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Edited Transcript of ACHC earnings conference call or presentation 24-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Acadia Healthcare Company Inc Earnings Call

PEABODY Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Acadia Healthcare Company Inc earnings conference call or presentation Friday, February 24, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Turner

Acadia Healthcare Company, Inc. - President

* Joey Jacobs

Acadia Healthcare Company, Inc. - Chairman and CEO

* David Duckworth

Acadia Healthcare Company, Inc. - CFO

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Conference Call Participants

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* A.J. Rice

UBS - Analyst

* John Ransom

Raymond James & Associates, Inc. - Analyst

* Brian Tanquilut

Jefferies LLC - Analyst

* Whit Mayo

Robert W. Baird & Company, Inc. - Analyst

* Kevin Fischbeck

BofA Merrill Lynch - Analyst

* Ralph Giacobbe

Citigroup - Analyst

* Gary Lieberman

Wells Fargo Securities, LLC - Analyst

* Charles Haff

Craig-Hallum Capital Group - Analyst

* Dana Hambly

Stephens Inc. - Analyst

* Gary Taylor

JPMorgan - Analyst

* Ana Gupte

Leerink Partners - Analyst

* Paula Torch

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

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Good morning. I am Brent Turner, President of Acadia Healthcare, and I would like to welcome you to our fourth-quarter 2016 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 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 will now turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

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

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Good morning, and welcome to our fourth-quarter conference call. In addition to Brent, I am 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 fourth quarter and our outlook for Acadia. Then we will open the line for your questions.

Acadia performed well for the fourth quarter of 2016, which capped a strong year for the Company. Our financial results for the quarter and the year reflected the impact of a couple of significant headwinds in the second half of 2016.

The first was the decline in the US dollar to British pound sterling exchange rate following the Brexit vote in June. Second, we experienced the delay in receiving regulatory approval of our acquisition of Priory and the related integration with our existing partnership and care operations.

Finally, we did successfully complete the divestiture of the 22 facilities that was required to obtain regulatory approval from the CMA. As a result of this divestiture on November 30, we were only then able to begin our work to fully integrate Priory into Acadia, and to capture approximately $20 million in anticipated cost synergies.

As expected, we generated about half of the synergies subsequent to the divestiture, with the transfer of a management team and some support functions to the new Company. We expect to recognize the remainder of the cost synergies by the fourth quarter of the current year. The Priory acquisition was the primary driver of the 42% growth in our fourth-quarter revenues.

Even with the divestiture, Priory brought nearly 6,200 beds to Acadia in a year in which we expanded our total beds by more than 7,100, or 72% from the end of 2015. This increase included the 967 beds we added to existing facilities, and two de novo facilities in 2016, compared with 670 beds added in 2015.

The new beds that we added to existing facilities in our same facility base contributed to a 6.3% increase in same facility revenue for the fourth quarter, which drove a 30 basis-point increase in same facility EBITDA margin. We plan to add over 800 new beds during 2017, primarily to existing acute facilities, and through two acute de novo facilities, scheduled for opening in the second half of 2017.

We also remain actively engaged with our acquisition pipeline, and we continue to believe that our 2017 acquisition and joint-venture activity will be heavily weighted to acute facilities in the US. We are very well positioned to fund our new bed development and acquisition activity with $57 million in cash at year end, and full availability under our $500 million revolving credit facility.

We further expect substantial ongoing cash flow from continuing operations, which totaled over $370 million for 2016. We currently expect to deploy the net proceeds from the Priory divestiture of approximately $370 million into new acquisitions by summer's end.

We also plan to apply excess cash, primarily to reduce debt during 2017. Despite the headwinds encountered in 2016, we entered 2017 in a compelling position as the leader in nearly a $50-billion market. Strong industry demographic and regulatory trends are driving increasing market demand, while constrained capacity.

In a fragmented base of facility operators and rising consolidation pressures continue to create organic growth and acquisition opportunities for Acadia. We have a long and clear track record that demonstrates our ability to leverage these opportunities to create long-term growth and shareholder value. As David will discuss in greater detail, our guidance for 2017 indicates that we're also confident of spending this record in the coming year.

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

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

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Thanks, Joey, and good morning. Acadia's revenue for the fourth quarter of 2016 increased 41.9% to $702.9 million from $495.3 million for the fourth quarter of 2015. Adjusted income from continuing operations attributable to Acadia increased 21.4% to $51.3 million for the fourth quarter of 2016, and was $0.59 per diluted share for both the fourth quarter of 2016 and 2015, on a 22.1% increase in weighted average diluted shares outstanding.

