Thank you for standby. We are about to begin. As a reminder, this call is being recorded. Please proceed..

Good morning, and welcome to Acadia's First Quarter 2021 Conference Call. I'm Gretchen Hommrich, Director of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to Chief Executive Officer, Debbie Osteen.

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..

Good morning and thank you for being with us today for our first quarter 2021 conference call. I'm here today with Chief Financial Officer, David Duckworth, and other members of our executive management team. David and I will provide some remarks about our financial and operating results for the first quarter of 2021 and guidance for 2021.

Following David's comments, we will open the line for your questions. We are very pleased with our solid financial and operating performance for the first quarter marking a strong start to 2021.

These results demonstrate consistent and successful execution of our growth strategy, as well as strong cost management in the face of the impact from the resurgence of COVID. And one less day in 2021, due the Leap Year in 2020.

Before we get into the results, I want to commend Acadia's dedicated employees and clinicians across our operations, who have continued to meet this critical demand and provide the highest quality care in a safe and accessible manner.

We have a proven operating model supported by an experienced team, as well as the financial strength to support our ability to reach more patients who need our services. For the first quarter of 2021, our US operations produced very favorable results driven by solid volumes and strong cost management.

Our same facility revenue increased 7.4% compared with the first quarter of 2020, including a 2.7% increase in patient days, and a 4.5% increase in revenue per patient day. Acadia is well positioned to meet the needs of those seeking behavioral treatment with our diversified service lines, all of which provide high levels of exceptional patient care.

In 2021 and beyond, we believe that there will be continued growth in demand for all these services. While we are beginning to see some relief from the pandemic, with increased vaccinations, and a less restrictive environment, elevated levels of mental health and substance use disorders are expected to remain long after the COVID-19 pandemic ends..

Thanks Debbie and good morning. Revenue from our continuing operations for the first quarter was $551.2 million, compared with $509.2 million for the first quarter of 2020, a growth rate of 8.2%. Net income attributable to Acadia stockholders was $9.7 million, or $0.11 per diluted share.

Adjusted income from continuing operations attributable to Acadia stockholders per diluted share was $0.47 for the first quarter of 2021.

Adjusted income excludes income from discontinued operations, as well as a $1.7 million tax benefit related to ASU 2016-09 transaction related expenses, debt extinguishment cost and the income tax effect of these adjustments to income.

Acadia's continuing operations adjusted EBITDA for the first quarter of 2021 was $119.5 million, compared with $96.7 million for the same period last year. Same facility adjusted EBITDA margin improved 280 basis points to 26.5%.

In March 2021, the company completed its expected debt repayment and refinancing plans following the completion of the UK sale in January.

We have strengthened our capital structure through the reduction in debt, totaling $1.6 billion in the first quarter of 2021, as well as the refinancing transactions completed in 2020 and in the first quarter this year.

With the completion of these transactions Acadia's debt structure includes the new $1.25 billion revolving credit and term loan facilities $450 million of 5.5% senior notes due 2028 and $475 million of 5% senior notes due 2029. The company's net leverage ratio was approximately 2.7x as of March 31, 2021.

Cash at the end of the first quarter was $179 million. And we have $160 million drawn on our new revolving line of credit of $600 million. Turning to our financial guidance, as noted in our press release, we have increased the previous financial guidance for 2021 as follows.

Revenue in a range of $2.24 billion to $2.29 billion, adjusted EBITDA in a range of $500 million to $530 million and adjusted earnings per diluted share in a range of $2.30 to $2.55. With the completion of our debt refinancings in March, our interest expense for the remainder of 2021 is expected to be approximately $17 million per quarter.

With our improved debt structure, our ongoing cost management initiatives and our disciplined capital allocation, we have a solid financial position to support our business. We will continue to make strategic investments in the business while aligning our costs to meet the ongoing needs of our patients.

We are confident that the essential nature of the services we provide supported by robust demand will lead to growth through 2021 and beyond..

We'll take our first question from Frank Morgan with RBC Capital Markets. .

