Good day, and welcome to the Acadia Healthcare Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gretchen Hommrich. Please go ahead.

Good morning, and welcome to Acadia’s second quarter 2023 conference call. I’m Gretchen Hommrich, Vice President of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to our Chief Executive Officer, Chris Hunter. 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 2023 and beyond. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia’s filings with the Securities and Exchange Commission and in the company’s second quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter, for opening remarks.

Thank you, Gretchen, and good morning, everyone. Thank you for being with us for Acadia’s second quarter 2023 conference call. For the second quarter, we reported impressive results across multiple measures. Given this momentum and our confidence in the continued strong performance of our business, we’re increasing our guidance for the year. I’m eager to discuss our performance, but first, I want to acknowledge several outstanding additions to our leadership team. This includes Heather Dixon, who started with the company earlier this month as our new Chief Financial Officer. Heather brings significant executive-level financial expertise with substantial payer, provider and pharmacy experience across the health care landscape. We’re also pleased to welcome Judith Simon, as the company’s new Chief Human Resources Officer; and Brian Farley, is our Executive Vice President, General Counsel and Secretary. Both Judith and Brian bring deep experience and we know they will make valuable contributions in their respective roles. And as we welcome these new leaders, I want to also thank David Duckworth and Chris Howard for the contributions they made in support of Acadia’s growth and success, we wish them the very best. Turning to the quarter. Our second quarter results reflect continued momentum in our business through the first half of 2023. Excluding $8.6 million of income from the provider relief fund recognized back in the second quarter of 2022, we reported year-over-year revenue growth of 12.2%, adjusted EBITDA growth of 10.9%, and adjusted EPS growth of 9.5%. We are pleased with the growth trajectory of our business with solid performance across all service lines. Same facility revenue increased 11.4% compared with the same period last year. Notably, we achieved strong patient day growth of 4.9% and revenue per day growth of 6.1%, which is supported by favorable rate increases across our service lines,…

Thanks, Chris, and good morning, everyone. I'm honored to be with you today as Acadia's new Chief Financial Officer and look forward to working with this extraordinary leadership team. Acadia has significant opportunities to deliver high-quality care to our patients and sustainable value to our stockholders, and I'm excited to partner with Chris and the management team to further enhance our scope of services and extend our market reach. Now looking at the results for the quarter. Our second quarter financial performance showed continued momentum through the first half of 2023. We achieved solid top line growth with $731.3 million in revenue for the quarter, up 12.2% over the second quarter of last year. During the second quarter of 2022, the company recorded income of $8.6 million related to the provider relief fund established by the CARES Act. Excluding this income, adjusted EBITDA for the second quarter of 2023 increased 10.9% to $174.5 million compared with $157.3 million for the second quarter of 2022. And adjusted income attributable to Acadia stockholders per diluted share was $0.92, up 9.5% for the second quarter of 2023 compared with $0.84 for the second quarter of 2022. Adjustments to income for the second quarter of 2023 include transaction-related expenses loss on impairment and the related income tax effect. We remain focused on maintaining a strong financial position, providing us the flexibility and access to capital to support our organic growth strategy and future investments. As of June 30, 2023, we had $112.2 million in cash and cash equivalents and $505 million available under our $600 million revolving credit facility with a net leverage ratio of approximately two times. Before I discuss our updated guidance for the full year, I want to touch on the 8-K, we filed on July 11, 2023, regarding the Desert Hills verdict and related litigation in New Mexico. Since that filing, there have been no developments and we have nothing new to report. In accordance with the accounting guidance, we have maintained our professional liability reserves related to this matter, consistent with the amounts recorded in prior periods. We are evaluating all legal options and intend to challenge the verdict. Given this is ongoing litigation, we will not be providing additional commentary regarding this legal matter on today's call. Now turning to guidance. As noted in our press release, we are increasing our financial guidance for the full year, which includes revenue now in a range of $2.86 billion to $2.9 billion, adjusted EBITDA now in a range of $655 million to $685 million and adjusted and adjusted earnings per diluted share in a range of $3.25 to $3.50. Please refer to our press release for all other metrics that we affirmed. As a reminder, the company's guidance does not include the impact of any future acquisitions, divestitures, transaction-related expenses or the recognition of additional provider relief fund income. With that, operator, we're ready to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Andrew Mok with UBS. Please go ahead.