Shares outstanding increased primarily due to the equity that we issued in January and February of 2016 related to the acquisition of Priory. Adjusted diluted EPS for the latest quarter excludes debt extinguishment costs of $842,000, a loss on divestiture of $4.1 million, and transaction-related expenses of $14.8 million. For the fourth quarter of 2015, adjusted diluted EPS excludes debt extinguishment costs of $839,000, and transaction-related expenses of $5.2 million.

On a constant-currency basis, Acadia's revenue for the fourth quarter of 2016 increased 54.2%, compared with the fourth quarter of 2015. Adjusted income from continuing operations attributable to Acadia's stockholders increased 42.3%, while also increasing 16.9% on a per-diluted-share basis. Acadia's tax rate on adjusted income from continuing operations before income taxes was 18% for the fourth quarter of 2016, compared with 28.5% for the fourth quarter of the prior year.

As Joey mentioned, Acadia's same facility revenue increased 6.3% from the fourth quarter of 2015, with a 6.1% increase in patient days, and a 0.1% increase in revenue per patient day. Same facility EBITDA margin was 26.3%, up from 26% for the fourth quarter of 2015.

Comparable quarter consolidated adjusted EBITDA grew 33.7% to $149.5 million, which was 21.3% of consolidated revenue. Acadia's operating cash flow from continuing operations increased 8.1% for the fourth quarter to $106.6 million, and for the full year, increased 53.5% to $371.7 million.

Turning to our financial guidance for 2017, and as announced in yesterday afternoon's news release, our 2017 financial guidance includes the following: Revenue in a range of $2.85 billion to $2.9 billion, adjusted EBITDA in a range of $625 million to $640 million, and adjusted diluted EPS in a range of $2.40 to $2.50.

In addition, our guidance for adjusted diluted EPS for the first quarter of 2017 is in a range of $0.45 to $0.47. As compared to the fourth quarter of 2016, the first quarter reflects two additional months without the facilities divested in the UK, higher payroll taxes in the US, and two fewer calendar days in the quarter. 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 or transaction-related expenses. This concludes our prepared remarks this morning, and thank you for being with us. I will now ask Carrie to open the floor for your questions.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

A.J. Rice, UBS.

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A.J. Rice, UBS - Analyst [2]

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Thanks. Hi, everybody. I know in the guidance you do not have acquisitions baked in there, but you do have the proceeds from the priory-related antitrust divestitures. Any thoughts on how quick you might be able to deploy that capital, and what kind of discussions you are having in general out there?

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

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A.J., this is Joey. I think we will be able to deploy it in the third quarter, this summer. And that various discussions are going on with transactions that have multiple facilities. So we look good about that, and then we also look very good, I think my last count, we have about 16 discussions with joint ventures, with large not-for-profit systems, and a joint-venture hospital will cost about $25 million to $30 million in construction costs. So, we have plenty of opportunities to deploy the proceeds, two acquisitions are through our joint ventures.

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A.J. Rice, UBS - Analyst [4]

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Okay. And does it seem like the little softness in the organic growth that we saw in the third quarter seems like you're on the path to rebounding a bit. And it doesn't seem like there's any fallout from some of the negative publicity from one of your competitors saw in the fourth quarter, in one article that was written.

When you shake out everything, where do you think you are, in terms of organic growth going forward? I do not know if you are making a separation between the UK and the US now on that, but just any thoughts on embedded organic growth and how we should think about that going forward?

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

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A.J., we're off to a very good start. I think through the first 50 days of this year, the US same store is above 7%, and the UK is tracking in at around 3%. So, overall, we're about 6%, so far through this year, including the UK.

The UK will grow a little bit slow in the beginning, because, as you know, we did not start working, really, on the integration and the development plans until December 1, and the Team is off to a good start there. But the US same-store growth was unbelievable during January and the first part of February. Now, we must keep in mind that this last year was a leap year, so until we get through the first quarter, we will lose 110 basis points off that number, because of that one extra day last year and not this year.

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A.J. Rice, UBS - Analyst [6]

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Okay. All right. Thanks a lot.

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Operator [7]

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John Ransom, Raymond James.

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John Ransom, Raymond James & Associates, Inc. - Analyst [8]

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Good morning. There's a big Welsh Carson portfolio out there, as you know, and there's that Aurora in California. Do you think those deals will trade this year, Joey?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [9]

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We really do not come in on individual names like that. There is another larger one out there, there is one similar size that actually might trade sooner. So, we do believe long term that those type of assets belong inside Acadia, and -- but there's some other transactions that we are working on that are not the ones you mentioned.

