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Good day, and welcome to the AAC Holdings Third Quarter Earnings Call and Webcast. [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 third 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 this morning's news release.
This conference call may contain forward-looking statements within [ph] 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 the company's third quarter 2018 earnings release, and consequently, actual operations and results may differ materially from these 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 some of our highlights from the third quarter before turning the call over to Andrew, who will walk you through our financial results. We will then open it up to your questions.
This was a difficult quarter, and we're not pleased with the results. We faced some very difficult unanticipated headwinds that sharply impacted call volume. We're navigating these headwinds with process changes in our call center, better training of our employees in the center and a series of employee transitions, including a strengthened executive team leading our marketing department.
We experienced an excellent start to the third quarter with a very strong July; however, in early August, Google launched changes to its algorithm that impacted the search engine optimization position of our healthcare and medical-related websites. These types of broad changes to Google's algorithm happen from time-to-time and are unannounced. This particular change in healthcare and wellness-related websites is so hard that SEO analysts are referring to the update as the Medic change.
On a net basis, across all of our websites, this resulted in a sharp downturn in calls to our call center. Overall, calls dropped over 30% when you compare July call totals to September call totals. This led to a total census decline of just under 10% for the July to September period.
Changes we made in our call center to technology, leadership and our reps compensation plan also impacted the quarter. I have told you throughout this year that we would be, and are still, instituting significant changes in our call center to make long-term operational improvements and better serve those in need.
We implemented new technology that our admissions consultants use to interact with callers, changing some of our organizational structure and revising our call center compensation structure and training in connection with new regulations and best practices.
Our goal is to improve the initial intake information and make sure it gives the clinician to evaluate potential patients for admission the best information possible. We knew that making these changes would cause a small disruption, which we view is necessary to deliver both better quality clinical outcomes as well as census numbers. We believe we're well along in the transition and will ultimately see better operational results because of our investments here.
So what are we doing to navigate all these sales and marketing headwinds? On the SEO and online marketing side, let me start with people. In late September, we welcomed Stephen Ebbett as Chief Digital and Marketing Officer. Stephen was previously the Digital Officer of Assurant, an international consumer-oriented provider of housing and lifestyle insurance products. As such, he brings a wealth of experience in leading marketing across the digital spectrum and has experience in a regulated industry. I'm thrilled to have him on our team as we continue to invest in marketing and growing our lead-generation capacity.
With regard to SEO and the Google algorithm change, we are increasing our content marketing efforts to better target those looking for treatment. On the call center side, we now have a seasoned veteran overseeing operations, Sally Dahl. Sally is our VP of Admissions and came to us from Cancer Treatment Centers of America. We believe she's doing a great job helping our people navigate the many changes we've instituted, and ensuring training and consistent implementation of the practices we've identified as being critical to the success.
Finally, after spending the last 8 months from sales and marketing, I'm now turning my attention to the lab. There is some very exciting research and scientific information coming out of our lab. I think by mid next year, we'll be ready to talk about some very interesting research that can have positively affect this patient population.
Nothing has fundamentally changed in our business. I have no doubt we will improve census, deliver higher margins to maintain financial discipline and continue to provide best-in-class clinical care. And I have every confidence that I have the right executive team in place to solve these issues. I will now turn the call over to Andrew to discuss our third quarter financials.
Thank you, Michael. Before I discuss our third quarter results, I'd like to quickly note a couple of changes that impact how we report results.
First, the impact of revenue recognition changes associated with FASB Topic 606. We adopted these changes on January 1, and they have affected our first, second and third quarter results.
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 an impact on net income, cash flow or earnings per share.
Secondly, we also made a change in the accounting estimate of the collectability of accounts receivable, specifically relating to accounts where we received a partial payment from a commercial insurance company and where we're continuing to pursue additional collections for the balance that we estimate remains outstanding. This change in estimate resulted in a reduction in revenue of $6 million, an increase in the net loss of $4.8 million or $0.20 per basic and diluted share for the three and nine months ended September 30, 2018.
