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Good morning, and welcome to the American Addiction Centers First Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Andrew McWilliams, Chief Financial Officer. Please go ahead.
Good morning, and welcome to our earnings conference call for the first quarter 2019. I'm Andrew McWilliams, Chief Financial Officer of AAC Holdings. To the extent any non-GAAP financial measure is used 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 this morning'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 2019. 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 2019 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. On today's call, I'll be discussing our recent operational highlights before turning the call over to Andrew to walk through our financial results. We will then open it up to your questions.
However, before I discuss our recent operational highlights, I wanted to share with you some very exciting news. As I have been discussing over the years, my vision for the company from the beginning was to invest in the best people, the best science, best technology, information and content and the best real estate in order to provide the absolute best care for those struggling with addiction. Since going public in fall of 2014, we've been able to invest in people and today have the best team in the industry treating the disease of addiction each and every day. Since going public, we've been able to develop the best information and content with a portfolio of websites that generate over 10 million views a month that provide incredible resources for those seeking information on the disease of addiction as well as other behavioral issues.
Since going public, we've been able to invest in science and diagnostic testing that is clearly the best in the industry. Our diagnostic testing capabilities are truly cutting edge in the industry and go far beyond basic compliance testing. Since going public, we have been able to invest in real estate and today have the best portfolio of real estate in the industry with over 1,200 owned beds across 8 states in the U.S.
However, now it's time to lay out a new vision for the company. I'm very excited to announce that this coming Monday afternoon on May 13, I will be sharing with you all our strategic vision for the next decade. It is a bold and exciting plan that will greatly expand upon my original vision for the company. Moving on to a few operational highlights for the quarter. As we discussed on our last call, we have been -- we have executed several initiatives in sales and marketing, which included leadership enhancements and organizational improvements, which is giving us positive momentum in early 2019. Our inpatient census improved over 25% at March 31, 2019, compared to December 31, 2018.
Also as we discussed on our last call, we took measures to implement a series of cost-cutting saving initiatives, including corporate expenses. These actions included the consolidation of our Las Vegas and Southern California markets, the sale of our Townsend operation in Louisiana, consolidation of our lab operation and corresponding reductions in our corporate expenses. Our cost saving initiatives will result in approximately $30 million of expected annualized cost savings. These savings positively impacted our first quarter operating margins and will have even a greater impact on the remainder of 2019. Finally, we took steps to improve our liquidity and financial flexibility. In early March, we closed a $30 million incremental term loan that provided us with additional liquidity moving into 2019. We also announced that we are evaluating our strategic alternatives for our real estate portfolio. Our real estate consists of attractive treatment facilities that provide a compelling set of assets that could generate significant additional value.
Our goal is to leverage the portfolio to improve the balance sheet and enhance shareholder value. We hope to have more specific details to share on May 13. Though we still have a lot of work to do, overall, I am pleased with the momentum we are experiencing so far this year.
I will now turn the call over to Andrew to discuss the financial results.
Thank you, Michael. For the first quarter of 2019, total revenue was $55 million compared with $81 million in the first quarter of 2018. Inpatient treatment facility revenue was $45 million in the first quarter of '19 compared with $67 million in the first quarter of '18. Outpatient and sober living facility revenue was $7 million for the first quarter of '19 compared with $9 million for the first quarter of '18. And client-related diagnostic services revenue was $2 million for the first quarter of '19 compared with $3 million for the first quarter of '18.
On a sequential basis, revenue decreased by 4% from the fourth quarter of '18 primarily due to average -- lower average daily census in the quarter. While inpatient census at March 31, 2019, the end of the quarter was over 25% higher than our inpatient census at the beginning of the quarter, the average daily census for the first quarter was slightly lower than the average daily census for the fourth quarter due to a lower starting point of our census at the beginning of the quarter.
