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Edited Transcript of ACHC earnings conference call or presentation 28-Jul-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Acadia Healthcare Company Inc Earnings Call

PEABODY Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Acadia Healthcare Company Inc earnings conference call or presentation Friday, July 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Duckworth

Acadia Healthcare Company, Inc. - CFO, CAO and Controller

* Joey A. Jacobs

Acadia Healthcare Company, Inc. - Chairman and CEO

* William Brent Turner

Acadia Healthcare Company, Inc. - President

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Conference Call Participants

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* Albert J. Rice

UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities

* Anagha A. Gupte

Leerink Partners LLC, Research Division - MD, Healthcare Services and Senior Research Analyst

* Ann Kathleen Hynes

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Benjamin Whitman Mayo

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brian Gil Tanquilut

Jefferies LLC, Research Division - Equity Analyst

* Charles Edward Haff

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Christian Douglas Rigg

Deutsche Bank AG, Research Division - Research Analyst

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* John Wilson Ransom

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

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

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

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William Brent Turner, Acadia Healthcare Company, Inc. - President [2]

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Good morning. I'm Brent Turner, President of Acadia Healthcare, and I'd like to welcome you to our second quarter 2017 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 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 Acadia's filings with the Securities and Exchange Commission and in the company's second 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'll now turn the call conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [3]

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Good morning, everyone, and welcome to our Second Quarter Conference Call. In addition to Brent, I'm here today with our Chief Financial Officer, David Duckworth, and other members of our executive management team. David and I each have some remarks about the second quarter and our outlook for Acadia, then we'll open the line for your questions.

Acadia's second quarter results exceeded our expectations and we were pleased with the improvement in our operations for the quarter. This improvement was especially clear with our stronger performance in same facility revenue on a consolidated basis and in both the U.S. and the U.K. Even though we faced very tough comparisons for the second quarter of last year, in fact, our 6.5% consolidated same facility growth and 7.8% growth for our U.S. operations were our best rate of same facility growth for the last 4 quarters.

As our outlook indicated, we expected our second quarter results to be better than the first quarter. We were pleased with the results and the sequential improvement from the first quarter, highlighted by: revenue increase of $36.7 million; adjusted EBITDA increase of $25.9 million; margin improvement of 260 basis points; decline in salary, wages and benefits as a percentage of net revenue of 180 basis points from 54.3% to 52.5%; and adjusted EPS increase from $0.46 to $0.66.

For the second quarter, we added 91 beds, and we remain on pace to open approximately 800 new beds during 2017 in the existing facilities and 3 de novo facilities scheduled to open in the second half of the year.

In the third quarter alone, we anticipate opening more than 250 beds as well as adding beds to our existing facilities. We've also remained very focused at the individual facility level in driving additional revenues, primarily through program enhancements and other growth investments. We are continuing to actively evaluate additional acquisitions, primarily in the U.S., and we are believed that we are well positioned to fund our acquisition strategy.

Additionally, given our scale, operations expertise and independence, we believe we are an attractive behavioral health joint venture partner for acute care hospitals, as evidenced by our most recent joint venture agreements in Ohio and Pennsylvania. We are very optimistic about all of our potential growth opportunities. We remain excited for the future and confident in our team and business model.

Thanks for your time this morning and your interest in Acadia. Now here's David Duckworth to take you through the financials.

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

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Thanks, Joey, and good morning. The company's revenue for the second quarter of 2017 was $715.9 million, a 5.4% decline from $756.5 million for the second quarter last year. Adjusting for the impact of the divestiture, other discontinued operations and the decline in the exchange rate, the company's revenue increased 6.4% from pro forma revenue of $672.9 million for the second quarter of 2016.

Adjusted earnings per diluted share was $0.66 for the second quarter this year compared with $0.73 last year. As detailed in the press release, on a pro forma basis, adjusted EPS increased 10% for the second quarter of 2017 from pro forma adjusted EPS of $0.60 for the second quarter of 2016. Adjusted EPS for the latest quarter excludes transaction-related expenses of $9.1 million and debt extinguishment cost of $0.8 million. For the second quarter of 2016, adjusted EPS excludes transaction-related expenses of $6.1 million and a gain on foreign currency derivatives of $98,000.

