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Good day, and welcome to the AAC Holdings Fourth Quarter 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. I’m Andrew McWilliams, Chief Financial Officer and I’d like to welcome you to our fourth quarter 2017 conference call. To the extent any non-GAAP financial measure is discussed in today’s call, you will 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 the Press Releases and viewing 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 financial performance for 2018 and beyond. For this purpose, any statements made during this call that are not statements of historical fact 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 fourth quarter 2017 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.
At this time, 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 the top line results and highlights from the strong year that we have had and then Andrew will walk you through the specific financial results on our fourth quarter and full-year. Following that, we will open the line up to your questions.
Q4 was a solid quarter for us and a good finish to 2017. We are excited to build upon this momentum going into 2018 with stronger operations, increasingly disciplined financial management and a solid focus on identifying and servicing more patients in need. Revenue, adjusted EBITDA and operating cash flows all increased double digit on a year-over-year basis. We continue to keep our costs down, enabling us to deliver operational efficiencies that enhance shareholder value.
A few highlights. First, our continued focus on bringing DSOs down is paying off. DSOs came down to 101 days in the fourth quarter, an improvement of 10 days from the prior year and 5 days sequentially from third quarter. Andrew will go into more detail regarding our financial and operational metrics later on during today's call. Second, just this week, we published recent findings of our 12-month clinical outcomes study, conducted in partnership with Centerstone Research Institute.
The treatment industry has historically done a good job of approving what treatment works, so we felt that it was critical for us to invest in patient outcomes studies. After analyzing more than 4000 patients, the study indicated that 63% of AAC’s patients maintained abstinence one year after treatment as compared to national benchmarks of 30%. After 12 months, days of alcohol used decreased by 80% and days of heroin used decreased by 88%. This is very gratifying finally for us. Delivering excellent clinical care remains our top focus and it is clear that our approach is having a real impact. We continue to make investment in clinical and other technological advances that will further improve client satisfaction, safety and outcomes.
Another highlight this year was our announcement of the pending acquisition of AdCare. This presents a significant opportunity for us to diversify our payer mix, particularly in government pay and to grow our presence in New England. The AdCare facilities being acquired include 114-bed hospital for substance abuse treatment and 5 outpatient centers in Massachusetts and a 52-bed residential treatment center and 2 outpatient centers in Rhode Island.
Finally, we made some significant investments in management talent we made that will drive 2018’s focus on operational efficiency and financial discipline. I'm thrilled to welcome our new Chief Operating Officer, Dr. Michael Nanko who we hired in December. Mike will help us achieve our goals through his proven operational skills and experience in behavioral health. As you know, Andrew McWilliams also recently stepped into his role as Chief Financial Officer and already we're seeing his disciplined approach that will set us up for continued operational efficiencies and financial discipline.
Going forward, 2018 will be a year of focus of improving admissions, maintaining financial discipline and continuing or further improving our level of patient care and outcomes. With that, I'll now turn our call over to Andrew to discuss the financial results for fourth quarter and full year 2017.
Thank you, Michael. For the year, total revenue increased 14% year-over-year, driven by improvements in our average daily residential revenue and by increases in both outpatient visits and increases in our average revenue per outpatient visit. Residential treatment facility increased 30% to 247 million compared with 189.5 million in the prior year. Average residential improved billing and collections activity as a result of the investments we've been making in our revenue cycle processes throughout 2017. Also contributing to the increase is a favorable shift in the 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, as the average daily residential revenue for these lower levels of care are significantly less than the higher levels of care, our residential average daily revenue has increased. Outpatient and sober living facility revenue increased 74% from the prior year due to increases in both the volume of outpatient services and the increase in the average revenue per visit. Client related diagnostic services revenue, which includes point of care drug testing and client related diagnostic laboratory services revenue was down 50% year-over-year basis. This decrease is not due to reduction in the volume of laboratory tests performed, but reflects previously anticipated lower reimbursements.
Net loss available to common stockholders was 20.6 million or $0.88 per diluted common share for this year. The net loss includes an accrued litigation liability of 23.3 million or $0.70 per diluted common shared related to the estimated settlement of the Tennessee class action litigation and the Nevada derivative litigation matters. We continue to be in discussions with insurance companies, but have reserved the amount on our balance sheet. In addition, there is a non-cash increase in our provision for the income taxes of 3.5 million or $0.15 per diluted common share related to the estimated impact of Tax Cuts and Jobs Act on the deferred tax assets and liabilities.
