Yahoo Finance Acadia Healthcare Co Inc (ACHC) Q2 2019 Earnings Call Transcript
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Acadia Healthcare Co Inc (NASDAQ: ACHC)
Q2 2019 Earnings Call
Jul 31, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
You are currently on hold for the Acadia health company's 2nd quarter 2019 earnings conference call. We are currently gathering additional participants. Please continue to hold the call will begin in a few minutes. Please stand by, we are about to begin. [Operator Instructions]. Please proceed.
Debra K. Osteen -- Chief Executive Officer
Good morning and welcome to the Acadia's second-quarter 2019 conference call. To the extent any non-cash 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 and 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 the Chief Executive Officer, Debbie Osteen.
Debbie Osteen -- CEO
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. Then 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 US operations performed well with consistent top-line growth and favorable trends in key operating metrics. US same facility revenue increased 6.6% for the second quarter, with a 3.3% increase inpatient days and a 3.2% increase in revenue per patient day compared with the prior-year period.
US 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 Milton, 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 and we remain confident that we will achieve our goal of approximately 700 beds additions for the year. The results from our UK 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 2.7% rate increase from the NHS and local payers and higher returns from our retooled beds.
Same facility EBIDTA 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.
David Duckworth -- CEO
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 dollars, 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 based on a tax rate of 17.2%. The companies consolidated adjusted EBIDTA 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.
Hours 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. And 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 to $3.175 billion, adjusted EBITDA for 2019 and a range of $610 million to $620 million adjusted earnings per diluted share for 2019 and a range of $2.15 to $2.23. We've reduced the high end of our guidance to reflect the recent acceleration of retooled beds in the UK, a slower ramp of the two de novo facilities opened in the first quarter of 2019 and an additional facility closure in the US.
And 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 toward the back end due to a number of factors, including the usual seasonal slowdown in the UK, the timing of the UK retooling initiatives, the continuing ramp-up of our de novos, 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.
Debbie Osteen -- CEO
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 strength 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 today is within procurement. And we are building a team to oversee this area. We are confident that we will deliver on the 20 to 25 million savings over the next two years. But since we are early in the process, we don't expect to see a material impact until 2020. Regarding the potential sale of the UK, 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 UK. We are closely evaluating all aspects of the KDS 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.
Questions and Answers:
Operator
Thank you. if you would like to ask a question, [Operator Instructions]. We ask that you please limit yourself to one question at a time and one follow up question [Operator Instructions] And our first question comes from Brian Tanquilit with Jefferies. Please go ahead.
Brian Tanquilut -- Jeffries
Hey, good morning, guys. Thanks for all that caller. I guess my first question is, as you think about the UK 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. Like how many beds are we talking about? And also, as we think about the de novos here. It sounds like the ramp is slower than you had expected. So if you are just walking us through any thought on changes that you're seeing in terms of the projected ramp in de novo beds in the US. Thanks.
David Duckworth
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. And we did talk about in the first quarter how we picture the ramp over the course of the year. And I'll say, Ohio it has been slower in terms of the second quarter and early July. They have made up 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. So 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. But I 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. So optimistic on the continuing ramp from those two facilities over the second half of the year on the retail beds in the UK. We 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.
And we do think those beds will be off line in the near term. But over the course of the second half of the year, especially the fourth quarter or early next year, we will reopen a service that is aligned better with the demand and we'll be at a higher return than the previous service that we operated. But seeing additional opportunities on the retooling and it's really just a temporary factor affecting our third-quarter earnings. But over the long term, optimistic about those opportunities.
Debbie Osteen -- CEO
[Speaker Overlap] I'll just add to what David said about the retooling, I think that the team in the UK has very good visibility around the service needs for the private sector. They're a partner in these collaborating and they're in 39 of the 42 that exist and the ones they're not in are in areas where we don't have facilities. But 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. And it is at a higher acuity, but also a higher reimbursement, which David mentioned.
So we think in the long term, w
e will be positioned. The demand is there. And I think that what we want to do is match that demand with our ability to take care of those patients. And so we tried to get ahead of it. And I think that we will be very well positioned as these beds come back. And we don't foresee a lot more of these retooling. But when we can generate a better outcome in return, we will pursue that. But right now, we're focused on matching those service needs with our beds.