For the third quarter of 2018, total revenue less the provision for doubtful accounts was up 10% to $77.5 million compared with $70.7 million in the third quarter of 2017. Excluding the change in accounting estimate, revenue was up 18% compared to third quarter of 2017. Inpatient treatment facility revenue less the provision for doubtful accounts and excluding the change in accounting estimate decreased 2% to $58.5 million in the third quarter of 2018 compared with $59.4 million in the third quarter of 2017.
Excluding the change in the accounting estimate, inpatient treatment facility revenue increased by 11%. This increase was driven by the continued successful integration of AdCare completed in March 1 of this year, offset by decline in census that Michael discussed and a slight decline in our ADR due to a greater concentration of census in our in-network facilities, which tend to have lower reimbursement rates.
Outpatient and sober living facility revenue less the provision for doubtful accounts increased 56% to $11.3 million in the third quarter of 2018 compared with $7.3 million in the third quarter of 2017. Excluding the change in accounting estimates, outpatient and sober living facility revenue increased 77%.Outpatient visits increased to 163% to approximately 49,000 in the third quarter of 2018 from approximately 18,000 last year.
This increase in outpatient business was primarily related to the impact of AdCare as well as an increase in our average daily sober living census, which increased 34% to 294. Average revenue per visit decreased 59% to 233 in the third quarter of 2018 compared with 437 in the prior year period.
Excluding the change in accounting estimates, average revenue per visit decreased 44%. The decrease in average outpatient revenue per visit was primarily related to the significantly higher mix of in-network and Medicaid outpatient visits as a result of the AdCare acquisition.
Client-related diagnostic services revenue increased $3 million or 185% in the third quarter of 2018 to $4.7 million from $1.6 million in the third quarter of 2017. The increase in client-related diagnostic services revenue is primarily due to the reduction in reserves based on the aging of the receivables as a result of improvement in our collections, which have reduced the number of days outstanding. Adjusted EBITDA was $10.7 million or 14% of revenue, and adjusted loss per diluted share was $0.08 for the third quarter of 2018.
Notwithstanding the add-back to accommodate for the change in accounting estimate, the biggest driver of EBITDA softness this quarter was the decrease in average daily census and admissions, which began to be affected by the Google algorithm change in August and continued throughout September. As Michael mentioned, we continue to be focused on operational efficiencies, and we have taken steps to reduce our overall cost.
Corporate overhead as a percentage of total revenue continues to trend down and decreased by 4% in the third quarter of 2018 compared to 2017.
At the end of September, we consolidated our laboratory operations, which included relocating operations from Louisiana with our current ongoing operations in Brentwood, Tennessee. By consolidating our laboratory operations, we will gain additional operational efficiencies.
Coupled with operations consolidation at several of our facilities, we anticipate initiatives we took this quarter to generate total annualized cost savings of approximately $2 million, which will begin to be recognized in the fourth quarter. Cash flows used in operations for the quarter were $4.2 million, and maintenance CapEx was approximately 2% of revenue on adjusted basis.
We're revising our expectations for the full year of 2018 to account for the challenges we have faced this quarter regarding census. We now expect revenue of $315 million to $320 million, adjusted EBITDA of $47 million to $50 million and an adjusted loss per share of $0.10 to $0.15. These revisions reflect the temporary headwinds we've faced.
Though this was a more challenging quarter, as Michael mentioned, we're taking a number of steps to address census weakness, and I'm confident in the team we have in place to execute against this. That concludes our prepared remarks for this morning's call. I'd now like to turn the call over to the operator, who'll open up your line for questions.
Thank you. We will now begin out question and answer session [Operator Instructions]. Ladies and gentlemen our first question today will come from Ryan Daniels of William Blair. Please go ahead.
Hey guys, this is Nick speaking out in for Ryan, thanks for taking my questions. First one, going on to the kind of the Google algos, if I know, you said calls dropped about 30% from that July to September, but assuming these leads are usually less likely to convert, what was the, I guess, your estimated drop in admissions there, the impact from that?
