Good morning, and welcome to the Acadia Healthcare Second Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Gretchen Hommrich, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Acadia's Second 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.

Good morning. And thank you for being with us today for our second 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 second quarter of 2021 and our increased guidance for 2021. Following David's comments, we will open the line for your questions. We are very pleased with the momentum in our business for the second quarter as Acadia delivered a solid financial and operating performance. These results reflect increased demand for our behavioral health services and our continued focus on delivering efficiencies across our operations. We experienced favorable volume trends while providing exceptional patient care across all of our service lines. Before we get into the results, I want to commend Acadia's dedicated employees and clinicians across our operations who've continued to meet this critical demand for our services and provide high-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.

Thanks, Debbie, and good morning. Revenue for the second quarter was $582.2 million compared with $491.5 million for the second quarter of 2020, a growth rate of 18.5%. For the second quarter of 2021, net income attributable to Acadia stockholders was $44.5 million or $0.49 per diluted share and adjusted income attributable to Acadia stockholders per diluted share was $0.71. For the current and prior year periods presented in our earnings release, adjusted income excludes transaction-related expenses, debt extinguishment costs, loss on impairment and the income tax effect of these adjustments to income. Acadia's adjusted EBITDA for the second quarter of 2021 increased 25% to $141.3 million compared with $112.8 million for the same period last year. Same-facility adjusted EBITDA margin improved 180 basis points to 29.3%. During the second quarter of 2021, the company received $24 million of additional Provider Relief Funds under the CARES Act. These funds have not been recognized in the second quarter or included in our 2021 guidance. We are evaluating the guidelines to determine whether any of the funds will be recognized or will be returned. During the second quarter, we repaid $41 million of debt, including $35 million on our $600 million revolving credit facility, reducing the outstanding revolver balance to $125 million at June 30, 2021. The company's net leverage ratio was approximately 2.4x as of June 30, 2021, and cash at the end of the second quarter was $185.5 million. As noted in our press release, we have revised our full year expectations due to our strong operating and financial performance for the first half of this year and our outlook for the second half of the year. We have increased our 2021 financial guidance as follows: revenue now in a range of $2.280 billion to $2.320 billion; adjusted EBITDA now in a range of $530 million to $550 million; adjusted earnings per diluted share, now in a range of $2.50 to $2.70; and operating cash flows now in a range of $275 million to $310 million. Our guidance for 2021 reflects our expectation that the recent trends in patient volume and pricing and the focus on cost efficiencies and discipline will continue in the second half of the year. As a reminder, this guidance does not include discontinued operations or the impact of any future acquisitions, divestitures or transaction-related expenses. With that, Andrea, we are ready to open the call for questions.

And our first question will come from Kevin Fischbeck of Bank of America.

Great. Just wanted to dig into labor cost. It seems like some of the providers have been signaling that labor is getting more and more difficult to source. Some companies are talking about that as being getting factored to growth. Just want to hear what your seeing and how you feel about the labor -- the pressure on growing or just margins going forward?

Well, Kevin, I think, generally, we have seen a tight labor market, but I believe that we have done a very good job of managing through it. We have a very strong, consistent focus on recruiting and also retention. We're in many markets. We are in 40 states, and we do see, from time to time, isolated staffing challenges. I think that the team has done, as I said, a good job. They're very aggressive, and we've been very proactive in our approach. So our goal is to be competitive in our markets. We have very robust local efforts and focus. And we also have a corporate team that supports the facilities. So they are recruiting and helping the facilities with some of the challenges that are there. We haven't seen a significant disruption or change in the cost of our staffing. Our agency labor has been pretty consistent. It's around 2% of our total labor. So I think we're managing through it. I think it takes a lot of effort and focus. And again, I just have to commend the team because I think they've done a good job with just managing that and making sure that we're not limiting our growth.

All right. Great. And I think you referenced earlier, certainly in the press release about a favorable reimbursement environment. I guess there was a high-profile press release about United and going out-of-network. I just want to hear, I guess, your color on that, maybe specifically, but then more broadly speaking, what the reimbursement outlook looks like among commercial payers?