Good morning. First question on the strong same store top line growth. Just curious when I look at that looks like nice growth in patient days and part of that driven by about 2% growth in length of stay.

So I'm just curious, what's driving that increase? And then any color or any breakout on the 4.5% on the pricing side? And then second question is on just the margins and the sustainability there.

Obviously, you've had some really good cost initiatives in place and things like purchasing, but any other remaining areas of focus we should look for there, even including label? Thanks..

I'll take the first part of that, Frank. I think when we look at our volume trends for the first quarter, our acute senses continues to be just very stable and strong.

I think that what we were pleased with is that our specialty senses, which had a slower ramp up during last year during the pandemic, and also had a little bit of slowness after the holidays, we started to see some very strong trends for specialty.

I think that if we look at year-over-year growth, both in February and March, we were very pleased with that growth in the specialty area, I think that what we're seeing there is that travel is starting to return to normal.

I think that we've also seen an increase in our out of state admissions, and our volumes there, we actually had the highest referrals from out of state referrals that we've seen since January of '20. We always had, I think, consistent performance even during the pandemic from our RTC and our CTC service line.

But those trends are also very strong, and have continued, as I said in my remarks into April. I think, David, if you want to add to that..

And Frank, picking up on the revenue per day, we did see a strong revenue per day of 4.5% year-over-year growth here in the first quarter, that is a continuation of a strong trend that we have seen, we were above 3% in the second half of 2020.

Our team at the facility and the corporate and those that manage our payer relationships here at the corporate office are doing a great job on rate increases across our service lines. And in the -- in Q1, we're also seeing a strong payer mix.

Our commercial payer mix did increase slightly, just under 30% for the quarter that is a contributing factor to our revenue per day growth being at 4.5%. And part of that does relate to the specialty facilities.

And the volumes we saw there at some of the higher revenue per day specialty facilities where we're now seeing strong volumes as we exit the quarter..

I'll just add Frank, on the margin, I think that we had very good cost management and I have to give the operations team, just a lot of credit, they stayed very focused on that area. And I think we've been able to sustain the savings from our initiatives in -- that we identified in 2019.

But we've also achieved other efficiencies and cost adjustments in 2020 that continued into 2021. We are looking for additional opportunities for savings. But as I just look at their efforts in the first quarter, our margin was -- had a very good impact from that cost management. But then also, as David mentioned, our strong revenue per day.

So those two things combined, I think helped us and that's why we saw the improvement in the margin. And we believe that we're in a strong position to carry those efforts forward. And we believe that the margin can be sustained. And we're hoping to improve it from where we are right now..

Our next question from Kevin Fischbeck wit Bank of America..

Okay, great, thanks. I guess wanted to hear your view on M&A. I guess there are a couple of large transactions out there, love to hear your thoughts. You mentioned your balance sheet strength.

Where do you think you'd be willing to take your back balance sheet for the right transaction going forward?.

We do see capacity with our balance sheet and our leverage being at 2.7 relative to a longer-term range that we're thinking of for our now US only business of three to four, we are not in a hurry to take the leverage to the high end of that range.

But do think for the right opportunities that are the situation where we would be at the higher end of the range.

But any M&A transactions that we evaluate we're evaluating through our framework that we have established that we think will serve us well, thinking of this strategic set the market the real estate, many other factors related to this specific acquisition that we look at, and of course, financial returns and Acadia specific factors.

So we'll continue to look at M&A opportunities, using the criteria and the framework we have. And for the right transaction, we would think about the right place to be within the leverage range.

But we're certainly pleased that not -- we not only have that capacity, but we also have multiple options as we think about our growth and the force growth pathways that we talked about earlier. I think M&A is part of that. But there are also other options and multiple ways that we think we will continue to see those growth opportunities..

Okay, and then just I guess we think about the de novo growth, is there anything we should be thinking about or being prepared for? I guess in the past, sometimes when you open up a new facility, it has startup losses for some period of time, if you guys are doing more JV developments next year than you have in a long time.

