Acadia Healthcare Company - Q4 2025

Transcript

Operator (participant)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Patrick Feeley, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

Patrick Feeley (SVP and Head of Investor Relations)

Thank you. Good morning. This morning, we issued a press release announcing our fourth 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 Debbie Osteen, 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 2026 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 fourth quarter news release, and 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 Debbie.

Debbie Osteen (CEO)

Good morning, everyone. Thank you for joining us. I'm pleased to be with you today on my first earnings call since returning as CEO. I want to begin by recognizing our clinicians and employees across the country. The work you do every day makes a meaningful difference for patients, families, and communities, and I am grateful for your dedication. I also want to thank our leadership team, partners, and board for their support during this transition. Our mission remains unchanged, and my focus is on stability, execution, and clear communication. Since returning, I've spent time assessing the current operations at Acadia. I know this industry, I know many of our teams, and I understand what drives quality and performance in behavioral health care. My approach is grounded in focus and accountability.

I am committed to supporting our teams in the field to drive strong fundamentals and consistent execution across the organization. With that context, I want to briefly reflect on the leadership transition and how I am approaching this role. My intention is to bring steady leadership, reinforce operational discipline, and help position the company for success in both the near term and the long term. I have great confidence in our teams and in the long-term direction of the company, and I am fully committed to supporting Acadia through this next phase of improvement. Let me now outline the most important priorities that are guiding our work. The first area of focus is the quality of management at all levels. I believe that performance in our business starts with having the right people in the right positions, both at corporate and in the field.

I am reviewing leadership depth and the layers of operational supervision with the goal of ensuring our teams in the field are supported. We are returning to fundamentals. This includes a tighter operating focus and faster escalation when issues arise. Many operational misses result from missed details rather than flawed strategy. The need for behavioral health services remains strong. Our focus is on ensuring we consistently meet that need. We will continue to maintain strong relationships with our partners, align staffing and provider coverage with patient needs, and remove internal barriers that slow problem-solving. Our priorities translate directly into what we need to achieve at the facility level. Some of our newer facilities have not ramped as quickly as expected. There is no single cause. We are evaluating each facility individually, and we will be building a clearer, standardized approach to our new hospital openings.

We are focused on the 2026 openings and have adjusted our planning process to ensure successful execution. Alongside this work, we continued to expand our presence through joint ventures with leading health systems. In 2025, we opened new joint venture facilities with Henry Ford in Michigan, Geisinger in Pennsylvania, Ascension in Texas, ECU Health in North Carolina, and Fairview in Minnesota. Each partnership is tailored to the needs of the local system and community, and we work closely with our partners to ensure alignment of mission, priorities, and values. We are excited about these opportunities to better serve the needs of the local community and advance our position as a leading provider of behavioral health services.... As I look across the business, I am encouraged by the significant opportunity.

The company has added more than 2,500 beds over the past 3 years and is on track to add an additional 400-600 beds in 2026. After a period of record expansion, the priority now is to shift our focus toward operational excellence and execution. The environment is not without challenges, but there is a large opportunity to unlock the EBITDA and free cash flow potential within our existing facilities. Relative to the startup losses included in our 2025 results, the incremental EBITDA opportunity represented by the new facilities opened from 2023 through 2026 exceeds $200 million. Given my history in this industry and with Acadia, I am confident that we are well-positioned to deliver on this opportunity. Our operational and clinical priorities also guide how we deploy capital. We intend to allocate capital with discipline.

Each project must stand on its own merits, supported by clear market fundamentals and patient needs. In parallel, we are evaluating our service lines in a comprehensive manner, always with a focus on long-term value creation. At the same time, quality and patient safety are the foundation of everything we do. That's what drives our mission and our results. We keep it simple. We measure what matters, we look at it every day, and we act fast when something doesn't look right. Our quality dashboard gives leaders real-time visibility into more than 50 measures, so we can spot issues early and share what's working across our facilities. Building on the data that was shared last quarter, we're expanding outcomes tracking across more programs in 2026, so we can be more transparent about patient progress over time.

The early results are encouraging, and we've begun to share them on our website. The industry is also operating in a more active survey environment, and I'm pleased with how our teams have performed, including strong accreditation survey results. Surveyors are spending more time on units, talking with patients, and directly observing care, and we welcome that accountability. At the same time, we're moving faster on prevention. Because of the investments we've made in technology, we are able to identify patterns that may signal safety risks earlier, so we can intervene sooner and prevent harm. Finally, regarding regulatory matters, we are cooperating fully. I will not comment on timing. My focus is on the recruitment and retention of highly qualified leadership and staff that deliver high-quality care to our patients. These are factors we control, and they are critical to reducing risk and maintaining consistency across the business.

As we look ahead, the operational priorities we have in place provide us with a solid foundation. We are aligning our teams, sharpening our focus, and reinforcing the execution discipline to support more consistent results. With that, I will turn it over to Todd to review the financial details and our expectations for the year.

Todd Young (CFO)

Thanks, Debbie. Good morning, everyone. Turning to our fourth quarter results, we reported revenue of $821.5 million, representing a 6.1% increase over the fourth quarter of last year. Adjusted EBITDA for the quarter was $99.8 million. Fourth quarter results included a $52.7 million adjustment to the company's reserve for professional and general liability, in line with the updated guidance that was provided on December 2, 2025. For the full year of 2025, we generated revenue of $3.31 billion, an increase of 5% over the prior year, and slightly above the upper end of our guidance range of $3.28 billion-$3.3 billion, a reflection of improved volume.