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John Ransom, Raymond James & Associates, Inc. - Analyst [10]

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Okay. And my second question is, I think the last time we spoke you mentioned you had a dozen JVs, so now that's up to 16.

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

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I think last time I counted, we had 16 potentials. Yes.

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John Ransom, Raymond James & Associates, Inc. - Analyst [12]

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Right. I am saying December it was 12, now it's 16, so I am saying it looks like you keep adding to that total.

So, if we are talking 15, let's say that shakes out to 10, that's $250 million, if 10 out of 15 work out. How do you -- maybe this is a question for David -- how do we start modeling this, and what is the trajectory of profit and revenue and margin, and how much gets shared to the partner hospital, and when should we start putting these things in our model, other than just the capital spend?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [13]

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John, that's a great question. We are working internally. We may at somewhere in the second quarter actually put in our investor presentation an example of a de novo project.

But basically, if you were to spend $25 million and your joint venture partner took 20% of that, you would invest $20 million, we think after 24 months it should be turning over into the profitable range, and then ramp up quickly after that. But we saw improvement in our de novos in the fourth quarter, and so those are some of the general parameters of that, but we are internally strategizing and kicking around, maybe giving an example, a study on a de novo.

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John Ransom, Raymond James & Associates, Inc. - Analyst [14]

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And if I can make an unsolicited suggestion, to the extent these things start ramping, you ought to break out, in my opinion, the [startup office] and guide to that, that will confuse people, like me.

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [15]

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Yes. And we have used you as the example as we have gone through this and said, what would be --

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John Ransom, Raymond James & Associates, Inc. - Analyst [16]

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As somebody who is easily confused, that is the example I use of somebody easily confused.

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [17]

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Exactly.

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John Ransom, Raymond James & Associates, Inc. - Analyst [18]

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All right.

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

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We thought about breaking them out, too.

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John Ransom, Raymond James & Associates, Inc. - Analyst [20]

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Thanks so much. I will jump back in the queue.

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Operator [21]

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Brian Tanquilut, Jefferies.

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Brian Tanquilut, Jefferies LLC - Analyst [22]

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Hey, good morning, guys. Joey or Brent, as I think about same store, obviously it got better in Q4, but I think earlier this year you gave us 6% to 8% guidance on same store globally. So how should we think about the breakdown between the US and the UK on that one? And also, what drives your confidence in getting to that 6% to 8% number, and how does the new bed adds we saw in Q4, the new beds adds you're planning for the year, how do all of these things factor into the confidence in getting to that 6% to 8% range?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [23]

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Well, I think, Brian, the bed adds really add to our confidence, and we were able to increase the number of beds that we were able to bring online in the fourth quarter by moving some of the ones in the first quarter of this year, getting them done early, so we're off to a good start there. We do have the first 50 days of this year and we're seeing how the same store is ramping up, so those things give us the great confidence.

The 6% to 8% that we have given, that would be for the total Company. The UK did come in a little bit less than that, US could be a little bit towards the higher end of that. But we have got some great additions coming online.

We approved right at 100 beds last week two existing facilities that unfortunately we now have a waiting list at those facilities. So it's those kind of examples that give us confidence that if we will continue to do the blocking and tackling and execution, that the opportunity to hit those same-store numbers is there.

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Brian Tanquilut, Jefferies LLC - Analyst [24]

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I appreciate that color, Joey. Follow-up for me, margins were strong in Q4. So how should we think about the margin progression for this year? Number one, just as we think about the synergies flowing through. And then number two, the de novos improving. And then lastly, how do you tie that into kind of like staffing, because there were obviously concerns that it is getting harder to staff in the behavioral space. So how should we read into your margin performance as it relates to your ability to staff all these facilities?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [25]

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My expectation is that we will have margin improvement this year. Whether that is 25 basis points to 50 basis points to 100 basis points, the expectation is that we will have margin improvement. So far, Ron Fincher and his recruitment team have been able to find the necessary staff so that we are confident that when we build the 967 beds that we are able to staff those beds and that that won't be an issue to keep us from hitting our [due] numbers.

I guess the only other comment I would say since the last call we have had, is that the labor market is a little tighter, but once again, we have been able to recruit and find the staff to work through that. Once again, blocking and tackling our recruitment department, doing what it needs to do, hitting its target, I think we signed three physicians this week. So, if we can keep doing that, and so we should be okay there.

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Brian Tanquilut, Jefferies LLC - Analyst [26]

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Thanks, Joey.

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [27]

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Thank you.

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Operator [28]

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Whit Mayo, Robert W. Baird.