Acadia's second quarter same facility revenue increased 6.5% from the second quarter of 2016, with a 4.6% increase in patient days and a 1.8% increase in revenue per patient day. Same facility revenue for the U.S. increased 7.8% from the second quarter of 2016, with a 6% increase in patient days and a 1.7% increase in revenue per patient day; while in the U.K., same facility revenue increased 4%, patient days increased 2.8% and revenue per patient day increased 1.1%. Same facility EBITDA margin was 26.4% compared with 26.7% for the second quarter of 2016.

Acadia's tax rate on adjusted income from continuing operations before income taxes was 24.8% for the second quarter of 2017 compared with 21.7% for the second quarter of 2016. Acadia's operating cash flow from continuing operations was $131 million for the second quarter of 2017.

Turning to our financial guidance. And as announced in yesterday afternoon's news release, we adjusted our 2017 financial guidance within the previously established range, including: revenue in the range of $2.85 billion to $2.87 billion; adjusted EBITDA in the range of $628 million to $635 million; and adjusted diluted EPS in the range of $2.42 to $2.47. This guidance assumes an exchange rate of $1.25 per British pound sterling and a tax rate of approximately 25%. Our financial guidance does not include the impact from any future acquisitions and transaction-related expenses.

This concludes our prepared remarks this morning, and thank you for being with us. I will now ask Lauren 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) Our first question comes from Brian Tanquilut with Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [2]

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Brent or Joey, just first question for me. You narrowed the guidance ranges, and I think that the -- there has been a lot of question overnight for investors on whether there's anything to read into the revenue guidance midpoint being slightly below the previous midpoint. Is there anything you guys would be able to provide in terms of color and how you are thinking about the revenue guidance adjustment?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [3]

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Brian, great question. No, there's not. That at the beginning of the year, we set ranges, as we always do and in the middle of the year, we just tighten them up a little bit, and that's all we did here was tighten them up a little bit. There's nothing other than just -- we're just narrowing the ranges from the beginning of the year. And as you saw in our second quarter results, we're doing terrific, and we expect that to continue for the last 6 months.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [4]

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I appreciate that, Joey. And then my next question, we're obviously seeing a lot of headlines on opioid addiction and how the government's trying to fund and increase the focus on that. So do you mind just giving us some color on what your view is, in terms of how Acadia could directly or indirectly benefit from all the funds being thrown at this problem? And then also, what your exposure is to methadone, for example? Is that one way to treat this problem and what your exposure is there? Just trying to figure out if -- how big of a benefit could this be for Acadia?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [5]

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Well, as you know, the Cures Act and the money there is divided into 2-year increments. And states are beginning to work through that process of how they're going to treat more of the patients in their states for the opiate addiction. Now we've had positive results in one large state already, where we're going to get through our system about $4 million a year, in addition from the funds that have been allocated. And now we won't -- that won't all drop to the bottom line. We'll take care of patients. And then there'll be a couple of other facilities in this network that will be sharing in this money. But states are beginning to work through this issue, and the first state to get through it and to allocate some money, we were able to get over $4 million for that.

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Operator [6]

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Our next question comes from Whit Mayo with Robert Baird.

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Benjamin Whitman Mayo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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Maybe just first on the volumes. Any pockets of strength to call out across any of your U.S. businesses? And maybe if you could just broadly comment on payer mix trends.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [8]

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Payer mix is very stable from the first quarter. And the strength has been in our acute business, but it's been in all our businesses. But acute, once again, that's where we've been concentrating on the bed builds. It continued to be a little higher percent of the patient days generated for the company. And so everything else is pretty stable, and we think the outlook is very positive. And as we have worked through the second quarter results and thought about it, it's very important if you're going to put up these -- if you're going to meet the needs of the local community and put up good same-store growth numbers, you've got to get your beds built. And that's what we've been doing and we will build more than 800 beds this year, and that's coming off of about same number for last year. So we're in a good position to continue to build acute beds but we will build some beds in all areas of service and just focus on meeting the needs of the local community. So we feel pretty good right where we're at.

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Benjamin Whitman Mayo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Okay. And my next question, Brent, any just update on the U.K. operations, how they're trending versus your expectation? I'm just really more curious now, after the election, any change with the NHS or staffing changes? Just -- we've seen some hiccups from some other nonbehavioral providers. I'm not sure this applies to you, but just any general observations on the current environment over there would be helpful.

