursuing a purposeful and best-in-class growth trajectory. We will continue to deleverage the company while making prudent investments based on a disciplined return on capital allocation framework. As we continue to grow our 4 lines of business, you will see the synergies, complementary investments and corresponding operating leverage we can achieve through this approach. We believe Acadia is in the ideal position to meet the tremendous market need that exists.

Now I will turn the call over to David Duckworth to discuss our financial results and guidance in more detail.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [4]

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Thanks, Debbie, and good morning. Revenue for the fourth quarter was $780.2 million compared with $743.5 million for the fourth quarter of 2018. Our consolidated revenue growth of 4.9% was affected by revenue generated by closed facilities in the prior year. The closed facilities had a $9.4 million -- had $9.4 million of revenue in the fourth quarter of 2018, which represents a 1.3% impact on revenue growth. Consolidated revenue growth adjusted for these facility closures was 6.2%.

As a reminder, our fourth quarter 2018 U.S. revenue was impacted by an accounts receivable adjustment of approximately $8 million. Adjusting our U.S. same facility stats for this adjustment as well as the impact from the specific facilities we highlighted in the third quarter, fourth quarter 2019 U.S. same facility revenue growth was 6.6%. Patient day growth was 4.4%. Revenue per patient day growth was 2.2% and EBITDA margins increased 40 basis points as compared to the prior period. The company's consolidated adjusted EBITDA for the fourth quarter of 2019 was $144.4 million or 18.5% of revenue. Adjusted income attributable to Acadia stockholders for the fourth quarter of 2019 was $45 million or $0.51 per diluted share, excluding transaction-related expenses of $11.8 million, a $54.4 million loss on impairment and an income tax effect of adjustments to income of $9.9 million based on a tax rate of 18.1%. The loss on impairment relates to property values at facilities that were closed during 2019.

Turning to our financial guidance and as noted in our press release, we are providing guidance for the full year 2020 as follows: revenue in a range of $3.28 billion to $3.34 billion; adjusted EBITDA in a range of $610 million to $630 million; adjusted earnings per diluted share in a range of $2.20 to $2.40; depreciation and amortization expense in a range of $175 million to $180 million; interest expense in a range of $172 million to $177 million; total diluted shares outstanding of approximately 88.1 million shares; operating cash flows in a range of $375 million to $420 million (sic) [$410 million]; total capital expenditures in a range of $330 million to $350 million, which includes maintenance CapEx of approximately $90 million. Our guidance also assumes an exchange rate of $1.30 per British pound sterling and a tax rate of approximately 17%.

Our guidance for the first quarter of 2020 is as follows: revenue in a range of $795 million to $805 million; adjusted EBITDA in a range of $133 million to $137 million; and adjusted earnings per diluted share in a range of $0.37 to $0.42. This guidance does not include the impact of any future acquisitions, divestitures or transaction-related expenses.

Due to the process relating to our U.K. business, we are providing the following annual guidance for that segment for 2020: revenue in a range of $1.16 billion to $1.19 billion; adjusted EBITDA in a range of $180 million to $190 million; and depreciation expense related to our U.K. business in a range of $78 million to $80 million.

As we look to 2020, there are several items that we would like to highlight regarding the timing of factors that impact our guidance. First, we continue to see progress at the specific facilities we highlighted in the third quarter of 2019. The action plans at these facilities have been implemented. We're seeing these facilities ramp up and expect improvement will continue through the first and second quarter. Second, as Debbie mentioned, we expect to see an ongoing contribution from the operational improvement initiatives throughout the year, which we expect to achieve a run rate of $20 million by the end of the year. Third, we expect bed additions to continue to drive strong growth throughout the year. We have added 585 beds in 2019 and expect to bring approximately 600 beds online in the U.S. in 2020.

As a result of these factors, we expect to achieve revenue growth in the 5% to 7% range throughout 2020 for our U.S. operations. Additionally, in the second half of the year, we expect to achieve our goal of revenue growth at the high end of that range and EBITDA margin improvement for our U.S. operations.

This concludes our prepared remarks this morning. I will now ask Lisa to open the floor for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from A.J. Rice with Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [2]

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Just maybe looking at the U.K., I think you're putting -- is the slight moderation in growth in the fourth quarter revenue and EBITDA versus what you'd seen earlier in the year, it sounds like that's mostly just retooling beds to get ready to take higher acuity patients. But we also do have the political backdrop going on and the move ahead with Brexit and so forth. Is it still your view that, that's not having any impact on the business or the way NHS is relating to either staffing needs across the country or reimbursement or patient fund?