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Whit Mayo, Robert W. Baird & Company, Inc. - Analyst [29]

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Hey, thanks. Just wanted to see if there's any more color you can provide on the UK performance in the quarter, obviously there was a lot going on, a lot of distraction with the divestitures, et cetera. So just wanted to see if there is anything you can share to put into context, how we should look at the performance, and maybe if you could just comment on sort of the cadence of the expected synergies that 2017 plays out?

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Brent Turner, Acadia Healthcare Company, Inc. - President [30]

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Sure, Whit, this is Brent. Again, the facts are mid, two-thirds through the fourth quarter was when we closed the divestiture transaction, but there was a tremendous amount of focus by the leadership in the UK on both separately-run companies over there to help make that happen. Multitasking, call it what you want, there was a lot of distraction, and it weighed on the operation.

Now that is behind us. We have gotten the roughly half of the synergies are out of the run rate, because of the removal of the redundancy, management team going over to the new company, and now we are, the UK is focused, integrating and getting back on track.

But it does not happen overnight. Remember, the benefit we get in the UK is a very healthy and long length of stay. But the admissions activity is much more slower than you see in the US. So, we are on a path. I just think people should expect the UK to improve rateably each quarter throughout 2017.

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Whit Mayo, Robert W. Baird & Company, Inc. - Analyst [31]

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That's helpful. I am curious about how the pair mixes is trending down, and maybe this is the question in the context of the IMD, have you seen anything noticeable in terms of Medicaid or Medicaid managed care? I know it's really early, but any color would be helpful. And maybe anything to note about pay or mix shifts in the US? Thanks.

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Brent Turner, Acadia Healthcare Company, Inc. - President [32]

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Sure. I think we have seen, even in the fourth quarter, an increased in our managed Medicaid revenue, as it relates to fourth quarter of 2016 back to fourth quarter of 2015. We have not been able to absolutely quantify how many of those are Medicaid adults, due to the managed Medicaid expansion. But what we do know is that legislation, or excuse me, in this case, that regulation is a significant tailwind and really just a huge statement for our industry.

CMS stepped in and changed something that has been a law for 50 years to allow these patients to be covered in freestanding psych hospitals in the managed Medicaid markets. The most recent thing we know is that through a Kaiser study that has been out for a couple of weeks, it looks like 80%-plus of the affected states, their Medicaid leadership is saying we are moving forward, we're putting it in place effective in this fiscal year.

So, that's a positive. And again, should just be another tailwind to support our organic growth plans.

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Whit Mayo, Robert W. Baird & Company, Inc. - Analyst [33]

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Okay. And maybe just one quick one, just CapEx this year, is there a good number that you can point us to? And I will hop off. Thanks.

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [34]

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Whit, this is David. CapEx, looking back on 2016, $76 million, or 2.7% of our revenue, was towards maintenance CapEx. With the remaining $232 million on expansion. We think for 2017, the numbers may be very similar, similar in terms of the percentage of revenue and the maintenance spend, as well as what we see going towards our expansion activities and bed additions.

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Whit Mayo, Robert W. Baird & Company, Inc. - Analyst [35]

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Great. Thanks, guys.

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [36]

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Thanks, Whit.

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Operator [37]

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Kevin Fischbeck, Bank of America.

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Kevin Fischbeck, BofA Merrill Lynch - Analyst [38]

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Hey, thanks. Can you talk about, you said that the de novos that were pressuring results this quarter improved this quarter, I was wondering if you had any color on how that ramp looks?

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

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I think three of the four that we have classified there are positive EBITDA contributions now. And the one that was giving us, that gave us the longest delay, the one in California, we have gotten through the Medicaid process there and can take Medicaid patients or Medi-Cal patients out there, and their [synthes] ramped up nicely. And actually, in January, they went positive on the EBITDA line.

So we cut the operating loss from the previous quarter. I think we cut it by roughly 70%, if I remember correctly. So, we are doing well there, and once again, as I mentioned earlier, we are thinking about including something in the second quarter that would be a case example, or maybe some actual numbers on our de novos.

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Kevin Fischbeck, BofA Merrill Lynch - Analyst [40]

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Okay. And then I think you have said that you planned to leave Priory proceeds on acquisitions, but use the free cash flow to delever. I just wanted to see if there was anything to read into that.

Are you guys now focused on reaching a certain leverage target? Does the deal pipeline look to be the size of the Priory proceeds so you do not expect more deals through year end beyond that amount? How should we think about that element?

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

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I think you should, I think we want to do both. We want to make the acquisitions that this Company needs to continue its growth, and then the excess cash would be used to pay down the debt.