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William Brent Turner, Acadia Healthcare Company, Inc. - President [10]

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I think, as you see from our second quarter numbers, the U.K. improved for us in the second quarter over the first quarter. And our expectations are consistent there with what we said is that we're going to get incremental improvements through the U.K. over the balance of the year. We don't expect that market to be exactly in line with the attractive metrics of the U.S., but it's not far off. And we are not seeing just massive issues around some of the election issues. I mean, the behavioral health needs in the U.K. are not going away. And so ultimately we believe, short term and long term, our facilities and our operations are well positioned to meet the needs over there. And we see good funding streams for that, again, both in the short and the long term.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [11]

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And Whit, I'll just add that the new team we put together, that Ron Fincher and David Duckworth put together in December -- both of those guys just got back from the U.K., and we're very pleased with where we are there and the team we've got assembled there. So -- it will follow -- it will be a little bit slower growth than what the U.S. is because of -- the metrics here are so strong. And we're very pleased with our investment in the U.K. and we expect them to continue, just at a little slower pace.

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Operator [12]

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We'll take our next question from A.J. Rice with UBS.

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Albert J. Rice, UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities [13]

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Maybe just first on, I know you made the comment about the deal pipeline still being strong. I know there was some discussion about how quick you might be able to redeploy the Priory divestiture assets or cash and larger transactions versus smaller ones. Any further commentary along those lines?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [14]

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We have active discussions underway to do that. And we're very busy looking at acquisitions, both one-off and larger transactions, A.J. And I can't comment any further other than it's -- we're working hard on those opportunities.

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Albert J. Rice, UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities [15]

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Okay, okay. Obviously, not as much for you, but to some degree, there's been discussion around the industry about the tightness of labor supply and finding both psychiatrists and nurses. Any update on your thinking? What are you seeing in terms of turnover rates, vacant job postings and so forth and wage updates and so forth?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [16]

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We still have -- as we've mentioned for the past couple of years, we have some isolated markets where it's a little tougher to find the nurses or the psychiatrists. But we've got a great team in recruitment. And we have provided additional resources this year into that department, and we'll see them -- those resources be very fruitful. So the labor market is tight, but we've been able, Ron and his team and the recruitment department that reports to Ron, have been able to find the personnel that we need to continue to put up 6% same-store patient day growth here in the U.S. So I think we can continue to do that and find the people. Their -- on the salary wage pressures, it's in the 2% to 3% is what we're seeing for wage increases. And so -- but we want to be competitive in all our markets with -- we compete with the med/surg hospitals and other health care providers. So we think we're in a good position and have been able to work through it for these past several years.

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Operator [17]

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Our next question comes from Ralph Giacobbe with Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [18]

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Any way to parse out the impact from IMD Exclusion or maybe whether you think that's kind of aiding the strong U.S. volume or if that's still on the come? And if you sort of feel that momentum of that can sort of be a driver into the back half?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [19]

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The only thing I have in front of me is the payer mix, which we disclosed inside the quarterly report, and it's very stable. Medicaid, just Medicaid with -- in total is up a little, 0.50 basis points from the first quarter to the second quarter. And we think it's going to stay in that range. And so our payer mix is very, very stable. And so the IMD, I think, is already factored in and we don't see -- we just think it's a very stable payer mix.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [20]

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Okay, fair enough. And then there's been a lot on the length of stay pressure in the market, particularly in the U.S. [Is it -- did you] see a whole lot of that in this quarter? I guess, how do you view length of stay? Do you expect there to be kind of some pressures on a go-forward basis or just your general thoughts on length of stay?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [21]

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Length of stay for us has been very stable. And the length of stay, the utilization review process has always been tough, and we've always done well with that process. Our length of stay, if it does slightly decline, is more of a function of more acute patients who have shorter length of stays versus our specialty facilities or our residential facilities. So any decline so far this year, and really last year, was basically just because we have more acute patients because we built all those beds. So our length of stay is very stable and very strong.