Overall, as Michael mentioned earlier on the call, while we still have a lot work to do on admissions, I'm pleased with the momentum in early 2019 with admissions on a sequential basis improving by over 10% for the first quarter of '19. On a sequential basis, the loss from adjusted EBITDA went from $12.4 million in the fourth quarter of '18 to $6.5 million in the first quarter of '19, which represents an improvement of $5.9 million or 47%. This was primarily due to the benefit realized from the expense savings initiatives that we implemented in the fourth quarter of '18 and into the first quarter of 2019 with operating expenses decreasing by over 20% on a sequential basis.
AAC Holdings' balance sheet reflected cash and cash equivalents of $18 million, net property and equipment of $163 million and total debt of $341 million. As a reminder, on March 8, we closed a $30 million incremental term loan facility with our existing lenders that provided the company with additional liquidity. Cash flows used in operations totaled $10 million for the quarter compared with cash flows used in operations of $19 million in the prior year period.
This concludes our prepared remarks. I'll now turn the call over to the operator for questions.
[Operator Instructions]. And our first question comes from Ryan Daniels of William Blair.
This is Nick Spiekhout in for Ryan. I guess to start off, revenue cadence for the year, it looks like we were modeling in a little bit more consistent quarter-to-quarter. With this quarter kind of maintained guidance, it looks like we're going to need to ramp it. Is there some lumpiness there? Or is it mostly just kind of like a general ramp throughout the year, improvement quarter-over-quarter?
Yes. I mean I think you've got to look at what Q4 did. The census really dropped pretty dramatically in Q4 when we lost that call volume and really what happened with the Google algorithm update. And we really got to the lowest point in December. So you're starting out in January at the absolute lowest point. So the fact that Q4 and Q1 are flowing there together and you could assume that we're on the right momentum and trajectory, we've said that multiple times that we would look better in Q2 and 3 and 4 throughout the year. We're feeling good about the trajectory we're making. But there's still a lot of hard work to do.
Great. And then as far as your evaluation of different strategic alternatives, kind of where are you, I guess, in that? Like I guess, which inning are you? Is that something that's going to kind of be going on over the next year? Do you feel like you have most of that kind of taken care of by now? Or I guess just a little bit more color there.
I think there's two things we're talking about there. Like we have the strategic vision for the company and the operations of the company and where we think we should be going to go. Because, look, the entire industry is in distress for a variety of different reasons. Number one, most of the insurance companies are not paying a lot of the providers timely. They're slowing down payments. They're letting you know that you need to send in charts. Then you send them the charts, then they send them back. I don't know if you saw HCA's lawsuit that they won. There's lots of companies out there now attacking the insurance companies because they're not acting rationally as they normally do. That's one issue in the industry. The other industry problem you've got going on is a lot of people jumped into this space that really want professionals that dealing with addictions, right?
I'm sitting here with Dr. Nanko, me and Dr. Nanko have been doing this for 20-, 30-plus years each. And we've been doing -- we'll be doing this for another 20 years. A lot of folks from the hotel space and other areas jumped in the addiction space because they heard opioid epidemic. Well, I hate to tell you that opioid epidemic was the death of people coming with fentanyl and all these different synthetic drugs, we talk about it a lot in our laboratory. But there's not a lot of new patients. The annual growth rate is about 3%. So you have all these new providers jumping into this space that they know nothing about. So it will shake itself out. I experienced this in the early 2000s. I've experienced this in the mid-1990s. We saw it in the psychiatric hospital space. It ebbs and flows. But the bottom line is we have the best team with the best professionals with the best science and technology out there. We will weather this storm and come out on the other side stronger than ever.
Great. That's helpful. And then I guess a little bit more specifically, kind on the sale leasebacks. Like for that, do you kind of expect that to go on for the rest of the year? Or do you feel like you've done kind of most of what you're going to do for the year?
I think we've done a lot of our homework in terms of what is the real estate valued at. We've certainly tested that waters with a lot of different folks. I think we've built a portfolio of assets there that are in the $350 million to $450 million range. So it's quite interesting to me that our stock price sits where it is when we have quite a few of our real estate assets that are extremely valuable. I don't know if you've been to a place in Tampa or a place up in Worcester, Mass or a place out in Las Vegas, Laguna. I can go on and on at the quality of real estate that we own around the country. So we certain understand the value of it. We've tested it. And we're looking at a variety of alternatives. And we'll lay that out over this year. It's more of a tactical plan.