I think the leverage will be roughly around the 5 times, I think it is 5.3 times now or something like that. So, hopefully, we can get a little improvement there and make our acquisitions, we have $500 million available under the revolver, and over $50 million sitting in cash on the balance sheet, so we are in a pretty good position to execute on the acquisition strategy, and maybe bring down the debt ratio slightly.

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Kevin Fischbeck, BofA Merrill Lynch - Analyst [42]

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Okay. Great. Thanks.

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Operator [43]

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Ralph Giacobbe, Citi.

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Ralph Giacobbe, Citigroup - Analyst [44]

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Thanks. Good morning.

I guess first, I wanted to ask about the same-store EBITDA margin down in the UK. Was there certain costs that maybe wouldn't repeat, and more related to some of the distraction that you talked about that you can help us reconcile, plus, obviously, (inaudible) capture, to give you visibility on the improvement there?

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

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Yes. The main thing, obviously, in the UK they were down somewhat on a census perspective route. What we also saw, just on the cost affecting the margins is just around the labor costs and the labor management costs in the UK, just with the census.

There would be a focus on managing your labor, and with some of the distraction that did not happen to where we thought it would. And I think that is where we will see as the census recovers, and as we are able to move forward with the integration and put the new management structure in place we will see both the census rebound and the growth rebound, as well as the margin improvement in the UK.

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Ralph Giacobbe, Citigroup - Analyst [46]

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Okay. And then in UK, I am sorry I missed it, what did you say the growth was through the first 50 days?

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Brent Turner, Acadia Healthcare Company, Inc. - President [47]

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Around 3%.

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Ralph Giacobbe, Citigroup - Analyst [48]

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3%.

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [49]

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Inside that number also you have the elderly care numbers, which is a much slower growth. So people are going to -- one thing people are going to have to kind of absorb is just the overall mix of the business in the UK. We got healthcare, we got education, children services, and adult care, and then finally the elderly care business over there, and there is a little bit different growth rates amongst all of those, but that is probably something for offline to clarify.

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Ralph Giacobbe, Citigroup - Analyst [50]

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Okay. Sounds good. And is there any built-in guidance for IMD's (inaudible) and maybe just any updated thoughts there? Thanks.

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Brent Turner, Acadia Healthcare Company, Inc. - President [51]

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Our guidance reflects our view of the growth drivers, again, we do not isolate the IMD by payer group or population group, nor do -- we just have the view of what is the market's absorption rate and our bed build. And so there's nothing specific with IMD, but we do continue to see that being a going-forward tailwind, but probably something that plays out over multiple years.

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Ralph Giacobbe, Citigroup - Analyst [52]

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Okay. Thank you.

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Operator [53]

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Gary Lieberman, Wells Fargo.

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Gary Lieberman, Wells Fargo Securities, LLC - Analyst [54]

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Good morning. Thanks for taking the question.

Your guidance for the first quarter and the full year implies a pretty nice ramp-up in EPS over the course of the year. Can you just maybe help either quantify or just kind of put in order what are the drivers of that step-up?

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Brent Turner, Acadia Healthcare Company, Inc. - President [55]

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Are you talking about just the way the effective quarterly performance looks, Gary?

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Gary Lieberman, Wells Fargo Securities, LLC - Analyst [56]

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Exactly, Brent.

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Brent Turner, Acadia Healthcare Company, Inc. - President [57]

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I think a couple things, obviously, just coming off of a challenging back half of 2016, we are trying to make sure we have got reasonable expectations out in the external world. And then you couple that with the Company always has a higher burden for withholding taxes, which is a significant impact in the first quarter.

Once these various state and local withholdings cap out, obviously, that is a big impact going forward, and then you have the culmination, the bed build effect ramping up throughout second, third, and fourth quarter. So I think the consistency here is that our first quarter is always a little off of what, it is never one-fourth of the year, it is usually in the 19% to 20% range portion of the year, and I think that is what you see for 2017.

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Gary Lieberman, Wells Fargo Securities, LLC - Analyst [58]

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Okay. That is helpful. And then maybe just a follow-up.

One of the things that I guess you had mentioned in terms of holding back benefit from the IMD exclusion was being included in as a provider in the appropriate plans. Do you feel like you are in the appropriate plans so you could benefit from that?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [59]

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I think all of our facilities are positioned well with their payers in their plans. So I don't -- there will be an isolated example where we are going to have to do some extra work to get in the plan, but that's the exception versus the vast, vast majority. We are okay with the plans, and we are already in the plans.

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Gary Lieberman, Wells Fargo Securities, LLC - Analyst [60]

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Okay. But incrementally more so than last year, or you were already there last year?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [61]

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We are little bit better this year. We are a little better this year, but we had most of them last year anyway, but we have taken some steps and gotten a few more plans in.

