William Brent Turner - President Joey A. Jacobs - Chairman and Chief Executive Officer David M.

Duckworth - Chief Financial Officer, Chief Accounting Officer and Controller

Brian Tanquilut - Jefferies LLC, Research Division Frank G. Morgan - RBC Capital Markets, LLC, Research Division Gary Lieberman - Wells Fargo Securities, LLC, Research Division Kevin M.

Fischbeck - BofA Merrill Lynch, Research Division Whit Mayo - Robert W. Baird & Co.

Incorporated, Research Division Kevin Campbell - Avondale Partners, LLC, Research Division Dana Hambly - Stephens Inc., Research Division Dana Nentin Charles Haff - Craig-Hallum Capital Group LLC, Research Division

Good morning. I'm Brent Turner, President of Acadia Healthcare, and I'd like to welcome you to our Fourth Quarter 2013 Conference Call.

To the extent any non-GAAP financial measure is discussed in today's call, you may also 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 Press Releases and viewing yesterday'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 Acadia's expected quarterly and annual financial performance for 2014 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 Acadia's filings with the Securities and Exchange Commission and in the company's fourth quarter news 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, for opening remarks, I'd like to turn the conference over to our Chairman and Chief Executive Officer, Joey Jacobs.

Good morning, and welcome to our fourth quarter call. In addition to Brent, I'm here today with our Chief Financial Officer, David Duckworth, and other members of our executive management team.

David and I each have some brief remarks about the fourth quarter and our outlook for Acadia. Then we'll open the line for your questions.

Acadia continued to produce exceptional results during the fourth quarter of 2013. Our revenues increased 66% compared with the fourth quarter last year.

Our adjusted income from continuing operations, 79%, and per share results increased 53%. We were very pleased with our results for the full year with growth of 75% in revenues, 109% in adjusted income from continuing operations and 62% in adjusted income from continuing operations per diluted share.

Our growth for both the quarter and the year was primarily the result of our adding more than 1,000 licensed beds to our operations during 2013, to complete the year with approximately 4,200 licensed beds in 51 facilities. More than 700 of the beds added in 2013 came from 7 acquisitions completed during the year.

These transactions included the fourth quarter purchases of Longleaf facility in Alexandria, Louisiana, and Cascade facility in the state of Washington. We also opened a 75-bed North Tampa facility in the fourth quarter, which was under construction when we acquired it in May 2013.

The remainder of 300 beds was added to existing facilities and through the opening of 2 de novo facilities. The fourth quarter new bed additions included 28 beds added to existing facilities and the opening of a 48-bed de novo facility in Lancaster, South Carolina.

The addition of new beds to facilities in our same facility base was again the primary driver of our strong growth in same facility revenue, which increased 8.5% for the fourth quarter and 10% for the full year. For the quarter, this increase reflected a 7.3% increase in patient days and a 1.1% increase in revenue per patient day.

Our same facility revenue growth contributed to our maintaining same facility EBITDA margin above 27% for the quarter at 27.1% versus 27.3% for the fourth quarter of 2012. Our consolidated EBITDA increased 61% for the fourth quarter to $39.2 million, and for the year, increased 80% to $145.3 million.

As we look into 2014, we continue -- we expect to continue producing solid profitable growth. We have discussed with you before our intention to add new beds to existing or de novo facilities on an annual basis of at least 5% of our licensed beds at the beginning of any given year.

Our current plans for 2014 call for more than 300 beds to be added. We also expect to continue to add beds through acquisitions.

Although our earnings guidance does not include the impact of any future acquisitions, our guidance does include the impact of the acquisition we already completed of the 68-bed Riverside facility in California, which closed on January 1, 2014. To summarize, Acadia had a great 2013, and we are well positioned to produce further profitable growth in 2014.

There is growing market demand for high-quality in-patient behavioral health care, and our team has a well-established record of growing successfully to meet this demand. Thank you again for being with us today, and now here's David Duckworth to discuss our results in greater detail.

