Please stand by. We are about to begin. As a reminder, this call is being recorded. Please proceed.
Good morning, and welcome to Acadia's second quarter 2019 conference call. 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 on our website by viewing yesterday's news release under the Investors link. 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 2019 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed 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 second quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The statements, whether as a result of new information, future events, or otherwise. 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 would like to turn the call over to Chief Executive Officer, Debbie Osteen.
Good morning. Thank you for being with us today for our second quarter conference call. I'm here today with Chief Financial Officer, David Duckworth, and other members of our executive management team. David and I each have some remarks about the second quarter, and then I will close. We'll open the line for your questions. We are pleased to report a solid financial and operating performance for the second quarter. These results were in line with our expectations and reflect consistent execution of our growth strategy. Our U.S. operations performed well with consistent top-line growth and favorable trends in key operating metrics. U.S. same-facility revenue increased 6.6% for the second quarter with a 3.3% increase in patient days and a 3.2% increase in revenue per patient day compared with the prior year period.
U.S. same-facility EBITDA margin was consistent with the second quarter of 2018 at 28.2%. During the second quarter, we added 118 beds, increasing our size and geographic scale and further enhancing our position as a leading provider of behavioral healthcare services. These expansions included 72 new beds in existing facilities and 46 beds resulting from the acquisition of Bradford Recovery Center, a specialty treatment facility located in Millerton, Pennsylvania. As we mentioned on the first quarter earnings call, we opened a 44-bed expansion at Sierra Tucson in late May. We're pleased to report that the expansion has exceeded our census projections. Through the first six months of the year, we have added 332 beds. We remain confident that we will achieve our goal of approximately 700 bed additions for the year.
The results from our U.K. operations showed same-facility revenue of 3.9%, consisting of a 0.2% decrease in patient days and a 4.1% increase in revenue per patient day. This was driven by a 2.7% rate increase from the NHS and local payers and higher returns from our retooled beds. Same-facility EBITDA margin increased sequentially 150 basis points to 17.8% for the quarter. During the second quarter, we accelerated our retooling efforts to respond to the needs of the NHS. We continue to work with the commissioners to develop services they require in a region and identify services that will deliver a better return. We believe we are well-positioned to take advantage of future demands across our service lines.
With the beds that we've retooled, we have already seen good results and believe this will contribute to our future growth. Now I will turn the call over to David Duckworth to discuss our financial results and guidance in more detail.
Thanks, Debbie, and good morning. Revenue for the second quarter was $789.4 million, an increase of 3.1% compared with $765.7 million for the second quarter of 2018. Net income attributable to Acadia stockholders was $48.1 million or $0.55 per diluted share for the second quarter of 2019, compared with net income of $58.8 million or $0.67 per diluted share for the second quarter of 2018. Adjusted income attributable to Acadia stockholders for the second quarter of 2019 was $53.8 million or $0.61 per diluted share, excluding transaction-related expenses of $5.2 million and an income tax effect of adjustments to income of $0.4 million based on a tax rate of 17.2%.
The company's consolidated adjusted EBITDA for the second quarter of 2019 was $158.9 million or 20.1% of revenue. Acadia's operating cash flows from continuing operations were $128.7 million in the first six months of 2019, compared with $217.9 million for the same period last year. This decrease primarily relates to the previously announced legal settlement payments made in 2019 and higher cash tax payments in 2019 as compared to a tax refund received in the second quarter of 2018. Turning to our financial guidance, as noted in our press release, we narrowed our guidance for the full year 2019 as follows. Revenue for 2019 in a range of $3.15 billion-$3.175 billion. Adjusted EBITDA for 2019 in a range of $610 million-$620 million. Adjusted earnings per diluted share for 2019 in a range of $2.15-$2.23.
We've reduced the high end of our guidance to reflect the recent acceleration of retooled beds in the U.K., a slower ramp of the two de novo facilities opened in the first quarter of 2019, and an additional facility closure in the U.S. As we think about the cadence of our earnings for the remainder of the year, we believe the second half of 2019 could be weighted towards the back end due to a number of factors, including the usual seasonal slowdown in the U.K., the timing of the U.K. retooling initiatives, the continuing ramp-up of our de novos, a diminishing impact from our closed facilities, and the continuing ramp of bed additions at our existing facilities. This concludes my prepared remarks this morning, and I'll turn it back over to Debbie for some final comments.