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Gary Lieberman, Wells Fargo Securities, LLC - Analyst [62]

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Got it. Okay. Thanks a lot.

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Operator [63]

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Charles Haff, Craig-Hallum.

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Charles Haff, Craig-Hallum Capital Group - Analyst [64]

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Thanks for taking my question. Congratulations on terrific occupancy here. That was outstanding. I am wondering if you could talk about the UK management team that you have in place now, the former Priory management team, and what competencies or skills that they bring to the table versus your prior PIC management team that you had in the UK?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [65]

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That's a tough question. What we see in the team we have there today is some great leaders, lots of energy, tremendous expertise over there, a can-do attitude. So, the Priory was the bigger of the transactions, as everyone knows. And their depth there was stronger, and so, fortunately for us, Ron and David were able to pick the best of what they thought were the best, and so just a great group. That's not taking any shots at the group that left.

The group that left with the acquisitions, we wish them well and hope they do well, and Tom Rao is going off to other things, so we have a good team there. We have the team that we think we need there, and so far it is going well, and they are doing a good job working through the distractions that they have, and they are very good operators.

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Charles Haff, Craig-Hallum Capital Group - Analyst [66]

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Okay. And then a follow-up question on the UK, the back office and kind of the back-of-the-house management and staff, I understand is located in a lower wage cost geography in England. Can you talk about that a little bit, and maybe what impacts that could have on your UK synergy targets?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [67]

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Sure, Charles. The offices that we have in the UK, we have three different centralized offices that support all of the facilities. We have a finance office in the North, in Darlington.

We also have HR and IT offices, and I do think that that provides us with the ability to perform those functions at a lower cost. While we also get excited about in those offices is the retention that we have, and just the teams that are there have been with the Company for a long time, do great work, and we do not tend to see the same types of turnovers that we might see in other parts of the country. So, definitely a lower cost, and we also have a great team that has been with the Company for a long time.

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Charles Haff, Craig-Hallum Capital Group - Analyst [68]

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Okay. Great. Thanks for taking my questions.

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Operator [69]

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Dana Hambly, Stephens.

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Dana Hambly, Stephens Inc. - Analyst [70]

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Thanks. Good morning. Clarification on the synergies, but it's $20 million in the UK, and I'm trying to understand, are you saying you have recognized half of those already since the November closing, and then there is about $10 million in this year's guidance?

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Brent Turner, Acadia Healthcare Company, Inc. - President [71]

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Well, yes, on a run rate basis. Obviously, when you take the Management out for the month of December, you only realized one month of that annual run rate, but we are on a run rate. And I think to answer your question and Charles's question, it is important to recognize here, if we are still talking about $20 million in synergies out of the UK today, that's actually better than what we originally said a year ago, because $20 million takes more pounds than it did a year ago, because the exchange declined. So, we are basically halfway with the divestiture, and then we will get the remainder benefit of the synergies throughout the 2017 such that when we get to the year, end of the year, $20 million of annualized savings on a run rate basis.

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Dana Hambly, Stephens Inc. - Analyst [72]

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Okay. That's helpful. Thanks. And then Brent, on the Hill, I think you are on the Board at the National Association, just kind of what are your priorities for the industry, just from an advocacy standpoint this year?

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Brent Turner, Acadia Healthcare Company, Inc. - President [73]

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Sure. Great question, Dana, and obviously, we are, foremost is just protecting a lot of the things that we have been, so, the industry has had such success and getting access, getting coverage, parity, essential health benefits. We did not as an industry receive tremendous impact from ACA, but we want to be very careful that we have a seat at the table, and when they adjust, they repeal and replace, or whatever happens, that we do not lose things that we never really benefited from.

And so our industry association has great leadership. We are much more recognized. We do get the face time and the feedback. We have an annual meeting coming up in the spring, and there will be a lot of grassroots efforts, so again, our industry is positioned well knowing that the critical care, the importance of what we do, but we are spending time just making sure that as lots of discussions around, changes happen that we do not have anything negative occur to our space.

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Dana Hambly, Stephens Inc. - Analyst [74]

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That's helpful. Thank you.

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Operator [75]

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Gary Taylor, JPMorgan.

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Gary Taylor, JPMorgan - Analyst [76]

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Hey, good morning. A couple of housekeeping items. First, on the EBITDA guidance for 2017, what's the estimate of stock comps that you are excluding from that?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [77]

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Hey, Gary, our estimate for next year is just under $31 million for stock comp.

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Gary Taylor, JPMorgan - Analyst [78]

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And at this point, there is probably not any identified transaction expense, right?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [79]

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That is correct. We do not include transaction expense in our guidance.