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [3]

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A.J., I've talked with the team in the U.K., and they don't see any significant impact from Brexit. I think that historically, they really employ very few people from Europe, I think less than 5% of their workforce. But they don't see that being an impact. I think as far as the election and just the political climate, there is a focus on mental health throughout the U.K. I think that there may be more funding through NHS, but there's not going to be capital necessarily for extra beds. So we think there's actually going to be more opportunities for independent providers. And there are provider collaboratives that are going to be in place and, hence, there's been a lot of discussion. They actually become effective in the spring. We're very involved with that, and we think that's going to open new opportunities regionally for us. So we don't see an impact from the Brexit.

And also, we don't see really changes in the labor market. There are talks about doing more from an NHS perspective to provide more training and money to -- for education for nurses and others, but we will be a recipient of that if that happens.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. And then maybe my follow-up would be around the discussion around partnerships with health systems. That seems like it's going to become an increasing avenue for growth. Can you just tell us now that, that's sort of settled out last year or 2, anything about the terms of the deals? Is every deal its own thing? Or is there own situation? Or is there interesting aspects to the way terms are being done? Are most of these situations competitive? Are they coming through brokers? Or these things at your network, you just are making contact with systems and really pretty much working with them exclusively?

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [5]

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I'd probably answer that, A.J., to say all of the above. I think that there are some processes that are competitive. There are some systems that have taken the position they want to hire bankers to represent them and look at who is out there to partner with them. We also have several that have not done a competitive process, have reached out to us exclusively. And I think that's based really on our track record. Most of the systems will do a back check of how we are doing with our partnerships. And when they do that, we have excellent recommendations from the partners that we currently have our existing relationships with.

But I also think that it's a growing area. And I think, as I said in my remarks, we see actually more systems reaching out to us because I think they are seeing that they need to have mental health expertise as they look at how to serve their patients, population health and other areas. Each one is really different. And I think that we do have a template that we try and look at for deal terms. But we also want to be responsive to our partners. We want to listen to what they feel is appropriate, and we usually come to terms so that it's really positive for both of us.

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Operator [6]

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We'll take our next question from Brian Tanquilut with Jefferies.

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Jason Michael Plagman, Jefferies LLC, Research Division - VP [7]

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It's Jason Plagman on for Brian. Thanks for the update on the U.K. sale process. So looking forward, any thoughts on potential deployment of the proceeds you'd receive from a transaction? And then thoughts on potential capital structure, debt leverage, things like that, after a potential transaction.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [8]

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Jason, this is David. We don't have specifics to share with you at this time. We do intend to deleverage the company and have a capital structure that allows us to pursue the growth and the different opportunities that we believe we have. The initial intent is absolutely to deleverage the company, and we will share more specifics on what that looks like immediately and in the long term for our capital structure as the process continues.

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Jason Michael Plagman, Jefferies LLC, Research Division - VP [9]

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Okay, fair enough. And then my follow-up, it seems like the de novo performance improved in Q4. Can you talk about the outlook for those facilities in 2020? And then what you've baked into your guidance for 2020 as far as EBITDA impact from the new de novos you have plan to open in 2020?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [10]

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Sure. We did talk about having 2 new facilities that opened in the first quarter of 2019 and some of the start-up losses relating to those facilities throughout the year. We were very pleased that both of those facilities achieved breakeven in the fourth quarter, that is within a year of opening. That is the goal that we generally have for our new facilities. And both of those facilities, after getting off to a slow start, did achieve that goal in the fourth quarter.

For the new facilities that we mentioned earlier for 2020, we do have about $5 million of start-up cost in our 2020 guidance relating to those facilities. Those open throughout the year. So unlike 2019 where we had 2 at the same time, we have more of a phased approach for the de novos that we see coming online in 2020, but the start-up losses for those will be $5 million as a group.

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Operator [11]

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We'll take our next question from Ralph Giacobbe with Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [12]

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Just want to go to the guidance, specifically the revenue guidance for 6.5% revenue growth. 2019, obviously, a slower year and you still have the U.K. challenges and under a sales process. So I guess just a comfort on that magnitude of growth. And maybe if you can give us sort of the underlying growth expectations for the U.S. and the U.K.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [13]

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Sure. This is David. We do have a strong revenue growth outlook in both the U.S. and the U.K. We are expecting for the U.S. 5% to 7% revenue growth throughout the year. And we see that being at the high end of the range in the second half of the year, with the primary factors driving that being the bed additions being a strong number as well as the facilities that we highlighted in the third quarter improving throughout the year.

