All right, good morning. This probably will be the most packed presentation of this conference, so we're pretty excited to have this. Our second company for this 2025 Jefferies Healthcare Services Conference is Acadia Healthcare , one of the largest operators of behavioral health facilities in the U.S. Joining us this morning is Chris Hunter, the company's CEO. Chris, thanks for doing this. Really appreciate you being here. I think you just pop it up, up the top. I know you issued an 8-K this morning and we were just chatting how I was planning to ask you anyway to address, you know, in this forum, the activism that has come out for Acadia. Maybe let's hit the 8-K and just address some of the announcements you made this morning.
Yeah, thanks so much, Brian, for hosting us. Maybe a few things that I would just say at the outset. I think first of all, at Acadia , we just really feel like we're playing a very important role in the nation's healthcare system overall, delivering evidence-based, high-quality behavioral health services to vulnerable populations. We know that there's a growing need for behavioral health and there's a real supply-demand imbalance across the country. We continue executing a very focused strategy as a result. That strategy is very much focused on high-quality behavioral healthcare, improving our clinical outcomes, and also driving operational efficiency across our national network. I think we also would just acknowledge that 2025 for us has been a challenging year. On the volume front, we've come in a little bit below our expectations this year, primarily due to weaker Medicaid volumes in our Acute line of business.
We've also seen some incremental weakness in the third quarter, which we did highlight in the 8-K filing this morning. On the local dynamics front, we've seen some underperformance of a certain number of facilities that go back all the way to last fall. With that in mind, as we look ahead to 2026 and beyond, we're taking several actions, and that really was what we were trying to accomplish in the 8-K filing this morning that we believe will set the company on a path to sustainable top and bottom line growth. We're also expecting to demonstrate the underlying and inherent free cash flow potential and generating power of the business into 2026. Really, kind of three main actions that were in the 8-K filing and that I would speak to. I think the first is on the CapEx front.
We have paused several projects in our portfolio, which will lower our 2026 CapEx by at least $300 million versus our 2025 levels. We expect to lower that even further in 2027 as we work to demonstrate the underlying free cash flow generating power of the business. The second is on the volume front. The company, as everyone here that follows the story knows, has seen record investment in facilities and volume over the last few years. We've added nearly 1,800 beds between 2024 and 2025. We expect to add an additional and incremental 500 - 700 beds in 2026. That includes new facilities with a number of marquee joint venture health system partners, like Geisinger Health and Ascension, who this year alone as joint venture partners, we added our second facility with each of them, one in Pennsylvania with Geisinger and one in Austin, Texas with Ascension.
We really expect material contributions here to both same facility volumes and to EBITDA as these new beds ramp over the next few years. The final thing I would just say is, from a portfolio review standpoint, it's always a difficult decision to close facilities. We recently announced the closure of five facilities, and I've said before, if there are instances where there is a facility that doesn't fit our strategy, we're going to be aggressive and we won't hesitate to take action. We just continue to be very focused on improving performance and enhancing shareholder value, working to create a world-class organization that truly sets the standard for treatment in behavioral health. I think that's the backdrop on the K.
Chris, lots to unpack there. Maybe I'll start with the volume commentary on Q3. I'll just go right at it. What does that mean for full-year guidance for 2025?
Yeah, no, completely fair. We're not providing an update on full-year guidance at this time. We will provide any relevant updates on our Q3 call. We are making several portfolio changes that I would point out that we expect to lead to improved EBITDA next year, including not only the closure of these facilities, but this reduction in CapEx and associated lower startup costs. As we look out to 2026 and 2027, we expect to see a pretty significant improvement in EBITDA growth and an acceleration in our free cash flow generation due to really three things. One is just the ramping volumes from the significant number of bed adds over the last few years. Again, 1,800 over the last few years with guidance or with visibility into 500 - 700 from the facilities that will open next year.
Declining startup costs, which will come down next year, and then taking a much more aggressive stance towards closing underperforming, non-core facilities. We will provide further updates as well when we provide 2026 guidance next year.
I was going to ask you about CapEx, but maybe let's just hit on this first. As I think about volumes, Chris, what do you, I know you mentioned Medicaid. If you don't mind walking us through the dynamics of what's happening in Medicaid and why do you think volumes have softened?
Yeah, I think we would, we've pointed out particularly in the Acute line of business that we've just seen some challenges with payer behavior and just, you know, I think the traditional push and pull that you see between payers and providers that has just become more pronounced on that front. That said, we are serving some of the most critical, acute patients in the country. We've invested heavily in being able to demonstrate the strength of our clinical outcomes. We have very good outcomes that we're able to share with payers. I think that is going to continue to position us well here moving forward. We've always thought that the progression in the industry would be towards more leveraging technology and being able to clearly articulate outcomes. That's something that we're clearly seeing in our payer negotiations and discussions. We think that will continue going forward.