We will see some just related to the ongoing divestiture cost, as we realize the remaining synergies and have some employee termination cost. That should not be significant, but we will plan to see that, and that is excluded from our guidance.

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Gary Taylor, JPMorgan - Analyst [80]

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Okay. And then just on tax rate, so the guidance for 2017 is 25%. Should we be straight lining that, or would we have, would you anticipate the kind of seasonality or 4Q true-up with the lower 4Q tax rate, like we saw in 2016?

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Brent Turner, Acadia Healthcare Company, Inc. - President [81]

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I think you could just allocate it by quarter, 25%. Is it going to be a little off of that periodically, could be, taxes are very precise. But it is going to be a lot closer on average to the 25% throughout each of the quarters.

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Gary Taylor, JPMorgan - Analyst [82]

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Okay. Thank you.

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Brent Turner, Acadia Healthcare Company, Inc. - President [83]

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Thanks, Gary.

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Operator [84]

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Ana Gupte, Leerink Partners.

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Ana Gupte, Leerink Partners - Analyst [85]

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Thanks. Good morning. The first question just on the scrutiny into one of the critical practices that one of your peers is facing, might that change or impact how you look at length of stay or staffing, and might you have to change that in any way?

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Brent Turner, Acadia Healthcare Company, Inc. - President [86]

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Ana, length of stay in our industry has been on the acute side, in the 9 to 10-day range for 25 years now. This is an industry statistic.

We just don't see, that is not an area that there has been longer lengths of stay. The UK, by contrast, is months/years, not days, so we do not see a change on overall length of stay to the negative. We think it's, most providers and professionals in our space are concerned that it is too short now, which really leads to a higher likelihood that the patient comes back into a facility versus the small savings of one or two fewer days that might be garnered.

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Ana Gupte, Leerink Partners - Analyst [87]

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Okay. All right.

And the next question would be on the pricing environment in the US, it seems to have slowed down a little. Is that more mix related, or in terms of contacting, can you give us some thoughts or color on the trends there?

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Brent Turner, Acadia Healthcare Company, Inc. - President [88]

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Sure. Yes. What you see in our sort of same facility profile of the revenue per day is really heavily impacted by just the mix of patients, it is not the same every quarter over the prior quarter.

I think if you look at our payer mix and think about roughly in the US, 16% revenues from Medicare, we get a consistent annual cost-of-living increase on the PPS rate there of something in the 1.5% to 2.5% range. And then Medicaid, obviously our largest total payer group at 40%, but coming from over 44 states, each state is different, but in positive economic times, when the state revenues are doing well, we are going to see small cost-of-living adjustments there, call it 1%, and then our commercial book of business, in the 30%, 35% range. We focus on local negotiations, and with those payers, and generally focus in on trying to get 5%-plus revenue per diem increase each year from those payers.

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Ana Gupte, Leerink Partners - Analyst [89]

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Final question on interest rates and fixed versus floating debt, can you just give us any color on swaps or other mechanisms that you are using?

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Brent Turner, Acadia Healthcare Company, Inc. - President [90]

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Sure. We roughly have 55% of our debt floats, and 45% is fixed. I think it is important to note, we have saved over, well over $10 million of annual interest expense last year through a couple of different repricings of our term debt, so we in effect built in some cushion against these increasing rates, and the latest pricing change did not occur until December, so some of that benefit will flow through in 2017.

We have talked, and we have a $650 million of cross currency hedge on our -- that helps protect some of the cash flows on the UK. We do not have currently any fixed or floating to fixed rate swaps in place right now. But as the market indicates, we continuously look at what is the best fixed to floating structure given the rate environment. But right now, we are very comfortable with our interest expense and debt profile.

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Ana Gupte, Leerink Partners - Analyst [91]

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Great. Thanks for the color. Appreciate it.

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Brent Turner, Acadia Healthcare Company, Inc. - President [92]

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Thanks, Ana.

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Operator [93]

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Paula Torch, Avondale Partners.

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Paula Torch, Avondale Partners - Analyst [94]

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Thank you. Good morning.

I just wanted to ask about the 21st Century Cures Act that was passed, and I think it was expected to add some funding for medication-assisted treatment. So, how are you benefiting from this either by reimbursement or volumes, and how much growth should we expect to see from this part of the business in 2017?

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Brent Turner, Acadia Healthcare Company, Inc. - President [95]

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Paula, obviously, that is a, and once again, it's another tailwind positive headline, $1 billion allocated to the states for medically-assisted treatment. In a lot of things, that sort of has figure its way through the states and local areas.