Yes, Kevin. We do have very long lasting, strong relationships across our diversified group of payers and including our commercial payers. The majority of our commercial, over 90% of our commercial revenue, is in-network. And so we are pleased with that strategy and pleased with the relationships that we have, the referrals that we get across our commercial payers. We are aware of the announcement you are referring to, but do not believe that it has an impact on our company, given that we are mostly in-network with United. And in fact, believe that with that strategy, we could see some benefit to our volumes because we do have most of our facilities in-network. So out-of-network for the company across our U.S. operations is about 2% of our revenue. And again, over 90% of our commercial revenue is in-network. So we think we're positioned well and any potential impact, not only could be limited, but also could provide some benefit in certain markets and certain facilities.

The next question comes from Ralph Giacobbe of Citi.

Great. Debbie, in your prepared remarks, you talked about seeing more push for access for behavioral health. Hoping you can give a little bit more context. Is it employer, states? Does it relate to payers? Is it the telehealth influence? Just trying to understand where that push for that incremental behavioral access is coming from.

Ralph, I think when we think about access to our services, many of our patients, certainly that come to our inpatient facilities start usually in a lower level of care. And I think that there is a shortage of practitioners in many markets. So I think what we have seen through telehealth is in some of the outpatient companies is really trying to make sure that people that need our assistance for mental health and addiction can see a person, a professional that can help them diagnose what their needs are. I do think that as we think about just going forward, we are really trying to make sure that people can reach us. We've done -- we have a crisis hotline that we have instituted last year during the pandemic, but there are other funding and sources for these hotlines and crisis centers where people can access and reach out. With the suicide rates that are climbing, I think it's even more important that people be able to get service at the right time and not have to wait in an ER or other places. So we're working with our partners on making sure that they can access our facilities. But then just generally, I think there's a real movement and funding around it, frankly, for access so that as this pandemic has unfolded and many individuals have needs. One of the studies I read recently, half of adults continue to report negative mental health impacts. So as we see this, they need to be able to access someone that can help them. And so we're a part of that, but I think it's happening really across the industry.

Okay. That's helpful. And then it does seem like the joint venture efforts with hospitals and larger systems is accelerating. Is the catalyst you think at this point, simply the COVID pandemic or anything else that would be driving it? And maybe just give us a little bit more on the pipeline and how easy or difficult it is to integrate and operate sort of the JV relationship versus MA or de novo build, if you can help us with the economics there.

Sure. I mean, we thought that we would see less discussion during the pandemic, and in fact, we actually saw more. And I think that our potential partners wanted to keep the momentum going. They have really started, and I think these large health systems really want to see mental health and physical health put together. So this has started before the pandemic, but I do think it continued to be strong throughout 2020. We do have a robust pipeline, and we have projects that are in different stages. We recently announced the Bronson, which I mentioned in my remarks. We also plan to -- we have a groundbreaking actually later this week for a JV with Lutheran Health Network in Indiana. We just announced a partnership with Geisinger to build 2 hospitals. So as we think about just our pipeline going forward, there's usually a competitive process. There are others that are seeking to partner. But we have been fortunate because I think our track record stands for itself, and we've been chosen as preferred partners with many health systems. We have signed several LOIs that we have not announced. We will do so when we have a definitive agreement. And I think that what we have seen is that as we work together, we're able to enter a market with a strong partner, they have established reputation. And so together, as we build a facility, which is usually, in fact, always what happens, together with their relationships with payers and certainly, their referral pipeline, usually they're closing beds and that's folded into the partnership. So it does give us an advantage if we're entering a market to do that with a partner. As far as just ramp-up and other things, it usually moves a little bit faster. And I think that certainly, the payer relationships helps us with our price negotiations with payers. But we think we're very fortunate because I think that we have these 13 partnerships now. And they all check references when they make a decision, and we're fortunate that we have such a strong reputation. Again, I give a lot of credit to those that are in the field working with these partners, and we really want to see that as a growth pathway that will continue for several years because we do have over 30 in the pipeline right now.

The next question comes from Brian Tanquilut of Jefferies.

Congrats on a really strong quarter. David, I guess, I'll start with you. You mentioned something in your prepared remarks about cost efficiencies that you expect to carry over into Q2. Just wondering how are you thinking about that given the tight labor market? And I know you've managed through it pretty well. But also, as we think about kind of long-term margin targets from a same-store perspective, where should we be thinking about where that would land?