Hi, good morning. Maybe first question just on guidance. You beat Street estimates by about $7 million and raised the guide by $15 million. Just wanted to better understand the strengthening trends that you're seeing and that prompted you to raise the outlook for the back half of the year? And any color on the second half pricing outlook would be helpful? Thanks.

Sure. Thanks for the question, Andrew. So first of all, I just want to reiterate that we're very pleased to see the strong results and the operating trends that we had for the first half of 2023. And I would point to a few things that are really driving the confidence that we have to look towards the back half of the year. The first is volume trends, reflecting strong demand, occupancy rates and capacity additions. The second is improved visibility into the back half of the year for our revenue per day. We expect that to continue for the full year to be in mid-single digits. And then finally, I would point to labor costs continuing to moderate throughout the year.

Got it. Maybe just a follow-up on the labor. Sequentially, SWB stepped down in the quarter, which booked historical trends and possibly steps over some April merit increases. Can you flesh out the drivers of the sequential decline? And if we look at SWB per patient today, is the expectation from here that you'll hold that flat such that the year-over-year increase steps down meaningfully in the back half of the year? Thanks.

Sure. Sure. And let me take those one at a time. So I would say, partially, you're right. What we did see is some seasonality that's coming through from Q1 to Q2. If you remember, in the first quarter, we have about 70% of our employee base merit increases that come through – and in the second quarter, in April, we have the remaining 30% of those that come through. I mean those are addressed according to the geographic markets, the performance job categories, et cetera. But generally speaking, it's about a 70-30 split. In addition, we have seasonality in the payroll taxes that we see that come through in the first quarter of every year. So for sure, there's a portion of that that you're seeing in that sequential decline. And that said, I would say that we expect to see that hold flat and to continue to moderate overall. We are seeing improvements in the labor trends and we would expect to see that to continue. The base wage inflation went down about a 120 basis points from 7.5% in Q1 to 6.3% in Q2, and we would expect to see that to continue to moderate throughout the back half of the year.

Great. Thanks for all the color.

Our next question comes from Whit Mayo with Leerink Partners. Please go ahead.

Thanks and welcome, Heather. Chris, maybe just to start, just a strategic question. I mean I think you've been sort of identifying some field-level initiatives around cost management, specifically, maybe standardization opportunities in the back office, IT, administrative functions. Just where maybe you see some of the largest organic growth opportunities on the cost side to standardize some of those functions and maybe any way to put some numbers around it? Thanks.

Yes. I think – thanks for the question, Whit. And there were a number of things that we have had ongoing. I mean, clearly, we see technology as an opportunity for us to not only achieve efficiencies in the business, but we're also seeing some real improvements on the safety side and clearly just evidence of being able to produce greater clinical outcomes. I know that everyone would like to see more detail on some of the efficiencies that these IT investments will drive, and I think we'll have that in short order. I would say in the near term, the results that we're seeing from the EMR installations that we've seen to date have been extremely beneficial in that we have seen not only really solid feedback from surveyors and regulators that have been into our facilities, but we're also seeing a really nice uptick in employee engagement for those facilities where we do have an EMR in place, which has really helped us on the recruitment front, and we think will continue to help us on the retention front as we roll those out as well. And then we alluded in the prepared remarks to some of the remote monitoring software that we've been able to put in place that also has proven some really strong benefits to our patients as well. And I think overall, just given how paper-intensive this industry has been – we just know that we're going to continue to see back office improvement as time goes on as well. So those are just some of the broader things. I mean, clearly, as we continue to roll out the EMR across all of our acute facilities, we'll continue to see greater efficiencies. But I think the point I would want to make is that we are already seeing the benefit to date on the patient engagement side and on the employee engagement side and also just with these surveyors and regulators already.