These estimates may be refined as further information becomes available. Adjusted EBITDA increased 20% to 57.1 million, while adjusted net income available to AAC Holdings’ common stock holders decreased to 13.9 million or $0.60 per diluted common share because of the liabilities I just outlined. Our press release includes a full reconciliation of these non-GAAP measures. Cash flows provided by operations totaled 19.3 million for the year compared with cash flows from operations of 100,000 in the prior year. Capital expenditures in the year totaled 33 million.
I will now provide a quick overview of the fourth quarter specifically. Total revenue for the fourth quarter increased 19% to 86.1 million compared with 72.4 million in the same period in the prior year, bolstered by strength in residential and sober living. Residential treatment facility increased 40% to 71.5 million compared with 51.2 million in the same period in the prior year due to the shift away from [indiscernible]. Average daily residential revenue increased 58% to 1,054 compared with 667 in the same period in the prior year.
Outpatient and sober living facility revenue increased 59% to 9 million compared with 5.7 million in the same period in the prior year. Average revenue per visit increased 16% to 418 compared with 360 in the same period in the prior year. Client related diagnostic services revenue was down 78% to 3.1 million compared with 14.2 million in the same period last year. Again, this was in line with our expectation as a result of lower reimbursements combined with a shift in the mix of client related diagnostic services from higher reimbursement test to lower reimbursement tests.
Net loss available to AAC common stockholders was 18.8 million or $0.80 per diluted common share, while adjusted EBITDA increased 35% to 15.1 million over the same period in the prior year. We’re pleased with our liquidity as of yearend. Our cash and cash equivalents were 13.8 million and we had a undrawn revolver of 55 million. Capital expenditures in the fourth quarter of 2017 totaled 5.9 million, while cash flows provided by operations totaled 5.3 million for the fourth quarter of 2017 compared with cash flows used in operations of 1.2 million in the prior period.
As Michael mentioned, DSO is continuing to improve and we were 101 days for the fourth quarter of 2017, down sequentially from 106 days in the third quarter and 111 days in the prior year period. Total cash collections for the year ended 2017 as compared with the prior year increased by 15%. Focusing on DSOs continues to be a priority for us as part of our strategy to accelerate operational efficiency and discipline. Going forward, we expect improvements in DSOs to be incremental on the quarter rather than significant downtick we experienced this quarter.
Turning now to our outlook for the full year of 2018, we expect revenues to be in the range of 325 million to 335 million. This estimate assumes residential treatment facility revenue of approximately 258 million to 260 million, outpatient and sober living facility revenue of approximately 38 million to 42 million, client related diagnostic services revenue of 18 million to 21 million and non-client related revenue of approximately 11 million to 12 million related to third-party marketing and laboratory services.
We expect adjusted EBITDA to be in the range of 62 million to 65 million and adjusted earnings per diluted common share to be in the range of $0.70 to $0.75. We expect an annual effective tax rate of 24% to 26% and diluted weighted average common shares outstanding of approximately 24 million for the year. Please note that this outlook does not include any future acquisitions, including the pending acquisition of AdCare, transaction related costs, litigation settlement expenses related to legal defenses or the adoption of ASU 2014-09, revenue from contracts with customers or topic 606. Upon the adoption of topic 606 on January the 1 of this year, a majority of the provision for doubtful accounts, which historically was reported as an operating expense will now be reported as a direct reduction to revenue. We do not currently expect that the adoption of topic 606 will have any impact on adjusted EBITDA.
This concludes our prepared remarks for this morning’s call. So we’d now like to turn over the call to the operator who will open it up to your questions.
[Operator Instructions] Our first question comes from Ryan Daniels of William Blair.
Congrats on the strong end to the year. Let me start with the AdCare deal. Michael, you mentioned that’s pending and I’m curious if we could number one get a timing on the – update on the timing there. And number two, any commentary on kind of what their revenue run rate is looking like. I know it was about 50 million TTM as of June. I'm curious what their growth has looked like or any color you can provide on how their business has been performing?
Sure. Just last week, myself and Dr. Doub were in Massachusetts and we passed the final regulatory hurdle and received approval from the Massachusetts Department of Public Health for the AdCare transaction. So I'm anticipating within the next thirty to sixty days, we should be able to close everything up. They are running their organization just like they have as a strong organization. Year-over-year, it's very, very similar. I know we'll be doing an updated guidance and look for the full year once we close that transaction.
And then I know we've discussed this in the past, but I'm curious with the very strong results you've got from the clinical work and analysis you've done for your patients post discharge AAC, how are you going to leverage that, if that could be more of a brand developer for the organization if you're going to use that from a sales and marketing front, if you can use that for contracting, for better length of stay or reimbursement, just what are the various goals of leveraging that data effectively for the organization going forward.