Thanks, Joey, and good morning. Acadia's revenue increased 66.3% to $190 million for the fourth quarter of 2013 from $114.3 million for the fourth quarter of 2012.

Adjusted income from continuing operations increased 79% to $14.5 million from $8.1 million, while also increasing 52.6% on a per-share basis to $0.29 from $0.19. Our adjusted results exclude transaction-related expenses of $3.3 million for the fourth quarter of 2013 and $6 million for the fourth quarter of 2012.

Acadia's weighted average shares outstanding increased 15.4% on a comparable quarter basis, primarily due to its common stock offering in December of 2012. Acadia's same facility revenue increased 8.5% for the fourth quarter with a 7.3% increase in patient days and a 1.1% increase in revenue per patient day.

Same facility EBITDA was 27.1% of same facility revenue for the fourth quarter of 2013 compared with 27.3% for the fourth quarter of 2012. As we discussed last quarter, the slight margin decline is primarily attributable to lower same facility bad debt expense for the fourth quarter of 2012 of 0.8% compared with 2% for the fourth quarter of 2013.

For the full year, same facility bad debt expense was 2% for 2013 compared to 1.6% for 2012. Adjusted consolidated EBITDA increased 61.1% for the comparable quarters to $39.2 million, which was 20.6% of revenue versus 21.3% for the fourth quarter of 2012.

Acadia's tax rate for the fourth quarter of 2013 improved 140 basis points to 37.8% compared with 40.2% for the fourth quarter last year. For 2014, we expect our tax rate to be approximately 38%.

As reported in our news release yesterday, we recently expanded our senior secured credit facility and extended its maturity date. The facility now includes a $300 million term loan and a revolving credit facility of $300 million, which was increased from $100 million previously.

The facility matures in February of 2019, and we lowered the interest rate for the entire facility by 50 basis points. We currently have approximately $232 million of availability under the revolver, and this will be used primarily to fund future acquisitions.

Finally, we have established our 2014 guidance for adjusted earnings per diluted share in a range of $1.26 to $1.29. Included in our 2014 guidance is a $3.5 million increase in stock compensation expense to approximately $8.7 million related to our third year as a public company.

For the first quarter of 2014, our guidance for adjusted earnings per diluted share is in a range of $0.27 to $0.28. Our first quarter guidance is impacted by the ramp-up at our recently opened de novo facilities, as well as the recently acquired Cascade facility in Washington.

Our financial guidance excludes the impact from any future acquisitions, as well as transaction-related expenses. This concludes our prepared remarks this morning, and thank you for being with us.

I'll now ask the operator to open the floor for your questions.

Joey, just hitting the acquisition question right away. Has anything changed in terms of your target on hitting your $1 billion and $2 billion revenue run rate targets by end of '14 and end of '17?

Brian, no, it does not. I was out yesterday with Steve Davidson working on an acquisition opportunity, and we're very busy going through the process of finding our next acquisitions and closing those transactions.

And the opportunity to grow the $2 billion company by the 2017 -- by the end of 2017 is still there for us. We just got to work hard, have just a little luck.

Got it. And then, yes, just to follow up on that.

If you look back to this time, the same time last year, would say that your pipeline today is bigger or smaller than what it was the same time last year?

The actual number of possible acquisitions is basically the same size. We have 1.5 pages that Steve reviews every Monday with us at our e-team meetings.

So that -- the number of facilities stays about the same even though we make acquisitions, and they go off and new ones come on. But there are a couple of large transactions that are on the list that probably are more active today than they might have been a year ago.

Got it. And then for David, as we think about your guidance for the year, what sort of same-store organic growth have you baked into that projection?

Well, we expect the same facility margin to improve by about 100 basis points. And of course, we do have the start-up facilities that are ramping up.

We also have a number of facilities that are moving next year into our same facility group. So we do expect to see improvement within that group.