Thanks, David. Now that we have covered the results, and before we take your questions, I would like to briefly update you on our strategic review process. As we shared with you on our call in May, we are working hard to leverage our core strengths and scale and execute our operational improvement initiatives while meeting our primary objective, to deliver the highest quality of patient care. We have now moved into the early stages and have formed internal teams to identify and fully execute these improvements throughout the organization. One of the largest areas of improvement identified to date is within procurement, and we are building a team to oversee this area. We are confident that we will deliver on the $20 million-$25 million savings over the next two years. Since we are early in the process, we don't expect to see a material impact until 2020.
Regarding the potential sale of the U.K., we have hired advisors and are moving expeditiously to evaluate alternatives in an organized manner that maximizes value for our shareholders. We will not be commenting further as the board reviews strategic alternatives in the U.K. We are closely evaluating all aspects of Acadia's business to see where we can deliver better performance. Our highest priority is to deliver greater value for our shareholders and continue to provide excellent care to the many patients that come to Acadia facilities for help. I will now ask the operator to open the floor for your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question at a time and one follow-up question. Once again, that is star one to ask a question, we'll pause for just a brief moment to allow everyone an opportunity to signal for questions. Our first question comes from Brian Tanquilut with Jefferies. Please go ahead.
Hey, good morning, guys. Deb, thanks for all that color. I guess my first question is, as you think about the U.K. business and also the de novos that you highlighted, is there anything you would call out in terms of the retooling effort there? What your plans are for the back half? How many beds are we talking about? As we think about the de novos here, it sounds like the ramp is slower than you had expected. If you don't mind just walking us through any thoughts on changes that you're seeing in terms of the projected ramp in de novo beds in the U.S. Thanks.
Brian, I'll take that. First of all, on the de novos, we did open the two facilities in the first quarter of 2019, one in Texas, one in Ohio.
Those opened in February. We did talk about in the first quarter how we pictured the ramp over the course of the year. I'll say, while it has been slower in terms of the second quarter and early July, they have made a lot of progress over the last month. Both facilities now have completed their survey and all the accreditation that they need and are working with the payers and are really seeing some progress more recently here in the start of the third quarter. We did see losses from those de novos over the course of the second quarter, around $3 million of losses that did exceed how we thought the ramp-up would go. Think we're positioned very well going into the second half of the year.
Both facilities absolutely have a chance to hit break even by the end of the year, which was the goal that we had here in the first year of their operations. Optimistic on the continuing ramp from those two facilities over the second half of the year. On the retool beds in the U.K., we have reopened around 40 beds that we had previously taken offline for retooling and are seeing some just great progress in getting those beds reopened. We have identified further opportunities and have looked at an additional 150 beds or so that are now offline for further retooling. We do think that there's going to be tremendous returns from these further opportunities. We work very closely with the NHS, the local commissioners, to identify these projects.
We do think those beds will be offline in the near term, but over the course of the second half of the year, especially the fourth quarter, early next year, we will reopen a service that is aligned better with the demand and will be at a higher return than the previous service that we operated. See additional opportunities on the retooling, and it's really just a temporary factor affecting our third-quarter earnings. Over the long term, we are optimistic about those opportunities.
I'll just add to what David said.
Hey, David.
Right. I'll just add to what David said about the retooling. I think that the team in the U.K. has very good visibility around the service needs for the private sector. They're a partner in these collaboratives, and they're in 39 of the 42 that exist. The ones they're not in are in areas where we don't have facilities. I think what we've tried to do and what they are doing is being very proactive to reposition our existing facilities to provide care. It is at a higher acuity, but also a higher reimbursement, which David mentioned. We think in the long term, we will be positioned. The demand is there. I think that what we want to do is match that demand with our ability to take care of those patients.
We've tried to get ahead of it, and I think that we will be very well-positioned as these beds come back. We don't foresee a lot more of these retoolings, but when we can generate a better outcome and return, we will pursue that. Right now, we're focused on matching those service needs with our beds.
