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

Good morning and welcome to Acadia's second quarter 2020 conference call. I'm Gretchen Hommrich, Director of Investor Relations for Acadia. I'll provide you with our Safe Harbor before turning the call over to our 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. 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 financial performance for 2020 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by the important factors, among others set forth in Acadia's filings with the Securities and Exchange Commission and in the company's second quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. At this time for opening remarks, I'd like to turn the conference call over to Chief Executive Officer, Debbie Osteen.

Good morning and thank you for being with us today for our second quarter 2020 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 and year. We will then open the call for your questions. I would like to begin by acknowledging and thanking all our employees and clinicians for their dedication and relentless focus on providing the highest quality care to our patients and their families, especially during these challenging times. Our top priority remain supporting our patients with quality care provided in a safe manner. Behavioral healthcare providers are playing a critical role in addressing the ongoing mental health needs in communities throughout the US and the UK, especially for those who had previous mental health issues and suffer from the added anxiety and isolation. Our experienced teams across our operations and diverse services have met the demand and advanced our position as a leading operator of behavioral healthcare facilities. Our 40,000 employees truly illustrate the strength of Acadia. They are a key reason we are well-positioned to meet the current demand and stand ready for the opportunities to serve those in need in the future. During the second quarter, we continue to make meaningful improvement in almost every facet of our business. We made prudent investments to increase our market reach and quality of care. We further strengthened our liquidity and longer term financial position. As states reopen, we shifted our marketing strategy to connect with our referral sources and emphasize our key advantages in this current environment. We also quickly expanded our telehealth capability to better reach and support our patients and we did all of this while closely…

Thanks Debbie and good morning. Revenue for the second quarter was $750.3 million compared with $789.4 million for the second quarter of 2019. The company's consolidated adjusted EBITDA for the second quarter of 2020 was $144.4 million or 19.2% of revenue. Net income attributable to Acadia stockholders was $41.1 million or $0.46 per diluted share for the second quarter of 2020, compared with net income of $48.1 million or $0.55 per diluted share for the second quarter of 2019. Adjusted income attributable to Acadia stockholders for the second quarter of 2020 was $48.1 million or $0.54 per diluted share, excluding transaction-related expenses of $5.2 million, debt extinguishment cost of $3.3 million and an income tax effect of adjustments to income of $1.5 million. As we discussed on our first quarter call, we had taken decisive steps to mitigate the financial impact of COVID-19 on our operations. These initiatives included aligning corporate and facility level staffing costs with patient volumes, implementing a hiring freeze for nonclinical staff, canceling and now limiting all nonessential business travel, reducing discretionary expenditures, temporarily reducing marketing spending, negotiating with certain vendors for discounts and/or revise payment terms and closely managing our working capital as our facilities continue to bill and collect for services rendered. We believe these were necessary steps to support our operations during this period. The cost management actions taken by our operations team and the level of variability in our cost structure has helped mitigate the impact of lower volumes during the early part of the second quarter. Our balance sheet remains strong with ample liquidity and capital to invest in and continue to grow our business. At June 30, 2020, we had $212 million in cash and cash equivalents and full availability under our $500 million revolving credit facility. Our cash position…

[Operator instructions] We'll take our first question from Pito Chickering with Deutsche Bank. Please go ahead.

Good morning, everyone. Thanks for taking my questions. I understand not providing guidance at this time, but if you look at July revenue growth in the US, is it fair to think about maintaining or growing pre-COVID margins and can you give us the puts and takes to you think the margins in the UK was slight revenue declines that your point are still increasing?

Yeah, we do think Pito with the volume growth that we're seeing in the US that we should see strong margins. There is still of course uncertainty. We don't know what stage we're in here of the recovery, but we are seeing some very positive signs obviously of volume and we do think in the US that will lead to us returning and seeing some margin improvement on a year-over-year basis. In the UK, we did see margins during the quarter impacted by a higher level of employees that were out and we did see that peak in early April. So we should see that continue to improve and we saw sequential improvement as we look at each month of the quarter in the UK. We did see labor cost there that had been improving and has been stable in the 67% to 68% of revenue range. For April and May, we did see that above 71%, but as we closed the quarter in June, we saw that return to below 69%. So really seeing a temporary impact from employees that were out and we had sick pay along with some backfill costs related to that, but have seen sequential improvement. In the UK we do expect to see that continue to be stable and to see all the positive signs around recruiting and retention continue in the UK and for that to lead to the stable environment that we were seeing pre-COVID.

Okay. Great. And then quick question the UK to your point is bouncing back, visibility is there. So the overall markets are stable. Any quick update on the field UK business you can us at this time?

Peter we are watching closely the country as they ease their restriction. Were looking -- right now there tours and travel restrictions and those have been changing a little similar to the US but we're monitoring and we are looking for the opportunity to restart the process. I will say that and I've said this in the first quarter buyer interest is we believe it's very strong and we are also seeing improvement in the debt markets and our advisors are walking that very closely, but we're seeing positive signs there, more normalized activity levels. So we start to see this recovery happen, we're watching for that and we'll use that as a guide as to when we reopen our process that we suspended in the first part of the year.