In the U.K., we also have a strong revenue growth outlook, and that primarily relates to the retooling. We now have, for the 150 beds that are currently off-line, a detailed time line as to when those beds come back online. And we see that starting in the first quarter and continuing throughout the year. And so the volume growth that we see in the U.K. and the project time lines that we have supporting the visibility that we now have around the retooling is the key driver of the revenue growth in the U.K. Our pricing outlook in both markets is between 2% and 3%. So in addition to the volume, we do expect an ongoing stability and strong pricing in the 2% to 3% range.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [14]

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Okay. That's helpful. And then just to follow-up. Maybe I missed it. Can you give us what the U.K. volume growth would have been ex retooling? And is that sort of the bridge? Because I think given the guidance you gave just on the U.K. of EBITDA of $180 million to $190 million, I think that implies, at the midpoint, growth of about 11% EBITDA growth. So can you just help bridge that? I mean that's a pretty sizable jump kind of year-over-year to what we saw in '19.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [15]

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Sure. In the U.K., there is about a 2% impact from the retooling beds. The revenue per day performance has been strong on increased pricing as well as improved acuity and service mix. But there is the volume impact from the beds that were closed for retooling. So as those beds come back online, we think there's 2% volume growth just from that, with other volume growth relating to an overall improvement in the U.K. occupancy. And so mid-single-digit U.K. revenue growth is supported by the retooling beds coming back online; overall, other opportunities we have in the occupancy as well as the pricing that we mentioned.

So the U.K. revenue growth is in that 4% to 6%. If you look at it on a constant currency basis, there's a little bit of contribution from the foreign currency. So I'm not sure if you're seeing that in your numbers. But on a same constant currency basis, it's a mid-single-digit expectation for the U.K.

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [16]

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I'll just add that as we have been opening the retooled beds, that the team in the U.K. has had a lot of success working with commissioners to obtain block contracts. And what that does is it assures us of reimbursement for all of the beds we're reopening. And it gives us the ability to ramp back up on our staffing and get the beds back open, but through a block contract that assures payment. And we have over 30 of those presently. And as we do reopen and we get to a point where we finish construction, that's when the negotiation starts with our commissioners. And I think that protects us a little bit from reopening the beds and having to ramp back up because we have taken that down, obviously, for construction. So they've done a good job with that. And we expect more of those with the retooled beds that open during 2020.

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Operator [17]

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We'll take our next question from Kevin Fischbeck with Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [18]

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This is actually Joanna Gajuk filling in for Kevin today. So first, I guess, just want to clarify -- or I guess also get additional color on the comment around the U.K. sale process. So you said you expect to complete this transaction, I guess, at the end of Q2 into Q3. So does it mean that you think it's going to be closed? Or you're going to have a final decision announced by that time?

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [19]

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Well, we're in the second phase, Joanna, of our process. And when we talk about the second quarter, early into third, we're talking about completing the sale and actually having that finished. Now that is providing that we do have, as I said in my remarks, a firm and final bid that we determine maximizes value. But if we do have those circumstances, we expect to close either second quarter or early third quarter.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [20]

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Okay. Great. And the other piece, so I appreciate the comment that you're not commenting on specifics in terms of the use of proceeds. But just philosophically or, I guess, longer term, when you talk about trying to delever. So can you give us a frame, I guess, how you think about the optimal lever for the remaining U.S. business? Are you thinking more 4x? Or is it a different number in terms of debt-to-EBITDA kind of target for the business?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [21]

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Yes. I mean. We're confirming that we are targeting a leverage that is lower than where we are today. We will provide more specifics and a range once we complete the deal.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [22]

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Okay. Great. And if I also can squeeze in a question on the guidance. So you now, you are talking about the specific segment, the U.K. growth seems to be implying -- or the guidance for the U.K. business seems to be implying pretty decent growth. But when we put the numbers on the paper, it seems like for the U.S., it's kind of surprisingly low. So is there a missing piece in terms of the unallocated corporate overhead that we should be also considering here in terms of just trying to get the implied U.S. numbers? Because we're getting a very low single-digit growth rate. So I don't think that, that will be what the guidance should be implying. Because you're talking about a much stronger revenue growth on a same-store basis. So can you just frame to us how you think about the U.S. growth outlook for the EBITDA in 2020? Or maybe also throw it in there, kind of long term in terms of how you think about that business.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [23]

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Sure, Joanna. And we did provide the guidance around the margin throughout the year with improvement happening throughout the year. And really, in the second half of the year, getting to a margin improvement on a year-over-year basis. The EBITDA, if you just look at our U.S. facilities without the corporate overhead, it is in a strong mid- to upper single-digit range. The timing is just part of that, as we mentioned.