No, that's a great comment, Debbie. I guess my follow-up, David, just really quickly. As I think about the closures that you've done this year and even late last year, I think with some of the Arkansas facilities, how do we think about the revenue associated with that, just for modeling purposes? Because your same-facility performance is really strong, and I think The Street might have mismodeled the revenue for the quarter a little bit. Just if you can give us some color so that we can model it probably more accurately. Thanks.
Brian , we did close an additional facility that was really identified during our strategic review and made a decision in June to close that facility, and it is winding down its operations over the course of July. As we think about the revenue, there was about $15 million of Q2 2018 revenue associated with the closures that we have completed. Obviously, these were underperforming facilities, so there was not a lot of EBITDA associated with those facilities. It does have an impact on our revenue growth. Going forward, we did have a loss of around $15 million of quarterly revenue. Obviously, where we're positioned from an EBITDA perspective is much better having closed those facilities. That was the revenue associated with the closures. We do have some losses incurred relating to the wind down of the operations.
As we mentioned, that will become less significant over the second half of the year as we think about those facilities having completed all of the wind-down activities, hopefully by the end of the year.
All right. Got it. Thanks, guys.
Our next question comes from Pito Chickering with Deutsche Bank. Please go ahead.
Good morning. Thanks for taking my questions. Just for back up a little bit with you guys lowering the top end of guidance here. Can you quantify from what parts of it brought down that guidance, from the closures to U.K. retooling? Can you just put some numbers around and also FX operationally sort of why you reduced it?
Pito, we've already discussed a couple of the factors. In the U.K., looking at the timing of the retooling projects and the additional opportunities that we identified. There's an impact that that has just on the third quarter. That's certainly reflected in our update. In the U.S., we talked about the de novo and the facility closures. Those are the two factors that drove the update to the guidance in the U.S. In terms of quantifying the amount, it's sort of equally split between the U.K. and the U.S. initiatives. We did not update our guidance for the FX. Wanted to provide that clarification. In the second quarter, the exchange rate was $1.285, which was very close to the forecast that we had of $1.30.
We have seen a decline in the exchange rate over the course of July, but have not updated our guidance for the second half of the year. I'm certainly very much aware of the volatility there. The impact as we think about the exchange rate is for an annual period for each 0.01 move in the exchange rate would be less than $0.01 on EPS. Did want to just provide that information for you. We did not update the guidance for FX. We do continue to have the hedging in place around the exchange rate, and that's about 25% of our investment there is hedged, which translates to the value associated with those derivatives.
Okay. For follow-up, looking at the retooling of the beds in the U.K. In 2018, you guys also retooled a lot of beds. That was part of what led to the margin pressure as getting those beds back online took longer than expected. I was under the impression that you guys were going to sort of not be retooling beds over the short term just to get those margins back up. I guess the question is sort of why now? What have you learned differently, and how will this be executed differently in 2019 than it was in 2018?
Pito, part of it is some transition that is happening within the NHS that we were aware of, and the timing of that has been somewhat uncertain. This is where, as part of the Transforming Care agenda, more of the beds are being commissioned locally, and there's also service lines that the NHS is very much focused on getting to a different setting and a different geography. That transition within the NHS has been accelerated. Part of the decision was around that. Additionally, we have identified opportunities for retooling that weren't previously identified. As Debbie mentioned earlier, we do think we've now identified and are moving forward with most of those bed closures and retoolings. Some of that has been the NHS and the timing of them making the changes, and then us identifying more opportunities.
I'll just add to David's comments. It's a fluid process in the U.K. with the Transforming Care agenda, and I think that what we saw is their acceleration to move some of these patients out of the higher acuity settings into lower levels. What we're doing is trying to move those patients and then retool so that we do have the volume coming in for the needs. I think if we had not done anything, they would still be moving those patients out, but we would not be prepared for the high acuity patients, which is what we want to do short-term and long-term. The other thing I'll say is, as we look back to the retooled beds from at least 2018, it's a very good result with margin as well as net revenue, and it's very clear that by doing so, we had a positive.
Again, it is a short-term pressure on volume, but it will be a long-term benefit to the operation in the U.K.
Great. Thanks so much.
Our next question comes from Matthew Gillmor with Baird. Please go ahead.
Hey, thanks for the question. Following up on the bed retooling in the U.K., can you talk about what impact that had on volumes for the second quarter, and then how should we be thinking about the volume impact as it relates to the third quarter?