And last question, just views on the physician fee schedule, the proposal there, the impact on the CTC business? And maybe any updated thoughts on the opioid settlement, some of the states are disclosing now direct support to OTP program, so wondering if you had any updated views? Thanks.

Yes. I mean clearly, we continue to watch the CTC, the settlement dollars very closely. $54 billion, again, have been allocated, only about $3 billion of the total settlement funds have been dispersed to this date. There was a report that we saw earlier this summer by Reuters that only 16 states right now actually have a central statewide publicly available process for organizations to apply for funding. But we have been successful in applying for and receiving funds early on. Usually, this is at the individual county level. And to date, it's been for things like harm-reduction services and wraparound care, things like case management and even housing support. But I would just say it's still very early days. We've bolstered some of our capabilities there and continue watching and tracking these grants as they come over and think that we'll continue to be really well positioned for that. But overall, I think we just continue to be really optimistic here. 70% of the money that has actually is received by states has to be spent on future opioid remediation efforts. And so we feel great about that and the transparency that we're beginning to see. I think there's 15 states now that have explicitly promised to publicly report 100% of their settlement expenditures, which is really a contrast to the way the tobacco settlements worked out. So it's still very early stages here. We've bolstered our team on the CTC side and just continue to feel very positive about our ability to continue to win many of these awards as they continue to come out. But clearly, this will accelerate into 2024 and well into 2025 as well.

Okay, thank you.

Our next question comes from A.J. Rice with Credit Suisse. Please go ahead.

Thanks. Hi everybody. Just maybe first to delve in a little bit more on the pricing for the back half of the year and year ahead. You had, I think, back in February when you gave the fourth quarter release, there have been some discussion, and it actually created a little bit of confusion that the company was at least baking into guidance at that point, the possibility of a moderation in pricing in the back half of the year as pricing has been pretty robust. It sounds like you're feeling a little better about the sustainability of at least the level you're at now. Can you just comment on whether I'm hearing that right? And does that tend to concentrate more on what you're seeing on the Medicaid side, on the commercial side? Any thoughts on that?

Hi there. Yes, you are hearing that correctly. You are correct that we had anticipated some moderation in the revenue per day and the rates in the back half of the year previously. But as we've finalize the number of the Medicaid and commercial rate increases since the last time we spoke to you, many of which have effective dates as of July 1. We're seeing much more direct visibility into the second half of the year. I mean the experience can, of course, vary by market and payer, but we continue to see average rate increases in the mid-single digits. And so that's now what we're projecting for the back half of the year is for that continued mid-single-digit growth across all service lines, including CTC we'll expect to see that continued growth.

Okay. And then just maybe on the follow-up, the turning point deal looks like an interesting one. Maybe just spend a minute talking about that opportunity? And I know one thing with the development pipeline in general in the M&A pipeline – there was a time when we had to think about start-up losses associated with that, those pipelines. It doesn't seem like that's as much of a headwind for you. And I wondered if I'm hearing that right? And why might that be the case? You seem like you're managing that a little more, a little better in terms of the potential costs and so forth of all the new development you're pursuing?

Yes, A.J., this is Chris. Thanks for the question. Why don't I take Turning Point, and I'll let Heather just speak to the start-up loss question that you have. But first, on Turning Point, we feel great about the ability to announce this transaction. I mean, this is the first time that we have been able to have all four lines of business in one geographic region in Salt Lake City. This is a nice opportunity for us, 76-bed specialty provider of substance use disorder and primary mental health treatment services. We expect it to close by the end of the year and are already beginning to work on the integration related to that. This is one where just our ability to extend our specialty footprint, but also the synergies with our other lines of business, just had made this one particularly attractive. This is a proprietary transaction that we identified and sourced ourselves. And when we have historically looked back at those acquisitions that have been most successful at Acadia, the ability to have expansion opportunity has proven really important. And this is one where we think we can add an incremental 48 beds to the 76 beds that they currently have over time. So that really was a deciding factor for us on this transaction. And we do expect, while this won’t close until the end of the year that the acquisition will be accretive in its first year. So Heather, do you want to speak to the start-up loss question?