Chris, is that payer denials of admissions, or is it reduced days, tighter scrutiny of approved days? How do we think about what the Medicaid, is it, and I'm guessing it's MA plans, right, versus state-run Medicaid?
Yes, primarily managed Medicaid. I think it can range from, you know, denials upfront to reductions in the length of stay for a given patient depending on the actual service line. It's really across the board. I think those can ultimately be interrelated.
Got it. Okay. Maybe let's shift gears a little bit. CapEx, if you can tell me more about the review of your capital allocation priorities that you mentioned that led to the decision to cut CapEx by at least $300 million next year. I mean, what spurred this? Is this a board-driven move or management seeing what's happening in the market making that call?
Going back several years, a big part of our growth strategy continues to be prudent investments to expand our portfolio. We have continued to see opportunities, not only to partner with health systems on the joint venture front, but also with payers and a number of state governments that recognize the importance of addressing behavioral health, particularly higher acuity patients and those needs that are truly across the nation. We have been doing a thorough, truly facility-by-facility review of future growth opportunities. We decided, as we had first acknowledged on our Q2 earnings call, where we first referenced that we would look at pausing facilities, on that call, we referenced pausing at least two projects, which collectively would be $100 million. We have since taken that further.
As a result, we have decided to take down our CapEx next year by the $300 million versus our 2025 CapEx guidance, which is $600 million - $650 million, while still, I would point out, adding 500 - 700 beds next year, which we think is really important. We are refocusing a number of our planned bed additions as well to a narrower group of locations that we believe have a more favorable reimbursement environment. We have really had to look at this. Healthcare is local, obviously, and we are looking at this on a market-by-market basis, as well as looking at the demand. We believe this is going to enable us to reach positive free cash flow for the full year next year. We have previously talked about that happening by the end of next year. Obviously, the significant reduction in CapEx will only enable us to accelerate that.
Chris, what kinds of projects are you cutting out? Where is the focus of the reduction in CapEx?
Yeah, I think there's a number of different ways that shows up. I mean, we've been pretty actively managing the portfolio across the board. It can range from our Acute facilities. We've certainly seen some specialty facilities as well. I think those are the primary areas as we've made those reductions. It really is on a project-by-project basis. There are certain facilities that we just did not feel like had the demand characteristics in a given market. Sometimes didn't have the broader labor trends that we would expect, competitive environment, just all the things that you would look for in a given market. Those are all the things that we're constantly trading off. As we went through this very comprehensive review, took into consideration.
Chris, when I think about the, one of the bulk theses for Acadia historically was that there's very strong demand for behavioral health.
Yeah.
You just touched on, you know, some of the markets don't have that demand. What are you seeing in the market and what's changing in the behavioral health space?
To step back, the demand for behavioral health services overall still remains structurally very strong. I think particularly when you look at patients that have rising acuity, we are continuing to see that across our lines of business, everywhere from inpatient Acute, where patients will present that have comorbidities, but also schizophrenia, bipolar disorder, all the way to our CTC patients. Those coming in with opioid use disorder have a higher intensity and a higher acuity than they have before. The demand overall continues to be very strong. There is also greater awareness, obviously, of mental health. We saw this through COVID, the destigmatization of mental health. There is this supply-demand imbalance, particularly in underserved geographies. We believe overall these trends are durable and they continue to support a long-term runway for growth. All that said, we're taking a much more measured approach in the near term.
We've gone through this portfolio review. We're looking for markets that continue to have favorable reimbursement. We're also just taking this time to step back and look at bed additions as well. When we're doing bed additions to existing facilities, obviously those facilities, we have strong visibility into the growth dynamics, what the market demand is, what the reimbursement is, what the competitive landscape looks like. We're being very scrutinous on that front as well, which we think also is going to position us well. Overall, the demand characteristics in behavioral health are still there. We're very much attuned to continuing to track and monitor that as we contemplate continued capital deployment here in the coming years.
Chris, what are you seeing with, you know, private equity has been chasing the space as well, building units and platforms around behavioral health. I'm just curious, like, what are you seeing in the market? I mean, when you say the demand dynamics are there, there used to be a big supply-demand imbalance. What does that look like right now in your key markets?