Well, the volume impact, of course, is reflected in the year-over-year growth. We do not take those retooled beds out of our bed count. As we look at it internally, we do have that reflected in the occupancy figures that we track. As we think about that, there are about 150 beds that are currently being retooled. Those beds, if they were online and when they do get back online, would lead to an overall volume increase of close to 2% higher than what we're reporting right now. Absolutely, those beds are reflected in the volume. We think once they get back online, we will get back to the volume target that we have for the U.K. going forward, which is around that 1%-2% level.
Matthew, I think one thing I would just say before we ask your next question on this subject is the retooling itself is a process. It's not just the renovation and change of the unit service. What has to happen is we have to ramp down the patients that are there, and we find placement for them. Sometimes if they're longer-term patients, they're a little bit more difficult to place. There is a time period of ramping down, there is the retooling, which is more around reconfiguring the service. Once that's complete, we're ramping back up. We have received some block contracts from NHS, which is basically protecting us when we do come back online, that we will have a certain number of beds that they will utilize and we will be reimbursed for.
We're trying to negotiate more of those as we bring back these retooled beds just to protect ourselves from this ramp up again for volume.
Got it. That's very helpful. Then one more on U.K. margins. It seemed like maybe that ran a little bit better than what you indicated on the last call, even with some of the retooling efforts. I was hoping you could just talk about the margin trend within the U.K. and what drove the stronger sequential performance.
Matt, we were very pleased with the margin in the second quarter. Noted the sequential improvement to 16.4% for our U.K. operations in total. That does reflect the stabilization that we have seen in the labor cost. The progress that we've made around recruiting and retention and all the labor initiatives has continued to show improvement in our labor cost. Additionally, the rate increases that we saw that apply to about 80% of our revenue in the U.K. effective April 1st had a benefit as well. The labor, the rate increases both contributing to what we see as a good improvement in the U.K. margin.
Got it. Thank you.
Our next question comes from Whit Mayo with UBS. Please go ahead.
Thanks. David, maybe just on that last point, can you elaborate a little bit more on the staffing and agency costs? Maybe just put some numbers around how you're tracking and how you've been trending over the last few quarters.
Sure, Whit. We do see labor cost as a percentage of revenue that continues to improve. What we've seen is that this quarter, we are below 67% of revenue on our labor cost. That is an improvement compared to the three quarters prior. Additionally, just around agency, we were less than 12%, again, on the agency as a percentage of our total labor. That's an improvement as well and really a stable result compared to the first quarter. We've been talking a lot about improvement compared to the second half of 2018. We see on both of those labor stats, the agency as well as the total labor, an improvement compared to the second half of the year, last year.
Okay. No, that's helpful. It's just when we sort of back into the same store operating expenses per patient day in the U.K., it still feels like your costs are growing in that high single-digit range. Is there any other area within your cost structure where you're seeing some pressure? Is it just some of the transitions that you're seeing with the retooling initiatives right now?
Well, I do think we have higher acuity patients, we may see some staffing costs associated with that. I think if you're comparing year-over-year to the second quarter of 2018, we would see the impact there because we're really focused on second half of the year and sequential improvement. I don't think we've seen significant cost per day increases as we compare more sequentially to the last three quarters in the U.K.
Yeah. No, that's fair. Maybe back on the de novo losses for a second. Can you just remind us what exactly you have in your plan for those facilities? I wasn't sure if you were budgeting the losses to turn flat, or do they have to turn positive for the second half? Any help would be great.
Yeah, sure. I think I mentioned that we had losses in the second quarter, and those losses were around $3 million.
Yep.
We think in the third quarter that those could improve and be in the range of $1 million-$2 million.
Okay.
I mentioned in the fourth quarter, we do hope that they get to break even. That is what we have modeled for the remainder of the year for the two de novos.
Whit, this is Debbie. I want to just emphasize that the delay in the ramp-up was related to getting certification and our number from Medicare. There was, I think, the facility did everything they could to get that in an expeditious manner, which was really disappointing because it took longer than we would have expected. I do think that they chose two very good markets, and we see a lot of demand in both of those markets. We're optimistic that we'll be able to recover. They have good plans in place to ramp up as quickly as we can.