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Operator [22]

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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, Equity Research and Director of Healthcare Research [23]

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A couple of things. Joey, how long do you have line of sight looking out over the next, say, 3 to 5 years that you can continue to add beds in the U.S. at this 800 level?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [24]

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I see it accelerating, John. I don't -- so not only are we going to maintain it, I think there's an opportunity that we could actually build more beds. So -- over the next 3 to 5 years. So if you were to average it, I think it's -- over the next 3 to 5 years, it's going to be above 800. We see the demand and access these patients need. And our people in the field, Ron has -- Ron Fincher, once again, and the team there that he's put together. And whenever we go over the bed build report, that's an exciting time of the month because we see all the opportunities for the next 18 months. So we're very bullish on the next 3 to 5 years.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD, Equity Research and Director of Healthcare Research [25]

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Great. Secondly, just hypothetically, let's say, there was a deal somewhere north of $500 million in the U.S. Other than -- would you be inclined to raise equity at that point to keep the leverage? Or would you look at maybe sale-leaseback some of your mature facilities? How are you thinking through -- or should we just worry about that bridge if you decide to cross it?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [26]

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I think, as you've seen, we've always done in the past is when we come up to large acquisitions, we look at what is the best way to finance that transaction to give return to all of our shareholders. And I think if it was a transaction the size of what you described, we pretty much know the sellers there, and they -- it's possible that they'd take some of the purchase price and shares of Acadia. So -- but once again, we would look at the balance sheet at the time of the transaction and find the best, most efficient way to finance it to return value to our shareholders.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD, Equity Research and Director of Healthcare Research [27]

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Fair enough. And then my last question, and this is just more kind of accounting minutiae, as you start to build these de novos, on your reported financials, are you going to add back startup losses into your adjusted EPS and adjusted EBITDA numbers?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [28]

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We have no intention to do that. That's something we'll think about, John. We have no intention to do that. If it becomes something that we think we disclose, I think, in the past, we just verbally disclose it.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD, Equity Research and Director of Healthcare Research [29]

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Okay. And I think the last number you gave was 20. Is that still the right number? Or has that number changed -- as in de novo projects?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [30]

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Oh, John, it could be even more -- it could be more than 20.

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Operator [31]

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Our next question goes to Ryan Daniels at William Blair.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [32]

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I want to do a follow-up on the U.K. operations. I know you said the expectation, Brent, is for that to continue to improve. But number one, how close are you on achieving the $20 million in annualized synergies as of this quarter? And then number two, with a fully integrated care continuum in the U.K., I'm curious if you're starting to see more referrals or if it's helping your volumes by keeping the patient in the system longer now that, that's been integrated?

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William Brent Turner, Acadia Healthcare Company, Inc. - President [33]

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Okay, Ryan. I think David can give us the exact -- but we're on track on the synergies, making continuous -- continuing progress to meet or exceed the $20 million in synergy savings there out of that with -- now that we've been able to integrate the 2 businesses and work those. I think we actually have been positioned well across the continuum, even back to our former acquisition in 2014. And so again, I think our belief there is that our positioning across the different levels of care and our commitment to invest capital in the U.K. and add beds where needed, really positions us well to keep those patients in our system and really see them throughout the process. So we think there's good stability there from that standpoint.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO, CAO and Controller [34]

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And Ryan, this is David. I'll just confirm, our team in the U.K. has done a fantastic job on the integration. We are still on track to achieve the $20 million synergy target in the second half of the year.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [35]

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Okay, perfect. And then as my follow-up, just a quick question on the same-store EBITDA margins. Obviously, a nice improvement versus the trend in the first quarter, so congrats on that. But still curious, given the strong US same-store growth, if you anticipate seeing kind of better margin expansion in the future. I know it was down about 20 basis points year-over-year this quarter.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [36]

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The 20-basis point decline over last year, last year's number was the highest this company has ever had. So the 28.4, we're absolutely pleased with that number. And so there's not a lot of concern here about the 20 basis points. That is more a factor of last year, this was the best quarter we've ever had -- that we ever had on that margin number, I think, or since 2013 maybe. And the 28.4, that's pretty strong.