Adjusted EBITDA was $608.9 million, near the upper end of our guidance range of $601 million-$611 million. In the fourth quarter, same-facility revenue grew 4.4% year-over-year, driven by a 1.3% increase in revenue per patient day, and a 3.1% increase in patient days, an improvement over recent quarters. Included in fourth quarter results was $12.8 million in startup losses related to newly opened facilities, compared to $11.2 million in the fourth quarter of 2024, and $3.6 million in net operating costs associated with closed facilities. On a same-facility basis, Adjusted EBITDA was $152 million in the fourth quarter.

We invested $93 million in CapEx in Q4, and a total of $572 million for the full year of 2025, nearly $50 million favorable to our prior guidance. Costs related to managing the government investigation were $12 million in the fourth quarter, down 69% sequentially. From a balance sheet perspective, we remain in a solid financial position. As of December 31, 2025, we had $133.2 million in cash and cash equivalents, and approximately $595 million available under our $1 billion revolving credit facility. Our net leverage ratio stood at approximately 4 times adjusted EBITDA. Moving to development activity. During the fourth quarter, we added 181 beds, including 144 beds, from opening of a new joint venture facility in North Carolina.

For the full year 2025, we added 1,089 beds, exceeding the high end of our guidance range. This includes 778 beds from opening 6 new facilities. As previously discussed, over the course of 2025, we made the decision to close 5 facilities, including 4 specialty facilities and 1 acute care hospital. These closed facilities totaled 382 beds. Looking forward to 2026, we expect to add between 400 and 600 new beds, primarily through the opening of new facilities nearing completion. This includes 3 facilities with joint venture partners, including new hospitals with Tufts Medicine, Methodist Health, and Orlando Health. During the fourth quarter, we also opened a new de novo in our CTC line of business, bringing the total to 15 new CTCs added to the full year of 2025.

De novos in our CTC line of business continue to be capital-efficient way to expand our footprint into new markets that are underserved. Turning to our 2026 outlook, we expect full year 2026 revenue to be between $3.37 billion and $3.45 billion, an adjusted EBITDA of $575 million-$610 million. We expect adjusted EPS of $1.30 to $1.55. Full year guidance includes the following assumptions. We anticipate full year same facility volume growth between 0% and 1%. This growth is driven by the incremental contribution from ramping beds, including approximately 630 beds that will be added to the same store bucket in Q1.

That is partially offset by an approximate 350 basis point headwind to the same facility growth from changes in the New York Medicaid program, which I will discuss further in a moment. Moving to pricing. For the full year, we expect a 2%-3% increase in same facility revenue per patient day. This includes a decrease in Medicaid supplemental payment revenue for the full year, 2026. As a reminder, our fiscal year 2025 results included a non-recurring $34 million revenue benefit from Tennessee's supplemental payment program, which was recorded in the second quarter of 2025. We also expect to recognize $11 million of out-of-period supplemental payments in the first quarter of 2026. Guidance does not include any programs that have not yet been approved.

We estimate certain programs currently awaiting regulatory approval, represent at least a $22 million EBITDA benefit, if approved this year. Startup losses are expected in the range of $47 million-$53 million, compared to $56 million in the prior year. Guidance assumes startup losses will be weighted forward towards the early part of the year, with approximately 60% coming in the first half of the year. 2025 consolidated results include approximately $40 million of revenue from closed facilities. The closure of those facilities is expected to create an approximate $9 million tailwind to 2026 adjusted EBITDA. As we previewed in January, the State of New York has decided that it will no longer allow Medicaid patients to receive care in out-of-state facilities. We continue to estimate a $25 million-$30 million annual EBITDA impact.

As a result of this change, we are consolidating our footprint in that market and have closed two leased specialty facilities. We are actively working to backfill the remaining occupancy in the market. For 2026, PLGL expense is expected to range between $100 million and $110 million, in line with our prior guidance. We anticipate generating positive free cash flow this year, as we expect to see CapEx decline to a range of $255 million-$280 million. Moving to our outlook for the first quarter of 2026, revenue is expected to fall between $820 million and $830 million. Adjusted EBITDA is expected to be between $130 million and $137 million.

This outlook reflects the following assumptions: startup losses of approximately $14 million, the recognition of $11 million in supplemental payments related to the prior year, and the impact from severe weather of approximately $3.7 million. I will now turn the call back over to Debbie for closing remarks.

Debbie Osteen (CEO)

Thank you. As I look across the business, I am encouraged by the strength of demand and the need for our services, as well as the significant opportunity across all of Acadia's service lines. Over the last several years, we have expanded our footprint to over 12,500 beds, taking care of 84,000 patients per day. The focus now is on delivering quality care for patients and consistent operational performance. We have the right mission, the right markets, and the right foundation to deliver improved results. This work will take discipline and consistency. We remain focused on providing care with the highest standards. Fortunate to have an experienced and dedicated team who provide quality patient care for those seeking treatment for mental health and substance use issues. I am confident in the value we can unlock through focused execution.

With that, we are ready to take your questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster. The first question will come from A.J. Rice with UBS. Please go ahead.