Yeah, no, that's helpful. I understand it's generally out of your control. Maybe one last one for you, Debbie. Has anything changed with the reporting structure in the U.K.? Just curious, how you're looking at span of control within the organization, just with all the changes you're making to the strategy and holding the teams more accountable. Just wasn't sure if there are any developments worth sharing today that may be different than the last update you provided us in your strategic update. Thanks.
Sure. I think everyone is aware that Ron Fincher has retired, and we had a couple of good send-offs for him and really value his contribution to Acadia, and hopefully he is enjoying his new life in retirement. As a part of that, the U.K. had previously reported to Ron Fincher, and they now report directly to me. I've already started and have really made several trips to the U.K., will be overseeing that more closely than I have in the past, since Ron has left the company.
Thanks.
Our next question comes from Ralph Giacobbe with Citibank. Please go ahead.
Good morning. Thanks. This is Jason [Casciolo] on for Ralph this morning. Just a quick question. You saw length of stay stabilize in the U.S. Do you expect that to remain the case as you move forward, or is there too many kind of moving pieces to get comfort with that?
Jason, I'll just say that we've had a very stable length of stay here in the U.S., and we haven't seen that change. The only differences over the period has been more around the mix change from RTC to acute. We've not seen any change in instability of that and don't anticipate any changes in the future.
Okay, thanks. Great. I guess my follow-up here, just as a high level, the business has faced margin pressure for a while now, and in some cases, even despite mid-single-digit growth. Maybe can you just help level set the margin targets in the U.S. and U.K.? What kind of organic top line is needed in each segment to kind of hold the line or get margin expansion? Thanks.
Yeah. The U.S. business, we had a strong margin for the second quarter at above 28%. That is generally our target for our same-facility business. Over the course of a year, just due to some seasonality, we would see the U.S. in the 27%-28% range. Certainly pleased with the performance there in the second quarter. In the U.K., we target on a long-term basis that 16%-17%, but think we have an opportunity to be better than that. We just hesitate to provide some of those targets with the retooling projects that are underway. Think those could be a positive to get us above the 17% level. Really, in the second half of the year, the target for the U.K. is between 15% and 16%, just with the seasonality that we typically see and the retooling initiatives that are underway.
That's how the second quarter would play out in the U.K., with the longer-term target getting back above that 16%-17% range. In terms of the growth needed to be there, we have 5%-6% in the U.S., and then the U.K. is more of a single-digit 4%-5% growth that we see in order to get to that margin.
Thank you.
Our next question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.
Thank you. Good morning. This is actually Joanna Gajuk filling in for Kevin. I guess to follow up on that last comment in terms of, in particular, the U.S. segment, those same store revenues were actually very strong, right? Almost 7%. That will be above the target at 5%-6%. I guess the margin was 28%, but I guess it was flat year-over-year. Is there a way to think about it in terms of what kind of growth rate you need year-over-year to keep your margins flat? Because it seems like this quarter actually was exceptionally strong top line, but the margin was flat. Any color how to think about that dynamic? Thank you.
Yeah. We did see strong performance in the U.S., 6.6% growth, and that was on strong volume and strong revenue per day. I do think, while the 28.2% was a strong margin, we would see an improvement. If we look at it over the course of a year and over a longer-term period, we would see margin expansion improvement. We do expect in the second half of 2019 to see that in the U.S. Some of that is just the timing of the bed additions that are driving both the volume and the revenue growth as well as the margin. I think margins will improve as we see over a longer period of time the new beds coming online.
That 28%, while it was a strong number, I do think we'll see some margin expansion in the second half of the year in the U.S. same-facility group.
That's helpful. I guess, to drill in or stay on the topic of U.S. segment, which is very strong, can you maybe talk about the different pieces inside that segment? If there was a way to think about it, were there any geographic areas that were driving the strength? Was it across the board? Was there any particular pieces of the business specialty versus RTC versus acute? I guess on the specialty, I guess there's some trends there in terms of more money flowing into the industry from the government. I guess how you position there for that? Thank you.