Sure. In terms of the start-up losses, we do continue to project those to be fairly consistent. We usually expect them to be between $15 million and $20 million a year, and that’s consistent with what we saw in Q2 of $5.4 million, and we would expect for that to continue to be roughly that same amount per quarter. As we think about how we moderate the scheduling of the openings and how you think about new facilities opening roll in and then facilities that ramp roll out of that calculation, we just expect that to stay pretty stable.

All right. Thanks a lot.

Our next question comes from John Ransom with Raymond James. Please go ahead.

Hi good morning. A two-parter for me. Number one, if you look at your pre-overhead margins, they’re about as high as they’ve been. What do you think the ceiling is for those margins, number one? And then number two, you have an idea like what the spending per hospital is going to look like when you roll out – fully roll out your EMR? Thanks.

So maybe I’ll speak to what I think you’re asking is the corporate overhead sort of cost. And if we see that stabilizing over the period to period, we would...

No, no, no. I’m actually asking the pre-overhead hospital margins in the high 20s, what do you think the feeling is not – it’s pre-overhead. What do you think the feeling is for the pre-overhead hospital margins as you sit today? Thanks.

Okay. Thanks. I understand. So, I would say that we continue – we expect, we can see that to be a continued strong margin as we look at what those will contribute.

And then the EMR spending for hospitals.

Yes, John, sorry, can you – you cut out on the tail end of that. What specifically was the question around EMR?

Sorry. So the EMR, you provided a range at your Analyst Day. But as you think about your EMR spending, have you landed on a kind of rollout schedule and a cost per hospital on that line item? Thanks.

Yes. We’re still working through that. I mean, I would say that what we’ve laid out in our Investor Day continues to be very consistent. We broke that out between CapEx and OpEx. And I would say we’re still very much tracking there. I think one of the things we’re looking at, just given the early results that have been very attractive as we’ve continued to bring a number of these acute facilities up on an EMR is can we even go a little bit faster. Right now, we’ve had a plan to roll all of our acute facilities out over a two-year period. And we’re looking closely with others help at whether or not it would make sense for us to accelerate that, but we’re still – we haven’t disclosed the cost per facility I think most importantly, what we laid out at Investor Day continues to be very much on track.

Thank you.

Our next question comes from Kevin Fishbeck with Bank of America. Please go ahead.

This is Nabil [ph] on for Kevin. Thanks for taking my question. Can you talk about how volumes trended across the different segments in the quarter? And how are you thinking about growth in the second half of the year?

Sure. So we have seen strong demand in patient volumes during the second quarter, as we’ve been saying. The last three years of same facility volume growth has been roughly in the 2% to 4% range, and we’ve been really highly focused on delivering volume growth acceleration. And the opportunities that we’ve identified have led us to really point to 4% to 6% growth expectation for 2023. We really attribute that and some record patient census levels to a few things. First is demand across the service lines. Second is optimization and our marketing and admissions processes. Third, the stronger occupancy rates that are driven by that demand and the operational execution. And then finally, I’d just point to the recent bed additions that we mentioned. We had 212 that we added in the second half of 2022 and then we combine that with another 204 in the first half of 2023. And that’s really what’s driving us to be well positioned, I think, to hit that 4% to 6% range for the second half of the year.

Thanks. And then for the follow-up, can you provide us an update on redeterminations and what your guidance is assuming on the impact?