A.J. Rice (Managing Director and Senior Equity Research Analyst)

Thanks. Hi, everybody. Welcome back, Debbie. First, you know, I just wanted to ask, I know last year the company had embarked upon a, I think, what was described as a value creation review with some outside advisors. That wasn't mentioned in the, in the prepared remarks. I wondered, can you just update us on the status of that? Is that still ongoing, or now that you're back, has that been put on hold?

Debbie Osteen (CEO)

Thank you, A.J., for welcoming me back. It's not on hold. I think that what we are focused on right now is really what's in front of us, which is 2026, and making sure that we perform and that we're able to address some of the issues from last year in 2025. We're always looking for opportunities to create value, that's really an ongoing process. We didn't mention it, you know, it's important that we look at short-term and long-term value, that's continuing. We are, as I mentioned in the remarks, we are looking at our service lines to make sure they're aligned, that they will create the value that our shareholders expect. I think there's more to come there.

There is a real focus right now, though, on immediate progress, and then, as I said, looking at the long-term value as well.

A.J. Rice (Managing Director and Senior Equity Research Analyst)

Okay, great. Let me, for my follow-up, just as you've had a chance, I know it's still early in your assessment of things, but I think we've always thought about this industry, at least in recent years, in a normal environment, can generate low to mid-single digit organic volume growth, low to mid-single digit pricing gains, and then with the de novos, have some opportunity for margin improvement over time. Is there anything you're seeing? I know there's noise in what's been happening in the last 18 months, but as you come out the other end of this, and this year is probably getting back to a normalcy year, is there any reason to think that that growth algorithm is different as you reassess the landscape?

Debbie Osteen (CEO)

No, I don't think it's different, A.J. I do think the demand continues to be very strong, and I certainly don't see anything that would impact that, either short term or long term.

A.J. Rice (Managing Director and Senior Equity Research Analyst)

Okay.

Todd Young (CFO)

A.J., overall, we, you know, we feel good about where it is and how we're playing out this year. A lot of noise in the numbers of the last couple of years that we think, you know, as we get stable here and add to our beds with less closures, we should get, you know, back to more of a normal course on the growth side.

A.J. Rice (Managing Director and Senior Equity Research Analyst)

Okay, thanks so much.

Operator (participant)

The next question will come from Whit Mayo with Leerink.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Obviously, there's a lot of embedded earnings inside the organization from all this development activity. I think you framed it as $200 million of incremental EBITDA. Debbie, what's the time frame that you think you could realize those earnings? Is it, you know, 2 years, 3 years, 5 years? Just how do we think about the pace of that?

Todd Young (CFO)

Yeah, Whit, it's Todd. I think, you know, we've not defined the pace of it, but clearly, we think it's inside 5 years. We're gonna keep, you know, doing this based off increasing occupancy. You know, we've added a number of beds since 2023, and we'll add, you know, an additional 400-600 beds this year. As we look at that on a facility-by-facility basis and looking at it based off occupancy rates, that's how we've calculated out that, you know, performance improvement and do think it's inside 5 years. We're not committing is it, you know, 3 years, is it 4 years, but certainly, you know, it's in this, you know, 5-year window as we drive occupancy at all these new facilities we've brought online.

Debbie Osteen (CEO)

I'll just add with, you know, we built these beds because there was a market need, and we entered into the joint venture partnerships because of the market need. In many cases, they had beds that were folded into our operations. We're gonna move with a sense of urgency here. We wanna eliminate the barriers and really start to see our investment be realized. As you said, there's a lot of opportunity embedded there. You know, I know the team is committed to move quickly and to work in collaboration with not just our partners, but.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Average length of stay was under pressure, with managed Medicaid being called out by the previous regime as squeezing the approved days for patients. I'm curious, how do you think about addressing that or bumping up against that pressure from managed care to sort of maintain length of stay in this business?

Todd Young (CFO)

For me, it seems.

Apologies to all listening on the call. We seem to have a technical issue. Our understanding is that you can hear Debbie and I as we speak, but that we're not hearing the questions coming in from the analysts. Hopefully, we'll be back on here in a minute.

Operator (participant)

As we are having technical difficulties, there will be hold music until we can get our speaker line connected. We have our speaker line reconnected. Please proceed.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Hi, good morning. Debbie, thanks for taking the question, and also nice to hear back from you here. I guess I was thinking, question-wise, you know, as we think through the challenges that the company faced, especially towards the last year, the end of the previous regime, one of the things that we got called out was the pressure from managed Medicaid on average length of stay, where the approvals and on the, on approved days for patients, especially in acute, were being pressured. Just curious, how do you foresee pushing against that pressure from managed Medicaid to sort of maintain stability in that length of stay metric? Thank you.

Debbie Osteen (CEO)

Yeah, apologize for the technical difficulties. A great way to start out our call. You know, I've been in the business a long time, as everyone knows, and I think there's always gonna be a natural push and pull in the reimbursement environment, not just with managed Medicaid. I don't think it's a new development. I think that some states and payers are more challenging than others, but. We address those situations individually. We really have a very stable length of stay. It's obviously on a same store basis. We're going to see that, I think, stay stable. However, there is an impact this year on our length of stay with respect to the New York Medicaid, which I think everyone is very well aware of.