Is anything to think about from a market perspective?.

We have talked about in the first year of operations for a new facility, incurring losses that we estimate around $2 million. We have four facilities right now in various stages of that startup process with two facilities opening in the second half of last year and two more that are opening at various points in time this year.

So we do think that we can manage that number that should be a fairly consistent number. Of course, if we think about next year potentially higher number of new facilities, we could see just a greater overall number. It's just going to depend on the timing of those transactions.

What we have seen, though, with the transactions we opened last year that I think we have the facility that has been fastest to breaking even as we look back at the history of the company, with the one that we opened in the third quarter last year being breakeven here in its third quarter of operations.

So I think part of that is the team that we have, just doing a fantastic job opening that new facility. But also just the benefit of having a joint venture partner, as we open a new facility in certain markets, we're seeing a faster ramp than what we've seen in the past.

So there is a $2 million or so investment in those startup losses, but at the same time, we are doing a great job getting those new facilities open. And hope for a very successful year as we think about a greater number of those new facilities next year. .

And Kevin, I'll just add to what David said, I think he mentioned the joint venture that we opened in the summer with Power. And I think what we seen there is what we're seeing really across the company, and that is strong demand, we've had very solid pricing, and good execution by the team on the ground to really get the facility open.

We've just been very pleased. We are looking at opening, even more services there in the next month or so. So I think this is a growth pathway with integration, as well as a de novo is that we think while there is the short term impact, the long term of both of those strategies, we feel are very positive for us.

And there are a number of markets that we think are underserved in the de novo area in particular that we've identified. And we think that we have a good pathway there as well as the integration..

Our next question from Ralph Giacobbe with Citi..

Thanks. Good morning. Debbie you mentioned out of state refer, Debbie you had mention out of state referrals, I guess, are there incremental referral streams you're seeing as well.

Do you think it just capturing greater share than maybe previously? And then any other strategies, particularly as we think about sort of more usage of telehealth in the day real stays from a referral standpoint?.

Well, Ralph, I think if we think about the facilities the specialty facilities, they pull from a wide range, really across the country. And I think that during the pandemic, we did see, those referrals were impacted, because in the, for the most part, unless it's close to the state where our services are individuals do fly and travel in that manner.

So as we are looking at it for the first quarter, what we've seen is that there's more comfort in traveling. And so these referral sources have really been with us for a number of years, they're very stable and steady.

I think now, what we've seen is just we've been able to accommodate those referrals, and they've been able to make their way to our facilities. We do have programs that we've opened in several of our specialty facilities that are more specialized.

So I do think we're getting in new patients, as well as new referral sources that have, in a lot of cases asked us to provide those services. So I do think there are additional referrals that are coming, but then we've seen a return of those that have been steady over a number of years and we have an excellent track record and reputation.

So now that I think some of the pandemic, and vaccinations are those are happening, I think we're going to continue to see our specialty senses not only recover, but build from where we are right now. We've certainly seen that in April as well..

Okay, and then what about on the telehealth side in terms of referral patterns or relationships with some of those providers?.

We have through telehealth we really utilize that for our outpatient services and during the pandemic it was used to access our services. But I think that certainly through telehealth it's really an access way for our patients to avail themselves of our services.

So if we're in a rural area or even we are planning to try and expand telehealth in some of our acute and specialty service areas, where if someone is coming from a distance, we can then extend the continuum and use telehealth as a way for them to continue their treatment with us.

And I think that our referral sources during the pandemic and to some extent, even as we're seeing that start to become less of an impact to us, our referral sources, and our physicians for that matter are comfortable with telehealth, they are using it.

And I think that it just opens up a new area of opportunity for us, that's one of the positive things I think that occurred from the pandemic is, we are looking at support for our existing services, we are looking at ways to expand the existing services, and that's connecting with not only referral sources, but our patients.

And then also we're looking at growth into new service areas. And that might be linking with someone that is providing those telehealth services, either a physician group or others that we might partner with..

