Acadia Healthcare Company, Inc. Q3 2025 earnings call

Thank you, and good morning. Yesterday, after the market closed, we issued a press release announcing our third quarter 2025 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website. Here with me today to discuss the results are Chris Hunter, Chief Executive Officer, and Todd Young, Chief Financial Officer. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. 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 2025 and beyond.

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 third quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to Chris.

Good morning, everyone, and thank you for joining Acadia's third quarter 2025 earnings call. I'm pleased to be joined today by Todd Young, who recently joined Acadia as our Chief Financial Officer. Todd brings nearly a decade of public company CFO experience, most recently serving as CFO of Elanco Animal Health, where he helped shape the company's strategic direction following its spinoff from Eli Lilly. Prior to that, he served as CFO of Acadia Pharmaceuticals. Todd's deep experience in healthcare finance, capital allocation, and operational transformation will be instrumental as we continue executing our growth strategy and enhancing shareholder value. I also want to thank Tim Sides for his leadership as interim CFO over the last few months. Tim will now resume his role as Senior Vice President of Operations Finance.

Likewise, I would like to take a moment to thank Dr. Nasser Khan for his many contributions to Acadia Healthcare over the past three years, including most recently as our Chief Operating Officer. Nasser is stepping down from the role of COO and will continue to serve as an executive advisor to the company through the end of the year to help facilitate a seamless transition. Turning to our third quarter results, we reported revenue of $851.6 million, representing a 4.4% increase over the third quarter of last year. Adjusted EBITDA was $173 million, compared with $194.3 million in the prior year period. As previously disclosed, these results reflect softer-than-expected volumes in our Medicaid book of business, particularly in our acute care segment. Same facility volume growth was 1.3% in the quarter, which was consistent with the preliminary commentary we shared at the Jefferies Healthcare Services Conference in late September. This was approximately 100 basis points below our internal expectations.

In addition to this increased pressure on our volumes since our Q2 earnings call in August, we have also faced incremental headwinds from rates and benefit expense related to employee healthcare costs, along with an anticipated increase in professional and general liability expense, or PLGL. These items are causing us to reduce our Adjusted EBITDA guidance for 2025 to $650 million-$660 million from our previously issued guidance of $675 million-$700 million. Todd will take you through the specifics in more detail later in the call. Stepping back, we recognize that our operating environment has faced increasing headwinds as we move through 2025, particularly with regard to pressures on managed care companies and increased uncertainty on Medicaid funding at the state level.

Accordingly, we have taken decisive steps to optimize both our growth investments and our existing portfolio in order to position our company for improved financial performance in a more uncertain environment, particularly due to ongoing headwinds that we believe will ultimately be transitory in nature. As a result of these steps, as we finish 2025 and move into 2026, our company is in a better position to serve more vulnerable patients in our communities while sustaining both top and bottom line growth and unlocking the free cash flow generating power of the business. We are doing this in three primary ways. First, capturing the growth opportunity currently embedded in the business. Second, realigning our capital spending priorities. Third, optimizing our portfolio of existing facilities. First, let me expand on how we are focused on capturing the inherent growth opportunity that currently exists in the business.

Having added over 1,700 beds across 2024 and 2025 year-to-date, we have increased our capacity to serve more patients in need, and we expect to add another 500-700 beds in 2026. Including new facilities developed in partnerships with our marquee joint venture partners such as Tufts Medicine and Orlando Health. These additions are expected to contribute meaningfully to both same facility volume and EBITDA as they ramp over the next several years and reach their full performance potential. As we continue to optimize the impact from beds added in 2024 and 2025, we are also driving execution across all of our facilities in order to provide high-quality and effective healthcare to our patients. To support these efforts, we've implemented a series of targeted initiatives focused on acute care referral sources.

For context, approximately 80% of acute admissions originate from professional referral sources such as emergency departments, police departments, and schools. We've developed referral source-level action plans at underperforming facilities with senior operator ownership and weekly executive team updates. We've repositioned key clinical roles, introduced more data-driven planning, and allocated dedicated resources to support execution. Our execution across these initiatives drove over 3% same facility admissions growth in Q3 compared to last year, which is an acceleration from trends in the first and second quarters. In parallel, we are closely engaging with our payer partners, particularly in Medicaid, to demonstrate how our unique investments in technology and process position us to be part of the solution to the cost pressures facing government and other payers. Over the past several years, we've made meaningful investments in our quality platform.

Including standardized clinical protocols, enhanced data systems, and outcome tracking, all of which are becoming increasingly important to both our payer partners and to accrediting agencies. These investments are designed to strengthen care delivery and demonstrate the value of our services, and we expect them to drive long-term benefits for patients, payers, and our business, which I will talk more about momentarily. Second, we are realigning our capital spending priorities. As a backdrop, the demand environment for behavioral health services remains structurally strong. We continue to see rising acuity across patient populations, greater awareness and destigmatization of mental health, and a persistent supply-demand imbalance, particularly in underserved geographies. These trends are durable and support a long-term runway for growth. That said, we're taking a more measured approach to capital deployment in the near term.

