Addus Homecare Corp (ADUS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the First Quarter 2010 ADDUS HomeCare Corporation Earnings Conference Call. My name is Yvette and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the call over to your host for today Ms. Amy Glynn from The Ruth Group. Please proceed, ma'am.

Thanks, operator. Before we begin, I would like to remind you that certain matters discussed in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by words such as continue, expect, and similar expressions.

Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those expressed or implied by such forward-looking statements, including changes in reimbursement, changes in government regulation, changes in Addus HomeCare's relationships with referral sources, increased competition for Addus HomeCare services, increased competition for joint venture and acquisition candidates, changes in the interpretation of government regulations and other risks set forth in the risk factor section in Addus HomeCare's annual report on Form 10-K which is available at www.sec.gov.

Addus HomeCare undertakes no obligation to update or revise any forward-looking statement whether as a results of new information, future events or otherwise.

With that, I will now turn the call over to Mark Heaney.

Thank you, Amy. And thank you all for, and welcome to Addus' First Quarter 2010 Conference Call. I'm in our support center in Palatine, Illinois and I'm joined with -- by Darby Anderson who is our Division Vice President for Home and Community Services, by Frank Leonard, who is our CFO and Michael Siegel is with us who is our Vice President for Information Services.

As you've seen in the press release that we issued earlier today, we're encouraged with the work that we have done and the progress we have made over the past several months in strengthening our business and improving our financial position. Over the past quarter, we've made progress. We've made progress in collecting outstanding receivables, in increasing our home health admissions, in reducing and controlling our costs and lowering our debt and improvements in our home and community margins. And while we're pleased with our execution today, we know that we have more work to do. We know what that work is and we're on it.

As you know, getting Illinois to pay its overdue balances is going to -- our highest priority and that's why I'm pleased to announce that we have received $22.3 million in payments from Illinois since the end of March. And I want to give special thanks to the Addus team headed by Darby Anderson who, along with a coalition of advocates from across the state has led the effort in Illinois to bring attention to this important problem.

We're encouraged by the state's action. We believe it reflects the state's commitment to providing much needed care to the at-risk elderly population. But while we're pleased, the future payment cycle remains uncertain. Collecting our receivables and getting to a fair and predictable payment cycle in Illinois remains the top priority for the company.

We've also made initial progress on our initiatives to centralize and enhance our overall accounts receivable process. Last quarter, we told you that we were centralizing our billing and collection processes in home and community from the local agency responsibility to the corporate offices. That process has begun and while -- and will be completed in the third quarter. We believe this has begun to increase effectiveness of our collections demonstrated by a reduction in our non-Illinois DSO from 60 days at 12-31 to 58 days at March 31. There remains work to be done here, but we're encouraged with where we are.

I also wanted to highlight that as of May 12th, our revolver availability has increased substantially to $21 million, the highest level since September 2006. Our overall debt has decreased since December 31, 2009 by $13 million to $36 million. Looking at our revenue in the first quarter, total company sales increased 4.5% with home and community up about 4.9% and about a 2.6% increase on the home health side.

In home and community, our census trends are up year-over-year owing to our continued shift to a more sales oriented approach to business development in this segment. We expect these positive trends to continue in the second quarter. We also improved our gross margin slightly by 30 basis points compared to the first quarter of '09. Principally, this is due to a staff change in staff training requirements with one of our larger payers.

Looking at our home health segments, revenues were up modestly year-over-year and essentially flat sequentially. As was reported in our last Q call, in an effort to kind of rev up sales performance on the home health side, over the past two quarters, we have increased -- our sales force added two experienced regional sales leaders and we've really sharpened our on the ground sales focus.

These investments, while still early, have begun to yield very positive results. Our first quarter Medicare admission growth was 19.5% up year-over-year and 15.6% sequentially. In fact, while trending up throughout the quarter, our organically developed Medicare starts of care in March and April were our highest ever. I like what our sales people are doing on the sales side and we look for their continued success. In our integrated services program, you will remember that starts of care slowed late in '09 continuing into early '10.