Brian Tanquilut -- Jeffries
Now, this is a great comment, Debbie. I guess my follow, 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 you think about, The revenue associated with that just for modeling purposes, because you're same-store performance is really strong and I think the street might have mis-modeled the revenue for the quarter a little bit. So just if you can give us some color so that we can model it more accurately. Thanks.
Unidentified Speaker
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. And there's obviously, these were underperforming facilities, so there was not a lot of EBITDA associated with those facilities. But it does have an impact on our revenue growth. And so going forward we did have a loss of around 15 million of quarterly revenue.
But obviously, where we're positioned from an EBITDA perspective is much better. Having closed those facilities. So that was the revenue associated with the closures. We do have some losses incurred relating to the wind-down of the operations. And 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.
Brian Tanquilut -- Jeffries
All right guys. Thanks, guys
Operator
And our next question comes from pito Chickering, with Deutsche Bank. Please go ahead.
Pito Chickering -- Deutsche Bank -- Research Analyst
Good morning. Thanks for taking my questions. Just for back up a little bit, with you guys lowering the top end of the guidance here. He's put some -- can you quantify to what parts of it brought down the guidance from the closures, T.K. retooling. Can you just put the numbers around, which it also affects operationally so why reduce it?
Unidentified Speaker
Yeah, Pito we've already discussed a couple of the factors, but in the UK, looking at the timing of the retooling projects and the additional opportunities that we identified, there is an impact that that has just on the third quarter. And so that's certainly reflected in our update. And then in the US, we talked about the de novo and the facility closures. Those are the two factors that are -- that drove the update to the guidance in the US. In terms of quantifying the amount, it's sort of equally split between the UK and the
David Duckworth
US initiatives. We did not update are our guidance for the effects. So wanted to provide that clarification through 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 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 a penny on EPS. So did want to just provide that information for you. But 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.
Pito Chickering -- Deutsche Bank -- Research Analyst
Okay. Then for follow up, looking at the retooling of the beds in the UK 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. And I was under the impression that [Indecipherable] we've not been retooling beds over the short term to get those margins back up. So I guess the question is why now? What have you learned differently and how will this be executed differently in 2019 that wasn't 2018.
David Duckworth
Well, Pito part. 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 different setting in a different geography so that transition within the NHS has been accelerated. And so 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 base closures and retooling. But, you know, some of that has been the NHS and the timing of them making the changes and then us identifying more opportunities.
Debra K. Osteen -- Chief Executive Officer
I'll just add to David's comments. The, It's a fluid process in the UK 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 level. So 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. So I think if we had not done anything that 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 that we look back to the retooled beds from at least 18. 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. So, again, it is a short term pressure on volume, but it will be a long term benefit to the operation in the UK.
Pito Chickering -- Deutsche Bank -- Research Analyst
Great. Thanks so much.
Operator
And our next question comes from Matthew Gilmore with Baird. Please go ahead.
Matthew Gilmore -- ANALYST
Hey, thanks for the question. Following up on the bed retooling in the UK. Can you talk about what impact that had on volumes for the second quarter and then how should we think about the volume impact as it relates to the third quarter?
David Duckworth
Well, the volume impact, of course, is reflected in the year-over-year growth. We do not take those retool bids out of our bed count. And so as we look at it internally, we do have that reflected in the occupancy figures that we track. But 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. And so 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 UK going forward, which is around that 1 to 2%level.
Debra K. Osteen -- Chief Executive Officer
And Matthew, I think one thing I just said before I guess, your next question and I'm this subject is the retooling itself, it's a process. And so it's not just the renovation and change of the unit service. So 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 and then there is the retooling, which is more around reconfiguring the service. And then once that's complete, then we're ramping back up and we have received some block contracts from the 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. And 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.
Matthew Gilmore -- ANALYST
Got it. That's very helpful. And then one more on UK margins. It seemed like maybe that ran a little bit better than what you indicate on the last call, even with some of the retooling efforts. I was hoping you could just talk about the margin trend within the UK and what drove the stronger sequential performance.
David Duckworth
Yeah, Matt, we were very pleased with the margin in the second quarter. Noted the sequential improvement to 16.4% for our UK 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. And then additionally, the rate increases that we saw that applied to about 80% of our revenue in the UK effective April 1, had a benefit as well. So the labor, the rate increases both contributing to what we see is a good improvement in the UK margin.