Yes, Brian, the operations team has done a fantastic job for several quarters now managing the volumes, and really seeing with the incremental volumes that we've seen, the opportunity to drive efficiencies and to leverage the cost structure that we have. And that is reflected in our margin. We are managing through, as Debbie mentioned, a tight labor market, but it really show that as we see the incremental volumes, we can manage through that labor market that we're going through right now. And we have seen the sustained benefits of many of the cost savings programs that I know we've talked about for the last couple of years. So the team continues to do a good job, maintaining discipline really focused on using our data, our dashboards and just weekly visibility into costs at the facility level so that we're able to staff and see the volume growth that we see and also match our costs according to the volumes that we see. Going forward, we do continue to add capacity. We're working on our pipelines across all of our growth pathways. And part of that is adding beds to our existing facilities. We do think that, that additional capacity that we add will drive further margin improvement opportunities. The way we size that, Brian, is that that should add around 50 basis points of margin improvement to our same-facility group of facilities. We will continue, of course, to invest in new facilities, joint ventures and de novos. And so that's a start-up process, that's an investment. Those are very attractive longer-term opportunities. But outside of that same-facility group, where we expect to see the 50 basis points of margin improvement, we'll see some investment in that. But once those mature, we think those will be accretive to margins as well. So we think with the additional capacity that we plan to add, we'll continue to see that margin improvement opportunity.

:

Well, Brian, we continue to see a fragmented market, which I mentioned in my remarks for behavioral. And I do think that there are a number of the smaller multi-facility systems and then certainly single-facility operators that present future opportunities for us. As we look at -- I mean, we don't comment on any specific transaction. But as we look at the M&A opportunities, we use a disciplined approach, and we are looking at the strategic fit as well as the financials. So as we look at the strategic fit, what the synergies might be, whether we're going to be able to enter a new market, we also are looking at the financial component, which is return metrics for us, the IRR, the return on invested capital. I think that we will see and we will have opportunities for M&A. We're going to stay disciplined, and we're going to make sure that it fits us. The good thing about Acadia, which I think is good for long term, is we have a number of ways to grow, and we have a number of ways to grow organically. But then I also think there will be opportunity. And I think that, fortunately, we're well informed of what's out there. And we do have an opportunity to evaluate. We do a very, I think, a thorough job of that. But also, I think that will be something that will be opportunity for us in the future with just what I see with even just the single facilities. And some have, frankly, not fared as well through what all of us have suffered through the pandemic. But I think that we have an experienced team here who knows what to look for, and we're going to stay disciplined as we do it.

The next question comes from A.J. Rice of Crédit Suisse.

:

Well, A.J., I think that as we see patients coming into our facilities, certainly, they have to meet the medical necessity. So they are acute and they are individuals that need very specialized services. I think as we just think about the impact, we've seen multi diagnosis for those that are needing treatment for substance use. And I think that, that is something we can see just from the overdose deaths and just the staggering, to me, statistic that was put out by the CDC that, that's a real area of need. So we see that in our specialty facilities, also not just substance use but co-occurring, which are mental health issues that are a part of the patient's issue. We also have seen demand across our CTC and that stayed very steady last year, but it's continued into this year, and that's why we're opening the number of new CTC clinics. We do see individuals that are depressed and suicidal. That's one of the criteria, but that has actually risen during the pandemic. And I think, again, just our facilities have done a great job of being prepared. It's really the patients that prior to the pandemic we were treating, but now in some of our locations, we are seeing more acuity. And I think that we've been asked by some of our payers to develop more -- even more specialized programs, which we've done. I think that's benefited the specialty service line. But really, the acute and specialty have both just been very strong demand. And again, I think that's going to continue.

Maybe the follow-up question would be around -- there's a lot of discussion in the marketplace about the use of telemedicine to address behavioral needs and so forth, the outpatient -- people looking at outpatient. How do you guys view that? Do you view that as totally sort of a distinct silo from the things you're focused on? Do you feel like over time, it's going to be important for you to be integrated with some of those initiatives? So how do you think about that?