Okay. That's helpful. And then just quickly follow up, I want to go back to the cost management and just wondering if there's anything more to sort of call out there, I guess I'm trying to reconcile is you put up 7%, same store revenue against 20% same facility EBITDA growth right.

So obviously, you mentioned sort of balancing pricing, as well as sort of the sustainability of margin. So I'm just trying to reconcile and understand and do you need the pricing levels to sustain these margin levels.

Or if there's a way to sort of frame the benefit of sort of the pricing drop through the margins relative to the sustainability, some of the cost initiatives? Thanks..

Sure, we do think that virtually all the margin improvement is related to the cost management initiatives. And I know we've talked about those over the last two years, and all the tools that have been put in place to manage our costs.

The cost savings initiatives that we talked about and implemented last year, we do see those as the primary drivers of where our margin was for the first quarter. And really, a good way to think about that is if you look at the second half of 2020, we were 27%- 28% margins.

And that was sustained into the first quarter, we do see some seasonality in the first quarter related to payroll taxes, and the calendar around the payroll taxes that has about a 1% impact on margin.

So if you think about where we were trending in the second half of last year, that is being sustained into the first quarter with the exception of that seasonality. And so that's probably a more helpful way to think about the margin.

And of course, on a year-over-year basis, it does reflect a higher level of margin growth because of some of those cost savings that were implemented throughout 2020..

Our next question from AJ Rice with Credit Suisse..

Hi, everybody. First, maybe just on the guidance raised $10 million, both sides of the range. Is that purely just to confirm the Q1 outperformance? I don't know where you were relative to your own expectations. I know you're about $7 million ahead of consensus and then the sequestration with the back half operationally in your view remaining unchanged.

And is there anything about the first quarter outperformance that wouldn't continue into the rest of the year? Is it just too early to maybe make a change in the outlook? But no, no thing, nothing in the back half, it's somehow gotten a little worse..

The main factors behind our increase in the guidance were the first quarter beat and it was around $7 million ahead of our expectations as represented by the midpoint of our Q1 guidance range, which was $110 million to $115 million. So there is around $7 million there.

Medicare sequestration and the extension through the end of the year is $3.5 million value to us. We have about 11% of our revenue is with Medicare. There's another 5% or so that is with the Managed Medicare payer, but that sequestration is related to around 11% of our revenue. And there's a $3.5 million value there from April to December.

The other -- there's no other changes in our guidance, I think our guidance as we enter the year, already reflected, continuing strong trends in our volume and in our margin. And so with the trends we're seeing in April, part of our reaffirming and increasing our guidance is that we do see those trends that were part of our original guidance.

Now continuing for the year, as we are seeing in April, and AJ, there's nothing else that we saw in the first quarter or see in the year that we believe we need to call out. Those are the primary drivers of our increase..

Okay, that's great.

Let me just say on the follow up, but obviously, you got the uptick in JVs as you think about heading into next year, you're expressing openness on M&A tuck-in potentially larger deals too I guess, what is the competitive landscape look like? It seems like some of the private equity guys that were competing with you for transactions may actually be now sellers.

Is the competitive landscape getting a little better? And maybe that's part of the reason we're seeing the uptick in JVs or is it about the same? And is anything changed in the way you're seeing people pricing deals?.

It is hard for us to know exactly what the competitive landscape is. And I know there may be private equity those sellers, but there may also be buyers within the same space. And so yes, there does seem to be acquisition opportunities right now. But it's hard for us to really have a view on either the competition for that or the pricing.

We'll see, I don't think we have as many data points to look at just looking back on the last several years. So we don't have a view right now really on either the competition or the pricing. We, of course, as we think about our own framework feel like we have a right way to think about acquisitions, as well as those other opportunities.

And so we'll use those criteria as we evaluate opportunities. And we'll see..

And I'll just say, AJ, I think that our diversity of service lines gives us multiple opportunities for certainly M&A not just in our acute space and service line, but also the specialty in the CTC area. I do think that we're well informed of the market. We, as David said can't really speak about the competition there.