Those patients tended to stay longer, you'll see an impact on that. Just generally, we consistently advocate for patients when there are concerns about getting authorizations or medical necessity. We really try and work with our payers. We wanna make sure the patients are in the right setting. Overall, I think that we have very strong relationships, and I think this is just part of the behavioral health business, and I don't see a big change there or see, you know, we're not anticipating a change this year. We're both doing what we need to do. Ours is to advocate for the patient, and, you know, they have their concerns, we really wanna work in collaboration with them.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

... No, I appreciate that. Maybe my follow-up, Debbie, as I think through just the bed adds that Todd laid out for us earlier, I mean, obviously very exciting. As we think about, again, the previous regime, there were offsets to the bed adds with bed closures. Just philosophically, as you've looked through the portfolio today, how are you thinking about, you know, the opportunity to grow net beds or, you know, kind of maintaining or maybe even avoiding bed closures at this point?

Debbie Osteen (CEO)

Well, I think, you know, as I was here, you know, prior time, we always looked at our portfolio to evaluate, you know, what makes sense. In my mind, that accelerated pace that you've seen over the last couple of years in closures is behind us. I think that, you know, we would only consider closing beds if there's no clear path to viability. Our focus right now is really on operating and improving the existing portfolio. We're not talking about closures at this point and don't anticipate being in that situation.

Todd Young (CFO)

The only caveat on that is we did close two leased facilities in Pennsylvania as a result of New York's decision, driving more efficiency by, you know, consolidating in bigger locations. Because the leases were up, it just made logical time to close. Otherwise, very aligned with Debbie. The opportunity in front of us is to treat the demand that's out there and look forward to operating all of our facilities.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Awesome. Thank you, guys.

Debbie Osteen (CEO)

Thank you.

Operator (participant)

The next question will come from Pito Chickering with Deutsche Bank. Please go ahead.

Pito Chickering (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys. Thanks for taking my questions, and welcome back, Debbie.

Debbie Osteen (CEO)

Thank you.

Pito Chickering (Managing Director and Senior Equity Research Analyst)

You talked a little about this, but can you give us more details on exactly how you plan to rebuild trust with your referral sources, and how you'll change how Acadia operates at the facility level in order to rebuild that trust?

Debbie Osteen (CEO)

Well, I think we have good referral relationships, Peter. I do think that it has to be consistent, and it's got to be a focus every day to make sure that we are delivering the high-quality care that our referral sources expect. I think that we are doing that. As far as some of the issues in the last year in particular with just beds ramping, I don't think it was really related to a disconnect with our referral sources, but there were other issues involved around getting these hospitals open.

I feel good about our relationships, and we have, as you know, a team of people that really wanna connect with them, and they do that every day to make sure that we understand what they need in services, but then also that they're satisfied and the patient is getting what they need. Our outcome data, I think, is gonna be very helpful with referral relations because, you know, it is, we are in a very good place with those outcomes. It's our job to show our referral sources what we can do, and that builds trust. It's a track record of really treating their patients with the excellent care they expect, and then also being able to demonstrate that through outcome data.

Pito Chickering (Managing Director and Senior Equity Research Analyst)

For the follow-up here, you know, what is sort of your goal in the first 90 to 180 days? Because at the facility level, you're going into each hospital individually, is it at the divisional level? As you think about the current utilization of dashboard systems and processes, you know, kind of where do you wanna focus on most in the next 90 to 180 days? Thanks.

Debbie Osteen (CEO)

Well, you know, my priorities are improving our volume, which we just talked about, you know, with particular focus on the same store growth, but also on the, you know, 1,200 beds that we've added over the past 2 years. I think that when I think about the team, I wanna make sure that we have the right people, and I mentioned that in the remarks. I think that's key. I do think that we need to improve our operational discipline. We do have a lot of visibility now, and I've been very impressed, certainly with the quality dashboards. They're, you know, we also have benchmarking around some of the other areas, you know, with respect to the financial key factors that our facilities need to use to operate.

What I'm really trying to convey to the team, and they're embracing this, is use the data, use it for problem-solving, but make decisions and take action. If we see something that is not in line, we need to act, and I think that started day one here as I rejoined the team.

Pito Chickering (Managing Director and Senior Equity Research Analyst)

Great. Thanks so much.

Operator (participant)

The next question will come from John Ransom with Raymond James. Please go ahead.

John Ransom (Managing Director)

Hey, good morning. Welcome back. I'll add my salutation as well. Thinking about the long-term CapEx, how should we think about the cadence of that beyond 2026? Are we gonna commit to maybe a moratorium on building new hospitals and focus on bed adds, or what's the capital discipline look like from here?

Todd Young (CFO)

John, we appreciate that question. I think you see a significant reduction in CapEx in 2026, which is gonna lead back to free cash flow growth. We will continue to evaluate opportunities in markets that have high demand and that meet our threshold for bed adds, understanding that the cost of construction has increased a lot over the last few years, so that bar has changed versus where it was three years ago. With that lens, we'll also look for continued expansion opportunities within existing facilities and the possibility that M&A may be a better option than building, depending on what that cost multiple is.

Fundamentally, right now, we're focused on delivering in 26, ramping the new facilities we've put in the ground, and then being very disciplined on CapEx in the years after that, as we get back to generating free cash and really showing off the cash-generating power the underlying business has now that we have these beds available and as we fill them.

