Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Acadia Healthcare Third Quarter 2025 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Brian Farley. You may begin.

Thank you, and good morning. Yesterday after the market closed, we issued a press release announcing our third quarter 2025 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website. Here with me today to discuss the results are Chris Hunter, Chief Executive Officer; and Todd Young, Chief Financial Officer. 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 in the press release that is posted on our website. 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 2025 and beyond. 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 third 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 Chris.

Good morning, everyone, and thank you for joining Acadia's Third Quarter 2025 Earnings Call. I'm pleased to be joined today by Todd Young, who recently joined Acadia as our Chief Financial Officer. Todd brings nearly a decade of public company CFO experience, most recently serving as CFO of Elanco Animal Health where he helped shape the company's strategic direction following its spinoff from Eli Lilly. Prior to that, he served as CFO of Acadia Pharmaceuticals. Todd's deep experience in health care finance, capital allocation and operational transformation will be instrumental as we continue executing our growth strategy and enhancing shareholder value. I also want to thank Tim Sides for his leadership as Interim CFO over the last few months. Tim will now resume his role as Senior Vice President of Operations, Finance. Likewise, I would like to take a moment to thank Dr. Nasser Khan for his many contributions to Acadia Healthcare over the past 3 years, including most recently as our Chief Operating Officer. Nasser is stepping down from the role of COO and will continue to serve as an executive advisor to the company through the end of the year to help facilitate a seamless transition. Turning to our third quarter results. We reported revenue of $851.6 million, representing a 4.4% increase over the third quarter of last year. Adjusted EBITDA was $173 million, compared with $194.3 million in the prior year period. As previously disclosed, these results reflect softer-than-expected volumes in our Medicaid book of business, particularly in our acute care segment. Same-facility volume growth was 1.3% in the quarter, which was consistent with the preliminary commentary we shared at the Jefferies Healthcare Services Conference in late September. This was approximately 100 basis points below our internal expectations. In addition to this increased pressure on our volumes…

Thanks, Chris, and good morning, everyone. I'm honored to join Acadia Healthcare and excited to be part of a company that is leading the way in behavioral health. Throughout my career, I've had the opportunity to help organizations navigate complex transitions, optimize capital allocation and unlock long-term value. I look forward to bringing that experience to Acadia as we continue executing on our strategic priorities and delivering sustainable growth. In my short time since joining, I've been deeply impressed by the strength of the team, the mission-driven culture and the scale of opportunity ahead. I'm particularly focused on ensuring that our financial strategy supports disciplined expansion, operational excellence and shareholder value creation. That includes a rigorous approach to capital deployment, a clear framework for evaluating growth investments, and a commitment to transparency and how we communicate our performance and outlook. Turning to our third quarter results. We reported revenue of $851.6 million, representing a 4.4% increase over the third quarter of last year. Same-facility revenue grew 3.7% year-over-year, driven by a 2.3% increase in revenue per patient day and a 1.3% growth in patient days. Adjusted EBITDA for the quarter was $173 million. Adjusted EBITDA came in at approximately $5 million below our internal expectations, driven primarily by lower volumes and an increase in bad debts and denials. Supplemental payments served as a partial offset to these headwinds. These results include $13.3 million in startup losses related to newly opened facilities, compared to $7.3 million in the third quarter of 2024. We continue to expect full year 2025 startup losses to come in at the prior outlook range of $60 million to $65 million. We expect startup losses for the full year 2026 to decrease modestly from 2025 levels, with a more material step-down expected in 2027. As a reminder,…

While we will provide formal guidance on our earnings call in February, I did want to take this opportunity to provide some color on our financial expectations for 2026. Overall, we remain confident in the strategy we are executing across the company to provide strong clinical outcomes for our patients and the communities we serve. And we see the following headwinds and tailwinds as we enter 2026. On the positive side, key adjusted EBITDA tailwinds include: A reduction in startup losses due to our more focused growth investments next year. Ramping contributions from the meaningful number of bed additions over the past several quarters, with 632 new beds entering the same facility calculation in the first quarter of 2026. And a modest EBITDA uplift from targeted facility closures. These benefits will be partially offset by several headwinds: Continued softness in acute care Medicaid volumes along with continued payer-related pressures, consistent with trends observed throughout 2025. Incremental cost pressure related to PLGL expenses. And the absence of the nonrecurring $28.5 million benefit from Tennessee's 2024 supplemental payment program, which was recorded in the second quarter of this year. We are also closely monitoring the reimbursement environment, which continues to evolve as government payers face significant cost pressures. We remain a committed partner to our payers, and we believe we can play a meaningful role in improving outcomes for the patients we serve. With that, we're ready to open the call for questions.