Got it. And then last one, on the organic growth, David, just in terms of like organic revenue growth.

How should we be thinking about that?

Brian, I'll step in and answer that one. As you know, we ended the year at 10%.

It's going to be hard to do double digits again. But as I've stated before during other presentations, we expect to lead the industry in same-store revenue growth.

And we expect it to be a very solid, strong, single-digit number if we get our beds built. We have more than 300 beds on our schedule for this year.

We got a few that came over from the end of last year that will be coming on in the first quarter. So if we get our beds built and get them online, we should have very strong industry-leading same-store revenue growth again.

Was hoping you could give us an update on just the pricing outlook by your different payer classes between Medicaid and particularly on the commercial side.

Well, Frank, as of the -- our payer mix is about 25% commercial, and we're hoping there to get a 4% to 6% price increase. Medicare, we think, is going to be hopefully between the 1% to 2% range.

And then on Medicaid, we kind of factored in a 1% increase there. So once again, I think it's going to be in the 2% range, like we've seen this past year.

So anywhere from 1.5% to 2.5% overall revenue per day increase is what we're shooting for.

Any implied change in mix of your overall business in the guidance? I know you had, last quarter, commented about your national marketing group, how they'd been successful at driving some volume, mostly -- more so on the Medicaid side than the commercial side.

But are there any kind of conceptual thoughts about how mix is embedded into the guidance?

No. I think the mix, Frank, just -- I'll just give you a few more numbers here.

We expect commercial to stay around the 25% range. We think Medicare's going to stay about 22% of our revenue.

Medicaid's going to be in the 47%, 48% range. And then other and -- other payers/self-pay is going to be in the 4% or 5% range.

That's how we ended the year. And I think that will probably hold this year, unless we were to buy a specialty facility that would have more commercial pay or if we were to buy a residential facility or a large residential facility that would be more Medicaid.

Those would be the only thing that would change the numbers, but we're nearly so large now, Frank, that it's kind of hard to change those numbers with just one acquisition.

Okay. One last and I'll hop off.

What would be your implied cash flow from ops for 2014 based on the guidance you gave?

Frank, this is David. Cash flow from operations was a strong number this year.

We did $20 million in the fourth quarter. We expect that to increase to $25-or-so million on a normal quarter basis.

But of course, first quarter tends to be lower cash flow from ops, but $25-or-so million a quarter is our expectation.

Can you talk about health care reform? And it doesn't sound like you have any benefit baked into the numbers, but what you view the potential upside as and what may be you're seeing in some of the markets?

Gary, we do not have that baked in. It's still too much of a moving number for us.

And with various states, where they're at and exchanges. So it's -- we did not -- we took more of a status quo and knowing that it should be positive to us, so once it gets fully implemented.

So we don't see it as a negative at all. We see it as a positive, but it's still just a little bit too hard for us to quantify.

It's just too hard for us to quantify, but it's a positive. Could it be 1% to 2% increase in revenues for us or whatever?

We still don't know that number yet, but we're keeping a close eye on it. We're watching the states as they do their exchanges, and just like everybody else in the health care industry, how's it going out there.

And -- but we're very fortunate that on the essential benefits, mental health was put in there. So we know it's a positive for us, but just can't quantify it at this time.

Okay. And then in terms of the 300 beds that you plan on adding, how do you -- how good do you feel about that?

Is there potential for that to change? Or is that number pretty much since done?

Well, the number -- that is a minimum number, David -- I mean, Gary. That's a minimum number.

We would only expect it to grow. Those are hard projects that we have identified with actual opening dates during 2014.

And so that number, as we go through the year, I would expect it to grow. So we're very pleased that we have over 300 beds with opening dates scheduled for the year, knowing that the number will only get larger.