I think in our key markets, we obviously have spent a significant amount of time investing and talking to our referral sources and our payer partners about the differentiation that we've had, particularly from a technology standpoint, but also from a quality standpoint that we think continues to really set the company apart. This is one part of healthcare, obviously, that has seen historic underinvestment really across the board in behavioral health. I think that's well known by investors that follow the industry more broadly. That was one of the reasons all the way back in our first Investor Day in December of 2022 that we made this commitment to investing in EMRs and patient remote monitoring and quality platforms and staff safety devices that we've been able to now incorporate into the company. We really think set us up.
I think all those things are really helping us on the labor front, they're helping us attract staff in, and I think it's also helping us in our top markets continue to set the company apart.
Chris, maybe just going back to the CapEx and capital deployment question. How do facility closures fit into your review of your capital allocation priorities? What does that look like? What are you shutting down? I think it's been a little bit all over the place. Just curious how you figure out what gets shut down.
Yeah. I would, let me go back to just what we've been doing here on the portfolio review. We've recently gone through this very comprehensive review, literally facility by facility. The overall aim has been kind of sharpening our operational focus, optimizing capital deployment. As part of that process, we did identify five specific facilities for closure. Two were due to continued underperformance and three that we just didn't think were a good strategic fit. These were eating disorder facilities that are just non-strategic and that had been impacted by some of the demand shifts for those specific conditions. These five closures, we believe, reflect a very deliberate effort to concentrate resources on our core lines of business and those geographies that we just see the longest term potential over time.
I think there are specific facility improvement plans that we've also put in place kind of across the board for underperforming facilities. We've been very intentional about bringing in flex resources, in-house kind of floating pools of staff. We've brought in clinical resources where it made sense, on the nursing front as an example, working closely with facility leadership. We've also been really intentional about understanding demand in the marketplace. There are markets where we've historically served adult populations where we see record demand for adolescents and we'll start an adolescent unit and sometimes we'll flip those if there's changing or shifting demand there as well. Beyond that, there have always been facilities that we're constantly working with our leaders to improve performance. We've invested so heavily on the quality side that that has also become a very routine part of the way that we're running the company.
I think it is a real distinction from the way we have looked at things in the past, which I think very much complements the financial review. I think those two are very, very synergistic. Hopefully that helps.
Yeah, it does. Chris, as I think about the portfolio review, is there a timeline that you've set at the management level to get the review done, or should we be expecting more closures in the coming months?
Yeah, we've continued to work on this, and we do have, you know, a very methodical process that we've gone through. We continue to have our eye on five other additional facilities that we're monitoring. This is something that we're, you know, wrapping this review up. We're constantly, we have 274 facilities, so we're constantly in a process of monitoring them. We really believe that this process is winding up.
Chris, maybe last question on sort of capital deployment netting out. As I think about some of these closures, some of them are in fairly prime real estate, right? Is there a decision factor between closing and selling?
I mean, that's something that we always have to take into account. We do have valuable real estate in some markets that will factor into the calculus. We are always looking for opportunities to enhance shareholder value. If we don't see a sustainable path for a given facility and the underlying real estate, we think that there's an opportunity to unlock value. Of course, we're going to capitalize on that.
Chris, since you mentioned the investor day in one of your comments earlier, as I think about the last Investor Day, December of 2022.
2022.
Oh, it's off.
Yeah, December of 2022.
I remember you guided to kind of like organic growth of double digits, basically 10% EBITDA growth. With facility closures, pulling back in CapEx, demand equation, what does that look like today?
Yeah, we're going to stop short of providing long-term guidance, but I would just go back to the fact that this company is extremely well set up for the next few years, having made record investments in all of these facilities with our startup losses coming down and then being very prudent on the portfolio optimization. We really believe that the top and bottom line growth is, you know, we have a strong line of sight and we'll be coming back and providing, you know, more detail in our guidance here for the year.
No, it makes sense. Chris, maybe as I take a step back and think about the letter that you got last week, I mean, we talked a little bit about labor here today. I'm just curious how you're thinking about the ability to drive cost improvement across the system.
Yeah, I mean, I think on the labor front, that's something where we've seen real stability. I think that we saw the high watermark on the labor front in terms of wage rates, kind of at the tail end of 2022. As a company, we've been very intentional about doing employee engagement surveys across our 26,000 employees. We've gotten very strong insights from that. I think the way that we've leveraged technology, that's something that attracts candidates in. I think we've done a very good job of talking about the investments that we're making in the business, and also in our staff. That has really helped us attract talent in, bring retention down. There's always going to be pockets of labor challenges across the country. Overall, in aggregate, I think we've been able to do a very good job on that. We've been pleased with the trends that we're seeing.
Premium pay has come down as well. The overall trends on the labor front, we'll always continue to monitor, but we believe that those have stabilized.