We'll take our next question from A.J. Rice with Credit Suisse. Please go ahead.

First maybe just to add in the US acute behavioral business we still have schools closed, ERs as reported by the acute-care hospitals are probably the slowest to come back. There is also travel concerns that people have and yet you're seeing a pretty good bounce back in your acute behavioral business. Do you think that's just incremental demand or people finding other ways to get to you? What do you when we come out the other end of this, the demand picture is going to look like for behavioral services?

Well A.J. I think generally I believe the demand is stronger than it ever has been. I think that there were some individuals that delayed their care when there were to stay at home orders in place and just the fear of seeking care at an ER and I think that has improved. I think patients and we said this, our treatment is not an elective service and I think that with respect to the ER and the acute, our ER business and we track that very carefully as you can imagine have returned to either at or above where they were before COVID and so I believe that while there may still be visits down in the ER, I think our patients are reaching out to the ERs, we maintained very close contact with them through this whole pandemic and we feel are doing that. We have our mobile team, we have teller assessment and also just a good plan around timeliness of our responses. So I think generally as we look at our acute service line, we are getting from ERs as well as our other referral sources and the pipeline has been very strong and I think that evidence by the numbers in June and certainly in July.

Okay. Maybe a little more granular question, the revenue implication today was down in the US 2.7% and I realize that may have something to do with the outpatient impatient mix but can you just comment on that specifically and then also a lot of discussion about state budgets been under pressure. Can you just comment whether any what you're seeing in that revenue per patient day relates to any pressure in state reimbursement even Medicaid or other programs?

Yeah A.J. first of all our revenue per day does include our total revenue for the US, but our patient days is only for our inpatient business. So we do have outpatient and our CTC business that can impact that metric. Outpatient did see a greater impact from the stay at home orders and was down around 30% in the month of April, but has since rebounded in a very similar way to our inpatient business and the CTC business has been very stable from a volume perspective, but we do have certain markets and certain payers that are based on in person services being provided around those seeing in group therapy and so we did see early in the quarter our reimbursement impacted by that and I think we mentioned that on our call last quarter. Both the inpatient and the CTC had temporary issues. Those have been resolved by the end of the quarter and we should see going forward just a more normal metric there and for our inpatient business, we continue to see stability in our payers and continue to maintain the pricing expectations, that we have for the US, which is a range of 2% to 3%. So after working through some of these temporary challenges early in the quarter, expect that to return to more of our normal expectations.

And A.J., I'll just add, our players have been very supportive and we have not seen or heard of cuts in Medicaid in our states. We're in 40 of them. So there is a lot of diversity, but we are not expecting cuts, but we are monitoring just to see how the budgets are set and we're advocating for our services and as I mentioned, our payers have been very supportive. Our cash coming in has been very strong. So we haven’t seen disruption there or really changes of any material nature that would’ve impacted the revenue. It's really what David just explained.

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

Hi there. You actually have Brad Bowers on for Kevin today? Quick question on the marketing strategy, it's something that just COVID-related, there is something that will help with the long term growth outlook?

Well, we have a marketing and sales platform that's really -- it's proprietary and it's really different. It actually gives us very real-time visibility around a lot of nitrates and I think as we have weathered this pandemic and we're still in some of it, it's really been a great tool for us to use to adjust. So we have our consumer marketing spend that we use and we target and we also have a plan that's very detailed by facility. And so the team and I them just enormous credit, they were very responsive as states opened us and we've had a few kind of rollback some of their restrictions and think that what's happened with the marketing is we already had this platform in place but we've been able to utilize it I think to really make sure we're reaching our patients but also our referral sources. So I see it as a strength of Acadia and it will be strength going forward. After we get through this, it's a very good platform that works well together with a lot of metrics and a lot of what I consider to be key actions that we were able to take to build our volumes back.

Got it. And switching gears here a little bit just was curious on CapEx. Obviously cash is strong for the year but obviously you want to maintain that liquidity. So just kind of wondering if we should be expecting CapEx to come back to be higher next year if there is some additional spending that you could be making next year if it just kind of goes back to run rate, thanks.

No, I don't think the changes we made in our CapEx plan for this year would lead us to say there's any significant changes going next year. From a maintenance perspective, we are still expecting to be in our $80 million to $90 million range for the year and would expect that going forward and then we did make a $35 million adjustment to our CapEx plan on the expansion side and saw savings from that during the second quarter. Some of that will continue into the third and fourth quarter, but we think we saw the most significant piece of that this year and are really focused on bringing a strong number of beds online in the second half of this year and a strong number of beds online next year. As we think about year-over-year capital expenditures, still expect to bring a strong number of beds online and are really looking at ways to do that as efficiently as possible from a capital perspective and are excited about the opportunities we have to really gain efficiencies and continue to grow our business.

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

Debbie just going back to the Medicaid question, we've had some questions from investors over the last few weeks just trying to figure out if the same budgets get squeezed and based on your experience, how do they view the RTC business and then is that part of their regular Medicaid budget or is that a carve out that shields it from any pressure, the theoretical pressure that we did see in 2021 or 2022 in a full-blown recession environment?