But I think that, as we look forward, we think there's going to be opportunity. There are I believe companies that may not have fared well through the pandemic. And if there's a way that we can look at those, and they are attracted to us from a strategic and financial fit, we will pursue those.

But we also want to, as David said, keep a disciplined approach with our balance sheet giving us really a lot of flexibility. And I think that that's why we feel that's going to be an important pathway.

But we'll have to see how pricing looks and how it fits in our view of return on invested capital and other things that we are going to be disciplined about. .

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

Hey, good morning, guys. Congratulations. I guess just trying to go back to Frank's question earlier. So Debbie if I think about this, you're saying that we've seen some strength carry over into April. So as I look at the admission trend from Q1, I think it was up 80 basis points.

And then the pickup in average month of staying and I think you've talked a lot about how specialty is pretty strong? Is it the right way to think that these numbers should continue to firm up? And, theoretically, that there's even further acceleration in kind like the organic growth outlook for the back half of the year?.

I think Brian, that's a good way to look at it. I think that as we saw the quarter and the progression, and then now we have visibility on April, I think that it's a good assumption that our trends are stronger. And I think that we feel like there's no reason why those would not continue through the rest of the year.

With the demand and just again with a pandemic becoming less of an issue, still have a few markets where there are issues with the pandemic. But overall, we feel good about just the progression. And also, as we just saw March and April numbers, we think they're strong..

Got it. And then, obviously a lot of focus on big deals. But I think with your balance sheet being clean and focused now in the US only, how are you thinking about the opportunity for tuck-ins? Kind of going back to the Acadia's old where you're doing a few tuck-ins here and there every quarter..

We do believe there will be tuck-in acquisition opportunities, we do like those opportunities. And we're excited about the one we talked about earlier in California.

And so we continue to look for those and believe we will see more of those, and they do present a very good opportunity for us and the benefit we can bring to that local hospital through the infrastructure and all the initiatives that we've implemented, make those acquisition opportunities more attractive..

And I'll just say, I think that one, in particular Vallejo with Adventist Health selling; we believe that we will have opportunity to add additional beds just based on what we see with their volume trends. But also we have other facilities in the area, and we think they can work together to serve the patients.

And so it's got a strategic focus to it, but also a way for us to grow over and above what we're purchasing at this point..

Our next question from Pito Chickering with Deutsche Bank..

Good morning, thanks for letting me ask some questions. Can you help me understand the dynamics between same store and like the stay? When I look at the like the stay increase it was a primary driver of patient day growth.

So the question is, if the growth of like the stay is from managed care easing restrictions, or is it an increase in mix from specialty, it manage to push back on like the stay again, do you think we can offset the pressure with increased admissions to keep the patient days growing in the 3% range?.

We do not view any of our metrics is relating to a change in what managed care is doing. It's been a pretty consistent process pre pandemic and through the last year, we attribute our stats more to just the service mix that we see.

We do see a pretty consistent link to stay, but we have to look at it by service line and by facility and it can vary but it tends to be within a range and we've seen it trend consistently within a range. And Peto, as you ask about admissions, we are seeing a number of factors that impacted our admissions during the quarter.

And we talked about just coming off of the COVID resurgence in the holidays and seeing a lower admissions but then seeing a significant progression throughout the quarter in the admissions and in our patient day metrics. And so going forward, we do think that there may be a more similar relationship between admissions and patient days.

But again, it can be impacted by the service mix that we see. But with what we saw in March we are seeing nice admissions growth, and we're seeing that into April..

Great, and then follow up on Ralph's question on the revenue per patient at day growth, it sounds like this growth with mix of specialty and commercial makes it sustainable for 2021.

As you mentioned, that specialty continues to ramp sort of during March and April, shouldn't the revenue per day increase from these levels? And then on the margin side, if the revenue per day continues to increase because the commercial mix and specialty wouldn't that provides substantial margin leverage beyond what you're able to achieve in first quarter?.