I guess wanted to understand a little bit the, I guess, the trajectory through the year implied in your guidance because Q1 is a little bit below what we're looking for, and just want to understand how -- is it this year playing out like last year? Because last year, you'd kind of said, hey, maybe the Street didn't model in Q1 seasonality a little bit the way it should have and then some deals that you had done at the end of 2011 were kind of ramping up and maybe losing a little money at the beginning of the year, becoming breakeven as the year went on and being more additive in the back half of the year.

Is that the way that you're kind of looking at your guidance right now?

This is how I'm looking at it, Kevin, is that this first quarter, we are ramping up North Tampa, Rebound and Cascade, with North Tampa being early out of the gate and ramping up nicely in this quarter. Rebound is behind it.

And Cascade is -- Rebound and Cascade are about at the same pace of ramping up. I think by the end of the first quarter, North Tampa will be there, that good positive numbers will be coming out of Cascade and Rebound.

So I'm hoping that the start of April, the second quarter, that those 3 -- the ramp-up has been mitigated mostly. And then that the earnings from the next 3 quarters are going to be about the same earnings per share contribution to us, with just slight, when I say slight, $0.01 to $0.02 change in the quarters.

So we expect the second, third and fourth quarter to be close to the same actual numbers. Now obviously, that's with no more acquisition.

That's just with the book of business that we started this year with. So that's how we get to the dollar to our guidance.

Okay, that makes sense. And I guess, some of the deals that you've done more recently are these kind of assets where maybe there's a little more of a ramp upfront, but there's a longer-term growth opportunity behind them.

Is that the type of deal profile that you're seeing more often today? Or are these just kind of unusual and the math around the deals are going to be more buying more fully ramped up and profitable assets?

As I think we said, we will do 1 or 2 de novo projects each year. Now the timing of these projects -- we got North Tampa through the acquisition in May of last year.

And it's going to be a terrific facility, and it's tracking very similar to our facility that we bought in April, the Fort Myers area, when we bought that facility and how it's now ramped up and doing very, very, very well. So we see North Tampa doing the very same thing there.

Rebound is actually -- we've been working on that thing for more than 2 years and had to get through the CON and licensing and whatever. So it's a smaller facility, but we have -- I recently visited Rebound and it's a tremendous facility.

All we've got to do now is just execute on a daily basis and fill it up. So feel good there.

Cascade facility, I hope, will be more of what we traditionally see. We do like to buy facilities that already have a provider number.

The Cascade facility was inside a med/surg hospital, so we're having to get that provider number. So that's what's taking us a little bit longer there with that transaction.

But we'll have a couple of those every year. But maybe not 3 at the same time in the same quarter trying to ramp up.

But Ron and his team have done a great job, and we firmly believe that all 3 of these facilities will be home runs for us in the outer years.

Okay, great. And then just one last quick question.

The $3.5 million stock comp headwind for this year, I think, normally, when you have companies go public, it takes, I think, about 4 years for that to be fully in. Is there another $3.5 million next year?

How should we think about that?

Well, we like to think of the vesting periods associated with our stock grants. So we do have some that are 3-year vesting periods and some that are 4 years.

So the increase next year, although that will be our fourth year, may be less significant since we do have a mix of 3-year vesting awards. But yes, we do expect to see 1 more year of increase and then it should even out more.

Maybe just to tag on to Kevin's question earlier on the progression of earnings and thinking about the impact from the de novos, but have you hit the 20 discharges for each of those facilities to get the provider, the Medicare numbers? And where are you in terms of the network contracting with managed care?

No. Tampa has everything and they're full speed ahead.

Rebound is close, they've got their number. They're just getting in the tie-in notices and really getting the contracts signed.

Cascade had Joint Commission this week. We expect to get deemed status next week, and then it'll take a little while to get that number.

Hopefully, within the next 60 days after that, we'll have that number and they'll be off to the races. So 2 of the 3 have already been through the process and completed, just waiting on Cascade, and it went -- and has a Joint Commission inspection this week.

