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Good morning, and welcome to the AAC Holdings First Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Andrew McWilliams, Chief Financial Officer. Please go ahead.
Good morning, and welcome to our First Quarter 2018 Earnings Conference Call. I'm Andrew McWilliams, Chief Financial Officer of AAC Holdings. To the extent, any non-GAAP financial measure is discussed in today's call, you'll find a reconciliation of that measure to the most directly comparable financial measure, calculated according to GAAP on our website, by following the Investor Relations link to yesterday afternoon's news release.
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 AAC's expected annual performance for 2018 and beyond. For this purpose, any statements made during this call that are not statements of historical facts 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 are hereby cautioned that these statements may be affected by the important factors among others, set forth in AAC's filings with the Securities and Exchange Commission and in the company's first quarter 2018 earnings 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.
I would now like to turn the call over to our Chairman and Chief Executive Officer, Michael Cartwright.
Thank you, Andrew, and good morning, everyone. In addition to Andrew, I'm here today with Michael Nanko, our President and Chief Operating Officer. On today's call, I'll be discussing some of our highlights from our first quarter, introducing Michael Nanko, and will then turn it over to Andrew, who will walk you through the specific financial results for the quarter. We'll then open it up to your questions.
This quarter was a good start to 2018, and we're on track to deliver the growth we anticipated for the second half of this year. We benefited from a month of performance from AdCare, which we closed at the beginning of March. Early indications from the integration are that AdCare is well positioned to deliver the operating results we anticipated and is well aligned with our long-term strategy of diversifying our payer, region and treatment types, specifically expanding government pay and our presence in New England. It's a very well-run business, and we are working together to bring some of our technology and sales and marketing expertise to further drive their results.
We're also pleased with continuing operational efficiencies in the first quarter as DSOs continue to trend down reflecting our continued commitment in this area. Finally, on January 15, we welcomed our new President and Chief Operating Officer, Michael Nanko, who formerly was the President of Behavioral Services for HCA. The addition of Michael and his deep experience in behavioral health aligns with our continued emphasis on inpatient and outpatient opportunities and brings additional proven operational skills to our business.
Looking ahead, I'm excited about the investments we are making in our clinical programs, which will help in our mission of delivering the best clinical care. For example, we've recently implemented our EarlySense technology that monitors patients without direct contact, by advanced sensors placed beneath the bed mattress, allowing nurses to better care for patients. We're also in the process of launching additional patient-outcome studies that will supplement our outcome study of more than 4,000 patients that was published in February. For the remainder of 2018, we're also looking forward to continued focus on our sales and marketing initiatives, operational improvements and integration of AdCare.
I'd now like to turn the call over to Dr. Michael Nanko.
Thanks, Michael. I appreciate the opportunity to speak with you all. Even though I've been at AAC less than 100 days, I'm excited to be at AAC. We're on such a strong trajectory of growth and we have a clear and singular mission that is to help those affected by the disease of addiction.
For those of you who don't know me, I was previously President of Behavioral Health at HCA. We had a lot of facilities, 70 inpatient facilities, 40 outpatient, access response centers, and we served all the HCA's ERs and acute care hospitals. I learned a lot from this experience, among others in my background that will translate well into my work at AAC.
I joined Michael and AAC because I was at a point in my career I wanted to go somewhere where I could truly make a difference. My experience spans the medical side, the health plan side and behavioral health side as well. And this background was something Michael and the team here thought I could be of value to AAC at this stage of the company and its path for growth.
I've been on the road most of my first 3.5 months. I've had a great opportunity to visit our teams across the enterprise. I've seen all the facilities and have been favorably impressed with what I've seen. First and foremost, what I was most impressed by was the passion and commitment of the leaders and the staff that I met in our facilities and here at the corporate office. And even above that, I was impressed by the sense of urgency of everyone to do what it takes to turn a life around to make a difference in the lives and to the field of addiction, to be a leader in the addiction field.
I was pleasantly surprised by the high quality of our facilities. They're truly in excellent shape, they're esthetic and I feel that they're conducive to treatment. Going forward, my team and I are focused on three core areas among many: It's executing on the day-to-day operations. There's lots of opportunities and operations and that's pretty similar across all health care, and will we be strongly focusing on operational excellence.