That was about 10%.
Okay.
Overall for the quarter, census dropped about 10%.
Okay. And then as far as kind of what you're doing to offset that impact, is that going to look like a change in your investment outlook on the marketing side going into the end of the year 2019?
We've definitely made some accommodations in the fourth quarter for changing some of our advertising strategies to lift call volume, to lift census. There's also some things that we've been doing in the call center all summer that I think is going to impact on conversion rates as well. So we feel like that we have a good game plan. I've definitely got the right leadership in place, and we're taking action on it all through the rest of this year.
Got you, but as far as the increase in your marketing spend, is it more like a shifting resources versus adding to that?
Andrew W. McWilliams, AAC Holdings, Inc. - CFO & CAO [7]
Yes, this is Andrew. From an incremental spend, as we look into fourth quarter, we did include that in our adjusted EBITDA, you know, guidance for the full year. So that was taken into account, that incremental spend in the fourth quarter.
Got you, and then as far as kind of - do you have like an estimate on kind of how long it's going to take to kind of get back to normal? Or is this something that you can kind of work around pretty quickly you think? Or do you think it will be kind of a work in progress?
I mean, I feel good going into Q1. I think we're - it's a work in progress in Q4, and that's the reason we revised our estimates. And I think you see the new numbers that we put out. We definitely see those headwinds continue the rest of this year. I feel like by first quarter and the second quarter, we certainly have the team in place to increase the conversions as well as lift the call volume.
Great, are you seeing any good sign so far? Or are you still kind of in that work around process?
We're still in that work around progress right now.
Okay, great. And then we'll shift away from that. If you could just talk about AdCare a little bit, how the integration is coming, is that complete? Are you seeing kind of the revenue and cost synergies that you're expecting going in there?
The integration of AdCare, you know, that was a great acquisition, and AdCare is going as exactly as we expected, so the revenues, the adjusted EBITDA and the synergies are coming online as we had originally anticipated.
Great, okay. And then how about any update on leveraging your outcome studies for getting stronger reimbursements there? Some more in network revenue?
Yes, I think we're having really good conversations with insurance companies. I don't know if you've noticed, we had an in-network contract with Anthem Blue Cross out in California we're really proud of. It's a relationship that we're building with the insurance company there.
In New Jersey, we have a strong relationship with Sunrise and the insurance companies there. We've been able to raise some of our rates in Rhode Island and developing the good working relationship with Blue Cross Rhode Island.
So I definitely think continued research studies is the way to go. Health care, in general, is looking for outcomes, looking for the best way to treat patients, and we need to be working with payers on that avenue.
Great, and then last one. Any update on kind of selling the lab services to external providers?
Yes. I'm glad you mentioned that. I briefly talked about it earlier on the call. And I've pivoted and started spending a lot of deep-dive time in the lab recently, and I'm extremely excited not just for the third-party revenue, but just some of the data and some of the things that we're seeing amongst patients that I think that we'll be able to start putting together a nice research study and some published papers next year in terms of how we think that using diagnostic treatment can really help with outcomes.
Great. And then I guess one last one. So we've been - there's always been a lot of interest in potential strategic alternatives, are you putting in any of little bit more attention on there? Or are you just kind of keeping the mind open, I guess?
Can you say that again? I missed that question.
Do you just think getting a lot of interest on potential strategic alternatives that you guys might take? Are you looking into that a little bit more? Or are you just kind of keeping your mind open there?
No, I went public for a specific purpose, and I think we're achieving that mission. After 4 years of public, we're doing what we had set out to do and are going to continue to do, build a national company that has excellent treatment services across the United States. And that's really what I'm focused on right now.
Great, okay, thanks guys and have a good…
Yes sir.
[Operator Instructions] Our next question will come from Joe Yanchunis of Raymond James. Please go ahead.
Hi there. So I know you guys - are you able to hear me?
Yes.