Matthew Gilmore -- ANALYST
Got it. Thank you.
Operator
And our next question comes from Whit Mayo with UBS. Please go ahead.
Whit Mayo -- UBS -- Analyst
Thanks. David, maybe just on that last point, can you elaborate a little bit more on the staffing and agency calls? Maybe just put some numbers around how you're tracking and how you've been trending over the last few quarters?
David Duckworth
Sure, Whit, we do see labor cost as a percentage of revenue that continues to improve. And 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 and then additionally just around agency, we were less than 12% again on the agency as a percentage of our total labor. And that's an improvement as well and really a stable result compared to the first quarter. And we've been, ta- Talking a lot about improvement compared to the second half of 2018 and we see on both of those labor stats the agency as well as the total labor and improvement compared to the second half of the year, last year.
Whit Mayo -- UBS -- Analyst
Ok, now that's helpful, it's just when we sort of back into the same store operating expenses per patient day in the UK, it still feels like your costs are growing in that high single-digit range. And so is there any other area within your cost structure where you're seeing some pressure or is it just, some of the transitions that you're seeing with the retooling initiatives right now?
David Duckworth
Well, I do think, we have higher acuity patients and so we may see some staffing costs associated with that. But 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. And I don't think we've seen significant cost per day increases as we compare more sequentially to the last three quarters in the UK.
Whit Mayo -- UBS -- Analyst
That's fair. And maybe back on to 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.
David Duckworth
Sure, we do think -- I think I mentioned that we had losses in the second quarter and those losses were around $3 million. We think in the third quarter that those could improve and be in the range of $1 million to $2 million. But I mentioned in the fourth quarter, we do hope that they get to break even. And so that is what we have modeled for the remainder of the year for the two de novos.
Unidentified Speaker
And Whit, this Debbie. I want to just emphasize that the delay in the ramp up was related to getting certification and our number from Medicare. So 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.
But I do think that they chose two very good markets and we see a lot of demand in both of those markets. So we're more optimistic that we'll be able to recover. They have good plans in place to ramp up as quickly as we can.
Whit Mayo -- UBS -- Analyst
Got it. That's helpful. I understand it's generally under your control, maybe one. One last one for you, Debbie, just, is anything change with the reporting structure in the UK? Just curious.
You're looking at in a 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 the last update you provided us in your strategic update. Thanks.
Debra K. Osteen -- Chief Executive Officer
I think everyone is aware that Ron Fincher has retired and we had a couple of good send off for him and really value his contribution to Acadia and hopefully he is enjoying his new life in retirement. But as a part of that, the UK had previously reported to Ron Fincher and they now report directly to me and I've already started -- and have really made several trips to the UK. That will be overseeing that more closely than I have in the past since Ron has left the company.
Whit Mayo -- UBS -- Analyst
Thanks.
Operator
And our next question comes from Ralph Geacop with Citibank. Please go ahead.
Jason Corso -- Ralph
Morning, thanks. This is Jason Corso, on for Ralph this morning. Just a quick question. You saw the length of stay stabilized in the US. Do you expect that to remain the case as you move forward, or is there to any kind of moving pieces to get comfort with that?
Debra K. Osteen -- Chief Executive Officer
Jason, I'll just say that we've had a very stable length of stay here in the US and we haven't seen that change. So the only differences over the period has been more around the mix change from RTC to accrue. But we've not seen any change in instability of that. And don't anticipate any changes in the future.
Jason Corso -- Ralph
Thanks. Great. I guess, my follow up here, just as a high level on the business faced margin pressure for a while now and in some cases even despite mid-single-digit growth. So maybe can you just help level set the margin targets in the US and UK and what kind of organic top line is needed in each segment to kind of hold the line or get margin expansion? Thanks.
David Duckworth
The US business. You know, we had a strong margin for the 2nd quarter at 28%, above 28%. That is generally our target for our same facility business. You know, over the course of a year, just due to some seasonality, we would see the US and the 27 to 28% range. Certainly, pleased with the performance of there in the 2nd quarter. In the UK, we've -- we target on a long term basis that 16 to 17%. But I think we, I have an opportunity to be better than that. We just hesitated to provide some of those targets with the retooling projects that are under way, but think those could be a positive to get us above the 17% level and really, in the second half of the year. The target for the UK is between 15% and 16% just with the seasonality that we typically see and the retooling initiatives that are under way.