Well, I think that's probably one of the positives that has come out of the pandemic is really just the regulatory environment around telehealth and also the payment environment. We do see it as part of what we do, and we are using it now. We use it in our facilities to support our existing services. We've also -- we are going to be expanding some of our specialty services across the country, and we're going to use that as a way for them to stay connected with our programs. We've found it to be an extension for us of coverage for physicians, which I think we -- when we have a physician shortage, oftentimes, we're forced to use locum. And in this case, it is an alternative to locum coverage. I do think that telehealth will be a key part going forward. It's not going to replace our inpatient care. Our patients need to be in a safe environment. And I think that we see it as just part of what we're doing. And we have a team, it's led by our Chief Medical Officer, A.J., that they're looking for ways where we can integrate. But I do think we're going to be connected to some of the telehealth companies that have come up. We have seen a decline in this year of telehealth usage. Last year, it was about 20%. And this year, it's about 10%. So there are individuals that prefer to have the face-to-face. But there are also individuals that are in rural areas or those that really don't have access that want to use it. So I just think it's a positive for the industry. It's an extension of what we do, and we will be looking for ways we can use it even more. But right now, even on the CTC, we're using it for our counseling and therapy, and it's been something that patients have asked for and we're providing. And so I do think it's here to stay. It will be interesting to see what the regulatory environment ends up being. I know payers are looking at what's appropriate, what they're going to pay for, how they're going to pay for it, how the delivery should be done, and we're watching that very closely to see how that ends up. And advocating for it, frankly, because it's a way to extend access.

The next question comes from Pito Chickering of Deutsche Bank.

Just a couple from me at this point. Can you talk about the revenue per day a little more? Can you break that into commercial pricing increases versus mix? What's the biggest driver there? And talk about the collaboration between you and your payers on specialty? And how we should think about revenue per day increasing over the next couple of days -- years?

Yes. Pito, we were pleased to see the strong revenue per day trends continue. We had revenue per day this quarter of 816, and we saw something very similar in our first quarter. The key drivers for that are rate increases across all of our payers, which we did meet, our expected range of 2% to 3%. And we're also seeing a favorable payer mix where commercial has grown slightly as a percentage of our revenue, it's typically just under 30%. And this quarter, it was just over 30%, close to 31% of our U.S. revenue. And that commercial mix really does reflect the strong relationships we have across our commercial payers and also the performance of our specialty facilities, which is where we see a higher level of commercial volumes. So we do believe we are positioned well from a service offering perspective in our specialty facilities and also with the long-term relationships that we have and expect to continue to have with our commercial payers. There is a component of our revenue per day growth this quarter that is a challenging comp to last year. We did see a different service mix in the second quarter of 2020, with acute and specialty being temporarily lower on patient volumes. And therefore, RTC mix was a little bit higher. So that's part of our 7.5% revenue per day growth this quarter. But as we look ahead, we think where we are right now, the 816 is a very strong metric. We do expect that to continue into this year, and that will continue to provide revenue per day growth, probably more in the 2% to 3% range given that a component of this quarter is the comparison to last year. But we do think a lot of the trends that we see and the revenue per day that we see will continue moving forward.

: Our out-of-state has also added to that during this quarter. So as we bring patients from out-of-state to our highly specialized programs, they do tend to be a higher commercial mix, and we expect that to continue as we go forward.

Great. And then a few quick follow-ups, and I'll ask them all upfront to save time. Any more details on sort of what you're seeing on the Delta variant in July? Can you talk about sort of seasonality in the back half of the year, what we should think about for 3Q and 4Q? And then on the labor side, if you look at behavioral technicians versus nurses, do you see any more or less pressure on one type of employee versus the other?

Well, I'll take the first part of that. We have seen a slight uptick in the number of COVID patients in a few facilities. We haven't seen a significant increase at this point, and it hasn't had an impact on volumes or our staffing. I do think that if we do see another way, then it certainly -- there's a lot of discussion about how this is going to impact everyone. We feel that we're well prepared with our robust procedures. We're staying in communication with our facilities, making sure they're ready. We have maintained, I think, all of our PPE supplies as well as just our protocols as -- even as we saw COVID start to decline. But I think most important, which I want to emphasize is we plan to treat our patients as they come to us, we want to ensure they still have access to care. So we're ready. If we do see COVID and the Delta variant, and I think we feel good about our procedures that really in the heights of the pandemic, we were able to manage. So that is something we're watching closely, but we're prepared for it. David, I'll let you…

Pito, on seasonality, we do expect the third quarter to be very similar to the second quarter. And so there's not a lot that's seasonal and it has a significant impact, at least from the second quarter to the third quarter. In the fourth quarter, we typically do see some holiday seasonality in certain service lines around our census. We typically would size that as having about $3 million to $5 million impact in the fourth quarter compared to the third quarter, and that's around where it's been in the past. So the third quarter might be a little bit stronger than the fourth quarter. But we do think the trends will continue. And the only seasonality we would really highlight would just be right at the end of the year around our service line census. On your labor question, we wouldn't highlight any specific group of employees. It does depend some on the service line. Certain service lines are more reliant on nurses as compared to other clinical employees where specialty, there would be more therapists and in our RTC business would be more of the mental health techs and not as many of the nurses. But it does depend on the market, and it's a very market-specific approach. And as Debbie mentioned, we're focused on recruiting resources at the local level and the corporate level to make sure that we're able to staff our facilities. And it can depend on the market, but I think we're focused on all of our clinical groups of employees, nurses and the techs.