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

It sounds like the situation with the payers is still challenging. I want to just maybe see if we can get a little more color on exactly what is happening there. This sounds like it's primarily in Medicaid, and it sounds like there's some denials and some challenges on getting referrals. Do you have a sense, is this specifically in the markets where you had some of those adverse publicity over the last year or so? Or is it across the board? And the denials, are those tending to happen after you've treated the patient, or is it denial of extra days of stay? Maybe just flesh out a little more of what you're seeing. And has it indeed gotten worse over the last quarter or 2?

Great. Thank you for the question, A.J. This is Chris. I'll go ahead and take that. I would say, first of all, we know that we can be a highly critical partner to these payers that are clearly under significant cost pressure, I think, particularly on the Medicaid side. And we're doing that by delivering really high-quality, evidence-based care, with better outcomes, which they need. That said, we are seeing some, what I would call, payer friction manifest across both rate dynamics and volume. And while it's not universal, it's more concentrated, we would say, in certain areas, particularly in Medicaid. So on the volume side, the most notable pressure has been around length of stay, where we've observed a more frequent utilization review, especially from Medicaid managed care plans, which are increasingly scrutinizing discharge criteria. And let's say this is a trend that we're seeing across the industry, but the impact, to your question, is just most pronounced in Medicaid-heavy markets. On the rate side, we're seeing some incremental pressure as we've moved through Q3 and into Q4. Many of our recent negotiations have resulted in low to mid-single-digit rate increases, but -- which is pretty consistent with our historical norms. But there's definitely a handful of states and payers where rate updates have been a little bit more challenging. And we're trying to approach those situations very constructively and remain highly focused on aligning around value in outcomes, which I think we're continuing to have some real success with. I think just to your question on adverse media, we really are not seeing that and I would not use that as a factor at all. On the bad debt front, the pressure that we're seeing is primarily driven by reimbursement for fewer days than maybe the full length of care that we've provided. And this can happen during a patient's stay or even post discharge, where a payer can determine that a portion of the stay doesn't meet criteria for coverage. And so that would flow through as a denial expense. So thank you for the question. I hope that helps.

Your next question comes from the line of Pito Chickering with Deutsche Bank.

I guess the biggest question I've been getting sort of all night this morning is just thinking about fourth quarter as a run rate as we sort of think about 2026, so -- just as a launch pad. So how should we be thinking about sort of the durability of these bad debt, sort of denials, pressure on length of stay and professional liability that we're seeing in the fourth quarter as we think about 2026? Should these be durable? Are these going to be more one-timers? Just any color on the durability of those headwinds?

Pito, it's Todd. Thanks for the question. Let me step back a little bit on just Q4, just seasonally, is our slowest quarter of the year. So we wouldn't want folks to run-rate volumes based off the Q4 reality just given the nature of how our services get used. There are a few items that aren't going to repeat at the same level going forward. As we called out, we've added a lot of beds in Q3, adding less here in Q4. So startup losses are going to get to the high end of the year here in Q4, $18 million to $20 million based off our $60 million to $65 million full year guidance. So that will step down in 2026, as we mentioned. It'll step down even more in 2027 just given the number of beds we brought on this year and the ramping of those facilities. There's also some closure costs here in Q4 that won't repeat, in the low single-digit millions. And then as you called out, the professional and legal insurance costs. We're really happy with the investments we've made on quality and how that's going to continue to improve our overall clinical results. We've talked with that with our insurance carriers, and they understand it. But there's still just this industry-wide pressure, and that's why we've added this incremental expense expectation into Q4. So again, as Chris called out, there's a number of tailwinds for next year. And then the other big one that's in play is we've got up to $22 million of EBITDA contribution from supplemental payments that are under review at CMS. Clearly, the government shutdown is having an impact on the timing of those, and that may fall into Q4 or it could be falling into next year. So overall, I wouldn't just run-rate Q4. That would be overly conservative as we continue to have the seasonally low quarter for the year.

Great. And then a quick follow-up. Just looking at the DSOs, which spiked in the quarter, just curious to what led to that increase. And as you're looking at your change in denials and bad debt, is there any concern about collecting some of the AR that you booked this quarter?

Yes, it's the right focus. Those are what's driving out the DSO. We've also got some slower payments from some federal plans that we do expect to collect. But overall, the team is doing a great job of following up and really working to make sure we collect all the payments that are due to us.