But, you know, that's how the second quarter will play out in the UK with the longer-term target getting back above that 16% to 17% range. In terms of the growth needed to be there, we have 5% to 6% in the US and in the UK is more of a single-digit 4% to 5% growth that we see in order to get to that margin.
Jason Corso -- Ralph
Thank you.
Operator
Our next question comes from Kevin Fishback with Bank of America Merrill Lynch. Please go ahead. Thanks.
Joanna Gajuk -- Bank of America Merill Lynch
Thank you. Good morning. This is actually Joanna Gajuk filling in for Kevin. So I guess, to follow up on that last comment, in terms of -- in particular, the US segment seems to revenues were extra very strong, like almost 7%. So that will be above the target at 5 to 6. I guess the margin was 28%, but I guess it was flat year-over-year. So is there a way to think about it in terms of what kind of growth rate you need year-over-year to keep higher margins?
Because it seems like, you know, this quarter actually was exceptionally strong cost top line but the margin itself was flat. So any color how to think about that dynamic? Thank you.
David Duckworth
We did see strong performance in the US, 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.
And we do expect in the second half of 2019 to see that in the US Some of that is just the timing of the bad additions that are driving both the volume and the revenue growth as well as the margin. And so I think margins will improve as we see over alonger period of time the new beds coming online. And so that 28%, while that was a strong number. I do think we'll see some margin expansion in the second half of the year in the US, same facility group.
Joanna Gajuk -- Bank of America Merill Lynch
That's helpful, I guess, to drill in or stay on. The topic of US segment, which was very strong. Can you maybe talk about the different pieces inside that second segment? If there was a way to think about it, you know, were there any geographic areas that were driving the strength? Was it across the border? Was there any particular business of the business specialty versus. RTC versus acute? And I guess on the on the specialty, I guess, there are some trends there in terms of more money flowing into the industry from the government. So I guess how you position there for that. Thank you.
Debra K. Osteen -- Chief Executive Officer
I'll just say that I think we saw a 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, Trust Point, which is here in Tennessee had a successful expansion. I mentioned in my remarks, the Tursun, on South Coast, which is in Massachusetts, also added beds and 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 US and we really saw solid performance in acute and specialty as well. We're starting to see some of the funding for our BOM come through to the states. We're well-positioned to take advantage of that because we have such a large impact we're the largest provider for those services. So we're optimistic about the growth potential and in that business line. And I think that's going to continue for some time.
Joanna Gajuk -- Bank of America Merill Lynch
Thank you.
Debra K. Osteen -- Chief Executive Officer
Thank you.
Operator
And our next question comes from Ryan Daniels with William Blair. Please go ahead.
Mic -- William Blair
Hey, guys, this is Mic, speak out for Ryan. Thanks for taking my questions. Just to start, I was wondering if you guys 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?
David Duckworth
So in the US, we do see two to three percent 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 US business. Most of which is at our acute facilities. And so that is that 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 comprises 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 to 3 % range.
Unidentified Participant
hi Greg, thanks for the color. And then I guess a follow up not really related, but I know in previous calls you mentioned having a goal of lowering your leverage ratio, but you didn't have a long term per year. I'm just wondering if you kind of zeroed in a target that you're kind of shooting for?
Unidentified Speaker
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, but we think by the end of the year we'll see some improvement there. And we'll communicate the longer-term target over time.
Mic -- William Blair
Okay, great. Thanks for the color, guys, have a good rest of your day.
Debra K. Osteen -- Chief Executive Officer
Thank you.
Operator
And our next question comes from John Ransom with Raymond James. Please go ahead, sir.
John Ransom -- Acadia Healthcare Company, Inc
Hey, good morning. This is John Ransom in for John Ransom. I'm sorry. You guys said in May that your real estate was worth a billion seven? So we looked at that and said, Okay, hypothetically, that if you took a $100 million rent stream and imputed, mid-five cap rate, you kind of get to that billion seven. Are we thinking about. I mean, when you were advised, 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?
David Duckworth
John, we're not going to comment right now just on 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 UK. But at this point, we don't have a comment around the math there.
John Ransom -- Acadia Healthcare Company, Inc
Okay. Second question would be, you know, you've lost about if memory serves, you know, about 800 points of margin in the U.K, you're starting to call that back,
Hundred bibs sequential improvement that you've gotten you know six months or so that gets her hands around this. How much of that loss margin do you think you could claw back over the next 12, 18 months?