If you include the corporate office costs, let me just provide the detail around that because it sounds like that is something to clarify. We did finish 2019 with about $84 million of corporate overhead in the U.S. That supports our U.S. facilities. We don't have overhead in that number relating to our U.K. operations. We do see that growing and the expectation for next year is in a range of $95 million to $98 million. The reason for that really is items in the 2019 number that just caused that to be lower than what we target in the normal year. Specifically, our bonus accruals are resetting in the 2020 guidance to more the targeted number, so that is the primary reason for our corporate office projection going from $84 million to around the $95 million to $98 million range.

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Operator [24]

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We're taking our next question from Pito Chickering with Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [25]

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First one, on bed retooling. Can you just quantify the number of beds that were retooled and open during '19? And that's in addition to the 150 that are closed at the end of the year.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [26]

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Pito, we did have

(technical difficulty)

Gone through the

(technical difficulty)

'19, and we mentioned having 150 beds at the end of the year that we'll be reopening in 2020.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [27]

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Okay. And then during, I guess, to A.J.'s question, you talked about provider collaborations, which I believe starts in April. Do you think that led to -- do that lead to any new bed retoolings throughout the year? Or do you think that sort of the 150 and then have those come online, we won't see any additional bed retoolings during 2020?

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [28]

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The team believes that we're really at, I think, the peak of the retooling. I don't think that they expect to have a substantial number of beds like we've seen in 2019. We're always going to look for opportunity. If we think a bed could be providing a higher level of service, if we're asked by our customers. But there aren't any plans to do any more in a -- more of a material way around the retooling for this year.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [29]

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Okay. Great. And then the last question, beginning in the U.S., have you seen any impact from niche competitors in autism or eating disorders in your markets?

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [30]

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We really haven't. There are competitors in both of those areas. We don't do -- we do provide some autism services but not to any great extent. We have several eating disorder specialty programs, and they seem to be doing well and actually growing. I think there are competitors, and there have been -- this is -- it's an area that I think there's a great need in for that kind of treatment, but we have not seen any real meaningful impact from competition.

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Operator [31]

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Our next question comes from Whit Mayo with UBS.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [32]

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Just wanted to go back to the U.K. a bit. I'm struggling a little bit with the guidance. But looking at the fourth quarter, on a constant currency basis, the operating cost per patient day increased about 7%, which is actually sequentially worse. And this trend of continued cost inflation really hasn't improved and just continues to trend in the wrong direction, which I know was partially a function of the retooling efforts. So there's just a lot going on. And I guess, I'm just trying to understand what are you sort of underwriting in your plan for 2024 operating cost per patient day? Or if there's any way that you can provide some context around the last quarter or 2, how much extra expense you're carrying through your run rate right now from all these retooling efforts?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [33]

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Yes. Whit, on a cost per patient day basis, we actually see the growth. If you look at it in constant currency, it's less than 5% year-over-year. And that really reflects the service mix and the higher acuity of the patients we're seeing. We are focused on the margin and just making sure that the revenue growth reflects that service mix and that higher acuity. And from that perspective, the margin has been very stable over the last 6 quarters. And as we look at the labor metrics, we've seen stability in both the agency percentage that we're utilizing within the labor as well as just the overall labor cost as a percentage of revenue. So there is an increase in the operating cost, but it does relate to the acuity and service mix that we see.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [34]

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So maybe I didn't understand it. So how are you assuming that trends in 2020? I mean it should moderate. I'm just trying to get a sense of what your assumptions are.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [35]

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Yes, it does moderate. The other part of the equation is obviously the volume. And so we have maintained some staff during the retooling, and that allows us to see the volume and the margin benefit as those beds come back online. So that will be reflected in the 2020 cost per patient day numbers, primarily driven by the stability that we see in the labor cost but also the incremental benefit of the volume.