The next question comes from John Ransom of Raymond James.

David, if we look at 2021, how much do you think the CTC business factors in as a percent of your same-store revenue growth?

John, I think for this particular quarter, acute and specialty were the service lines that were really the strong contributors to our growth. And part of that is just seeing very strong current year trends. And part of that is seeing -- those are the 2 service lines last year that had a temporary impact and the decline in their census. CTC last year did stay very stable. And so I would say CTC revenue growth is more in our typical range, strong single-digit type growth for the CTC business, where acute and specialty, because of the comp and because of some strong census trends this year, are leading among our 4 service lines.

Great. And just kind of looking over the next 5 years, I know you guys have not have to or made the migration from paper medical records to electronic medical records. Is that something that you think is in your future? And if so, do you have any kind of idea what sort of capital investment that might look like?

Yes, John, we do actually have certain facilities that do have an electronic health record system. We are implementing that and focused on many of our acute facilities. That's where we do have some within our existing portfolio of facilities. We do have a plan, and it begins later this year, to begin investing more in those implementations. And again, are focused on many of our acute facilities and many of our joint venture facilities that we bring online. We'll have some EHR system. So the capital that we're expecting, of course, it depends on the system that you use. I think we have a good plan to improve our systems and make that transition with a partner that will be a slightly lower cost than many of the investments that I know we've evaluated in the past. So we're excited. We'll have more to share on that probably as we move into next year, but we are beginning to work on that transition.

Can you say at this point who your vendor is for that project?

No. I don't know if we can. So I'll just say, no, we can't right now, but we will be sharing that later.

The next question comes from Frank Morgan of RBC Capital Markets.

:

Yes. The state level reimbursement, we, of course, do have a significant portion of our revenue that is Medicaid and that's across 40 different states that we're in. So we are very diversified within our Medicaid revenue. And of course, most of that at this point in our acute service line, I think over 80% of our acute Medicaid revenue is with a managed Medicaid payer. So we continue to see at the state level, very positive coverage trends. Of course, we've talked about that with our CTC business really improving across our states, but the coverage for behavioral health continues to be very strong at the state level. We have not seen any rate decreases within our Medicaid payers. And continue to expect to see -- 1% to 3% is how we think about Medicaid going forward, but many states could be stronger than that really depends on what the historical rate increases have looked like within each state and within each payer. So it continues to be a very stable, very good payer for us. And continue to see that be very diversified across our states.

Okay. Maybe one last one. Back to the sequential guidance for the -- or comments for the third and the fourth quarter. I know third quarter has always been a tough one. So I guess what level of confidence do you have this year, say, versus past years where it seems like third quarter has always been sort of a -- not as predictable?

Well, we did -- this is our first third quarter in a number of years without the U.K. business, and I do know that the summer and in particular, August, was interesting in the U.K. with vacation seasons and some other dynamics in the third quarter. So we do think, as we mentioned earlier, the third quarter should look a lot like the second quarter. And that, in most years, has been the case in our U.S. business. We have seen July numbers. We're here in early August, so we've seen July, and we're very pleased with the trends that we saw throughout the second quarter continuing into July. And so there's nothing that we would highlight for the third quarter, no reasons we have to think that it should be any different than the second quarter. And have a lot of confidence in the guidance revision that we provided.

This concludes our question-and-answer session. I would like to turn the conference back over to Debbie Osteen for any closing remarks.

Thank you, Andrea. While we continue to manage through the pandemic, the mental health crisis is not over. This pandemic has been a period of tremendous challenges, loss and stress. At the same time, it has brought greater awareness to issues that had not received the prominence they deserve. There is a growing awareness of mental health and substance use disorders across our country. Acadia will continue to be a voice for equity in mental health and strong advocates for patients to receive the right care in the right setting and at the right time. We remain ready across our 229 facilities in 40 states to ensure access to high-quality care for those that need our help. I want to thank you again for being with us today and for your interest in Acadia Healthcare. If you have additional questions today, please do not hesitate to contact us directly. Have a good day.

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