Debbie Osteen (CEO)

I'll just add to that, John. We really are focusing on the improved performance at our existing facilities. you know, in terms of at least how I look at capital, you know, it has to stand on its own merits, which I mentioned. we always have said, and I think it's still accurate, that bed expansions to existing facilities are the best use of our capital. You have the demand there, and you already have built in the overhead and other elements. We're gonna be very careful this year about what we do with capital. you know, Todd mentioned M&A.

That's, we're looking at that really not as a short term, unless there's just some great opportunity there, but we're looking really more focused on what we're gonna do with the beds that we've added and what we're going to do with the beds that we plan to add this year.

John Ransom (Managing Director)

Okay, my follow-up is, you know, med mal. I know it's a lagging indicator, but the industry's been on a long, in a cycle where they're chasing, you know, experience with increased reserves. You know, where do you think we are in that? Is there any leading indicator to suggest maybe that's gonna crest at some point in the foreseeable future?

Todd Young (CFO)

It's a fair question, John. Obviously, the PLGL expense was a significant headwind to 2025. You know, we've, you know, continued to analyze our claims coming in, and they are consistent with where we were in December relative to that expectation, which is why we held guidance for 2026. You know, as we look out, you know, we're making a lot of investment at the facilities and really focused on the training. It's our people that make the difference, and we think they will continue to, you know, provide really quality care, and that will be the driver, understanding that this is part of our industry, and we're never gonna get incidents to zero. Certainly, our goal is to continue to provide quality care and reduce the opportunities for more lawsuits in the future.

John Ransom (Managing Director)

Thank you.

Operator (participant)

The next question will come from Ryan Langston with TD Cowen. Please go ahead.

Ryan Langston (Director and Senior Analyst for Healthcare Research)

Good morning. DSO was up, I think, 6 days year-over-year. Was there a particular payer, maybe group of payers, driving this? Is this related to the higher denials rates you talked about recently, or just I guess anything else to call out there would be helpful.

Todd Young (CFO)

Yes, Ryan, no, it's a good call. We did see some slower payments on a couple of things. A couple of these were nuanced. There were 2 states that had different programs that needed to get finalized, including the supplementals we saw here in Q1 of this year. That meant we had to wait for the payments on previous services until those came in. You know, those monies have started to come in, such that I wouldn't be concerned about the DSO. We did see, you know, denials in line with what we'd expected for Q4. You know, cash collection is certainly a focus of the team and do expect it will be better in 2026.

Ryan Langston (Director and Senior Analyst for Healthcare Research)

Great. Then just following up, Debbie, welcome back.

Debbie Osteen (CEO)

Thank you.

Ryan Langston (Director and Senior Analyst for Healthcare Research)

On the New York and Pennsylvania issue, I guess, are there any other sort of geographies in the portfolio that you could maybe potentially see a similar dynamic, where one state limits sort of out-of-state care to another? Thanks.

Debbie Osteen (CEO)

You know, I think New York is an outlier. I do think that, we have opportunity there, to diversify our payer mix. We were very dependent, as you can see from the impact of it on New York Medicaid in a few of our facilities up in Pennsylvania. I don't see that as, it would not be a risk that I would list. I think that, you know, states oftentimes don't have the resources, available to adequately treat the needs of the patients, so they do send out of state. In this case, there was a policy in place, and, you know, they made a decision to enforce that.

We're advocating, because we don't believe there are sufficient resources in New York, understanding that we had to recognize the, you know, the impact of this. We're also working very diligently to really find new payer sources, and we're starting to see some early results from that. We'll continue to do that to ensure that the hospitals that we had there, continue to be viable, but with a different payer mix.

Ryan Langston (Director and Senior Analyst for Healthcare Research)

Great. Thanks.

Operator (participant)

The next question will come from Andrew Mok with Barclays. Please go ahead.

Thomas Walsh (Equity Research Associate)

Hi, this is Thomas Walsh on for Andrew. The core EBITDA growth in the bridge seems to outpace the underlying components of rate and volume. Can you help us understand what else is contributing to the 6% to 7% core growth, potentially on the cost side?

Todd Young (CFO)

Certainly, Thomas. The big driver of the core growth is the ramping facilities opened in 23 to 25. You're getting an occupancy benefit and just getting the greater leverage into EBITDA than what you would have at, you know, facilities that are already at a high occupancy level. You know, that's a big driver of the core growth in the bridge and why we're very, you know, confident that the initiatives we're putting in place in these facilities, and as they get longer tenured in the markets, are getting that traction and driving the growth.

Thomas Walsh (Equity Research Associate)

Great. Following up, could you help us understand how you're preparing for the changes in California's staffing requirements expected to phase in midyear? What's embedded in guidance for this?

Todd Young (CFO)

Sure. Now, as everyone's aware, you know, California has some new guidelines regarding nursing staffing ratios. You know, the team, you know, was working very diligently to be ready for this, for January 31st. It's been pushed back to June 1. We expected to have about a $4 million EBITDA impact that's embedded in our guidance. Overall, it's really not about us needing more people, because we were very well staffed to take care of patients across California. Rather, we now need a higher level of nurse in many cases, which is just an incrementally higher cost to us versus a, you know, full FTE. It's at the margin. You know, that's our expectation, for the impact in 2026.