Sure. This is Chris. We’ve been working on redetermination since late last year and continued to just be a really major focus for the company across all of our service lines. And as of July 1, every one of our states except for Oregon is now launched. So that said, I would say, only a fraction of our patients under 25% have completed redetermination due to the way that so many of these states continue to spread the disenrollment throughout all the way into 2024. So as we’ve previously discussed, we’re seeing good early results in our patients maintaining coverage. I would say on our RTC service line, those children are increasingly protected because 80% of Medicaid patients are awards of the state. On our specialty service line, those Medicaid recipients are also protected due to the unique county-level backstop funding that we have in place for patients in Pennsylvania where we have most of our specialty Medicaid volume. And then on the CTC side, I mean we just continue working very closely with our patients to ensure that they have visibility as to whether there could be some disruption. We’re seeing some patients moving to self-pay in a few cases. But overall, we’re really encouraged by our ability to work with these patients to use the hot line we put in place, the kiosks that we put in so many of our centers. And I think it’s done – it’s been very successful in ensuring continuity of care overall. Maybe a couple of other things I’d just point out. I mean, clearly, everyone has read about CMS’s action to pause redetermination in a handful of states. And I would point to some of the Kaiser Family Foundation data that came out early this month that said the three million…

Thank you.

Your next question comes from Gary Taylor with Cowen. Please go ahead.

Hi, good morning. Just a couple of questions. One, I just want to clarify. When you talk about wage inflation, how are you defining that? Is that just average hourly rate, excluding benefits, I don’t know if over time or contract labor would be in there. But since we can’t quite reconcile that, we can only look at the reported figure. I just want to make sure I understand how you define that. When you talk about 7.5% going to the 6.3%?

You are thinking about that correctly. They are excluded, but I would add that they’re stable across the board.

Okay. And then my second one would just be on the New Mexico settlements. I know you’re hopeful that will be reversed on appeal. My question, though, since it is fairly material amount. Is there – does it have any impact – it sounds like no on the investment you’re willing to make on de novo [indiscernible] facilities in the near term. But any other impact just in terms of how you’re thinking about balance sheet management or even just retaining credit availability, anything material to say on how you’re thinking about that at this point?

Yes. Thanks for the question. This is Chris. I would just say that we obviously are tracking this very closely. And as I think you can tell from the execution that we’ve seen just in the last few weeks and announcing two JVs in an M&A deal, we continue to be extremely focused on the core business and continuing to advance the company and all the things that we laid out on our Investor Day. So we do not see any material change at all. And obviously, we’re not going to be talking in detail about the litigation and given that, that is underway, but we are super focused on the business as I think our results reflect.

Thank you.

The next question comes from Pito Chickering with Deutsche Bank. Please go ahead.

Yes. Good morning, guys. Thanks for taking the questions. Congrats on an excellent quarter and Heather welcome to the team. A follow-up to A.J.'s question; with pricing gets continuing mid-single digits in the back half of the year, that would make sort of over two years with pricing tracking at mid- or above mid-single-digit range. As you sort of look at your contracting you have today in the sort of confidence back half year, is that the right level that we should be thinking about for 2024?

Yes, Pito, this is Chris. Thanks for the question. I would say that we continue to work really closely with our managed care team and with our payer partners. And I think that the reimbursement levels that we've seen, that we've discussed in the beginning of the year have continued to hold true in the second half of the year. I don't think we're ready to comment on 2024 yet. But I think we are doing a really good job of helping payers understand the acuity of our patients, the quality of care that we're providing, the inflationary impact on wages and we're coming very prepared to those meetings and leveraging the strong partnerships that we built over a multiyear period with our payers to continue to achieve really strong rates.

Okay. Great. And then one question on CDC; as like you look at the today's reimbursement model from methadone clinics, do you see a shifting in the near-term away from a bundled model where you're paying a monthly fee to provide those drugs and services into more of an unbundled model or managed care splits of payments between providing the medication as the drugs and another payment for providing accounting [ph] services?