Okay. So I know you talked about changes in your call center, but can you speak to how the conversion ratio trended in the third quarter?
Yes. I mean, I think that all the things that we're doing in the call center, I mean, look, in the third quarter, we changed our compensation plans, we changed our leadership, we changed our technology, and then right in the middle of that, we got hit by a little bit of a meteorite in terms of the Medic algorithm change.
And so a lot, there's been just a lot of noise in there for the last month to a month and a half. So we're starting to see a lift in conversions. We definitely feel like the changes that we're making are working. But in the midst of that, you get such a large volume drop, it's a little too early to tell. But we're certainly are working through it, and we certainly are keenly aware of it, and everybody is full all hands on deck, and we're, I feel like that we're making the progress that we need to make.
All right. And then, I guess, also in your prepared remarks you talked about how the ADR was impacted by mix, I was hoping, you could provide an update on what type of rate changes you're seeing within the out-of-network payers that you have there?
Yes, this is Andrew. From a rate perspective, absent any kind of mix changes whether that'd be service level…
Sure.
Or between our in-network and out-of-network facilities, overall, we're not seeing declining reimbursement rates on facilities. Example, at our in-network facilities, we're seeing really good rate increases in both on new contracts as well as negotiating contracts.
And on the out-of-network side, in terms of a reimbursement per day or per visit metric, we're not seeing large declines there either. Like I said, we are seeing some service-level mix as well as mix between our in-network and out-of-network facilities.
So have you started to convert some of your out-of-network beds to in-network beds to kind of meet that increased demand?
We're starting to just a little bit. Most of our out-of-network facilities will stay that way. Where we've been focusing our efforts is in, say, Sunrise, New Jersey or Rhode Island, AdCare, Recovery First, we have plenty of in-network beds.
Again, we did go with Anthem Blue Cross in Orange County, California as our hospital. We thought that made a lot of sense in the managed care organization wanting to partner with us, so we see that as a real positive. And we were able to achieve rates that we thought were very fair. But we're open to working with the insurance companies. I think it's just state-by-state, payer-by-payer depending on the services and level of care that we're offering at facilities that we have opened.
So would all of your facilities, did they all have - now have a mix of out-of-network bets and in-network beds? Or do you still have some facilities that are exclusive to out-of-network payers?
No. We have plenty of facilities that are still exclusively out-of-network.
Okay. And a couple more questions here. Do you have any sense on how the new opioid legislation in Washington will impact your rates at AdCare?
I don't see it's change in the rates at AdCare. Medicare ticked up just slightly this year. But outside of that, most of the opioid dollars, if you really trail it, is on the public sector side of things and on the MAT treatment, Medicated-Assisted Treatment side, as well as some enforcement side of things. We didn't see a lot of dollars in the bill related to residential treatment, traditional 30-day residential treatment. You're not seeing as much there. Seeing some research dollars, we certainly are looking at that and seeing, is there any way that we can partner with NIDA or SAMHSA on some research studies, but I don't see a lot that affects us on the side of business that we have.
Got it. And then my last question comes down to the DSOs. What were your DSOs in the quarter?
DSOs for the quarter approximated at about 100 days for the quarter. Cash collections were down this quarter sequentially from last quarter; however, that was due to some very specific items such as we talked about one of the synergies we had was the conversion of AdCare, Rhode Island's billing from a third party to our own with an e-billing conversion. There's a temporary decline in your cash collections, and there were a couple of other pretty discrete items as well. We are seeing cash collections improve over the average for Q3 and Q4.
Okay, great. Those were my questions.
Thank you.
This will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Michael Cartwright for any closing remarks.
Thank you very much. I do want to thank everybody for being on the call. I appreciate your patience. I think that none of us expected what happened in August, but I do feel confident in the management team that we put in place to overcome the obstacle.
We're working diligently every day to census to solve for volume issues. We're working on that through the year and feel like that we have a good game plan in place, and we're working that plan. Thank you very much for your patience and commitment to American Addiction Centers. Have a good day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.