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [36]

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And Whit, I'll just add. As we have retooled and we have brought the beds down and we've discharged patients to a lower level of care, there's a core staff that we needed to make sure that the ward is safe. So in some instances, through the year, and actually the third quarter and into the fourth, we were keeping a core group there to make sure that as we ramp down, we had safety on the wards in the U.K.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [37]

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Great. That's helpful. Maybe just 2 quick ones. Of the $20 million of savings that you guys identified from a host of operational initiatives, what do you actually expect to realize in 2020? I know that you'll hit the run rate of $20 million by the fourth quarter, but wanted to know what the incremental realization is. And then for your joint ventures, is there a number to think about for real estate acquisition spend this year? And that's it for me.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [38]

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Well, first, on the operational improvement initiative, we do think that we will gradually build to that $20 million that we achieved by the end of the year. It's somewhat gradual throughout the year and around $10 million is our expectation for what's realized during the year. As it relates to the real estate acquisitions, some of that spending does relate to just when we buy land or when we have other real estate that's acquired relating to an expansion, or a new facility or joint venture project. Going forward, that will continue to be around where it was this year. It typically is around $10 million to $20 million. But we think of that as part of the investments that we're making in the different types of growth.

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Operator [39]

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Our next question comes from Matthew Borsch with BMO Capital Markets.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [40]

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I just had a question on the EPS guidance. If I take the high end of your revenue and EBITDA -- adjusted EBITDA ranges and the other guidance that you're giving on D&A and interest expense in the share count, I'm getting to something well above the -- sorry, the range of $220 million to $240 million. If I'm making a stupid mistake, we can take it off-line, but I just wanted to see if there was something obvious that I might be missing. I know the tax rate you're guiding is 17%.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [41]

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Yes, Matt, it does depend on the range that you use for those non-operating cost, and we've provided clarity around depreciation and interest. So depending on whether you use the low end throughout all of the numbers or you incorporate some type of high end, yes.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [42]

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Okay, that makes sense. The other question is on the first quarter. It looks like your -- you guided -- I'm getting something sort of flat EBITDA for the first quarter. And I'm just wondering on the revenue line -- sorry, I know revenue was obviously up like 5%. What about the calendar impact? How are you estimating that? Isn't that a benefit, both with respect to the leap day, obviously, but there's also a little bit of other year-over-year benefit there?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [43]

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Yes, we do see a benefit from having 1 extra day compared to the first quarter of 2019. We estimate that somewhere in the range of $1 million to $2 million. But that is a year-over-year benefit that we expect.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [44]

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Okay. And how are you thinking about the stranded -- if -- well, are there any stranded costs as you see it, or at least lost operating leverage that you would expect to have for some period of time after the U.K. sale?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [45]

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No, there's really not. I mean, the U.S. corporate office costs that we mentioned a minute ago relate specifically to our U.S. facilities. And there are a few million of costs that we have within that number just that relate to the cost of us being a multinational company if you think about higher professional fees relating to tax requirements and things like that. So there will be a wind down of a few million of additional costs that we carry. But we don't think about there being any stranded cost, just given the self-sufficiency of each of those 2 segments.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [46]

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Let me just -- one last question on that, which is, do you think that we externally have the data elements to really estimate what the run -- earnings run rate is going to look like post the sale of U.K., I mean, absent the impacts maybe of the capital reallocation from that sale?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [47]

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Yes, Matt, we do. And part of our intent in providing the U.K. depreciation number and other metrics is just to give you all the information that we think you need.

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Operator [48]

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Our next question comes from John Ransom with Raymond James.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [49]

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In the Wayback Machine, when you bought CRC from Bain, you had about $475 million of revenue, 600 empty beds. And I don't think you guys disclosed how big the methadone business was. But could you just approximately size that business today? And I'm particularly interested in how much the methadone business has grown in the last 6 years.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [50]

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We have 127 clinics. We're now in 32 different states. We have seen strong performance in that business, improvement in the coverage that we have and really a diversified payer mix within that business. So we've seen strong revenue growth in line with what we've reported on an organic basis for our U.S. facilities. It's part of that number. So hopefully, that helps you size where the business is today. We don't separately report revenue relating to that segment because it's just -- it's one component of our U.S. operations.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [51]

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Do you remember how many you had when you bought it roughly versus the 127?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [52]

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John, I don't. I think it was somewhere around 75 clinics. We've done 4 or so tuck-in acquisitions within that service line.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [53]

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Okay. And do you remember kind of approximately -- of the $475 million at the time, what percent of that was -- is it fair to say that was maybe 25% of the mix at the time? Is that crazy?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [54]

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I don't remember what that represented of the CRC business. But where we are today, that segment, that service line is around 15%, 17% of our U.S. revenue. But I don't recall what piece of previous acquisitions that was.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [55]

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And then just last one for me is, of the beds you've added and plan to add in 2020, so let's kind of take '18, '19, '20, approximately what percent of those are de novos, freestanding, stand-alones versus adding beds to existing facilities?