Your next question comes from the line of Brian Tanquilut with Jefferies.

Chris, maybe as I think about the CapEx commentary in your release, that you're reducing CapEx by $300 million next year and you're looking at 500 to 700 beds. Just trying to reconcile, what does that mean from a dollar CapEx perspective when you're still opening 500 to 700 beds? Or maybe the opposite way of thinking about it, were you essentially planning like 1,200, like reducing $300 million of CapEx? So just curious how we should be thinking about the cash flow outlook for next year.

Yes. Let me start and see if Todd wants to chime in, but thank you for the question, Brian. I would say going back to the visibility that we provided at the end of September at the Jefferies Conference, we did make the decision to reduce '26 CapEx by at least $300 million. And that was a very deliberate shift towards more disciplined growth and capital efficiency, and it was informed by a comprehensive, literally facility-by-facility review of everything in our development pipeline, taking into account volume trends, reimbursement dynamics, really a number of factors across the board. And so we will be opening multiple large acute care facilities in 2026. And actually, the majority of the capital spend associated with those facilities has already been spent in '25. So on average, we're going to end the year around 85% complete from a development standpoint in '25, which really allows us to have a meaningful step-down in capital spend in '26. I think one other thing I would just point out, as part of the review, we did pause a combination of new facility developments and expansion projects that just did not meet our threshold for return or strategic fit. And we're just really concentrating on -- all of our resources on markets with strong demand fundamentals, really strong reimbursement. And we expect this emphasis moving forward on both margin expansion, but also free cash flow generation, as we head into '26 to be the real focus. So I hope that answers your question.

Yes, Brian, just to weigh in on the numbers. Our new guide here is $610 million to $630 million for CapEx in 2025, and then dropping that by more than $300 million in '26.

Your next question comes from the line of Whit Mayo with Leerink Partners.

Maybe just a follow-up on that. For the de novos that you're pausing, I mean, it sounds like the returns aren't that good. I mean can you and would you walk away from those? Or do you have contractual obligations to see those projects through? And if you could comment on CapEx for 2027. And then also given the opening of these facilities in '26, how much will D&A be going up year-over-year?

Yes. Whit, this is Chris. Thanks for the question. Why don't I just go ahead and start on that? I would say for the joint ventures that we've done, I mean, these are contractual obligations, and we would not walk away from those. There are situations across the board, including de novos that we have done, where we have either purchased land or we have not launched construction. And those were relatively easy decisions in markets where we didn't think there was favorable reimbursement over time, or we just -- one of the criteria just didn't make sense as we looked at everything in totality. So we're going to continue to be very aggressive there on all fronts. But just joint ventures is going to continue to be a strong use of capital and really a strategic imperative for us to grow the business. Todd, do you want to take the...

Yes. We'll obviously get to '27 later on as we exit '25 here. I'm not going to comment on the depreciation and whatnot as I'm digging in to everything from a budget and expectations for next year. I will say, we would expect CapEx in '27 to continue to be lower than in '26 as we commented that, in '27, we'd expect to bring on 150 to 250 beds versus the 500 to 700 that we'd bring on in '26.

Your next question comes from the line of Ryan Langston with TD Cowen.

On the legal expense, around $40 million this quarter. Certainly, I know you expect it to come down as we move here through the next few quarters, and it came down from the second quarter. But should we sort of expect that to be sort of a gradual ramp-down or maybe more of a material step-down in the near term?

Yes. Thanks for the question. Legal expenses in Q3 did step down about 28% from the prior quarter. So we do continue to expect another material step-down in spend as the majority of the work that we've been doing with respect to ongoing litigation and some of these government investigations was completed in Q2 and ended in Q3. So it's something that we're obviously super focused on. But we do think that we've hit the high watermark and you're going to see a consistent step-down from here.

Your next question comes from the line of Jason Cassorla with Guggenheim.

Great. Maybe can you just give us a sense of the runout costs for the 5 facility closures as we think about 2026? I know it sounds like you're anticipating some EBITDA uplift from the closures on a year-over-year basis. But maybe also just triangulate what the EBITDA headwind from those facilities were this year. And maybe broadly, just to follow up on that. As you look at your facility footprint, can you talk about the balance of further facility closures or how you're weighing that against any divestiture opportunity at this juncture?