Now, as a result of our adopting new procedures and the focused work of Donna McNally, our Vice President for Integrated Services and her leader, Sharon Rudden, our referrals in starts of care are up sequentially in integrated care. We are seeing this trend continue early in the second quarter. In fact, our April integrated starts of care are our highest ever.

I want to be clear about something. While we're pleased with our progress today, we have not yet turned the corner in home health. We have work to do. We have a plan and we're executing on it. As I mentioned in our call last quarter, we've increased our investment in sales and we still have to bring down -- continue to bring down our operating costs. While -- and we are doing that except -- and expect that the benefits of these changes will show up in segment margins in the second half.

Now, here are our near term priorities. It's crucial that we work for a structural and predictable solution to the Illinois reimbursement problem and Darby Anderson and our folks are focused on that. We've got to continue to collect [aged] receivables and we have a program underway and I think we're doing good work there.

We've got to continue to focus on an improved census development. We've got to continue the development of the integrated services model and we are. And we've got to lower our operating and labor costs in the home health side and Sharon Rudden is committed to making that happen. And importantly, because we're state driven, we have to monitor and work with the states as they finalize their 2011 budgets.

Lastly, I want to make a few comments about the passage of healthcare reform as it relates to home care. We like -- we like how Medicare home health was ultimately treated coming out of the bill. Like many others, at times in the process, we were very concerned with how home health might fare in the final bill. But more importantly though, at least for us, is the prominence and priority the healthcare reform bill gives to our sweet spot, which is home and community services.

The bill is replete with references to the value and the importance of home and community based care as a part of the healthcare solution. The bill encourages states to invest in home and community services to and incentivizes the states to do so with an increased federal share. Home and community based care did very well in the final reform bill and as we look for -- and we do look forward to working with the states and other social service organizations as home and community saw -- services are expanded through healthcare reform.

Now, with that, I'd like to turn the discussion to Frank who is going to give us some details on our financial performance.

Thank you, Mark. I would also like to welcome everyone to our First Quarter Conference Call. In the first quarter of 2010, our consolidated revenues increased by 4.5% to $64.6 million compared to $61.8 million in the first quarter of 2009. Revenue growth in both of our segments was entirely organic. Over the same period, our census grew by nine-tenths of a 1%.

Adjusted EBITDA was $3.7 million in the first quarter of 2010 compared to $4.4 million in the prior year quarter. Net income was $1.4 million or $0.13 per share based on 10.5 million shares outstanding. We had an increase in shares outstanding due to the conversion of preferred stock and the IPO both occurring in November 2009. Net income in the first quarter of 2010 also includes severance costs principally in the home health segment of $0.1 million or $0.01 per share.

Turning to our segment performance, in the first quarter 2010, our home and community segment revenues increased by 4.9% to $52.7 million. Increases in average billing rates contributed 2.9% of the total growth while increases in billable hours contributed 2%. Home and community growth profit increased 25.5%, up 30 basis points year-over-year principally due to reductions in staff training requirements.

Home and community pre-corporate adjusted EBITDA was $6.1 million in the first quarter compared to $5.9 million in the prior year quarter. In addition, home and community bad debt expense increased by six-tenths of a 1% to 1.6% of revenues in the current quarter compared to the year ago period. This was in line with our expectations.

In our home health segment, first quarter 2010 revenues increased 2.6% to $11.9 million. Medicare revenues of $7.4 million reflect admission increases of 19.5% for the quarter with an especially strong March 2010. We see this trend continuing early in this second quarter. Home health pre-corporate adjusted EBITDA for the first quarter of 2010 was $1.2 million compared to $1.7 million in the first quarter of 2009. Home health operating margins declined largely due to investments that we made in sales and marketing, higher field staff travel costs and lower margins from our Medicare services.

Our effective tax rate for the first quarter of 2010 was 31.2% compared to 32% in the prior year period. Our accounts receivable was -- our accounts receivable was $76 million as of March 31st, 2010 compared to $70.5 million as of December 2009. It is important to note that the entire increase in net accounts receivable is due to state of Illinois payers.

Total company DSO was 103 days at March 31st compared to 96 days at the end of the year. DSO for the Illinois Department on Aging, our largest payer, increased to 155 days from 142 days at year end. It's important to note that these figures have changed significantly since the end of the first quarter as a result of the $22.3 million in payments in the state of Illinois. These total payments reduced our state of Illinois DSO from 163 days at March 31st to 131 days as of yesterday, March 12th.