Debbie Osteen (CEO)

I'll just add that, you know, we're not, obviously, not the only company that's being impacted in California, and we're working very closely with the California Hospital Association. You know, their position, and we certainly agree, that if a new regulatory, you know, requirement comes in, that there should be an offset in funding for that. I don't want to say that that's been set, but I do know that there are discussions with the state about putting in new regulatory requirements and the practice and what we believe to be their responsibility to fund that regulation.

Operator (participant)

The next question will come from Ben Hendrix with RBC. Please go ahead.

Ben Hendrix (VP and Equity Research Analyst)

Thank you very much, and good morning. Welcome back, Debbie.

Debbie Osteen (CEO)

Thank you.

Ben Hendrix (VP and Equity Research Analyst)

I wanted to talk a little bit about the ramp of new facilities, and I appreciate that you're in the process of assessing those on a facility-by-facility basis. It does sound like some of the top-line outperformance versus the high end of guidance for 4Q was driven by that new capacity. Just wondering if there's any early observations on the puts and takes of the ramp pacing. Are there some new projects that are gaining better traction than others? Any high-level thoughts on what might be working, what might be lagging in those new projects at a high level? Thanks.

Debbie Osteen (CEO)

Well, you know, as we think about the 2025 issues around the ramp of our new facilities, we have identified common themes, and it's really in getting the facilities open. There's a lot of detail that go into getting our new hospitals open. You know, we have construction, we have to hire staff, but I think what we have seen as probably a common theme is that we need licensure, obviously, and then we need a billing tie-in to be able to bill for the patients within the facility.

When we get that, it's not a matter of need, it's not a matter of patient demand, it's really more through these processes that we have to work through in each state, and they vary with respect to licensure, and then also, as I mentioned, just being able to bill for the patients that are coming to us. We, we have a plan around that because I think that we recognize that we can work earlier on some of the areas, and we plan to do that. As our hospitals open, we are pretty confident that we're going to see those patients come in.

Again, back to what I said earlier, there was a need in the market, and we just need to make sure we get our hospitals open as we expect, and not all of them were opened on the timeline that I think the team thought was gonna happen. We're changing our processes for this year, and I'm hopeful that we'll see a difference in the ramp and the issues that we saw in 2025.

Ben Hendrix (VP and Equity Research Analyst)

Great. Thank you very much. I wanted a quick follow-up on the Pennsylvania facilities. You mentioned that you've consolidated, those and maybe repositioning those for a change in payer mix and maybe a repositioning towards in-state volume. What is the kind of the timing of a shift like that, given the magnitude of this headwind? Or, you know, could these be slated for a potential exit or strategic review, in the near future? Thanks.

Todd Young (CFO)

Ben, great question. I think overall, you know, we have closed the 2 facilities that I mentioned to consolidate, you know, from essentially 8 facilities that were impacted by this down to 6. We've opened up, you know, 1 new state, New Jersey, that we're excited to start trying to source patients from for these facilities as well as in the Pennsylvania market. You know, we've given the $25 million-$30 million EBITDA impact for 2026. That is our expectation. At the same time, we're very much looking to change that mix and deliver better results than that over the course of the year, as we, you know, find new referral sources and look for ways to fill up these really good facilities that take care of our patients extremely well.

Operator (participant)

Thank you. The next question will come from Matthew Gilmore with KeyBanc. Please go ahead.

Matthew Gilmore (Director and Senior Equity Research Analyst)

Hey, thanks for the question, and let me echo the welcome back to Debbie.

Debbie Osteen (CEO)

Thank you.

Matthew Gilmore (Director and Senior Equity Research Analyst)

Maybe following up on the operational discipline discussion, Debbie, you had mentioned a comment about looking at operational layers. I was hoping you could just help us sort of unpack that and sort of understand maybe how the team is organized today and what changes you're contemplating and how that might benefit the organization.

Debbie Osteen (CEO)

Yeah, I mean, we are taking a look not only at the corporate structure, but also the leadership structure that supports those in the field. You know, over my years in behavioral health and being in a public company, you know, I have a strong belief that whatever we do here at corporate has to support what happens in the field, and that that principle is really should guide what everyone does here in this office. I have started and in the process of looking at scope of each of our leaders, how the geography is set up, and also just what their experience level is, and do they have the right experience?

We have some new leaders, and we have those that are really have been here, so I've seen a lot of familiar faces as I've rejoined. My focus is on what do we absolutely need, and what do we need to support the growth, 'cause we've had a lot of that, and what does that look like from a corporate point of view as well as a field point of view? I think that, you know, it'll be an ongoing process, but we've already started to make some changes, which I won't go into detail on this call. I do think that the team is eager to make sure that we are right-sized, both here at corporate and in the field.

That's gonna be a continuing process over the next, you know, few months.

Matthew Gilmore (Director and Senior Equity Research Analyst)

Understood. Thank you. Then on the fourth quarter volume performance, particularly on patient days, it seems like that, you know, came in a little bit better than recent trends, and I know length of stay improved a little bit, and that then drove the upside to revenue, or was at least part of it. I was curious how the volumes performed relative to your expectations, and were there any areas of sort of notable strength to call out, in terms of the fourth quarter volumes?

Todd Young (CFO)

No, we were very pleased with, you know, the team's delivery in Q4. As you know, it's slightly better than expectations. That was really, you know, pretty broad-based with, you know, strength in both acute and specialty.

Matthew Gilmore (Director and Senior Equity Research Analyst)

Okay, thank you.