Second, in collaboration with doctors [indiscernible] we're working to evolve clinical programming at both the inpatient and outpatient levels. We know this quality in continuity of care is critical to our patients' long-term success.
We're also keenly focused on utilization review or utilization management. And this is where we, at AAC, advocate and champion for our patients. We work to get them the right level of care, the right length of stay, and all that leads to good outcomes. Obviously, our evidence that you heard from our outcome study, as well as the literature shows that the longer patients stay in treatment at the right level of care, the better their overall chances to have a long-term good outcome, that is abstinence that we track at 12 months.
There's a lot of work to do here in 2018 and at AAC, I'm confident we can strengthen our operations and build up our workforce talent to further improve patient care, our clinical outcomes and our operational performance.
At this time, I'd like to turn things back to Andrew.
Thank you, Michael. Before I discuss our first quarter results, I'd like to quickly note the impact of revenue recognition changes, associated with ASC Topic 606, which we adopted on January 1. Under ASC 606, provision for doubtful accounts, which was historically reported as an operating expense, is now reported as a direct reduction to our revenue. This change in presentation reduced revenues and operating expenses by the same amount, and did not have impact on net income or cash flows. As I discuss revenues, I'm applying the adoption of Topic 606 to the prior year period for comparison purposes.
For the first quarter, total revenue less the provision for doubtful accounts was up 18% to $78 million compared to $66 million in the prior year period. This was due to increases in inpatient and outpatient facility revenues that's partially offset by a decrease in our client-related diagnostic services revenue.
Inpatient treatment facility revenue less the provision for doubtful accounts increased 40% year-over-year to $64.9 million, primarily as a result of an increase in our average inpatient daily revenue. Average inpatient daily revenue increased from $933 to $640 in the prior year period as a result of the prior improved billing and collections activity and the investments we've been making in our revenue cycle processes as well as favorable shifts in service level mix at our residential treatment facilities.
As a result of the planned expansion of outpatient services, certain lower levels of care, such as partial hospitalization and intensive outpatient services are now performed more frequently at our outpatient centers. Because the average and daily revenue for these lower levels of care are significantly less than the higher levels of care, our average daily revenue has increased at the inpatient facilities.
Outpatient and sober living facility revenue less provision for doubtful accounts increased 60% year-over-year to $8.4 million, driven primarily by an increase in outpatient visits. Average revenue per outpatient visit declined to $278 this quarter from $318 last year. This decline is attributable to outpatient visits generated at AdCare, which provides care to both Medicaid and in-network clients. Absent AdCare, our average revenue per outpatient visit increased during the quarter as compared to last year.
Client-related diagnostic services revenue less the provision for doubtful accounts was down 80% on a year-over-year basis. As we discussed last quarter, this was primarily attributable to lower reimbursements for testing and does not reflect a reduction in the volume of laboratory tests performed. As Michael mentioned earlier, we're looking forward to realizing the impact of our investments in sales and marketing, and we expect to see these initiatives lead to positive impact on the results in the back half of the year.
Adjusted EBITDA increased 20% on a year-over-year basis to $15.1 million and adjusted earnings per diluted share was $0.13. Our earnings press release includes a full reconciliation of these non-GAAP measures.
Cash flows used in operations totaled $19 million for the first quarter, which included a $25 million payment to -- related to the Tennessee Class Action litigation matter. Absent the $25 million payment, cash flows from operations were $6 million which is a 36% increase on a year-over-year basis. As Michael mentioned earlier, DSOs continue to improve and were 95 days during the first quarter after adjusting for the adoption of the new revenue recognition accounted standard and adjusting for only having AdCare for one month during the quarter.
This represents a 7-day sequential improvement from the fourth quarter of 2017, and a 20-day improvement on a year-over-year basis. Total cash collections increased sequentially from the fourth quarter and grew -- and increased 25% on a year-over-year basis. We continue to remain on track to deliver the outlook we previously guided to for 2018.
This concludes our prepared remarks for this morning's call. And with that, I'll now turn the call over to the operator to open the line to your questions.
[Operator Instructions] The first question is from Ryan Daniels of William Blair.
Let me start with a couple on AdCare. I'm curious, Andrew, if you can provide us a little bit more detail on the revenues that it contributed for the quarter? And perhaps a number of admissions? Just so we can get a feel for core organic growth rates.