While Illinois receivables remain a very high priority for us, we are also focused on improving our collections of our non-Illinois receivables. With action plans initiated in March 2010, we did experience a slight decrease in the non-Illinois DSO in the first quarter from 68 days to 58 days and continue to see improvement.

Similar, we also reduced our debt level significantly since the end of the March quarter with total debt decreasing from $48.6 million at March 31st to $36.1 million as of May 12th. At March 31st, our senior debt leverage ratio was 2.4 times adjusted EBITDA. At May 12th, availability under our revolving credit facilities stood at $21.3 million. We also had $1.2 million in cash as of March 31st compared to $0.5 million as of the end of the year.

At this time, I would like to turn back the discussion to Mark for closing comments.

Frank, thank you very much. Operator, at this time, we'd like to open up for questions from our listeners.

Sure. (Operator Instructions).

Your next question comes from the line of Whit Mayo with Robert W. Baird, Incorporated. Please proceed, sir.

Thanks. Good afternoon. Can you guys talk a little bit more about Illinois and the $22 million of AR collected? Just like to get a sense for how you view that. Was that one time in nature and secondly, you paid down the $12 million that you paid down in debt since you closed the books in the first quarter. Frank, could you give us a sense for what the cash balance looks like? Just like to have an idea of how your net debt stands today.

Frank, why don't you address the cash question and then -- wait, I'm going to ask Darby to address it because you know, he knows best the Illinois situation.

Absolutely.

Yes, I and as of -- as of May 12th, our available credit facility stood at $21.3 million and I mentioned our cash balance at the end of the quarter was $1.2 million. We're at a similar balance also at May 12th in cash. So again, we saw a $12 million plus improvement in our cash flows since the end of the quarter.

Okay. So, the difference in the $22 million versus the $12 million would be just working capital, funding working capital?

The $22 million --

The $22 million that you -- of AR that you collected versus the $12 million that you paid down, just the other $10 million if your cash balance stayed the same, that just went to fund your working capital?

Mark Heaney. Yes, that would have just related to -- I mean, obviously we would have had increases -- in increases and ongoing business.

Okay. That's helpful.

Yes.

Okay, so Whit -- Whit, this is Darby. Your question is to the Illinois payments. The result of these payments we've been talking to the state for better part of two years now about the lag in payments. Those discussions yielded some interesting information about the claiming of federal dollars for our services to the Department on Aging and we realized that the claiming was not being done very quickly.

So, they caught up on the claiming of federal dollars which resulted in $100 million being paid to community care program vendors and our share of that was the $22.3 million roughly. Going forward, we're optimistic that we can continue to leverage those federal dollars quickly and get our payment levels -- get to a more consistent payment process, but we're still in ongoing discussions with the state on that.

Yes. I mean, our understanding from discussions with the Department of Aging is that they're trying to move providers to you in 90 to 120-day payment cycle and I clearly understand that that's a goal and it's not a set policy and -- but can you talk -- maybe some thoughts, Darby, just around that and your dialogue and dissuasion that you've had with the Department of Aging?

I'm hearing very similar numbers thrown around by the state and in the same context. Goals, not necessarily commitments. I do know that there is a renewed communication -- lines of communication between aging and healthcare family services which actually claims the Medicaid match and the comptroller's office. They're all sitting in the same room now talking about how do we solve this problem which is a very positive step for us.

I mean, have they given you any sense for the timeline with which they'd like to achieve this objective or is that just too far up in the air?

I think it's a little too -- a little too far for there to achieve the objective of 90 to 120 days, but I do know that we're having ongoing discussions and as are they, without our presence about how to better get their computer systems to talk and maximize the federal reimbursement.

Okay, so --

Whit, I don't -- this is Mark. I also just would throw in that the -- we are heading in to a political season and it would seem to me that there -- the department -- the state's looking for ways to take care of providers, especially this kind of provider that are providing services to the elderly, union sensitive. So, I'm optimistic that they're going to continue a dialogue and do everything they can especially if -- just to be cynical, just because it's we're heading into political season. I think that's an incentive for them.

