Acadia Healthcare Company, Inc. Q3 FY2025 earnings call

Introductions

• Chris Hunter welcomes Todd Young as the new Chief Financial Officer, thanks Tim Sides for his interim CFO role, and acknowledges Dr. Nasser Khan's contributions.

Third Quarter Results

• Reported revenue of $851.6 million, 4.4% higher than the prior year; adjusted EBITDA $173 million, down from prior year. Softer Medicaid volumes, especially in acute care, and headwinds from rates, benefit expenses, and professional and general liability (PLGL) expense.

Growth Strategies

• Plan to add 500-700 beds in 2026, including partnerships with Tufts Medicine and Orlando Health. Implemented initiatives for acute care referral sources, with over 3% same-facility admissions growth in Q3. Engaging with payer partners, particularly in Medicaid, highlighting investments in quality platform.
• Realigning capital spending priorities, pausing development projects with low return potential, expecting 2026 CapEx at least $300 million lower than 2025. Closed 5 underperforming facilities, focusing on markets with strong demand and reimbursement.

Quality Focus

• Integrated quality dashboard with over 50 KPIs, sixth consecutive quarter of employee retention improvement. Positive clinical outcomes at a recently opened JV facility, showing improvements in psychiatric symptoms and quality of life.

Revenue for the third quarter was $851.6 million, representing a 4.4% increase over the third quarter of the previous year. Adjusted EBITDA was $173 million, compared to $194.3 million in the prior year period. 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, coming in approximately $5 million below internal expectations, primarily due to lower volumes and an increase in bad debts and denials.

2025 Outlook

• Revised revenue range: $3.28 billion to $3.3 billion (previously $3.3 billion to $3.35 billion). Adjusted EBITDA range: $650 million to $660 million (previously $675 million to $700 million). Same-facility volume growth at low end of prior range (2%-3%). Adjusted EPS $2.35 to $2.45 (previously $2.45 to $2.65).

2026 Outlook

• Expect reduction in startup losses due to focused growth, ramping contributions from bed additions, and modest EBITDA uplift from closures. Offsets include continued softness in acute care Medicaid volumes, PLGL expenses, and absence of 2024 supplemental payment benefit. Up to $22 million of EBITDA from CMS-approved supplemental payments under review.

• Softness in Medicaid volumes, particularly in acute care. Rate pressure with low to mid-single-digit rate increases in some areas. Increased denials and bad debt expense. Evolving legal environment leading to incremental PLGL expense. Uncertainty around timing and magnitude of CMS-approved supplemental payments due to government shutdowns.

Q: 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.

A: Chris Hunter responds that payer friction is in Medicaid, with volume pressure on length of stay due to utilization review by Medicaid managed care plans, and rate pressure with low to mid-single-digit rate increases in some states, but no adverse media impact. Bad debt pressure is from reimbursement for fewer days than provided.

Q: 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?

A: Todd Young states Q4 is seasonally the slowest quarter, so not to run-rate Q4. There are one-time items like startup losses and closure costs, but tailwinds for 2026 include bed additions, ramping facilities, and up to $22 million of EBITDA from CMS supplemental payments under review.

Q: 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?

A: Christopher Hunter explains that majority of capital spend for 2026 beds was already spent in 2025, with 2026 CapEx reduced by at least $300 million due to disciplined growth and capital efficiency, focusing on markets with strong demand and reimbursement.

Q: 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?

A: Christopher Hunter states legal expenses in Q3 stepped down 28% from prior quarter, expecting further material step-down as most litigation and government investigation work was completed in Q2 and Q3.

Q: 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.

A: Todd Young says closure runout costs are expected to flip to a mid-single-digit tailwind in 2026. The team is rigorously evaluating the facility footprint, with no significant closures expected going forward but will make tough calls if needed for return on capital.