Addus Homecare Corp (ADUS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Addus HomeCare Corp. conference call earnings. My name is Gina] and I will be your coordinator for today.

(Operator Instructions)

I would now turn the presentation over to your host for today, Ms. Amy Glynn, from the Ruth Group. Please go ahead.

Thank you, 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 regulations, changes in Addus HomeCare 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-Q, which is available at www.sec.gov. Addus HomeCare undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

With that, I will now turn the call over to Mark Heaney, president and CEO. Mark?

Thank you, Amy, and thank you all and welcome to Addus' third quarter conference call.

I'm joined here today with Frank Leonard, our CFO, Darby Anderson, our division vice president for Home & Community Services, and [Greg Swanson], our corporate controller.

As most of you probably saw, we announced our preliminary results back in October and the actual revenues and earnings that we'll announce today are in line with these previously announced expectations.

Let me start the discussion today commenting on our core business, the largest business, our Home & Community business, which represents about 80 of our -- approximately 80% of our revenues. Given its concentration in the states, we are pleased that the fundamentals of this line of our business remain strong. There is still considerable challenges out there and there have been, but the team continues to navigate the environment.

In the third quarter, total Home & Community revenues increased 6.4%, which includes a 2.6 contribution from organic growth. This organic growth rate was driven by the Illinois rate increase and ongoing sales efforts. We completed our CarePro acquisition on July 21st. CarePro contributed $2 million in revenue to Home & Community in the quarter. That business is performing in line with our expectations. We continue to be excited about the opportunities provided to us by this acquisition, which includes a foothold in both South Carolina and Georgia.

We continue to beta test the new [telephony] systems. It's in 19 of our Home & Community branches. And while we're still in the early stages of this rollout, we believe that the implementation of this technology will ultimately help to reduce our operating costs and increase the efficiency of our operations.

Additionally and importantly, telephony will, over time, prove an important tool in our integrated care program, as it'll help us to better identify health issues among our considerable elderly caseload, allowing us to intervene early in disease process, driving Home Health admissions then, and improving patient and payer outcomes. And I think in light of the election, it's important to point out that payer outcomes are important because 95% of the revenue that we generate in this company comes from the taxpayer.

We continue to focus on our accounts receivable collections and our centralization effort. The company we have built over the past 31 years, as all companies do, has to rely on its customers paying their bills promptly. As our investors know, that has not been the case for us in Illinois, our longest term and our largest customer. As has been the case for too long now, we continue to get periodic payments, but these payments are not enough to work off the considerable balance owed to us.

While we can't make a deposit on this, we are encouraged by the fact that the state officials seem to understand the severity of the problem and are working with us and our trade associations and others in working toward a longer term and more predictable payment practice. Solving the Illinois reimbursement overhang is our single highest priority.

Without making a political statement, as a result of the elections of this week, it appears certain that the sitting governor in Illinois will be returned to his office. This is important because this governor has consistently called for revenue enhancement, a tax increase, to help pay off the mountain of backed up payments due to providers in the state and, of course, including us.

Also, and I think also importantly, there has been no change in control in either chamber of the legislature. So much of the foundation that we have laid related to this matter over the past year remains intact. That is a positive.

While the majority of states in which we operate are experiencing serious budgetary challenges, and we expect this to be the case for the foreseeable future, our Home & Community business continues to grow and we are proud of the results in this segment.

Turning our attention to Home Health, let me first say that we flat-out missed our goals for sales growth in this division in the quarter. Our goal is to convert this company into a sales organization. We are building the infrastructure. Over the past year we have hired additional salespeople. We have created the position of regional sales manager and hired two of them. We're going to hire a third. We have acquired and rolled out a CRM. Recently we brought on a senior level sales consultant to help us create a sustained sales culture throughout the organization.

In fact, from a macro, our Home Health admissions are trending up, but obviously and not satisfactorily in this past Q. It should be pointed out that a large portion of our Home Health revenue miss results from a sequential drop-off in admissions from the integrated care program. This is especially disappointing because the integrated care program was trending up in the start of the year and into Q2.

The decline in admissions resulted from two factors, both of which are being addressed. Very briefly, we had too many integrated care liaison positions, these are critical positions, open and unfilled.

And second, in a test we shifted the focus on a group -- for a group of our integrated services liaisons from primarily a home health orientation, a home health approach to the patient, to a mixed home health and social service approach. It didn't work and we are reversing that action.