Debra K. Osteen -- Chief Executive Officer
Well, I think that I feel good about the initiatives that are in place in the UK. I think that a key to margin improvement is going to be through the volume and getting the retooled beds, which we've been talking about on the call today. I think -- I was pleased to see the improvement from the last quarter. And I think that at this point we should continue through the quarters to see this improvement continue. I think that, as David mentioned and I certainly know the third quarter and the UK does have seasonality to it, but we would like to in the year higher than we are here in the second quarter. But it's going to depend on how we can quickly get those beds back on. And 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 an improved margin.
John Ransom -- Acadia Healthcare Company, Inc
Right. So just two others for me, so David I'm going to give you a chance here to save us all from ourselves. Obviously, the last two years if companies miss 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 the EBITDA in 3Q or if you want to do it another way, maybe the back half of the year sort of the mix of EBITDA 40 versus 3Q. I just want to do what we can here to try not to engineer another 3Q mess if it's avoidable in terms of providing some proactive guidance. I'd be great.
David Duckworth
John, I appreciate that question. We know 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 the de novos, the facility closures in the US. What we have going on in the UK is a third quarter item that we need to think about and we're not providing specific guidance for the any quarter. So I hesitate to go all the way to that level. But what we hopefully wanted to highlight is that we do see continuing improvement in those items, but it will be weighted more toward the back of the year. And what we didn't mention specifically, on this topic was just that the US bad additions has been really strong. 400 beds in the last 12 months added to our existing facilities. Those will continue to ramp and 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.
John Ransom -- Acadia Healthcare Company, Inc
So if I heard you, you're talking about a sequential $2 million improvement in de novo with the CEO in delay. So if we took you 3Q run rate or excuse me 2Q EBITDA, add a couple million for the improvement in de novo losses. Should we look at the sequential decline last year in the UK and say kind of expect that same level of sequential decline, at least in terms like building some quantitative framework for trying to get it 3Q? Is there anything else you would think about as we build our models, that we should think about?
David Duckworth
No. There's nothing else that we would highlight there other than just to say that in the UK, the second quarter to the third quarter of 2018 is not the type of decline that we expected this year, though that was more than just normal seasonality. So while we-- I did mention earlier, we may see a margin in the range of 15% to 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. But other than that, I think you are on the right track.
John Ransom -- Acadia Healthcare Company, Inc
All right, great. And then just so 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 onto this asset and we'd get more value from it, because people are going to pay us for marginal income? I mean, that is I assume that would all be part of the thinking as you evaluate the long-term plans there?
Debra K. Osteen -- Chief Executive Officer
I think that, you know, we can certainly validate that we are considering all our alternatives. And, you know, we've said in May and I'll say again, we're not going to sell the UK unless it brings and maximizes value. So that'll be part of the consideration as we think about our alternatives.
John Ransom -- Acadia Healthcare Company, Inc
Okay. Thanks a lot.
Debra K. Osteen -- Chief Executive Officer
Thank you.
David Duckworth
Thanks.
Operator
And our next question comes from Kevin Ellis with Craig-Hallum. Please go ahead, sir.
Kevin Ellis -- Craig-Hallum
Good morning, thanks for taking the questions. Debbie, Just wanted to set it off. You know, you gave good detail on the strategic review update, wondering if you had any comment, though, on progress for the revenue enhancement initiatives.
Debra K. Osteen -- Chief Executive Officer
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 of 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. So 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.
Kevin Ellis -- Craig-Hallum
Surely that's great. And then, you know, on the 20million to 25 million of cost savings, you know, you said procurement in account for a large portion of that, I guess. How much of it will come from procurement versus contracting and shared services in some of the other things?
David Duckworth
You know, 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 and we do see procurement being a significant share of the targeted savings. We're not providing real precise estimates at this point, but I do think a good percentage will be procurement and other cost where we feel like there's better opportunities to leverage our scale applied best practices throughout our facilities. But we are in the process of implementing our plan for each of the initiatives. But procurement absolutely is a significant area of focus as part of that.
Unidentified Participant
Great. [Speech Overlap]
Debra K. Osteen -- Chief Executive Officer
I think she would 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.