Operator (participant)

Your next question will come from Ann Hynes with Mizuho Securities. Please go ahead.

Ann Hynes (Managing Director)

Good morning, and thanks, and welcome back, Debbie.

Debbie Osteen (CEO)

Thank you, Ann.

Ann Hynes (Managing Director)

I want to focus my question on cash flow and leverage. You said earlier in the call that it could take 5 years to unlock the EBITDA, and I'm assuming that's the same timetable for cash flow. I guess that would be my first question. My real question is: I know you don't wanna discuss the outstanding lawsuits, but how do you think about leverage with the potential upcoming settlements, with the timing of unlocking the EBITDA and cash flow? Do you have any maybe short-term, intermediate, and long-term leverage goals that you could share with us?

Todd Young (CFO)

Thanks, Ann, for your question. As I said, it's certainly inside 5 years to unlock, that, you know, $200 million opportunity. You know, we're looking to be cash flow positive this year, and so we've brought down the CapEx significantly. We expect our legal costs to be, and transactional costs to be, you know, lower than last year. As I said, expect for some working capital improvements as well. All of that should lead to, you know, a positive on reducing debt. As we think about our outstanding legal challenges and the like, you know, we are taking that into account as we look at leverage over both the short and the near term.

But, you know, fundamentally, we do expect to grow EBITDA and to improve free cash flow in 26 and in, you know, 27 and 28, all of which, you know, then drives improvement in leverage, understanding that there may be some additional cash required to, you know, pay for a settlement or otherwise that can exist. You know, fundamentally, we do think our leverage will stay in a reasonable range, maybe not as low as, you know, it has been the last few years because of these draws on cash, but not in a way that will create any risk to the enterprise.

Ann Hynes (Managing Director)

Great. The de novos that are not performing to your expectations, what's the drag on EBITDA in 2026? Do you expect that to continue, like, have these startup losses in 2027 and 2028?

Todd Young (CFO)

No, we expect startup losses to improve. We're improving modestly in 2026 versus 2025. As I mentioned earlier, a big part of our core growth is the ramping of facilities opened in 23 to 25, and that continued ramping of these facilities will be the driver of improved EBITDA and cash flow performance in the next few years. We would expect in 27, given we don't have substantial beds or new facilities opening, that those startup losses would decline, you know, more than they are here in 26 versus 25.

Ann Hynes (Managing Director)

Great. Thank you.

Operator (participant)

The next question will come from Jason Cassorla with Guggenheim. Please go ahead.

Jason Cassorla (Senior Equity Research Analyst)

Great, thanks. Good morning, and welcome back, Debbie.

Debbie Osteen (CEO)

Thank you.

Jason Cassorla (Senior Equity Research Analyst)

I wanted to hit on 2026 volume quickly. You've got flat to up 1% total, same facility, 350 basis point impact from the New York Medicaid dynamic. You've got facility closures, and you've got over 600 beds coming into the same facility stat. I guess, could you help maybe bifurcate what the volume growth expectation would be on, like, a non-Pennsylvania, non-new bed, same facility basis? I'm just kinda, like, relative to, like, the overall, like, the 2%-3% longer term. Just curious on what you're seeing on that front would be helpful. Thanks.

Todd Young (CFO)

Sure, Jason, as you just rattled off there, we've got a lot of moving pieces that does make this a more complicated, baseline than normal. You know, as we've called out, we think underlying core growth is, you know, in the 1%-2% range, and then we're gonna get, you know, a 1%-2% benefit, from our ramping facilities on the 23 to 25 basis. Again, that ramping facility is gonna be a big driver going forward. We've added a lot of new beds, to our facilities and to new facilities and JVs over the last couple of years. You know, again, this drag on the 3.5%, roughly, from New York Medicaid, is the big, you know, negative this year that, you know, we don't expect will repeat in future years.

Then we'll get back to this growth as we ramp our facilities, and exit the startup losses and really drive that EBITDA growth from, you know, just getting a higher utilization of the fixed cost of each of the new facilities.

Jason Cassorla (Senior Equity Research Analyst)

Great, thanks, very helpful. Maybe just as a follow-up, I just wanted to ask quickly on the first quarter 2026 guidance. You know, if you net out the $11 million of out-of-period DPP benefit that you're expecting to book, it looks like first quarter EBITDA is down about high single digits. 2026 guidance, if you net the out-of-periods, it's pretty flat on a dollar basis. Like, maybe it's the run rate PLGL, maybe it's the maturation of new beds, startup cost, timing on seasonality, but is there anything to call out in the first quarter of 2026 specifically that might be impacting the guide, or is it just, you know, conservatism given some of the moving pieces? Thanks.

Todd Young (CFO)

Yeah, well, a very fair question. I think, you know, we do have a weather impact here in Q1 that, you know, the big storm that, you know, really knocked out the team here in Nashville. We had a lot of folks without power for a week. You know, that hit a lot of our facilities because it just hit so many states. We called out about a $3.7 million headwind there. We do expect that the facilities ramping will create a greater EBITDA benefit in the back half of the year than in the first half of the year. That also is different than the Q1 run rate would suggest.

Finally, we expect supplementals from just the normal course of already approved programs also has a bigger second half benefit than it does first half. You know, those are the number of pieces that allows for us to feel good about the acceleration and the EBITDA run rate relative to Q1.