Jason, thanks for the question. I mean the -- we have had expenses from the closure side with some runout costs. We expect that to flip into kind of a mid-single-digit tailwind in 2026. Overall we continue to look at the footprint. We will continue to do that. But overall, we've got a number of facilities, and we've ring-fenced this down to 5 to 7 that we've been talking about, that we're continuing to see improvements on and green shoots. But we're going to take a stringent lens to make sure we're getting the right return on those as we go forward. As Chris mentioned in the prepared remarks, that's one of the things I'm turning to, once we get through the earnings, is looking at the returns on the facilities across the footprint. Overall the team has done a great job of already having done that work and concluding. And we've got these that we've closed this year. And we're not looking to see significant closures going forward. That being said, we'll be rigorous in our evaluation, and if that makes the right thing to do from a return on capital, then we'll make those tough calls.

Maybe one thing I would just add is -- to answer your question just on the select asset sales. We have been very successful in generating cash and doing that, and we'll continue to look for opportunities just on that front. Even considering land, but also, in the event that it makes sense and there's greater value creation, selling a license along with the underlying real estate. That's something that we're always considering as well; anything to maximize value.

Your next question comes from the line of Andrew Mok with Barclays.

You noted 3Q EBITDA came in $5 million below internal expectations, which implies a $28 million cut to fourth quarter EBITDA. Outside of the $5 million professional liability, can you help break apart the headwind on the remaining $23 million between payer issues and bad debt? And secondly, given the mounting pressures building into year-end, do you think you're in a position where you can grow earnings next year?

With respect to the bridge to Q4, it's split pretty evenly between the rate side with bad debts and some of the challenges we've seen on rates, as well as in the volume declines that we called out at the Jefferies Conference that are then continuing into Q4, plus the PLGL expense that you noted. As we look, I'm digging in on the business, trying to get my full understanding. We called out a lot of the tailwinds we have going into '26 with all the bed additions and the ramping and the execution of the facilities we've brought online. There's obviously some headwinds as there always are. But we look forward to giving full guidance on in February. But we're excited and do believe that this is going to be a growing business as we move into '26 and '27 overall.

Your next question comes from the line of Matthew Gillmor with KeyBanc.

For the $22 million in Medicaid supplemental benefits that could come through for '25, can you give us a sense for what the annualized benefit would be into '26? And just give us a sense for the key states that are underneath that $22 million.

Yes, I think the 1 key state there is Florida. We've got 3 others that are in the mix that we're also working through. Certainly, the $22 million would be an incremental here in Q4 and it would provide a pretty nice incremental run rate going forward. But we're not getting into the specifics of those at this time with the '26 guidance to come in February.

Your final question comes from the line of Joanna Gajuk with Bank of America.

So I guess most of the questions were answered here. But just coming back to -- I know you don't want to give us specific numbers for '26 and you said Q4 not a good starting point thinking about into the next year. Is the better starting point, say, second half, third quarter and Q4, and then adjust for startup losses and some of these other items maybe? So is that a better way to think about next year?

Joanna, there's a lot of moving pieces in the business, and we will get into greater detail with full guidance in February. I think we are excited about all the new beds going on, the ramping. The team is really focused on continuing to get the most out of every one of our facilities. Excited by the growth in the CTC business as we've added more opportunities to treat patients there in a really high-demand space. And all of these things are items that are still coming together. We're in rate negotiations with a number of states. And we're looking to get the government back reopened. That will also be a helpful item with respect to supplemental payments as well as continued work on some of the federal programs. That being said, there are risks out there of different states and the like that we're making sure we're capturing appropriately so that as we give guidance going forward, it's very well informed with our expectations for our business. So I'll leave it at that with a big picture and turn it over to Chris.

Yes. I would just add that we really do look forward to working constructively with payers. I think we have made so many investments on the quality front and have very, very strong clinical health outcomes that I began to allude to in my prepared remarks. We look forward to sharing more of that. But I think that data is going to be extremely relevant for payers here going forward, and we really look forward to partnering with them to make that happen. And I think just one other thing I would point out is that when you just look at the way we're launching into Q1, 632 new beds will be entering the new store -- new same-store calculation in the first quarter of the year. And again, I think that just sets us up so well to partner closely with the payers moving forward. Thank you.

This concludes today's question-and-answer session. I would now like to turn it over to Chris Hunter for closing remarks.

Thank you. In closing, I just want to thank once more our committed facility leaders, clinicians and nearly 26,000 dedicated employees across the country who have continued to work tirelessly to meet the needs of our patients in a safe and effective manner. As the leading pure-play behavioral health provider in the U.S., we continue to be so proud of the important work that we're doing every day to address a critical societal need in our nation, and we remain focused on our purpose to lead care with light. Thank you all for being with us this morning and for your interest in Acadia. Have a great day.

This concludes today's call. You may disconnect.