We firmly believe that the Integrated Services model is a significant differentiator for Addus. The number of consumers that we serve who require both social and home health services who are also dual eligible, or Medi Medi, is significant. And we are in the early stages of attacking that market.

For the purposes of illustration so that our investors understand, as an example of the impact and the potential for integrated care, I'm going to take a month, this past April, an admittedly very good month for integrated care. Integrated generated an additional 63% to census on top of our traditionally generated organic home health admissions, over and above the admissions we got from knocking on hospital and doctor doors and getting admissions.

Now, leaving alone the positive patient and payer outcomes that result from integrating these models of care, the business opportunity presented by bridging the gap between the social and medical silos makes it essential that we continue to develop, to work on this new approach to care.

We continue to look at lowering our operating costs. During the quarter we initiated a standing process of continuous organizational review. We call it [COR]. Already we have reduced headcount in both divisions, merged or closed underperforming locations, renegotiated or terminated consulting agreements, reduced or deferred other general operating costs, and implemented new and more rigorous operating metrics within our division.

But I want to be clear about something. Some of the savings that we might realize from these cost reductions or improvements will be redeployed into growing our -- into growing sales. Keeping management's interests aligned with those of our investors, in the quarter we eliminated 2010 budgeted bonuses for senior management, which have accrued over the past nine months.

And finally, our CFO search and our search for a newly created position of COO continue, and more or less on plan. At this time we are inclined to hold open the position of the recently departed division vice president for Home Health, leaving that for the COO to fill. We can revisit that decision.

In the interim, we are very pleased with the work and the leadership provided by our interim DVP, Karen Meade, who comes to us from and with the full backing and support of Simione Consulting.

With that I'd like to turn the discussion over to Frank. Frank, you'll go over some numbers for us. And then if you'd hand it back to me, I would appreciate it.

Thank you, Mark. I would also like to welcome everyone to our third quarter conference call.

In the third quarter 2010 our consolidated revenues increased by 4.5% to $69.8 million compared to $66.8 million in the third quarter of 2009. Over the same period, our average census increased by 4.3%. The July 2010 acquisition of CarePro contributed $2.5 million in revenues for the quarter. Excluding CarePro, our consolidated revenues grew by $500,000, or eight-tenths of a percent.

Adjusted EBITDA was $3.9 million in the third quarter of 2010 compared to $5.4 million in the prior year quarter. Our Home Health segment accounted for $1 million of this decrease in adjusted EBITDA. Also contributing to the decrease were separation and executive recruitment costs related to management changes, public company professional fees and expenses, acquisition related expenses, class action litigation costs, and higher Home & Community bad debt expense, the combined impact of which was $1.5 million.

In addition, in the current quarter we adjusted downward accrued 2010 management bonuses, which resulted in lower bonus expense of approximately $1 million compared to the prior year quarter. Third quarter net income was $1.5 million, or $0.14 per diluted share, based on 10.7 million weighted average share outstanding. A total of 248,000 shares were issued in connection with the CarePro acquisition.

Turning to our segment performance, in the third quarter of 2010 our Home & Community segment revenues increased by 6.4% to $57.3 million, with organic growth representing $1.4 million, or 2.6% of the increase, and the CarePro acquisition representing $2 million, or 3.8% of the increase.

Our organic revenues were favorably impacted by a $0.91, or 5.6% increase, in our Illinois Department of Aging billing rate. Home & Community's gross profit margins increased to 25.3% compared to 24.9% in the prior year period, reflecting a decrease in our workers compensation cost and continued focus on cost control. The CarePro acquisition had a two-tenths positive impact on our current quarter profit margin.

Home & Community pre corporate adjusted EBITDA was $6.6 million in the third quarter of 2010, an increase of $350,000, or 5.6%, compared to the prior year period. The CarePro acquisition represented $240,000 of the increase in Home & Community's adjusted EBITDA. Home & Community's bad debt expense increased by $350,000 compared to the year-ago period, to 1.8% of segment revenues in the current quarter. This was in line with our expectations.

In our Home Health segment, third quarter 2010 revenues declined by 3% to $12.5 million, which included $500,000 from the CarePro operations. The $900,000 decrease in organic revenue was largely due to a $700,000, or 13.1% decrease, in non-Medicare revenues. Our Medicare revenues declined $200,000, or 2.7%, due to lower Medicare -- starts of care and integrated services.