We do think it will be a continuing factor as we move through the year. Of course, in the second quarter we'll be comparing back to the quarter that saw the most impact from COVID for the company last year, the second half of 2020, we saw very solid recovery in performance.

So the comparison will be different in the second half of this year, compared to the second quarter. But we do expect to continue to see that dynamic in our revenue per day. And to see strong revenue per day trends, especially in the second quarter, where we did see a greater impact, like I said in 2020. So yes, we do expect that trend to continue. .

We'll go to our next question from John Ransom with Raymond James..

Hey, good morning. Just to hit on labor for a minute, I'm curious, kind of where your metrics stand now versus says the peak of the pandemic in terms of having to staff shifts with temps? How many of your folks have been vaccinated turnover? Anything like that would be helpful. Thanks..

Well, John, as I think you know we're located in 40 states. So we will have staffing challenges there, they're fairly isolated, I think, overall, we've been able to accommodate the demand with our current staff. We've actually seen an improvement in agencies from year-to-year.

And it's all always been very low before that, I think as we look at our process here, we try and be proactive, and that started and has -- was in place before the pandemic, so our team is supporting the facilities, we have a team here a recruiting team, we also have, I think, some very robust local efforts, and we have used over time when we need it.

But we've also I think, just generally been able to handle our patients that are coming to us and making sure we can offer services to them, we have, I think, some good initiatives around retention, which I think is very important. So we can recruit, and we have some strong support there.

But we also have, I think, some good focus around retention of our staff, just generally, across the company.

I think we are continuing to see our employees avail themselves of the vaccine, I think that we're trying to really be very supportive, and with our education, about the importance of the vaccine, and certainly it varies by part of the country, but we're, we feel good about our employees, and their interests, but also we want to make sure we're educating them about the various vaccines and also, we have a partnership with Walgreens, where we are using them as a provider of the vaccine.

And we also have health departments, and in many of our areas that have come to our facilities and provided it.

So I think that's continuing to increase and again we're just pleased that it's something that I think across the country is going to be certainly a positive for all of us, but also for just those that need our services and didn't feel comfortable before, now that they're vaccinated will seek our services out. .

We'll go next to Matt Borsch with BMO Capital Markets..

Yes. Hi.

Could you just talk about how you're thinking about demand, post pandemics? I guess my question is given the increase in instances of mental health issues during the pandemic to what extent I know, you can't really predict this entirely, but to what extent do you think those will be sustained versus sort of staging once things get back to quote unquote, normal?.

Well, I think there's two parts to this. And one is before the pandemic; one in five Americans already had a diagnosed mental health condition. So that was before the pandemic. And I think one of the positives that have occurred during the focus on pandemics.

It's not just the public health crisis, but the mental health crisis, which you've just mentioned, but I think the other part is that people are more accepting of seeking treatment.

So I think we have this need that was there before the pandemic, certainly some increase from just the stress and the isolation, but also, I believe, stigma has -- it's not totally reduced, but I think it's starting to reduce from the levels of I've seen over my career. And I think that we're going to see more people being willing to seek help.

And I think that is going to continue and unfortunately, I do think that this is not a short term issue. There is research from other pandemics that have shown that it really is a long lasting effect. We're ready to offer our services for those that might have PTSD, health care workers.

I can think of a lot of individuals certainly adolescence, there's been a lot of research about just the impact on children and adolescents with their mental health worsened.

So if I think about it, as were the demand trends in general, we started out with strong demand, it's now increased, but we also had more acceptance and I think this pandemic is going to have long lasting effects..

As there are no further questions at this time, I'd like to turn the call back to Debbie Osteen for any additional or closing remarks..

Thank you. Well, I want to thank everyone for being with us today and also for your interest in Acadia Healthcare. I am very grateful to our field and corporate leaders for their resiliency, and their commitment to keeping our key growth and operational initiatives moving forward and at the same time responding to this unprecedented crisis.

Together, we look forward to the opportunities ahead for Acadia. If you have additional questions today, please do not hesitate to contact us directly and have a good day. .

For today's call, thank you for your participation. You may now disconnect..