We've recently completed a comprehensive portfolio and capital allocation review, and we're prioritizing growth in markets with favorable reimbursement dynamics and strong demand fundamentals. As a result, we are pausing several development projects that no longer project an acceptable return, and as previously disclosed, we now expect our capital expenditures in 2026 to be at least $300 million lower than our revised 2025 CapEx guidance of $610 million-$630 million. This discipline allows us to focus on projects with the highest return potential and ensures a more linear path to EBITDA growth, and importantly, it positions us to generate positive adjusted free cash flow for the full year 2026. A milestone we previously expected to reach on a run rate basis exiting 2026.

Looking ahead to 2027, we anticipate further reductions in CapEx as we concentrate our resources on high-performing markets and ramping facilities while maintaining flexibility to pursue targeted opportunities that align with our long-term strategy. Third and finally, our goal is to ensure we have a portfolio built to serve patient demand and help address the persistent supply challenges in behavioral health. This means investing prudently to grow the business, but also actively managing our existing portfolio to ensure we meet demand, maximize the returns on our investments, and best position us to deliver sustainable value-accretive growth. As part of our ongoing portfolio optimization, during the third quarter, we made the decision to cease operations at five facilities that no longer aligned with our strategic priorities or demonstrated persistent underperformance relative to our expectations.

Two of the closures are in the previously discussed group of underperforming facilities, one acute care facility and one specialty facility. The others are eating disorder facilities that do not fit with our broader portfolio. We make a decision to close a facility only after careful review and analysis of a variety of factors such as community needs, demographic trends, and existing healthcare resources within a region. When community needs evolve, we work with local regulators, community leaders, and other behavioral health providers to adjust our service offerings and facility locations accordingly. These decisions are never taken lightly, but they reflect our commitment to maintaining an optimized, high-performing portfolio that supports long-term growth and operational excellence. By concentrating our resources on markets and service lines with the strongest demand fundamentals and reimbursement dynamics, we're positioning Acadia to deliver stronger, more consistent results.

We will continue to assess our footprint with rigor and make thoughtful adjustments where appropriate, always with the goal of enhancing performance, improving returns, and creating long-term shareholder value. One of Todd's immediate priorities is to thoroughly review the more stringent lens we have been applying to capital deployment to ensure that every investment, whether in facilities, technology, or partnerships, meets our threshold for return and supports our long-term objectives. Before turning the call over to Todd, I want to discuss our continued focus on quality. I've spoken about this topic on numerous calls because it's the key to our mission and critical to our long-term success. Our integrated quality dashboard now provides real-time visibility into more than 50 key performance indicators to our field operators and senior management, supporting our commitment to operational excellence and payer engagement.

These initiatives have helped us attract and retain talent, and we're seeing more favorable labor trends in 2025, supported by centralized recruitment, employee engagement, and targeted training. These efforts have demonstrated real results as Q3 reflected Acadia's sixth consecutive quarter of improvement to employee retention, a key factor in helping us manage labor costs. It's also worth noting that the broader healthcare provider industry is seeing an expected increase in rigor on surveys and the new post-COVID normal. CMS has publicly directed accrediting organizations and state survey agencies to significantly increase the diligence and thoroughness in how they survey all hospitals, not just behavioral health, and we are pleased with how we are performing. Across the industry, surveyors are spending more time on the units with the patients, directly interviewing and observing staff.

Thanks, Chris, and good morning, everyone. I'm honored to join Acadia Healthcare and excited to be part of a company that is leading the way in behavioral health. Throughout my career, I've had the opportunity to help organizations navigate complex transitions, optimize capital allocation, and unlock long-term value. I look forward to bringing that experience to Acadia as we continue executing on our strategic priorities and delivering sustainable growth. In my short time since joining, I've been deeply impressed by the strength of the team, the mission-driven culture, and the scale of opportunity ahead. I'm particularly focused on ensuring that our financial strategy supports disciplined expansion, operational excellence, and shareholder value creation.

That includes a rigorous approach to capital deployment, a clear framework for evaluating growth investments, and a commitment to transparency in how we communicate our performance and outlook. Turning to our third-quarter results, we reported revenue of $851.6 million, representing a 4.4% increase over the third quarter of last year. Same facility revenue grew 3.7% year-over-year, driven by a 2.3% increase in revenue per patient day and a 1.3% growth in patient days. Adjusted EBITDA for the quarter was $173 million. Adjusted EBITDA came in approximately $5 million below our internal expectations, driven primarily by lower volumes and an increase in bad debts and denials. Supplemental payments served as a partial offset to these headwinds. These results include $13.3 million in startup losses related to newly opened facilities compared to $7.3 million in the third quarter of 2024.