Yes. Sure. Keep in mind that we acquired AdCare on March 1. We've had it for only about a month. AdCare came in exactly as we expected. As you know, we don't give -- historically haven't giving out same-store data. However, given that it came in just as expected, if you take kind of our implied guidance that we gave for AdCare and you kind of get to those numbers, it was doing about $50 million historically of revenue. It came in exactly kind of on target for that. Same thing on the admission stats that we previously gave for AdCare, again came in kind of right on target for that.
Okay. Perfect. And then it sounds like the integration is progressing well. But can you maybe, Michael, comment on some of the key milestones, both in regards to some of the revenue synergies that you anticipate, perhaps from marketing each others’ facilities to the specific client bases and then some of the cost synergies?
Sure. I mean, like Andrew said, we closed on March 1. Myself and Dr. Nanko have been up there several times since then. I think the most -- the thing that's most exciting is just the dedicated staff up there. They have great clinical programs. We're really proud to have them part of American Addiction Centers. We've just started digging in. Jeff Hillis is the CEO there. We have just started digging in to really how they do things, how they're marketing their facilities, the call volumes that they have, the 1 (800) alcohol number that they have.
We've had multiple meetings with their call center and sitting down with staff on explaining what our programs are. And what are the criteria, understanding better what are their programs and the criteria, the admissions process. So it's moving along. I wouldn't say that, in the first month in, we've seen lots of uptick at all in one month. But I definitely feel confident that over the year that we can do what we predicted. We gave an overview of synergy opportunities in a presentation recently, kind of the revenue synergies that we'd be able to project, would be around $1 million that we think that we can drive as well as another $1 million in savings or synergies. So I feel confident that we're on track for that.
Okay. That's helpful color. And then any thoughts on the de novo pipeline? And how that could change now that you own AdCare, both from a Medicare, Medicaid offering? And if you want to get more into that business? And number two, just on the balance sheet flexibility you have going forward to fund the de novo pipeline in the next few years?
Yes. I think, we definitely would want to do more Medicaid, Medicare in the states that we're currently operating in. We would definitely consider that in Louisiana. We would consider that in Nevada. So -- but as far as de novo, I mean, honestly, myself and Dr. Nanko, our focus this year is just continuing to build the base. We felt like that we had some great growth for several years. And then we outgrew in terms of bed capacity, the marketing engine. So we'll have step more, actively engaged in that process, Michael is actively engaged in the operations, day-to-day operations, clinical operations. We both feel comfortable that there is a lot of work to do in 2018 on just what we have. Getting to 88% occupancy is really our mantra around here, and having great clinical programming. And then more in 2019, I think, we would be looking to organic growth and acquisition opportunities that are on the horizon.
Okay. And while investments in the sales function come from more online marketing and search engine optimization, will it be more investment in your direct sales teams, which you've talked about in the past? Any update there would be helpful? Kind of what's going to drive those beds getting filled?
It's really all the above. And then also, just in our call center working on conversion rates. Now that we have multiple offerings, it sometimes can be more complex when you have outpatient, residential, in-network, out-of-network, 10 different states. So I think it's a matter of continuing to build out the sales and marketing team, continue to work with our digital assets and continue to put emphasis, training and education on our call center to improve conversion rates, is really what we're focused on in 2018.
And like I've stated, since back half of last year, and early part of this year, that I thought the first six months of 2018 would be pretty consistent with the back half of 2017. And we would really see the results starting to trend up, starting around August, September. Back half of the year is when I think that some of these things are going to come to well together. We're starting to see them. We're starting to see some of the changes that we're making -- is making improvements. But I think it's going to be more in the back half of the year.
Okay. And I promise last question, but just want to get your thought on the opioids legislation? Bipartisan support clearly, going to get passed and implemented. What that could mean to the organization? Or what your thoughts are on that from a funding perspective and meaning for the industry?
Just from a big picture standpoint to have an administration say that we have a national epidemic is huge. To have -- last week there was 27 bills in the House and Senate that were flowing through the system. In states of like Florida, California, Tennessee, there were state legislation being passed left and right in states all over the U.S. really to enhance and help our industry. Either enhance related to regulation, which I think overall gives better quality of care or enhance related to funding opportunities. And so all the above, I think, it helps American Addiction Centers and any large organization like Acadia, UHS, that's focused on addiction.