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Operator [37]

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Our next question comes from Ann Hynes with Mizuho Securities.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [38]

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Going back to the U.K., can you talk about the reimbursement environment over there and what you expect for the next 12 months? Because I think you just finished the negotiations.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [39]

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Yes, Ann, this is Joey. And good to talk to you this morning. We are averaging more than 1% increase in the pricing over there for this year. And we would expect that to be similar next year. And one benefit that we're getting is that the NHS, our contracts directly with the NHS, that percentage is declining, and we're negotiating more with the local communities, agencies that control the rates. And we're doing okay there. And so we're -- we think next year will look a lot like this year, over 1% increase in the rates.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [40]

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Okay, great. And just staying on the U.K. I know there's some thought with Brexit that the NIH could start outsourcing more of their beds to the private payers. Are you seeing that at all yet? Or do you expect that?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [41]

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Our team over there is cautiously optimistic that we think the NHS will close more of their beds. And when that does occur, they look to us. And they've already given us some beds that they need, and the service lines that they need, that we are building for them. And right now, I think we have more than 200 beds that are in that category, where we're trying to meet the NHS's needs for these services. So we have a good relationship with NHS. And they know we have access to capital. And they know that we will build as necessary to meet the needs if they continue to close their beds.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [42]

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Okay, great. Can I have one follow-up question, I think, that John asked? On the de novo expenses, is it $20 million that's embedded in guidance of startup costs?

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William Brent Turner, Acadia Healthcare Company, Inc. - President [43]

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No, no, no. John jumped to the overall outlook for de novo and joint venture opportunities with medical surgical hospital systems. And so our pipeline is more than 20, and it's nothing to do with $20 million of expenses.

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO, CAO and Controller [44]

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No.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [45]

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Okay. So what are the expenses embedded in guidance? Or the startup costs, I should say?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO, CAO and Controller [46]

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We do have 3 facilities coming on in the second half of the year. Just ballpark number, they may be a couple million of startup losses that we would incur in the second half of the year. But just thinking back to the last few years, we have opened facilities every year. So we think about that for us is just a normal part of the year because we just continue to open those new facilities. We had it last year and we may have it in the second part of this year.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [47]

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And if we think it's material, we will disclose the number on the calls.

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Operator [48]

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We'll take our next question from Chris Rigg with Deutsche Bank.

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Christian Douglas Rigg, Deutsche Bank AG, Research Division - Research Analyst [49]

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Just wanted to ask about capital deployment. Obviously, you're talking about robust M&A pipeline and same on the organic bed development side. How do you think about deploying that capital versus the return you get? Do you get a better return on the M&A versus the organic beds?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [50]

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No. Obviously, the organic bed is incremental patients to us, in that we spread the overhead of that facility across those extra patients. So always, with us, the best return is put them in a bed we have. If not, build the bed to the existing facility and then look for good acquisitions that meet those characteristics of growth and in a market that can grow and that has been underserved. So that is how we look -- that is how capital is deployed in the company.

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Christian Douglas Rigg, Deutsche Bank AG, Research Division - Research Analyst [51]

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Right, okay. And then with regard to the M&A pipeline, do you see more opportunity on the acute sort of behavioral side? Or is it substance abuse or residential treatment? Or where do you see a majority of the opportunities right now?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [52]

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We will continue to concentrate on the acute side. It would be the one-off transactions that might be on the addiction side. So it's more on the acute side, maybe one-offs on the addiction, maybe one-off on the CTC opportunity that we have. So there is too many substance abuse companies that have popped up over the last 5 years that did not have a long enough track record for our due diligence. So I turn down probably one a month of those just because they don't get through the due diligence.

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Christian Douglas Rigg, Deutsche Bank AG, Research Division - Research Analyst [53]

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Right. Okay. And then just one follow-up here. And sorry, it's just not clear to me. But when I think about the very modest margin pressure domestically overlaid with the startup costs from the new beds, is that factoring in to the same-store margin pressure? Or is that not the case?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [54]

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That is the case because everything is now in the U.S. same-store numbers.

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Operator [55]

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

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [56]

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I guess, sequentially, the revenue acceleration on a same-store basis in the U.S., obviously, a little bit of a volume pickup. But really, just more on rate. Is there anything that would highlight there around rates?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [57]

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It's a focus of operations to be prompt in their renegotiation of the contracts. And we've been getting some positive increases. So -- and so that is what's happening to the rate increases, is that we do have more awareness, review, expectation that they're making sure they're renegotiating their contracts more timely.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [58]

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Okay. And I guess, just go back to that startup loss question. That's a couple of million dollars. Is that couple of million dollars per site that you're assuming [in the guidance]? Or a couple of million dollars overall [in the share of] losses in the second half?