I think all the above. I mean first off, I have to look at the clinical programs themselves and I think the clinicians that are working in each of our treatment centers can take some of that data and alter programming to continue to get good outcomes. The other thing that we're taking a look at is just post discharge, how do we continue to stay in touch with people and that's where I was talking about technology and investing in technological advances in the future of how do you increase those outcomes by encouraging people to follow up with aftercare, outpatient services, remembering their medications, things like that.
So there's lots of just good R&D work that go along with research studies that will help us advance our treatment protocols. And then obviously we hope to spend time with the insurance companies. I know Dr. Nanko and team in Florida have a meeting with one of our insurance payers in Florida. Later on this month, we certainly will be having those conversations with any of our in network facilities going forward when we negotiate rates, but more importantly for me, it's always been about just how do we get the best clinical programs we possibly can.
And then as we think about the forward outlook, a couple of things, kind of the marketing and admissions front, can you give us an update on your size of your business development team number today and goals for 2018. And then, your advertising and marketing expenses, I know, a huge line item, but they’re down nicely year-over-year. So, clearly seeing some efficacy in your marketing programs. So can you talk a little bit about that too?
Yeah. The exciting thing for me is to really do what I did in the operations in 2017. I was able to spend a lot of time with all the operators in the field, get a sense of exactly what we're doing, what's driving good results. Some of that was putting good solid business office practices in place, making sure that we get more private pay, co-pays, deductibles, just tighten up our processes and procedures, our compliance programs. Dr. Doub has done an incredible job. We now have an EMR system wide throughout our organization that we can now do compliance programmings almost at a touch of a button from Nashville. Now with Dr. Nanko on board, he's really taken over day to day of running the operations.
It allows me to do the exact same thing that I did in ’17 to sales and marketing. We’ve made material progress in sales and marketing I think in 2017 from a cost per admission, but I still think that there are some things that we can do to drive additional admissions and we're working directly with the leaders in those different departments, both on the outside team, inside team as well as our marketing teams out on the West Coast to really find out how we can build the national brand that we always wanted to. So I'm really excited about ’18 having that additional help on the operational clinical front to make sure we're doing a great job there and then really spend a lot more of my focus and energy and I think you'll start to see that in the back half of 2018.
And then Andrew one for you on pricing obviously, the price has gone up so much year-over-year past the $1000 mark on the EDR residential. Number one, do you think that is sustainable? And then number two, can you provide maybe even more granularity there, how much of that is [Technical Difficulty] or one time true-up in nature versus how much of that is mix shift towards higher activity as you move your business outside into sober living and residential?
Yeah. So first off, we're really proud of the progress that we made throughout 2017 on our revenue cycle. That revenue cycle process was not just in our billing and collections, but focused all the way from the beginning, starting with our call center, moving into the facility, focusing on the business office functions at the facility and then focusing on the billing and collection from that standpoint. So, all of those processes came together during 2017 seventeen to see the improvements that we saw.
Contributing to that though, as you pointed out is a favorable shift mix as we extract outpatient services that were historically performed in our residential, like partial hospitalization and IOT and we now are able to do that with our investments in outpatient centers, we perform those services outside of the residential walls in a lot of cases. And so if you look at the year-over-year kind of ADR increase, that accounts for about 25% of that increase that we're seeing, of the roughly, I think, about $200 increase in ADR.
The other is a favorable shift that we saw in the mix of patients at our different facilities. We were able to, during the back half of the year, really keep some of our facilities that have better reimbursements fuller and so that also had a favorable mix. So as we look through to 2018 and we increase our capacity, we would expect a slight downtick in that ADR as we kind of fill out those facilities, just due to a shift mix change, but again, we have very favorable kind of tailwinds going into with all the process improvements that we've made.
For example, the cash collections that we're receiving from our co-pays, deductibles, private pay clients, we've seen a pretty dramatic increase in that. It went from roughly 4% of our total revenue in Q4 of 16 to 7% in Q4 of ’17.
[Operator Instructions] Our next question comes from John Ransom of Raymond James.
Michael, are you going to -- is this outcomes data, was this one and done or is this something that you report every quarter?
We’ll report every quarter. I think every quarter, since we've been public, we've always talked about our clinical first. We'll stay focused on that. We're going to be doing some additional data, looking and slicing and dicing some of the data from the 4,000 patients. The other thing that we've done is we're committing to a new research study. One of the things that we want to do with AdCare in the northeast is put some of the same processes and procedures in place that we've done with this study and take a look at what's going on with the AdCare patients as they flow through there as well. So we're committed to research. I mean, this is not a just a one time and done and let's use it for marketing. This is really a long-term commitment over the next 10 to 20 years to spend research and development dollars to find out what works in treatment and can we get better over time.