Jason Cassorla (Senior Equity Research Analyst)

Awesome. Thank you very much.

Debbie Osteen (CEO)

Thank you.

Operator (participant)

The next question will come from Joanna Gajuk with Bank of America. Please go ahead.

Joanna Gajuk (Director and Equity Research Analyst)

Hey, good morning, Debbie Osteen, great to have you back, for sure.

Debbie Osteen (CEO)

Thank you.

Joanna Gajuk (Director and Equity Research Analyst)

Thanks. You mentioned in your prepared remarks also, review of service lines. Can you give us a little bit more color on, you know, kind of what metrics you're looking at to kind of make these decisions and maybe early indications, you know, which of these service lines you were referring to, where you were thinking they might, you know, require divestiture?

Debbie Osteen (CEO)

Thank you for welcoming me back. I really wasn't trying to infer that we're going to be taking any action on any of our service lines. What I meant by those remarks is we are wanting to make sure that all of our service lines are performing at the highest level that they can, and I think that certainly most of the new beds that we've added have been in the acute area. We're looking at that as a separate focus. You know, with regarding CTC, we really feel like that's a very important and strategic part of the company. It actually has some very attractive characteristics when you think about it. It's low capital intensity, it's low labor intensity, and we really have a just very, very strong, predictable demand.

When I reference looking at all of our service lines, what I'm looking at is just where are they performing now? How can we improve that performance? Do we have the right leadership and the right teams in place to see that happen?

Joanna Gajuk (Director and Equity Research Analyst)

Thank you. If I may, a follow-up on the comment around the new hospital ramp-up. Sounds like could be construction delays or just approvals, but you also mentioned staff. Can you kind of, you know, maybe double down on that topic in terms of, you know, are there any markets with some shortages or just issues around staffing? In particular, also, as it relates to some other questions about management or other referral sources, you know, are there any trust issues maybe with local healthcare workers that it's creating, you know, issues staffing you beds? Thank you.

Debbie Osteen (CEO)

As you know, staffing, we always have staffing as a focus to make sure that we have, you know, especially with the new hospital, as you can imagine. It's not about trust of our referral sources. The ramping issues that happened in 2025 really have to do with getting all of the regulatory approvals in place to open. As I said, earlier, to bill for those services. I think, you know, we entered into these relationships with our partners because they were very strong in their market. We've learned that we need to leverage that strength-

even more than we have in the past and do it earlier. They're, you know, we're focused on really collaborating and meeting their needs and making sure their patients can access, you know, the new facility. I wouldn't, I wouldn't see it as a staffing issue that's been a barrier, really, or a lack of trust by referral sources. I've met with several of our partners since I've come back, and they're very excited about being able to meet the mental health needs, but do it with, you know, us and the strength that we bring. That, I think, is in very good position, and I don't, I don't think that we have issues going forward. Really, as we think even about the new facilities ramping, we've got some really strong partners that we'll be opening facilities with this year.

Joanna Gajuk (Director and Equity Research Analyst)

Thank you so much.

Operator (participant)

The next question will come from Sarah James with Cantor Fitzgerald. Please go ahead.

Sarah James (Managing Director)

Debbie, it's great to have you back.

Debbie Osteen (CEO)

Thank you, Sarah.

Sarah James (Managing Director)

I'm wondering, does your expansion of the quality dashboards include new investments in recognizing and responding to patterns in clinical outcome measures like readmissions or relapse rates? Could those metrics factor into payer negotiations or claims approval rates?

Debbie Osteen (CEO)

Well, I, you know, The 50 measures that we are looking at, you know, some of them have to do with, you know, on the unit, and how our clinicians are performing. Certainly, the performance and the of our patients and how they improve within our facilities, I do think can be a key part of our discussions with the payers. We're aligned in that. They would like to see these patients improve as we would as well. We are using those, that data. I think we can do it even more than we have, because now we have some published information that we can, you know, we're putting it on our website, as I mentioned. It's very clear that our patients are coming in, and they are improving from admission to discharge.

We do plan to use that more to demonstrate the difference that we make as they consider, you know, what they intend to reimburse us, and we want alignment with that. The dashboards give a lot of visibility, and it's visibility that is immediate, so that you can look at a particular hospital and a particular measure and know for that day what is happening, which I think is a great tool.

Sarah James (Managing Director)

Great. Just one follow-up on the referral channels. Can you provide us with a framework of what the referral channel mix looks like now, how that's different from two years ago, and as you're making these investments on building relationships, where that mix could go in the next few years?

Debbie Osteen (CEO)

As I've come back, I don't see a big difference in the referral patterns. you know, they do differ by service line, as you know, Sarah, just from following us. I think that we still get business from the emergency rooms, who are in need of placing patients that might be boarded there for a period of time. We also have many professional referral relationships with those out, not only practicing in psychiatry, but also other physicians. In each state, it's going to differ as to who is sending patients, but I don't really see a big shift there. I think that it's the same group of individuals that are referring.

Our job, and I think we're very focused on this, is making sure we're connecting with them and that we are being proactive with them to talk about what we can offer to their patients, as well as the outcome measures, which we've talked about.

Sarah James (Managing Director)

Thank you.

Operator (participant)

This will conclude our question and answer session, as well as our conference call for today. Thank you for your participation. You may now disconnect.