We continue to expect full-year 2025 startup losses to come in at the prior outlook range of $60 million-$65 million. We expect startup losses for the full year 2026 to decrease modestly from 2025 levels, with a more material step-down expected in 2027. As a reminder, though CapEx will step down meaningfully next year, startup costs will decline less on a relative basis due to the large number of new beds coming online in 2025. On the same facility basis, Adjusted EBITDA was $224.7 million in the quarter. We invested $135.8 million in CapEx in Q3, which is more than $20 million favorable to our Q3 plan. From a balance sheet perspective, we remain in a strong financial position. As of September 30, 2025, we had $118.7 million in cash and cash equivalents and approximately $790 million available under our $1 billion revolving credit facility.

Our net leverage ratio stood at approximately 3.4x. Costs related to managing the government investigations were $39 million in the third quarter, down 28% from the high watermark in Q2. We expect this spend to continue to moderate in Q4. Let me now turn to development activity. During the third quarter, we added 83 beds to existing facilities, bringing our year-to-date total to 274 beds added through expansions. We also commenced operations at three previously announced joint venture hospitals, including a 96-bed hospital in Danville, Pennsylvania, which is our second joint venture with Geisinger Health, a 106-bed expansion in Austin, Texas, with Ascension Seton, which is also our second joint venture with Ascension. A 144-bed hospital in St. Paul, Minnesota, developed through our joint venture with Fairview Health Services. We have added 908 beds through the end of the third quarter.

We have three projects that may still open through the end of the year, and thus we expect to add 945-1,076 total beds in 2025. Our comprehensive treatment centers, CTCs, offer scalable, capital-efficient solutions to meet a pressing public health need. In addition to our hospital development, we added three CTCs for opioid use disorder in the third quarter, extending our reach to 177 CTCs across 33 states. We've now added 14 CTCs in 2025, and we continue to see strong demand for medication-assisted treatment as the opioid epidemic persists. Turning to our outlook for the remainder of 2025, we have revised the range for revenue to be between $3.28 billion and $3.3 billion, from our prior range of $3.3 billion-$3.35 billion. We now expect Adjusted EBITDA of $650 million-$660 million versus the prior outlook range of $675 million-$700 million.

The revised outlook incorporates incremental volume softness and rate pressure. This rate pressure includes increased denials and bad debt expense, along with rate updates that came in modestly below prior expectations. In the fourth quarter, we also expect to record an incremental $4 million-$6 million charge related to our professional and general liability expense to reflect the evolving legal environment facing our industry. We now anticipate full-year same-facility volume growth to land at the low end of the prior outlook range of 2%-3%. For the full year, we continue to expect low single-digit growth in the same facility revenue per patient day, though we now expect to be toward the lower end of this range. We expect net Medicaid supplemental payments to be at the high end of our prior estimate of $30 million-$40 million, reflecting payments recorded in the third quarter from already approved programs.

We now expect adjusted EPS of $2.35-$2.45 versus the prior outlook range of $2.45-$2.65, reflecting similar dynamics as the revised Adjusted EBITDA range. As Chris mentioned, we're tracking several supplemental payment programs that are currently awaiting CMS approval. These payments could provide up to $22 million of additional Adjusted EBITDA that is not included in our 2025 outlook, given the uncertainty surrounding their timing and magnitude. I will now turn the call back over to Chris to provide some color on 2026.

While we will provide formal guidance on our earnings call in February, I did want to take this opportunity to provide some color on our financial expectations for 2026. Overall, we remain confident in the strategy we are executing across the company to provide strong clinical outcomes for our patients and the communities we serve, and we see the following headwinds and tailwinds as we enter 2026. On the positive side, key Adjusted EBITDA tailwinds include a reduction in startup losses due to our more focused growth investments next year, ramping contributions from the meaningful number of bed additions over the past several quarters, with 632 new beds entering the same facility calculation in the first quarter of 2026, and a modest EBITDA uplift from targeted facility closures.

These benefits will be partially offset by several headwinds. Continued softness in acute care Medicaid volumes, along with continued payer-related pressures consistent with trends observed throughout 2025, and incremental cost pressure related to PLGL expenses. The absence of the non-recurring $28.5 million benefit from Tennessee's 2024 supplemental payment program, which was recorded in the second quarter of this year. We are also closely monitoring the reimbursement environment, which continues to evolve as government payers face significant cost pressures. We remain a committed partner to our payers, and we believe we can play a meaningful role in improving outcomes for the patients we serve. With that, we're ready to open the call for questions.