We're starting to get the attention that I think that we deserve. I'd love to see more of it also in research and education. We're starting to see some of that. But it's lifting the whole industry, right. And I think that we're going to continue to see that going into 2019 and '20. I continue to get calls from representatives both from the Senate side, House side, state legislators, trying to figure out what more can they do to solve the problem of addiction in America. And it's not just opioids. I think people are missing out on the fact that 40% of our clients coming in for treatment today are alcoholics. And it's still the number one disease in America. So it's not just an opioid crisis, it's an addiction crisis across America.
[Operator Instructions] The next question comes from John Ransom of Raymond James.
Given the accounting change in revenue, it's a little hard to track, but in the fourth quarter, your ADR was a little over $1,000. If the same accounting had been in place, is that number essentially consistent with what you just reported?
If you look back at our operating stats and you go to that ANDR, which was average net daily revenue that is consistent. And if you look at our operating stats table that is consistent because ADR is now, for those prior periods, is net of revenue. So it is on a consistent basis in our operating stats that we reported.
Okay. So you had this incredible jump. But it's -- we should think about this being relatively stable on the core -- of course you have to adjust for AdCare. But on the core, it should be relatively stable at this point?
Yes.
Okay. And just kind of expanding that --
We have seen that we've had -- go ahead.
Go ahead, sorry.
I was just going to say, in the back half of -- go ahead, John, sorry.
No. No. And then just on that broader point, is it also true that if things sort of stabilized from length of stay, inpatient, outpatient admission kind of revenue per day on the inpatient side. So we had this big shift last year. The payers shortened length of stay and you guys really stepped up your outpatient. But is it -- are we at a point now where the business looks relatively stable from that standpoint? And also kind of where you're -- your lab revenue was probably a little lower than we would have thought this quarter, I just thought a nice quarter. But if we're just kind of look at all these metrics, are we looking at something that looks relatively stable at this point? Or do you expect more change?
In the back half of last year, we saw the ADR. We saw kind of this shift as we opened up outpatient centers and extracted some of the outpatient services that were historically performed inside of our inpatient facility, to those centers which impacted the individual length of stay inside of our inpatient centers, but didn't impact our overall length of stay. And we've seen another quarter of that. So now we have kind of have three quarters of that consistent trend.
So to your point, yes, I do believe that it is stabilized. But as we pointed out from an ADR perspective at our inpatient facilities over the course of year, you do need to adjust for the fact that we have AdCare as well as we get to that fuller occupancy, we fill more of our in-network beds. So the ADR in the back half of the year could trend down, just as we become fuller. But that's more from a mixed shift perspective, not any major disruption on the reimbursement side.
And as this quarter, the stats that you provided in this quarter, are there going to be the stats that you provide going forward?
Yes.
Okay. Because I know that, you didn't have a DSO number in here. We calculated, obviously, a wrong number because you only had one month of AdCare. But it was a little hard to pull out all that apart. My other question, I know this is a little bit of an odd question for securities analyst to ask, but, Michael, I'm just curious. As we track this very simplistically from a society level, there's been a ton of pressure on opioid prescriptions, as you know, I mean, with a crackdown, all the various payers and regulators cracking down. And so we've had this phenomenon of prescriptions declining and yet, opioid deaths increasing. So if you're talking to some legislator and you got to put it into a soundbite. How do you square that circle? And what other steps? I mean, obviously, cracking down on the scripts hasn't worked. What other things should they be doing because this is just not clear looking at those two very broad stats?
You're right. There is a little bit of misperception. So because there's so much press around this topic right now, I think people believe that addiction has risen by 200% in America. That's just not factually true. Addiction is rising about 5% annually. It tracks a little bit higher than the population, but it's not going up as much as you would think with the press. What's happened is the type of drugs that some patients are taking now. The fentanyl, the kind of black-market, heroin that people are getting from China, is deadly, right. It's killing people. But the number of people dying from alcohol in The United States has been a staggering amount for 50 years.
But there's never been this matter with press around the number of people that are dying with alcoholism or dying from drinking too much Jack Daniel's. But there is now is recognition that addiction is a huge problem. And society needs to address it. And now, where we need to go next steps is research and prevention, right. One of the things that is a big peeve of mine is that my kids go to public schools and we should have more prevention in school starting around 7th, 8th grade, going all the way through high school.