We are very committed to the medically-assisted treatment business, and have a great team there, and they are going that business, so obviously it's a positive. It's hard to quantify, though, how much and the when, but it is absolutely better than having something cut.

So, that's a tremendous need. You see more and more just awful stories about the impact of the opioid epidemics, and the impact of that abuse. So, we are optimistic, but we just don't have the specifics on how that is going to play out for us.

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Paula Torch, Avondale Partners - Analyst [96]

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Got it. Thank you. And just growth there, is that more geared to de novo versus acquisitions, or how should we think about that?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [97]

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Acquisitions will still be larger than the number of de novo beds that we would be adding to the Company.

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Paula Torch, Avondale Partners - Analyst [98]

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Okay. And then just one last one from me. What does reimbursement look like in the UK for 2017?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [99]

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We are going through that negotiation process right now. Around the 2% range, but we are negotiating that as we speak.

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Paula Torch, Avondale Partners - Analyst [100]

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Okay. Thank you.

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Operator [101]

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John Ransom, Raymond James.

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John Ransom, Raymond James & Associates, Inc. - Analyst [102]

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This one is for David. Your 25% tax rate, maybe I missed this, but did you provide a compare and contrast between the US tax rate and the UK tax rate?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [103]

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No, John, we do not. That 25% represents the consolidated Company, the corporate tax rate in the UK has gone down, it is below 20%. The tax rate in the US, you know is the 35%. But the consolidated rate is just what represents the consolidated Company and all the other items that impact our tax rate.

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John Ransom, Raymond James & Associates, Inc. - Analyst [104]

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So, let's assume that we get a just make up a number in the US of 20% tax rate, and as you own your real estate, maybe you get a mortgage exemption. What do you think that would do to your tax rate, kind of ballpark?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [105]

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John, repeat that question.

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John Ransom, Raymond James & Associates, Inc. - Analyst [106]

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Let's say the US tax rate went from 39% to 20%, let's say your US, I am just making it up, let's say US corporate tax rate federal went to 20%, what would that to your pro forma tax rate, roughly?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [107]

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Okay. And you are thinking about tax reform here. Yes. The impact in the US would be that the tax rate, we would have about $25 million of tax savings, just based on our US taxable income.

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John Ransom, Raymond James & Associates, Inc. - Analyst [108]

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Okay.

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [109]

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So, that would be 5% to the consolidated rate.

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John Ransom, Raymond James & Associates, Inc. - Analyst [110]

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Okay. Perfect. And just remind me, I think I know this number, but just to make sure our calculator is not broken here in Florida, but what's now with the divestiture and where the pound is now, what's the rough breakout kind of EBITDA mix between US and UK?

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David Duckworth, Acadia Healthcare Company, Inc. - CFO [111]

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It's 35% UK, 65% US.

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John Ransom, Raymond James & Associates, Inc. - Analyst [112]

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Okay. Great. I know you have got some non-core assets in the UK that you got as part of the deal, Joey, is there a better than 50/50 chance you might look to move some of those assets in the next, say, 12 months or so?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [113]

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Nothing in the next 12 months, nothing in the next 12 months. However, if somebody wanted -- no, nothing in the next 12 months.

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John Ransom, Raymond James & Associates, Inc. - Analyst [114]

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Okay.

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [115]

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(Multiple speakers) Okay. Good.

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John Ransom, Raymond James & Associates, Inc. - Analyst [116]

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I am sorry. I did not mean to interrupt. Say again?

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [117]

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No, no, no, no.

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John Ransom, Raymond James & Associates, Inc. - Analyst [118]

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I messed up, you were going to say something and I interrupted. I messed up, I feel bad.

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [119]

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You just confused us, John, because you have asked six follow-up questions. You must have thought the rule only applied to the original basket. (Laughter) We just created another Johnism. (Laughter).

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John Ransom, Raymond James & Associates, Inc. - Analyst [120]

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All right. I will be quiet now. I will be quiet now.

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Operator [121]

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That concludes today's question-and-answer session. Mr. Jacobs, at this time, I will turn the conference back to you for any additional or closing remarks.

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Joey Jacobs, Acadia Healthcare Company, Inc. - Chairman and CEO [122]

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Thank you very much. Thank you, everyone, for listening in and your questions.

The year is beginning, we have got a lot of hard work to do, but we have got the team that can make that happen. And I want to thank all the employees of the Company and the people we work with, and we are interested with those patients, and we want to do a great job for them. So, once again, thank you for your questions, and we will talk to you on the next call.

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Operator [123]

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That concludes today's call. Thank you for your participation. You may now disconnect.