I'll just say that I think we saw very strong demand across all our service lines. I will kind of highlight that we had very strong performance from facilities that added beds, which is one of our main strategic focus areas for growth. TrustPoint, which is here in Tennessee, had a successful expansion. I mentioned in my remarks Sierra Tucson, Southcoast, which is in Massachusetts, also added beds. I think the key here is they are adding beds and able to get volume in them. We've seen very strong demand continuing for behavioral services across the U.S., and we really saw solid performance in acute and specialty as well. We're starting to see some of the funding for opioid come through to the states. We're well-positioned to take advantage of that. In fact, we're the largest provider for those services.
We're optimistic about the growth potential in that business line, and I think that's going to continue for some time.
Thank you.
Thank you.
Our next question comes from Ryan Daniels with William Blair. Please go ahead.
Hey, guys. This is Nick speaking in for Ryan. Thanks for taking my questions. Just to start, I was wondering if you guys had an outlook on pricing for next year, given CMS rates announced last night, and if you are hearing anything from the states regarding Medicaid rates for the upcoming year.
In the U.S., we do see 2%-3% pricing growth on a longer-term basis. We had a strong performance there in the second quarter. I'll say on Medicare, the announcement was in line with what we expected. Medicare is 15% or so of our U.S. business, most of which is at our acute facilities. That increase there that was announced was in line with our expectations. On the Medicaid side, obviously, there's a lot of different payers and states that comprise that component. We're seeing good rate increases there, and expect, on an overall basis across all of our payers to continue at that 2%-3% range.
All right, great. Thanks for the color. I guess a follow-up, not really related, but I know in previous calls you mentioned having the goal of lowering your leverage ratio, but you didn't have a long-term target yet. I'm just wondering if you kind of zeroed in on a target that you're kind of shooting for.
We are shooting for a lower leverage. Absolutely, the goal is to lower our leverage, and we have talked about the ways that we will accomplish that. Some of that is through the earnings growth that we project for the second half of the year. We do continue to expect by the end of the year, we will be down to around 5.1. That is an improvement with where we've been, the last couple of quarters, more at the 5.5 level. On a longer-term basis, we have not yet communicated our target. Obviously, there's a number of initiatives that we are looking at to help us get to a lower leverage. We think by the end of the year, we'll see some improvement there, and we'll communicate the longer-term target over time.
Okay, great. Thanks for the color, guys. Have a good rest of your day.
Thank you.
Our next question comes from John Ransom with Raymond James. Please go ahead, sir.
Hey, good morning. This is John Ransom in for John Ransom. Sorry, that's an old joke. You guys said in May that your real estate was worth $1.7 billion. We looked at that and said, okay, hypothetically, if you took a $100 million rent stream and imputed a mid-five's cap rate, you kind of get to that $1.7 billion. Are we thinking, I mean, when you did that initial strategic review, is that in line, basically ballpark with the math that you were getting back from what people were telling you that was worth?
John, we're not going to comment right now. That is part of the work that we are going through with our advisors is how we think about the real estate value, how that affects the potential analysis around the U.K. At this point, we don't have a comment around the math there.
Okay. Second question would be, you've lost about, if memory serves, about 800 points of margin in the U.K. You're starting to claw that back, the 100 basis points sequential improvement. Debbie, now that you've gotten six months or so to get your hands around this, how much of that loss margin do you think you could claw back over the next 12, 18 months?
Well, I think that I feel good about the initiatives that are in place in the U.K. I think that a key to margin improvement is going to be through the volume and getting the retool beds, which we've been talking about on the call today.
I was pleased to see the improvement from the last quarter. I think that, at this point, we should continue through the quarters to see this improvement continue. I think that, as David's mentioned, I certainly know the third quarter in the U.K. does have seasonality to it. We would like to end the year higher than we are here in the second quarter. It's going to depend on how we can quickly get those beds back on. I feel good about the prospects there from just my interactions and also what I know about demand, which I think is very strong.
So I don't see any reason that we can't continue to see improved margin.
Right. Just two others from me. David, I'm going to give you a chance here to save us all from ourselves. Obviously, the last two years, your company's missed 3Q. I know you've talked about, in qualitative terms, 3Q versus 4Q, but currency aside, how should we think about the cadence sequentially of EBITDA in 3Q? If you want to do it another way, maybe the back half of the year, sort of the mix of EBITDA 4Q versus 3Q. I just want to do what we can here to try not to engineer another 3Q miss, if it's avoidable, in terms of providing some proactive guidance, that'd be great.