On the 13th next week, I'll lay out a vision that will also lay out a little bit of the tactics. But that's going to be over the next year or 2 that we're talking about. So right now, my focus is on operations. And the main thing is do we have enough patients in the system to provide great clinical care at a margin that is healthy for our company? And so we've consolidated. We've cut back some of the expenses. We've done all the rational, smart things these companies to do. Now we're focused on our admissions. And we've seen that trending the way we needed to trend. We're really excited about all the different changes we've made, which are doing more localized marketing, more boots on the ground, there's lot of things that we're doing to enhance our ability to acquire patients. So I think I'll lay a lot more clearer vision will be unfolded next Monday after hours.
[Operator Instructions]. And our next question will come from John Ransom of Raymond James.
Andrew, it's -- the minus $6 million of EBITDA in 1Q, how do we -- can you give us more detail on how we get to a positive EBITDA swing at 2Q, which was implied by your covenant? And I understand your covenant is just based on 2Q. And maybe we could talk about census, end of the quarter census today versus kind of what the average was in the quarter. Because the average actually went down a little bit 5 ADC in the quarter. So maybe we could talk about kind of where the census is and the split between AdCare and non-AdCare.
Yes, thanks, John. Good question. And you're right, our debt covenants don't include Q1. They really start with Q2 and don't include that historical look-back period. So as you know, we don't give kind of inter-year guidance. But I would say is our ADC, as you pointed out, was -- the average was lower in Q1 than it was in Q4 of '18. Again, that was due to the lower starting point. We put out there that our -- beginning to -- ending ADC did grow by 30% for the quarter. So we were at a higher ADC -- much higher at the end of the quarter than where we started from that standpoint. And as Michael mentioned on the census side, we're pleased with the momentum that we're seeing inside of the census from that.
So we're obviously expecting a pretty substantial improvement in revenue just from the ADC because ADC average for Q2 will be higher. Our expectation is it will be higher than 1 clearly. The other thing that I would comment on is we do see some variability quarter-to-quarter in our ADR and a lot of factors go into that, like payer mix, service-level mix and facility mix. Also keep in mind, at the beginning of the year, you have higher out-of-pocket costs from the clients due to the resetting of the deductibles at the beginning of the year. And again as another reminder, we don't put that exposure on our balance sheet. That revenue doesn't show up and actually collect the cash for that. So from that...
Let me ask you this -- yes, I was hoping for a number. So maybe let me ask the question this way. What revenue do you need to get to in 2Q to be in compliance with your debt covenant?
Well, I'd say, John, it's a combination of things. I mean obviously it's adjusted EBITDA number that we have to be in compliance. It's a combination of the revenue and expenses from that, that we're doing. But if you do the math on it, it's on our document, we've got -- it's just about $11 million of adjusted EBITDA for Q2.
Also want to remind you, John, that $15 million of the $30 million in cost savings were announced in January of '15 -- I mean, excuse me, January 15, 2019. So you'll see a lot more of those cost reduction flushing through in the second quarter than you saw in the first quarter. That's...
Certainly so. I mean that would a great -- yes, can we get a number on that? I mean, how much more will be seen in 2Q versus 1Q?
We can certainly look at putting that on our slide deck next week, John, if that's something that the market feels like that we need to lay out clearly from a tactical standpoint. We certainly can take a look at that.
Yes. And John, I mean I think the reason we're not giving out...
Yes, I mean -- I'm sorry?
I was going to say the reason we didn't give the revenue or the expenses but have kind of put out the adjusted EBITDA, I mean that's the real target, that $11 million for the debt covenants. And that's -- obviously we're focused on that bottom line number, not -- and obviously, the 2 individual components that make that up. But there's variability in both.
Okay. And then just last one for me is I know conversion rates are something you've talked about in the past. I think they were running 2%. And I imagine those fell when you went through your sales force changes. Can you -- Michael, maybe you could highlight -- I mean there seems to be a pretty good correlation between conversion rates and census. Can you just give some color on call volume and conversion rates, kind of where that stands versus kind of where you dropped?