And I guess for shallow financial types like myself, I mean, can you -- is there a way to put in a sound bite if you will, what AAC does differently? I know you're going to tell me it’s a whole program in your people and whatnot, but is there any like hook that you have that would be easy to understand that says what we do, we always do X and we don't think our competitors do X.
I just don't do that. I think there's a lot of great companies out there providing substance abuse services across the United States, the American Society of Addiction Medicine has really good guidelines, I don't ever like to knock another provider and what they're doing because it's really hard work what we do on a daily basis. I do believe that our investment in technology, our investment in systematizing across sites throughout the United States will lead to technological advances.
I’m really, really proud of what we're doing in our laboratory. We're now not just doing your analysis compliance testing, but we're also taking the blood work and doing it in-house and we're also doing genetics work in-house to where we can determine what medications we give someone quicker to help them with their mental health conditions. So there's things like that that I do think over time that we will be able to lead to some technological breakthroughs to give us a competitive advantage, but I don't ever like to knock someone else over that.
And I know that there are some of your facilities where you don't have sober living such as Tampa. As you add sober living, are these numbers going to continue to move like they have moved with the revenue per day going up and more coming from outpatient. Is there still room to go there or is this sort of [indiscernible]?
There is room to go. We’ll continue to add beds. I think my focus in the first half of ’18 is get that occupancy back up to 85% to 88% where we saw before we added on so many new beds and then you'll see us continue to advance in opening up more sober living facilities throughout the United States in locations that we already have large residential facilities like Laguna, Tampa, Florida, Rhode Island where we’ll have AdCare. There's plenty of opportunities for organic growth in the states that we operate in.
And then lastly, I just want to drill down a bit more in to marketing, I know that with your new COO, you're able to focus a bit more on that. So compared to three months ago, when you talked about this, what have you learned and if I could ask a more specific question, as we think about two years from now, what percent of your admissions do you think will be coming from the call center versus local people and is that ratio still, in other words, are you sort of a deep call center or is there room to go there, or is this going to be simply a matter of sort of for adding people in the field and knocking on doors.
I think it's both. I mean I think that the team that we have focused on digital marketing is incredible. The talent that we have there is really exceptional and I think the ideas that they come up with on a quarterly basis amazes me. Some of the partnerships that we're doing now with universities. We just started a unique partnership with University of Mississippi, partnering with Oxford Center and working with some of their new incoming freshman. It started all on the digital front, but now it’s really more of a community relations front. So I think one of the things that we're going to see is how can our digital work hand in hand with community marketing in the field, for example, in New Jersey.
We just had a great community program up there that handing glove, the community program work with the digital side to bring people together. So I think you'll see more community working in states like Nevada. They're working more as a team. So I think you're going to see growth both on the digital. You’re going to see it in the call center, but you're also going to see it local. You’re going to see a lot more local business being driven out of the states that we operate facility. So I think there's a long way to go there on both sides. I think we're just getting installed.
How many people do you plan to add this year?
We'll have over 100 in the field by the end of the year.
And how does that compare to today?
How about 72 in the field today and it could exceed more than 100 in the field. But again, I also think that you're going to see the phone volume in the call center in Nashville go up as well through some digital activities that they've been working on in the fourth quarter that started bearing fruit in the second and third quarter this year.
So what are you looking to do with your conversion rates, kind of legacy versus what you’ve just described and how much you think you can move the needle there?
That's a good question. I mean it just depends on what type of call that we get in, right, and what type of clients can we take. Right now, there's a lot of calls that we get from Michigan or Ohio or other locations that have in network benefits that we are not able to help that we always try to get to facilities that are local. So I think what our strategy has been that you've seen over the last three years as we've gone out involved in that work facilities just like AdCare, we're so excited about bringing on AdCare into the fold.
They have a big network presence in both Rhode Island and Massachusetts. There's lots of calls that we get from those states that we can't take now. We can't help them. So it's an opportunity for us to grow that business. So I think the conversion rate will continue to go up as we continue to have offerings in the community, whether it be out of network, in network as well as outpatient relationships in the field. So in terms of a percentage number, if it goes from 2% to 4%, that would be a big uptick, but I think it would be partly because we have many more offerings in the field.
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Cartwright for any closing remarks.
I just want to thank everyone for joining us. I feel like that we had an incredible 2017, what we set out to do, we accomplished. I just want to thank all the hard workers at American Addiction Centers for all the hard work you do on a daily basis, helping those in need. So we'll talk to you in about three months. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.