Got it. And in terms of managed care contracting, are they a network at this point or do you have to wait for the licenses to do that?

You have to wait really to get your Medicare number, but what you can do is out-of-network case rate, and we do those.

Okay, okay. So you've established some referral sources there?

Yes.

Is there any way to perhaps, and maybe you don't want to do this, but quantify the drag from those de novo assets in the fourth quarter and maybe how you see that progressing into the first quarter? Or I guess maybe said another way, is the drag larger in 1Q as you incur more costs than the fourth quarter?

It's going to be larger in the first quarter because we didn't buy Cascade until December 1, so we're going to have it for the full quarter. So the first quarter's going to have more of a drag than the fourth quarter did.

But once again, by April 1, Whit, I'm hoping, 2 of the 3 are way behind us and the -- that the one remaining will not be the drag on us.

Got it. And you also have like another $1 million of incremental stock comp that you're accruing versus the prior year in the first quarter?

Correct.

Ballpark, okay. And BCA and AmiCare, just hoping maybe you can comment on how those have progressed.

I think they're going to be rolling into the same-store count in the first quarter. So any commentary would be helpful.

We've been very pleased with those acquisitions, Whit, and very pleased, and we've now got all our teams. We had to put in a couple of CEOs, but those have been done.

So we're very pleased with both of those acquisitions.

Got it. And when I look at the -- your non-same-store assets and sort of back into the margins, it looks like sort of exiting the year, that, that group was running at a same-store EBITDA margin around 20% versus your same-store count near 27%.

So any reason that, that number can't move higher over time, any structural reasons?

Yes, I think David mentioned earlier in his comments that we do have more than 100 basis margin improvement once those facilities come into the same facility numbers. We expect more than 100% (sic) [ 100 basis points ] margin improvement from those facilities.

Got it. That's helpful.

And maybe just one last one, just the length of stay was up and I don't know if that's a real trend or something optical. There's so many moving pieces with your acquisitions coming in and out and the bed additions.

So maybe if you could help flesh that out for us a little bit.

We've seen no issues with the length of stay and it's just the math of all the different types of acquisitions that we've made. So it's still very, very stable, both on the specialty business, the traditional acute-type business and on the RTC business.

We've not seen any changes there.

Really just wanted to see what the multiples are looking like on deals right now, if that changed at all, if there's any increase or decrease in valuation?

It really hasn't changed. It's in the 8x to 10x, whether it's a single-facility or a multi-facility transaction.

We still do come across the facility where we pay a percent of revenue, and usually it's less than 1x revenue. So those have not changed, Kevin.

They have been pretty stable for the past 2 years.

Okay. And when we look at your cash flow statement from last year, you spent about $160 million on acquisitions.

Given sort of where the pipeline is today, would you expect to sort of spend a similar amount, more or less? Can you give us any sense there?

I think it's going to be close. Obviously, if we come across a big transaction, it will me more.

But I think $160 million for acquisitions, getting us 7 to 8 one-off transactions, is probably a good number.

Joey, just on the -- coming back to Kevin's question on the multiples. When you say 8x to 10x, that's the acquired EBITDA.

What do you think you're getting over time? What kind of multiple do you feel like you're paying over time?

Is it 6x to 8x with synergies you can bring?

Well, no. I think by the end of the third year, say we bought something at 8x, I would think by the end of the third year, we're looking close to 5x.

So Ron and his team do a great job of growing the programs. You see the same-store patient days.

When you do that, you get the margins up into the mid- to high-20s, and quickly that plays down the multiple that you acquired.

Okay, that's helpful. It dovetails into my next question on -- you talked in the press release about ongoing revenue generation initiatives in each facility.

Could you give some examples of what you're doing? Is this uniform throughout the portfolio?

Or does every facility have something unique going on?

Well, if it's a core acute hospital, you're looking to make sure they have child, adolescents, adults and geriatric programs. So when we make the acquisition, we see if one of those programs are missing or if there's a program maybe around substance abuse that they might could add to that facility.