Yes, sure. I mean, I think that's very interesting to follow because Q4 was all about the volume drop in phone calls whereas Q1 was really about conversion more than phone volume. We got the phone volume back up, but the conversion did drop. And so what we've been focused on now in Q2 is getting the conversions back up. Again, working the trajectory that we need to be on, we're all working [indiscernible] to make sure this company is in good shape and we hit our bank covenants. We also feel like that we have plenty of levers to pull with assets that we can sell to cover our situation. We feel very, very good about 2019. I wish the equity market felt as good as I did, considering I'm the largest shareholder, I feel pretty damn good.
Okay. And then last one for me is if we look at the changes in census, is it fair to say that the old non-AdCare census, that was the legacy AAC, the traditional AAC, I guess, as you might put it?
Yes. The improvement that we're seeing in census and what we expect in census in Q2 is non-AAC or non-legacy AdCare. [Indiscernible] has been pretty stable, right? The AdCare census, as we said all along, through kind of Q3 and Q4 was stable. So the growth we're seeing is in that and that's kind of another positive for ADR overall as legacy AAC ADR tends to be higher than AAC -- than AdCare.
All right. So as we model in additional ADC, how should we think about the ADR going forward? I mean, it's kind of -- that's actually a kind of tougher number to model for us than even census. It's just been all over the place. It's been as high as $1,000, it's been as a low as $655. I know the lab changes is there. How do we think about that?
Hey, John. That's a very good question that our entire industry is dealing with right now from Florida to Massachusetts to California. So if you could get Aetna and Cigna and all these insurance companies that are supposed to be worried about helping the public versus just -- I don't know what their value and purpose is, to be honest, but you can't get a straight answer from them. But we are working every day to work with them. Look, we've got in-network contracts with them and they're just as irrational in the in-network contracts as they are in the out-of-network contracts. And so right now, the ADR headwinds is based on the insurance companies and their irrational behavior. And I think you already know that. You've talked to enough experts out in the field, understand what's going on. And that's why you see a lot of companies across America -- Elements was one of them. They could not manage their way through that process.
We are comfortably managing our way through that process. And more importantly, we have a lot of assets, John, not just our real estate -- it's shocking to me that people just look at our real estate, but they don't even take a look at our technology that we've created, our diagnostic tools, some of the stuff that we're doing around blood work and how we can help people get better so much quicker now. It's unbelievable. And then you take a look at our website traffic. 10 million views? Tell me another company out there. WebMD has only 75 million views. AAC is the absolute best in the business out there. Everybody is in a little bit of distress. Everybody is having census issues and problems with the insurance companies. But I can promise you, we're going to make it through that and get out on the other side and be much stronger for it.
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Cartwright for any closing remarks.
Thank you very much. I'd like to take this time to thank our doctors, clinicians and staff for their incredible dedication and professionalism and the lives they are saving every day. We receive countless stories from our patients on how we saved and impacted their lives. I would like to take a moment to briefly share one of those stories. This is an excerpt from a letter from a recent client.
I'm writing you because of today, I have 1 year of sobriety. A year ago, my life was unmanageable. Years and years of drinking had taken a toll on me. I was isolating myself from everyone, including my family. I was having health issues. The alcohol wasn't doing for me what it used to. I was in pain when I wasn't drinking. I finally hit my rock-bottom when I lost my job of almost 14 years. It was then that I admitted to myself and my wife that I needed help. I had no idea where to turn or what I should do. After doing some research, we found AAC. And 2 days after getting fired, I was heading to one of your treatment facilities. When I was in your treatment facility, I found out my wife was getting ready to leave me and take our 2 children with her. A year later, my relationship with her and my children is better than ever. I'm actually present in their lives and we are a family. I was missing out on a lot. A couple months ago, my wife told me, "It is so nice to be able to count on you." Thank you for all you've done for me. I thought I was going to drink for the rest of my life. The program really works.
Again, this is just one example of the impact we are having on thousands of lives and families across America. Thank you for your time today and interest in AAC.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.