It worked for tobacco in the United States. So if you look at the tobacco use rates in the United States, have gone down dramatically over the last 20 years since we've started this more awareness campaign, more prevention and education campaign. So that's really where we need to be heading as a country. I don't know that we're ever going to stop the use of alcohol, of prescription drugs, of heroin, of these different substances. We've certainly tried on the interdiction front for years, and it hasn't really worked.
You have about 8% of the population that is still addicted in some form fashion, whether it's an illegal drug or a legal drug. And so I wish that we would spend a lot more time on prevention and then spend a lot more time on innovation, right. How do we innovate better care for clients with addictions through genetics, through medications, through other things like that. And that's really where American Addiction Centers is headed, is what the new best innovation for some of these problems.
Okay. And then my last question is, you've had your hands in the marketing engine for several months now. And I get the sense, as you know, more about what the issues are than you've said. So I'm not trying to tease you out and giveaway all the goods. But just at a very high level. Do you think that you can get to your 88% with your existing call volume? And do you think that part of the trick is converting more that call volume? And then, do you also think that it is a simple matter of adding more local BD reps? I'm just kind of curious to what your diagnosis is? Are you through the diagnosis phase? Are you in the execution phase? And just at a high level, what are some of the steps you're taking to improve the conversions?
Absolutely. All very good questions. I definitely feel like I'm through the analysis stage of what I was doing. My goal in January -- in February was to get Dr. Nanko on board. I've been just extremely impressed with his skill set, his ability to jump in with both the understand the business, take charge of the operation, and really free me up now to hyperfocus on the sales and marketing side of things. One thing I'm most impressed about is the people we have in sales and marketing. We have the right people. So it's not really a people issue because we have extremely talented people in our call center as well as on the outside BD team as well as in the digital marketing space.
You hit it on the head when you said is it a conversion issue. It is a conversion issue. We have the call volume, we have the right people. There are some tweaks that we're doing on technology front on how we answer phone calls. There's tweaks that we're doing on scripting. There's tweaks that we're doing on education and training of staff on different products that we offer. So I definitely think that's going to take another 3 to 6 months to really fully bake. And that's why I feel very confident on starting August, September, back half of the year that we should be more in that 88% range.
The fact that they're selling a lot more products now, is that part of it? I mean, it used to just be an out-of-network residential and now you've got outpatient, inpatient, Medicare, Medicaid, in-network. I mean, is part of it getting them educated on different level of products that you have?
That is decent.
And then the other thing. Is there any reverse synergy from AdCare's marketing that they -- they're sending out referrals that, that had been AAC customers? Or is it more your -- they're going to running on separate tracks, the 2 marketing engines? I'm assuming you're going to be able to [indiscernible] with your big machine but are they going to be able help you at all, or is that not the case?
No, they can. I've been extremely impressed with AdCare. Everyone up there has really impressed me. The call center, how they operate it is extremely impressive. There's definitely patients that are calling up AdCare that could go to the Greenhouse, that could go to Desert Hope, that could go to Sunrise, there's no question about that. Again, it's a matter of how do we educate the staff there, that now you have multiple options. You don't want to disrupt kind of what they're doing really well. They're highly occupied at the hospital. So you don't want to disrupt that. So we're trying to think through myself and Jeff and Michael are trying to think through, how do you best integrate the two teams and educate them on each other's products.
So they would best know where to send someone if they're calling up for that type of help. So it is just going to take them. But you're on the right track, John. And you've nailed it. Other thing is, do we do more localized admissions process versus national? Acadia and UHS and HCA, they're doing most of their admissions locally, right, within a 20-mile radius or within a region. So the question is, do we do more on a regional basis, do we do more on a localized basis? And so all those things are coming into play right now, as we've grown our company and stepping back and going. Okay, what are we going to be over the next three years and how should we best organize ourselves. We now have the right team in place to answer those questions.
There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference over to Michael Cartwright, for closing remarks.
Yes. I just want to thank everybody for joining us for our Q1 earnings call. Again, I want to thank American Addiction Centers' staff for all the hard work that they've done over the quarter, most importantly, the lives that we're saving on a daily basis. I'm so excited that we're able to touch so many lives, and we have so many innovative projects going on that Dr. Nanko, his team, [indiscernible] are starting to look into. Really excited for the future and what we're able to achieve. Thank you, all. Have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.