Chris, as you've invested in technology, I know I remember December 2022, that was one of the highlights of your presentation back then. It is an investment, and in theory, you should be repaying rewards out of those investments, whether that's improved quality, improved reimbursement. You know, you can draw a laundry list of what the payers would think would be the benefits of all these dollars that you've spent. What is that discussion like in terms of quality translating to reimbursement or honestly, like them trusting you with hours and days for patient approvals?
Yeah, I've always believed, and that was really the impetus for us coming to investors and talking about the commitment, the significant commitment that we were going to need to make on the investment front. That has continued to play out. I think you see it across lines of business. Whether that is us talking about the 50+ quality measures that we're tracking, the KPIs that we have on any given day in every single one of our Acute facilities and being able to demonstrate the progress to payers on that front, to our CTC business, which has a different regulatory body but is regulated by CARF. From a CTC standpoint, there's kind of 13 major quality measures, and we have been faring extremely well across the board.
I think when you're having a conversation with a payer and having been on the payer side for a long time, it can't just be we need a higher rate. I think we obviously talk about the acuity of the patients that we serve, and we're able to demonstrate that. We're increasingly able to come in with the improvements in quality that we're seeing across the board and what that looks like and the commitment that the company has on that. We're very granular in terms of being able to show the improvement across the board. That's not just in one line of business. Payers frequently want to see us demonstrate it in multiple lines of business. We've had success in doing that. I think there will become increasingly more demand for more data, more transparency with respect to what we're seeing on clinical outcomes.
We feel like the investments that we're making have really set us up to do that well.
Chris, you had very healthy rate growth from 2020, really from 2021 through 2024. What are you seeing now in terms of payers' willingness to give you the rates that you were getting and that you had guided to during investor day?
Yeah, we've seen obviously record levels on the rate side. You know, we incorporated into our outlook earlier this year, rate growth moderate a bit to low single digits across most of our payers. I think that's something that we have continued to track pretty extensively. As part of the more comprehensive review that we've done, I think we've been pretty intentional on just tracking the geographies, the service lines, the overall portfolio. There, I think there's still pockets of opportunity for mid-single-digit growth in various markets, particularly those that have been underserved for a period of time. I think our joint venture partners that have frequently been in a market sometimes for a century are very well known in that market. They can certainly be helpful on the reimbursement front.
In terms of our guide in the beginning of the year to low single digits, I think we stand by that. I think that is pretty consistent with what we've seen.
Chris, not that long ago, we were all focused on the One Big Beautiful Bill, obviously that passed. I'm just curious what your thoughts are in terms of how the final bill, what does that do for your business? State-directed payments, pretty big part of your revenue mix. Just curious, yeah, you know, just thoughts on that one.
The bill has passed, but I would still say we're still in the early days on the implementation side. I mean, our government relations team does a terrific job. We're very closely monitoring how this is going to evolve. I do think that we believe that based on the populations that we serve, we expect most of our patients to be exempt from Medicaid work requirements due to the intensity, the acuity, the severity of their behavioral health conditions. There's no question that the broader reimbursement environment is becoming more complex, particularly to your point when you look at the step down in state-directed payments that will really begin to start in 2028. I think at the same time, given the investments that we've made, the acuity of the patients that we're serving, I think that we continue to see real offset from that as well.
That's just something that we'll just have to continue to track as we go forward. We do believe that in the near term, so many of these investments that we've made have been able to help us offset that. This is not only on the federal level, but on the state level. It's just something that we have to be mindful of in every negotiation that we're heading into. I'd stop there.
Chris, we've got two minutes. We're asking this of all the companies here at the conference. What is the one thing about Acadia that you feel is underappreciated or misunderstood by investors at this point?
Yeah, I think for us, what's underappreciated, I think, is the depth and sophistication of our quality infrastructure overall. I mean, we have built a data-driven platform that not only promotes positive clinical health outcomes, but really drives operational consistency and enables us to run the business with a level of granularity and visibility into our quality that I always have believed has a downstream implication on our financials. The 50 KPIs that we're tracking by facility, I think, are highly unique. I think the only other thing you said, one, but I would just throw in our operational discipline at this moment. We've taken a very hard look at our capital allocation across the board. We've made the decision to pause a number of projects, and to take our CapEx down.
I think that kind of discipline, particularly in the context of reimbursement pressures, is really critical for ensuring sustainable growth, you know, and long-term expansion. As we look ahead to 2026, you know, we anticipate accelerating volume, strong EBITDA growth, given all these beds coming online, and we expect to truly unlock the free cash flow generating power of the business.
Awesome, Chris. We're right at the dot. Thank you so much for your time today. Good luck.
Thank you, Brian.