And on our specialty facility, whether it's eating disorders or substance abuse, we're fortunate that we have excess demand for those services so it's just basically expanding them. Now what is occurring at some of those facilities is we're putting more outpatient programs around them, partials and IOP program.

And then on the RTC side of the business, you would want to make sure that you had a -- you could add specialty programs for certain groups, might be adolescent boys, might be girls, something some sort of special program where we see a lot of inquiries into our national marketing for that type of service, then we might need to build a 20-bed unit or create a specialty unit in one of our RTC facilities.

Okay, that's helpful. And last one for me on the new covenant flexibility.

David, could you tell us where the leverage ratios, where the covenants were and what they've been taken to now?

Yes. They were stepping down, Dana, over the next 2 years to the lower 4x total leverage.

And we've reset those back up to 5.5x to stepping down to more like 5x over the next year.

This is Dana Nentin in for Darren. Given the clarity on the Mental Health Parity, are you seeing any notable impact from the business at this point, like any increase in your RTC business?

Any that's gone on level of care, anything like that?

No, Dana. It's -- our patients don't come to us and the disclosure upfront is I'm coming because of Mental Health Parity.

So it's hard for us to know that. What we do know is that we're needing to build 300 beds to existing facilities to handle the demand.

And is that -- part of that demand coming from Mental Health Parity? Probably, but we just can't quantify it.

Okay. And then just a couple of housekeeping items.

Can you give us the number of your same-store facilities and beds at the end of the quarter?

Yes. So we ended our same facility group at the end of the fourth quarter, we had 34 facilities and about just under 2,700 beds in that group.

A couple of questions for you here. On 2014 acquisitions, I heard your comments earlier about the pipeline.

I know it's hard to kind of quantify the timing of how these things roll out. But if you had to put them into big chunks of 2014, would you expect more of these acquisitions in the first half or the second half?

Any color there would be appreciated.

Right now, looking at the pipeline, I think it probably would be equal split. The third quarter may, and this is just coming from -- this is just me now.

The third quarter might be our big quarter this year, but we expect acquisitions in every quarter.

Okay, that's great. And then my last question is on BCA and AmiCare.

I think when you bought those facilities in December 2012, the operating metrics were a little weaker than your -- than the rest of your portfolio. I guess that was one of the opportunities that you saw.

I was wondering how those facilities have tracked now that you've owned them for a year or so relative to the rest of the portfolio regarding occupancy or margins. Any kind of color there would be appreciated.

Sure, Charles. I think we had expansions in both of those groups of acquisitions.

I would think BCA, the transaction there may be slightly ahead of the AmiCare acquisition. But we're pleased with both of them, and we're pleased with the teams that we have in those facilities.

But we're expanding both groups and -- but I do think the BCA is slightly ahead of the AmiCare, but they're both doing very well.

Okay. And the expansions you're talking about, I assume those are organic bed expansions.

Is that right?

Yes.

And is that organic bed expansion for BCA and AmiCare, is that kind of in line with your 5% of the total portfolio? Or would you say you're adding more aggressively to that -- those facilities?

No, this is across the board, and quite frankly, we've got some facilities that have been expanded 2 or 3 times on this list, and they're being expanded again.

Thanks, everyone, for listening in today. I do want to thank our employees out in the field and the great job they're doing.

They made us -- they had a great 2013, and we look for similar results in 2014. They're very, very dedicated to taking care of our patients and improving the lives there.

So we're very pleased, very thankful for what we did in 2013 and what -- how 2014 is looking. I did happen to recently visit the Village in Knoxville, Tennessee and Rebound and our new facility in South Carolina and had great visits there.

I'm very pleased with what we're doing there. So once again, thanks for all your hard work.

Thanks for your interest in Acadia Healthcare. If you happen to have any more additional questions, please feel free to contact us directly.

And have a good day, and thank you.