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [56]

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John, our de novos are 300 of the 600, and the remaining are bed additions that we will be making to our existing facilities. So it's about half and half.

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Operator [57]

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We'll take our next question from Gary Taylor with JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [58]

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Most of my questions are answered. I just wanted to understand just a little bit of the U.S. trajectory year-over-year and sequentially. So it looks like if we adjust for the AR charge in the fourth quarter of 2018, did see improvement sequentially in the U.S. same-store margins. They were down about 140 in the third, down about 90 adjusted in the fourth. So are you -- based on your comments, I guess, implying that you do think same-store margin U.S. are down in the first half, and then they'll be up in the second half? Sounds like that's what's sort of underlying the guide.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [59]

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Yes, Gary, we do, and hopefully, we provided enough explanation around some of the factors driving that. There are a few other factors that we do think contributes to that. I'll give you just another example that will hopefully just help you understand the guidance throughout the year. We did make a change in the timing of our merit increases for our U.S. facilities. So in 2020, we are transitioning that merit increase to happen rather than at each employee's annual anniversary date to once a year, either in January or April, for all facilities. This is an improvement, not only in just the -- in the process, the employee evaluation process and performance review process, but also just the visibility, the control that we have as we think about facility level cost. As part of that, there was a shift just that we will be going through, on a onetime basis, that affects the year-over-year comparison '20 versus 2019. It does shift some cost to the first half of the year, but will result in more stable cost throughout the year going into the second half of the year. So that, along with some of the other factors that we mentioned around the specific facilities improving, bed additions coming online, the operational improvements, that's part of our margin expectation improving throughout the year.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [60]

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And that sounds like the segment -- my follow-up was just, it looks like consolidated margins, down 40 this quarter. Your first quarter guidance was for those margins to be down about 100 basis points year-over-year. So it sounds like there's some of the corporate overhead stuff you talked about stepping up. Also, this change on the merit comp probably, I guess, would be 2 of the biggest factors on just that sequential guide.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [61]

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Yes, that's right, Gary.

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Operator [62]

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Our next question comes from Ryan Daniels with William Blair.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [63]

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Nick Spiekhout in for Ryan. I guess, I know we talked about this in the past, and you haven't seen anything, but I'm just wondering what you guys are seeing on the labor front in the U.S. I know a competitor noted they're having some trouble filling some vacancies, and I think they quoted that their annual wage increases jumped about 1% this year. So just a little bit of update there, if you can.

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [64]

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This is Debbie. We haven't really seen labor pressures really differ from 2019 or project them to. I think part of -- looking at others in the industry, we have our service lines that I believe factor into some of the labor pressures, particularly around RNs. We do have the specialty area and CTC, which are not as dependent on RNs. They use other professionals. And the other, I think, factor, which I think is very positive is we have had a very focused process on recruiting and retention. And I think that while we make changes in markets when we think we might be at a point where we might limit census, which we have not done, and we see capacity issues developing because of staffing, we have been proactive in making sure that we're putting in wage adjustments as necessary. It's very variable by market. And I think, again, comparing to others in the industry, we're not in all of the same markets. So we have markets where we do have pressures, but then we have others where we're keeping up with the competition through our wages.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [65]

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Great. And I guess, just shifting to the U.K. retooling. What's the progression of that for 2020? Is that weighted in the back half or the front half or pretty even about for those beds coming back online?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO [66]

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It's really evenly throughout the year. We do have some of the projects that tend to be larger than others. They typically range between 10 and 30 beds each. And we have the first one, is ready to open in March and it has a block contract for the reopening. And so it's starting in March, and it's somewhat evenly throughout the year.

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Operator [67]

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And that does conclude the question-and-answer session. I'd like to turn the call back over to Debbie Osteen for any additional or closing remarks.

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Debra K. Osteen, Acadia Healthcare Company, Inc. - CEO & Director [68]

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I just want to say thanks for being with us today and for your interest in Acadia Healthcare. I'd like to conclude by thanking all of our employees and our clinicians. Every day, they show real dedication and focus. They want to provide the highest quality care to our patients and our families, and I appreciate their efforts, and I just want to thank them.

I'll also say that if you have additional questions today, please do not hesitate to contact us directly. And have a good day.

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Operator [69]

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And that concludes today's presentation. Thank you for your participation, and you may now disconnect.