Kevin Ellis -- Craig-Hallum
Great, David, I have one quick one for you as well, so I might have missed this. So correct me if I did, but how many beds did you guys lose with the closures in Q2 and year to date? Just wanted to get an accurate headcount in the US and the UK.
David Duckworth
Sure, sure. We -- Second quarter, we did have a closure of a 16-bed facility that was part of the closure. That we talked about on our last quarter's call, the additional closure that we've mentioned this morning, is a pursuit that is in our bed count at the end of the second quarter because it closed in July. I think the big count there is around a 70 or 80-bed facility. And so but that's not reflected yet in our bed count.
Kevin Ellis -- Craig-Hallum
Got it, that's helpful.
David Duckworth
And Ellis, just to give you in case you're winning this piece of information. The bed count at the end of June is right at 9400 beds in the US.
Kevin Ellis -- Craig-Hallum
Thank you.
David Duckworth
Okay. Thanks.
Operator
And our next question comes from A.J. Rice with Credit Suisse. Please go ahead.
A.J. Rice -- Credit Suisse
Hello, everybody. A couple of quick questions here, in the UK Obviously, we've had a changeover and the prime minister is talking about moving forward for action once and for all. I know when that -- when we first got the whole Brexit push, it had some impact on labour 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 challenge with what's coming there.
Unidentified Speaker
A.J, I think that the UK 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 labour has already left previously when there was all the discussion around this but I think that they feel that while it does remain unsettled, that it'll have minimal impact on the day to day.
A.J. Rice -- Credit Suisse
And then I know I think the comments about Labour that you offered earlier were mainly about the UK situation. I wondered if I could get you just to comment on what you're saying here in the US Turnover rate, productivity, wage rates, those kind of things as well. As I know there's a lot of buzz about telemedicine and maybe the ability to use after going 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 a [Indecipherable]
Unidentified Speaker
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.
Kevin Fishback
But 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 rule settings or in areas where there might be shortages of professionals. So, yes, I think, A.J, that's something that will be in our future. And actually, we're already have several telehealth initiatives in place at the facilities. So we want to expand that because we think it just brings better access.
As far as the labor situation, I think, you know, 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. But we do have a focus on recruitment and retention, which we want to be proactive there. So even though it's stable, we want to make sure that we're prepared and that we're meeting the issues that in the markets and staying competitive.
A.J. Rice -- Credit Suisse
Okay. Thanks.
Kevin Fishback
Thank you.
Operator
And our next question comes from Akposh with PMO Capital Markets. Please go ahead, sir.
Analyst
Hi, this is Josh standing in for Akposh. I just had a quick question. One of your ps 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.
Debra K. Osteen -- Chief Executive Officer
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 beds they're supported by our sales and marketing platform. We actually have a plan 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 businesses. We have less than 5% of our US revenue without a network. Right. Yeah, at a network, we've done a good job. I think, in negotiating good rights in-network. And that's just based on the quality of the service and the relationship that we have with payers.
Josh -- Capital Markets
Okay. Great. And then just another question, can you kind of speak to if using any pressure in the US from more of your patients being, Transition from traditional Medicaid to manage Medicaid, have you seen any of that kind of flow through on your average length of stay?. Thanks and that'll be it for me.
Debra K. Osteen -- Chief Executive Officer
Well, our length of stay is is very stable. It's been the same for a number of years. I think that the manage 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. But as far as manage Medicaid coming into states that we're in, that's there's been no change that we've been able to see.
Josh -- Capital Markets
Great. Thank you.
Operator
[Speech Overlap] That is all behind you.
Debra K. Osteen -- Chief Executive Officer
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.
Operator
[Operator Closing Remarks]
Duration: 60 minutes
Call participants:
Debra K. Osteen -- Chief Executive Officer
Debbie Osteen -- CEO
David Duckworth
Unidentified Speaker
Kevin Fishback
Brian Tanquilut -- Jeffries
Pito Chickering -- Deutsche Bank -- Research Analyst
Matthew Gilmore -- ANALYST
Whit Mayo -- UBS -- Analyst
Jason Corso -- Ralph
Joanna Gajuk -- Bank of America Merill Lynch
Mic -- William Blair
Unidentified Participant
John Ransom -- Acadia Healthcare Company, Inc
Kevin Ellis -- Craig-Hallum
A.J. Rice -- Credit Suisse
Analyst
Josh -- Capital Markets
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