That's understandable. And Mark, I think in your prepared remarks you mention a program around -- new program, I guess or process around receivable management. Can you elaborate a little bit more on what you were referring to there?

Well, we have, in light of our AR situation, we have -- we looked -- we said look, we've got to change our practices. Let's go and look at how we are managing our accounts receivable. And so, we put together an AR recovery program that's headed up by Darby and our director of reimbursement. A very good program for identifying receivables that we're attacking. We're on it. Second part of that and this is more under Frank, and that is what was the -- what is our accounts receivable process? And is there anything that we can do to shore it up and improve it? And that is underway and we feel good about that process also.

Okay. Now, that's helpful. And maybe Mark, if you could also talk a little bit more about the gross margins in the home and community segment. And I think you mentioned, if I heard you correctly, maybe realignment of staff. Just if you could elaborate more on kind of both of those, I guess it's one in the same.

Yes, well, our -- I think our point is that our gross margins are -- our margins are stable. We feel good about where we're at. We're -- we are -- Darby is along with Sharon, frankly, and on the home health side -- both have committed to further to looking at our costs, look at our costs of labor. Some of these things that we can control and if we can improve them, then we're going to do so and they've committed to a plan to get any sites that are off budget to budget within a particular period of time.

So, there's -- there is -- we're really focused on doing more better with the same. We can - - we can get -- we think we can get some margin out of the business we have by doing it better. That's a program under way. Do you have another question?

Yes, I mean just one last question more of a high level question, but just -- in order to hit our numbers that we have out there right now, it clearly requires a slight ramp on the top line and improved margins and since you don't provide formal guidance which is something maybe you could help, maybe frame up your confidence level, just with regards to how you're thinking about the balance of the year.

I like -- I'm going to be careful there, but I will tell you that I know what we are doing to invest in and focus on census development. I like what we're doing on the home health side very much. It's structural. I like what we're doing on the integrated services side.

Darby has been for the past two years been converting his home and community model to more of a sales and outreach oriented model, and I like what he and his division are doing also. I think that Darby would tell you and I think Sharon would tell you, we should expect to see them winning in markets and steadily increasing their census.

Okay. That's helpful. Thanks a lot, guys.

Whit, thank you.

Your next question comes from the line of Andreas Dirnagl with Stephens. Please proceed.

Yes, good afternoon, guys. Maybe just, Mark, to start with, am I hearing it correctly that the improvements that we saw on the home health side this quarter really were from sort of an increased sales focus and were organic in nature that sort of the integrated service portion of referrals and starts while improved over the fourth quarter still has some room to improve going forward?

Yes. I'm going to take -- Andreas, I'm going to take those questions in two pieces. On the home health side, I'm going to be very clear here. Organic sales are improving and it's through the work of the sales team. They're very focused. We've added sales people. We've added good sales people and I'm going to frankly tell you we don't carry people too very long who aren't good sales people. Our organic sales are increasing.

The -- on the integrated services side, we are focused on integrating care. Our starts of care are trending up in the quarter. And as I pointed out in my comments, as a matter of fact, in April and in both integrated services and in organically generated Medicare starts care on our home health side, both were record highs for the company.

Now, I'm going to talk about integrated services just that in the sense that every day, I am very excited about our potential on the integrated services side. Today, integrated services represent somewhere between -- around 30% or so of all of our Medicare start -- starts of care. I expect that -- I expect integrated services to grow consistently through its continued hard work and I do not know, frankly, what its top is.

Okay and along those lines, are you finding that to sort of the build out of the integrated services that it's coming from the type of patient or consumer base that you already have in the home and community side or is it sort of a new base? In other words, how penetrated are you among your current home and consumer patients? Are they utilizing home health services that you're not providing, for example?

That's -- the answer is yes and I'm going to answer that last. The -- let me be clear. Where the -- where Medicare home health care starts of care are coming from in integrated services, they only come from our home and community base. And they come because we identify a health need, it's clearly a need. As you know, we're dealing with 20,000 plus very sick people. They would not be in the program if they were not at risk. See, there's older, very sick people and there are health needs.