Yes. Thanks for the question, Pito. And I would say we're not seeing that trend at all as of right now. We're obviously in very close contact with payers all the time and there isn't any movement towards unbundling that we have seen in our extensive negotiations that we're doing on a regular basis.

Great. Thank you so much.

The next question is a follow-up from John Ransom with Raymond James. Please go ahead.

Hey, I just wanted to circle back on the MAT. There were some concern in the marketplace about some new therapeutic options with [indiscernible]. And I just wondered kind of what your take is on that, if you've seen any sort of deterioration in the opportunity from that modality? Thanks.

Yes. Well, I would say thanks, John. Methadone continues to be the gold standard for treatment and we continue to provide buprenorphine as well. But as we've looked at our outcomes, we just feel continuously comfortable with our approach overall. I mean I would say that our quality as well, I think is going to continue to be very important. CARF, which is the regulatory body that provides oversight for opioid treatment programs and they're doing 3,500 site surveys annually. They came in and assessed Acadia at a 98-plus percent compliance across the board, outperforming all of the other OTPs. So we just continue to feel really good about our model. As we frequently say and [indiscernible], the leader of our business as the physician says, this is a program, it's not a pill where there's counseling that is required. It's not just dispensing treatment. It's engaging these chronic members of these chronic patients in treatment, particularly in the early stages where their addiction is more pronounced and continuing to engage them in that treatment as they – as their treatment evolves over a period of time. So we have not seen any trend. I think you may be referring to the public health emergency, which clearly allowed doctors to provide buprenorphine for up to 30 patients in care and the data that we saw during the public health emergency was the number of scripts written per month remained largely flat relative to pre-public health emergency and we're just not seeing any changing trends. We're continuing to see really strong volumes and just continue to feel very good about the outlook of that business and the leadership team that we've put in place.

Thanks so much.

Our next question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning guys and congrats, and welcome Heather. I guess, Heather, my first question, as I think about Q3, historically pre-COVID there was seasonality in the business, largely driven by the RTC business, but it has gotten smaller. How should we be thinking about the Q3 sequential trend versus Q2?

Hi. Thanks and welcome and for the question. I would think about it consistently with the sequential trends that we've seen. And I would see that we're expecting – we're expecting sort of sequential improvement for that to continue. So I think just in line with the expectations and what you've seen previously from a seasonality perspective.

Okay. Got it. And then Chris, as I think about some of these new efforts in dental health parity; how are you thinking – if those stuff which are successful, how do you think that will flow through like operationally or coverage-wise to Acadia?

Yes. It's a great question and one that we're still trying to analyze. I mean, you're probably referring to the Biden administration's recent efforts here to ensure that they're going to put out these proposed rules that impact how payers demonstrate mental health parity to federal regulators. And I think the way that will show up for payers is still a little bit to be determined. I mean clearly, the Mental Health Parity Act was put in place all the way back in 1996. So this legislation has been around for decades. The question has been around enforcement, which historically has been pretty limited and inconsistent by both federal and state government. So we applaud the focus on this. But in terms of what the downstream impact will be and ultimately how impactful it will be. I think it's just – it's a little bit early for us to tell. The first public mention of the rule came in on July 10th and we're still waiting on some additional detail in a public comment period after that. So it's something that we're tracking overall could lead to adjustments over time, but we just don't really have much visibility to share at this point.

Got it. Thank you.

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

Okay. Thank you. Before we end the call, I just want to again thank our committed facility leaders, clinicians and approximately 23,000 dedicated employees across the country who have continued to work tirelessly to meet the needs of our patients in a safe and effective manner. We really have an outstanding platform for growth and value creation and the momentum in the business right now reinforces our confidence in the future and the work that you all do every day. Thank you all for being with us this morning and for your interest in Acadia. And if you all have any questions at all, please do not hesitate to contact us directly into follow-up. Have a great day, everyone.

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