Yeah. John, appreciate that question. What we're trying to communicate is that we do see some temporary factors. The reason we're bringing this up is obviously we do see that the de novos, the facility closures in the U.S., what we have going on in the U.K., is a third quarter item that we need to think about, and we're not providing specific guidance for any quarter, so I hesitate to g o all the way to that level. What we hopefully wanted to highlight is that we do see continuing improvement in those items, but it will be weighted more towards the back of the year. What we didn't mention specifically on this topic was just the U.S. bed additions has been really strong.
Almost 400 beds in the last 12 months added to our existing facilities. Those will continue to ramp. We see a lot of the bed additions that have already come online, seeing some census improvement, as well as further beds coming online. That also contributes to what we see being a stronger fourth quarter than third quarter.
If I heard you're talking about a sequential $2 million improvement in de novo with the CON delay. If we took your 3Q run rate, or excuse me, 2Q EBITDA, add couple million for the improvement in de novo losses, should we look at the sequential decline last year in the U.K. and say kind of expect that same level of sequential decline, at least in terms of building some quantitative framework for trying to get at 3Q? Is there anything else you would think about as we build our models that we should think about?
No, there's nothing else that we would highlight there other than just to say that in the U.K., the second quarter to the third quarter of 2018 is not the type of declines that we expected this year. That was more than just normal seasonality. While we, I did mention earlier,
we may see a margin in the range of 15%-16%, that is holding pretty well compared to where we are in the second quarter of 2019. That is the type of seasonality that we expect, and what we saw last year was more than just the normal seasonality. Other than that, I think.
Okay
You are on the right track.
All right, great. Just to kind of close the obvious question, if we think we can get back, I'm just going to make up a number, let's say by the end of 2021, you're saying, "Gosh, I think we could be at a 20% margin." Would that tempt you to say, "Maybe we should hang on to this asset, and we'd get more value from it because people aren't going to pay us for margin on the come?" I assume that would all be part of the thinking as you evaluate the long-term plans there.
I think that we can certainly validate that we are considering all our alternatives. We said in May, and I'll say again, we're not going to sell the U.K. unless it brings and maximizes value. That'll be part of the consideration as we think about our alternatives.
Okay. Thanks a lot.
Thank you.
Thanks.
Our next question comes from Kevin Ellich with Craig-Hallum. Please go ahead, sir.
Good morning. Thanks for taking the questions. Debbie, just wanted to start off, you gave good detail on the strategic review update. Wondering if you had any comment, though, on progress for the revenue enhancement initiatives?
I think as a part of what we talked about in May, we are focused on the cost side of things as well as revenue. We think the cost side will probably be more quickly realized than the revenue. That involves our contracting and looking at our payers and also preparing what we want to do with value to demonstrate our results. I would think we're probably going to see more short-term around cost and expense reduction, and then revenue reduction or increase would actually come probably later, just based on the cadence of our contracts and our negotiations with our payers.
Sure. That's great. On the $20 million-$25 million of cost savings, you said procurement's going to account for a large portion of that. I guess, how much of it will come from procurement versus contracting and shared services and some of the other things?
Yeah. We have been working and mobilizing teams to address each of the initiatives that we identified as part of our initial strategic review. We have made progress there. We do see procurement being a significant share of the targeted savings. We're not providing real precise estimates at this point. I do think a good percentage will be procurement and other costs where we feel like there's better opportunities to leverage our scale, apply best practices throughout our facilities. We are in the process of implementing our plan for each of the initiatives. Procurement absolutely is a significant area of focus as part of that.
Great. David.
I think we'll be able to provide more detail around the actual numbers and how we see that breaking out as we develop these plans and move forward with the implementation.
Great. David, I have one quick one for you as well. I might have missed this, correct me if I did. How many beds did you guys lose with the closure in Q2 and year to date? Just trying to get an accurate bed count in the U.S. and the U.K.
Sure. The second quarter, we did have a closure of a 16-bed facility. That was part of the closures that we talked about on our last quarter's call. The additional closure that we've mentioned this morning, that is in our bed count at the end of the second quarter because it closed in July. I think the bed count there is around a 70 or 80 bed facility. That's not reflected yet in our bed count.