Now, what we have done is over the past several months is, again, under the direction of our Vice President for Integrated Services, we have been in our integrated sites appealing to and educating and training our aides who are in these homes every day and seeing these consumers every day. We're telling them look, you're dealing with the sickest of the sick. And they -- they are getting sicker and when they are getting sicker and you see a health need and we train them to identify that health need, then report it up. And then, what we want to do is we want to report that to the appropriate case manager if appropriate. But we've got to get some intervention.

And so, that -- and frankly, what we're looking for is early intervention because as you know, you do the best you -- you're going to do the best care. You're going to cut your costs most by intervening early in - - in a -- when there's a health need. So, it's structural and we expect it to continue.

Okay, great. And again, are you finding that there are pay -- consumers in your -- in your home and communities segment that are currently consumers of home health that you're not providing?

Yes. It -- I -- yes in -- and yes. Period. Let me -- let me give an example. Donna McNally is our Vice President for Integrated Services. Donna is working very closely on the model. Kind of a hamburger U kind of thing. She's in working on the model in one of our largest offices. As part, Donna's a -- an experienced community health nurse, used to going into homes.

A month ago, Donna did 17 home visits, randomly picked these consumers. They're not the most impaired. 14 of those 17 consumers had home health needs, 12 already had home health care in the home, not us, and two had home health needs and appropriate referrals were made for them. That's 14. It's not scientific, but 14 of these 17 randomly visited consumers had home health needs and I don't find that surprising. And the reason is these people are very sick and they're older. Not one of them, as hard as we try is getting any younger.

So, the potential for integrating is tremendous and the outcome for integrating is lowering -- it's intervening early in a disease process and thus lowering the cost of care delivered. And we're just excited to continue to develop the model.

That's great color. Thank you. Mark, I don't know if you want to handle this or if it's more appropriate for Darby. Obviously, great news on getting at least some payment out of the state. I was just wondering, given the political situation where we sort of stand in the budget process in Illinois and whether you can give us sort of an update as to what you see happening there?

I'm going to ask Darby to take that, Andreas.

Sure. As you probably know, Andreas, they're in the negotiations of their budget right now. They should conclude that by May 31st. They're on a short adjournment now while the leaders sort of convene and think about what they want to do.

It's difficult to conclude what's going to come out after 5-31, but what we do know is that this governor enthusiastically supports our program. He has -- he references it first as programs he wants to fund because of its cost effectiveness and this constituency that we care for in seniors. So, we're feeling pretty good right now overall that if there are already cuts proposed in this budget, they'll be in the form of utilization and they'll be fairly limited.

Okay, great. Thank you. And then, just a couple of quick ones. More housekeeping than anything for Frank, maybe. Frank, can you give us a level -- the absolute level of what the Illinois accounts receivable was at the end of the quarter?

Total state of Illinois?

Yes.

It was $49.3 million and that's up from $43.4 million at the end of December.

Right and of course, that doesn't take into account the payment that you received in -- after the end of this quarter.

That's correct.

And then finally, I was -- I was sort of furiously writing as you were saying some things. Did I miss something -- did you mention a $0.01hit from severance costs on the home health side? Was that this quarter or was that in the comp quarter?

That was in the first quarter and it was principally in the home health. We did have a -- also a very small charge here in the support center, but in total it was around $100,000 that would have an impact about a $0.01 a share.

Okay, great. Thank you very much.

Thank you, Andreas.

(Operator Instructions). With no further questions in the queue, I would now like to turn the call back over to Mr. Mark Heaney for closing remarks. You may proceed, sir.

Operator, thank you very much. I'll be brief. I appreciate the -- everyone's attention. We're, as always, we're just available for calls. You can please give us a call, Frank or myself.

I guess to summarize, the organization here has been working hard. They're very focused on certain objectives. Accounts receivable and I think we're making progress there. Business Development, and I think we're making there. Cost Containment, measurably making progress there. And integrated services, it's a team commitment. We're excited about what we're doing. We know we have work to do and we're doing it.

I do not have any other comments. The team's good. I'd like to thank everybody. Operator, thank you very much and we look forward to a good quarter and to talking to you again in a couple of months. Thank you all.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.