Well, I think that each state handles their funds differently, but most are part of the general healthcare budget. I do think that in the past when we've had the economic turn back, that these health crises were in, but certainly the economy suffered. There was not really a change to the budget around RTC. I think there was certainly management of utilization and another things but it's different. Our business line for RTC is very specialized and so the states have had adolescence that they cannot provide services for. We do receive a lot from out of states and so I think that does make us different than just a general program that might be in a state. So these adolescence comes and they're very specialized from the behavioral health point of view. I think that protects us, but just generally we have not heard of rate cuts. I do think that there will be pressure on the budgets, but I also think that just the nature of this pandemic and the mental health aspect of it that we would not be a first-line to cut. We would be protected because I think that there's a lot of acknowledge right now and even before the pandemic that mental health is a real need and that finding has to be there for those individuals.

I guess going back to the question on marketing right, and the acceleration of growth to North of 5%. So do you think you guys are gaining market share at this point with your marketing programs or is that sort of the market growth rate in these service lines and the geographies that you're present in?

I think it has to do with our services and just the diversity. We're very specialized in many of our location. We do have just great support from our referral sources, the track record that we have. So I think that we are seeing more individuals I believe that need help and there are those positive things that were already in place before this with just a reduction in the sigma another positive factors around reimbursement. So I think if you take that and you take our services how they are configured with respect to being able to treat the co-morbidities the specialty focus of substance used and then just a general diagnosis you see for mental health. I think that our team and back to our marketing, they've done a very good job of really being able to stay in contact with the referral sources through all of this and they've used telehealth and the virtual mechanisms that we have available. So I think that's made a difference with respect to the volumes and also our market share.

[Operator instructions] We'll go next to Pito Chickering with Deutsche Bank.

Couple ones here. Can you sort of talk a little more about your specialty businesses like eating disorders and drug rehab? You talked about lifting travel restrictions, I guess how have those things rebounded in July versus other businesses and it's easier to get commercial insurers to pay for these services today.

Well first of all, we did you going into the month of April and May we were focused on travel. We do have several of our facilities that have a nationwide network and get a good portion of their patients from out of their region. We were pleased with the level of travel we saw, it really continued throughout the early stages of the pandemic, although it was at a lower rate than what is normal and we've seen that still be somewhat volatile with a rebound during the quarter, but it still depends on many factors including the region as that patient might be traveling from. But it did continue to be stable Pito and I think that speaks to the strength of our services, the platform that we have and really the diversity of our specialty service lines, but the volumes there in specialty have been stable and so we're pleased with the specialty performance that we saw during the quarter.

I think our patients, we do get quite a few commercial patients. We really haven't seen a change there. I think that they have realized that this care is needed and so our facilities are still getting those patients. It's just as David said, some are coming from a closer proximity but also then some are traveling, which I think is just -- they know that they need those services and they're reaching out to our facilities to receive that care.

Okay. And then a follow-up on the UK side of the business, can you talk about how [indiscernible] is acting as a referral source right now. So you're still seeing weakness in shorter length of stay procedures, is that because [indiscernible] is keeping those patient in their hospitals and not discharging into private hospitals or they're just not entering the system at this point?

I think the referral system in the UK with the commissioning groups and certainly NHS, there was disruption to that and so some of the workers that would've been assessing patients were redeployed as the COVID became the volume of COVID patient grew. Also with the stay-at-home orders and the restrictions on travel, the commissioning process was also disrupted and I think that as things reopened the first week of July and that started to change, we have seen a return to more normal conditions and I think it'll build over time because there are and this has been said by NHS a number of individuals that have not actually accessed care and as these referral mechanisms and channels open back up, we're already seeing that business coming to us. We opened two retool units in the quarter and both of them are almost full and so I think that's really an example of just the demand that's going to be there but it's taken a little longer than it has certainly here in the US but I do think NHS still wants to send those specialty patients to our facilities which is why we're retooling these beds but they also recognize that those are services that they use the private sector for and we don't expect that to change.

Okay. And then last one here, as you think about cost optimization that you took during the quarter, how much of cost-cutting measures deem more permanent versus temporary as patient advance comes back online. I am trying to figure out cost measures you guys took during the quarter where margins can go with demand? Thanks so much.

Pito, we did see strong flexibility by our operations team and the cost in early part of the quarter and then as the volumes recovered just being able to have the resources and adding that back, but we have been careful with that and we do think that some of the cost adjustments we have made could see an ongoing benefit throughout the year and in addition to that, we are still on pace by at the end of the year to be at our $20 million of cost savings and expected to receive $10 million of that during 2020 and we're on pace for that as all of those initiatives are still going well and we expect that to contribute to margin throughout the quarter along with some of those ongoing cost savings that we've seen more recently.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Debbie Osteen for closing remarks. Please go ahead.

Thank you, again for being with us today and for your interest in Acadia Healthcare. I'm so grateful to our field and our corporate leaders for their resiliency and for their commitment to keeping our key growth and operational initiatives moving forward while responding to these unprecedented crises. If you have additional questions today, please do not hesitate to contact us. Have a good day.

Ladies and gentlemen, this concludes today's discussion. We appreciate your participation. You may now disconnect.