Got it. That's helpful. Thank you.
The U.S., just to give you, in case you're wanting this piece of information, the bed count at the end of June is right at 9,400 beds in the U.S.
Thank you.
Okay, thanks.
Our next question comes from A.J. Rice with Credit Suisse. Please go ahead.
Hello, everybody. A couple quick questions here. In the U.K., obviously we've had a changeover in the Prime Minister. He's talking about moving forward with Brexit once and for all. I know when we first got the whole Brexit push, it had some impact on labor and the business generally. Is it your view at this point that anything related to how Brexit plays out from here is probably not going to make much difference other than perhaps on the exchange rate, which you've already started to see? Just wondering about whether there's an opportunity or a challenge with what's coming there.
A.J., I think that the U.K. management team feels that there is minimal impact to their business from Brexit and where they are at this point. I think they feel that most of the labor has already left previously when there was all the discussion around this. I think that they feel that while it does remain unsettled, that it'll have minimal impact on the day-to-day.
Okay. I know, I think the comments about labor that you offered earlier were mainly about the U.K. situation. I wondered if I could get you just to comment on what you're seeing here in the U.S., turnover rate, productivity, wage rates, those kind of things. I know there's a lot of buzz about telemedicine and maybe the ability to use that, particularly in behavioral health more broadly. Is there anything that you guys are doing around telemedicine or opportunities that that creates for you to look at in any way?
We do have an initiative around telehealth and looking at where that might fit in our markets. I think that reimbursement has been an issue in the past with regard to getting paid for those services. I do see that starting to change, and there is an initiative here at Acadia to really provide more options for our patients, and I think that's a greater access for some markets where they might be in rural settings or in areas where there might be shortages of professionals. Yes, I think, A.J., that's something that will be in our future, and actually we already have several telehealth initiatives in place at the facilities. We want to expand that because we think it just brings better access. As far as the labor situation, I think, we've seen it fairly stable.
I do think there are isolated markets that occur from time to time where we see some pressure, but nothing that's really changed here at Acadia. I think they do a good job of getting staff in at the nursing level as well as the mental health techs. We do have a focus on recruitment and retention, which we want to be proactive there. Even though it's stable, we want to make sure that we're prepared and that we're meeting the issues out in the markets and staying competitive.
Okay, thanks.
Thank you.
Our next question comes from Matt Borsch with BMO Capital Markets. Please go ahead, sir.
Hi, this is Josh for Matt. I just had a quick question. One of your peers talked about seeing pressure in their addiction treatment in the second quarter. I was just wondering if you could talk about trends that you've seen and kind of what your outlook is here in the back half of the year. Thanks.
Sure. I think that we have not seen some of the negative trends in addiction. We've actually seen very strong performance from our addiction business. We have a solid referral base. They're supported by our sales and marketing platform. We actually have planned to add about 200 beds this year. We've added 90 beds that have opened through the first half. We do see increased competition, but I think it's always been in place, maybe a little bit more now, but we feel very good about our specialty business. We have less than 5% of our U.S. revenue is out-of-network. We've done a good job, I think, in negotiating good rates in-network, and that's just based on the quality of the service and the relationship that we have with payers.
Okay, great. Just another question. Can you kind of speak to if you're seeing any pressure in the U.S. from more of your patients being transitioned from traditional Medicaid to managed Medicaid? Have you seen any of that kind of flow through on your average length of stay? Thanks. That'll be it for me.
Well, our length of stay is very stable. It's been the same for a number of years. I think that the managed Medicaid movement in some of the states, we have not seen any change in that in our business lines in the states that we're in. We have seen an increase in total Medicaid, and that's related to the CTC growth and acquisition that we did earlier in the year. As far as managed Medicaid coming into states that we're in, there's been no change that we've been able to see.
Great. Thank you.
Okay, well, thank you.
I'll just say a few remarks. I want to thank everyone for being with us today. I thank you for the interest in Acadia Healthcare. What I'd like to conclude with is to thank all of our employees and the clinicians for their dedication and focus. They work every day to provide the highest quality of care to our patients and their families, and that's really what makes Acadia a leading provider in behavioral health. If you have additional questions today, please call us directly, and have a good day.
This does conclude today's call. Thank you for your participation. You may now disconnect.