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

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That's overall in the second half of the year.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [60]

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Okay. Is that weighted to Q3 or Q4?

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

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No, it would be spread over the quarter. Part of that is just the timing of when we're bringing these facilities on. We think that over the first year, they're breakeven. But just happening late in the year like this, the 6-month period would absorb more of those losses. But that's for all 3 combined, Kevin.

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Operator [62]

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Our next question comes from Charles Haff with Craig-Hallum.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [63]

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In terms of the 91 beds you added this quarter and the 250 you expect next quarter, do you have an approximate split between U.S. and U.K. there?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [64]

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Yes, we do. Do you have that, David?

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David M. Duckworth, Acadia Healthcare Company, Inc. - CFO, CAO and Controller [65]

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Yes, we do. Most of the beds this quarter were in the U.S., 80 of the 91. In the first quarter, 30 of the 82 were in the US. And we'll see, for the second half of the year, we will obviously, with the new facilities in the U.S., we will see most of those beds coming on in the U.S.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [66]

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Okay, great. And the 3 JV openings that you have in the second half of this year, can you just remind us which facilities those are, and how many beds they will be and when they're going to open?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [67]

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Well, the 3 facilities are located in Louisiana, Virginia and Arkansas. There's probably 200 beds for those 3 facilities. So they equal about 70 beds apiece.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [68]

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Perfect. And then on the labor side of things, have you found that you're having to use signing bonuses for some of those pockets where you're seeing some labor challenges?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [69]

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Not for the nurses or the medical, other medical individuals that we might need in the hospital. Where we see signing bonuses, which has been customary for years ever since I was at HCA for physicians, that is just a part of the package that goes when you recruit a physician that there's usually a signing bonus.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [70]

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Okay, but not for the nurses? You're not using those yet?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [71]

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No. And to have no intentions of doing that. Now I can't say that -- Montana might be using it but 99% of our facilities are not using that.

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Operator [72]

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

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [73]

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I'd also say good job on the growth. I think you'll be the only provider whose trends improved sequentially this quarter. So that's really good to see. Two quick questions. One is just coming back to length of stay a little bit, which, in the U.S., obviously was almost flat. It was barely down. In the first quarter, it was more of an issue. It was down about 2.5%. And at the time, you said it was really nothing. It's normal fluctuation. And obviously, this quarter's results would suggest your intuition was correct there. But I'm just trying to think about your average length of stay actually is up a little bit, 16.5 days versus 16.1 in the first quarter. And you talked about more in-patient beds, acute beds coming into that. Obviously, the length of stay is lower there. So that wasn't quite a driver sequentially. So I guess, we're splitting hairs looking at pretty small changes. But given that UHS has talked about some managed Medicaid plans essentially approving fewer days in some states, I just wanted to come back, maybe ask that question directly. Have you seen any of the managed Medicaid plans being more stingy, in terms of number of days they're willing to approve?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [74]

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I have to go back. Utilization review has always been, in this industry, been very tough. And our length of stay, by payer, Medicare, we run about 12 to 13 days. And you can imagine, the patient is older and takes a little bit longer to respond to the treatment of the pharmacology and the social issues that they may have. Commercial, that's me and you. We would probably stay 7 to 8 days. And that's pretty much been what it's been in the industry. And then on Medicaid, they are pretty similar to the 7 to 8 days. So we might find a market where Medicaid might be 6 days, but we also might find a market where Medicaid is 9 days. And so the length of stay, as you mentioned, basically is flat. And it's very stable. And I will give you one peek on the length of stay inside the acute patient day length of stay, it was 9.2 in the second quarter of last year and then this year, it's 9.5. So that's slightly up. But the grand total is flat. So we don't -- hopefully, we don't see a reduction here or whatever. So we feel real good about the stability of the length of stay and even in the stability of the length of stay in the Medicaid population.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [75]

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Okay. And then one quick one, one last one, if I could. Really appreciate the pro forma analysis taking out the divestitures and the FX because that certainly gets harder for us to do, as we move all the way down to EPS. But the question is, that pro forma EPS grew about 10% year-over-year. You've always been very willing to talk long term about top line growth, bed growth, facility growth, including today a little bit. How would you characterize what you think 3- to 5-year EPS growth should look like?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [76]

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For the same group, the same facility group, Gary, I think we're going to grow it lower double-digit. Now what we want to do is add another 7% to 8% growth through acquisitions or through the joint ventures. So that's kind of how we're looking at it. And if we get that all accomplished in the year, then we're going to see EPS grow 18%, and you can add 2%. To do the range, I would do 16% to 20% would be the range, long term -- now this is looking out, kind of like what John did on bed builds looking out. This is us looking out over the next 3 to 5 years, that would be our expectations.

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Operator [77]

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Our next question comes from Ana Gupte with Leerink Partners.

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD, Healthcare Services and Senior Research Analyst [78]

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The question I have is you have a peer, and we only have the two of you to really observe, has had some regulatory coding issues, has had clinical staffing issues -- is now also speaking about a length of stay pressure from payers and the mix shifting to Medicaid and the like. And it's somewhat corroborated by some of the inner channel checks we've done, at least the last one. But you're not seeing it, which is really great, and you had a good quarter. Is this really that the pressures don't exist? Or is there something about being a best-in-class in-patient operator, [and you know], can you talk about what that might be that makes you able to avert that better?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [79]

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Well, Ana, yes, we had a terrific quarter. Second quarter was terrific. But you can look at the year-to-date numbers, and they're terrific. We -- obviously, I think, our team is better than other people, other companies. Obviously, I think that. We cheerlead that. I think a factor that you can't quantify is -- and Ron and all the senior management, we have a -- very much a different culture inside Acadia. And we try to have a lot of fun, and we try to work hard, and we try to hit our expectations, and we happen to be in markets where we can do that. So -- and the length of stay, it may go down for us. But so far, we don't see that and we haven't really seen it in the past. When acute patient days -- length of stay is 9.5 days, and if you go back to the industry studies, this has been since the mid-'90s. Average length of stay for adults has been in the 9 to 10 days. And we are right in the middle of that for the second quarter. So -- and it could be just the composition of our programs and our beds and our markets. And -- but more importantly, my hats off to our operations team. Ron and that group are unbelievable.

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Anagha A. Gupte, Leerink Partners LLC, Research Division - MD, Healthcare Services and Senior Research Analyst [80]

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Helpful. Joey, just a follow-up on that, if you tie this to policy. This morning, the Senate didn't get their vote through. On the commercial side, is the likelihood now that essential benefits don't get repealed not just -- is it helpful, not just for Medicaid, but because there's an interface with mental health parities but we were hearing that it will actually help you, or at least not hurt you, on the commercial side? And then if you can talk about what CMS is proposing around behavioral health and value-based care and how that even ties to Medicare Advantage where plans are, as we're hearing, pushing more to do just consult in the long-term care setting and not have for more outpatient and not admit patients?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [81]

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That's a lot in that question, Ana. First is we are glad the bill was defeated. I have not been a fan of John McCain but I'm going to send him a get-well card. So as I have kind of said all along, I think nothing was going to happen this year and it appears that nothing is going to happen. And that this will come back up next year, I think. But we're positioned well. And at the end of the day, are you providing a service for a patient that needs it? Absolutely. And can you a get reasonable reimbursement for that? Then you can make a business model. As far as the value-based, we're -- our association, our company, we are responding to the CMS on this issue and we'll just have to wait and see. That's -- the discussions are just beginning now on that issue. So -- and our team is prepared, and so is our association is very much prepared for discussions on this issue.

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Operator [82]

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And have a follow-up question from Brian Tanquilut with Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [83]

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Joey or Brent, just as we think about the cadence for the back end -- where guidance is and how you're thinking about the distribution between the next 2 quarters, without giving quarterly guidance, are there any things you would call out, other than startup costs for the hospitals being spread out evenly or pro rata between the 2 quarters? Anything that we should be thinking about?

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [84]

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No, Brian. I think you should just, again, we tightened the reins just to reflect that we're halfway through the year. And I think you take the balance and split it in half, and you're going to be pretty close for the third and fourth quarter.

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Operator [85]

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It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Jacobs for any additional or closing remarks.

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Joey A. Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [86]

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Just thanks for tuning in and listening to the Acadia story. I just got back from Virginia on a new facility we got there and had a great visit. And we'll look forward to talking to you at the end of the third quarter.

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Operator [87]

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And with that, that does conclude today's conference. We thank you for your participation.