Contributing to the non-Medicare revenue decline were the nonrenewal of certain low margin business and changes in selected VA and Arkansas Medicaid contracts. Our Home Health gross profit margins were 45% in the third quarter of 2010 compared to 48.2% in the prior year quarter. The gross profit fluctuation was principally due to favorable Medicaid pricing adjustments in the prior year quarter, higher than normal Medicare final claim adjustments, and a slight increase in our average visits per episode.

Home Health pre corporate adjusted EBITDA for the third quarter of 2010 was $1.2 million compared to $2.2 million in the third quarter of 2009. The $1 million decline -- the $1 million Home Health EBITDA decline was principally due to lower starts of care in Integrated Services, a higher number of visits per episode, and an additional $200,000 of investments in our sales force. The CarePro acquisition contributed $70,000 to our Home Health adjusted EBITDA for the current quarter.

Net interest expenses decreased by approximately $200,000 to $900,000 in the third quarter of 2010. The decrease was attributable to lower credit facility debt levels resulting from our IPO and lower interest rates on our new credit facility.

Our effective tax rate for the third quarter of 2010 was 23.8% compared to 30.9% in the prior year period. Employment tax credits had a higher impact on our tax rate in the current quarter as a result of our lower pretax income.

Our accounts receivable net of reserves and deferred revenues were $73.6 million as of September 30th, 2010 compared to $68.3 million as of December 2009.

Total company DSO was 97 days at September 30th compared to 96 days as of December 2009. DSOs improved at all levels during the current quarter. Consolidated DSOs improved by four days, from 101 days at June 30th to 97 days at September 30th. Illinois DSOs improved six days, from 159 days at September 30th to -- 159 days at June 30th to 153 days at September 30th. And non-Illinois DSOs, which includes Medicare, improved four days, from 58 to 54 days. This improvement in receivables led to cash provided by operating activities of $4.3 million during the third quarter of 2010.

As of September 30th, we had total debt of $50.5 million compared to $49.2 million at year end. At September 30th our senior debt leverage ratio was 2.5 times adjusted bank EBITDA and we were in compliance with all our bank covenants.

At September 30th our availability under our revolving credit facility was $9.2 million. We also had $600,000 in cash at September 30th, 2010 compared to $500,000 at the end of the year.

Payment delays by the State of Illinois continued to impact our liquidity. We continued to explore other financing options in an effort to expand our overall availability of funds.

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

Frank, thank you very much.

[To our team], here's what we have to do. We have to continue to work on the Illinois solution, but whether we have one or not, we don't use that as an operating excuse. We have to continue to work on accounts receivable. We have to put the best people we possibly can in our key positions. We have to create a sales organization. We have to continue to develop our integrated model. And we have to manage our costs. These are the things that we have to do. And if we do that, we will continue to be a successful organization.

With that, Operator, I'd like to turn the call over to you, inviting comments or questions from our investors and our listeners. Thank you so much.

(Operator Instructions)

And your first question comes from the line of [Ellen Spivey] of Stephens. Please go ahead.

Hi. Thank you. This is Ellen. I'm calling in for Andreas today. Mark, if you could, just so I understand, make sure I understand this correctly, the main driver of the large falloff that you saw in the Home Health admissions during the quarter was due to a fewer number of those high acuity home and care patients, maybe on the [inaudible] recommended for Home Health services actually being rolled over into that business? And if so, just a little more color on what exactly caused that to change during the quarter versus the initial up-tick you discussed that you saw previously.

So, Ellen, so that I understand the question, you are asking essentially what -- give you some more color on what happened relative to the drop-off in integrated care?

Yes.

I hope -- if this doesn't answer, of course just follow up. The integrated care -- the integrated program has been -- we work on in it continuously. We've been active in continuous effort to work on it. You could look at it as our R&D. We have -- we've made continued steady progress over the time that we've been working on it.

In the summer, we -- two things happened. The first is we made a decision to convert a group of our liaisons, our integrated care liaisons who are more home health oriented, to becoming more social model and home health, but much more social model in their presentation to the consumer and in the work that they did with the consumer.

Without going into a lot of detail, that didn't work. While we were evaluating that test, we did not fill open positions because we didn't know whether we were going to fill them with a more home health oriented person or a person who was a little more on the social service side. We realized that the -- that this was having a negative effect on our identification of home health issues, which leads to home health referrals.

We ended that practice. We're reverting back to more of a similar historical practice. And we're filling those positions.

I hope that answers your question.

Yes, it does. Thank you. that is helpful. And just a follow-up to that same question, could part of the disappointment just be characterized as working out the kinks in this business model and really an issue with being able to properly forecast where that business will shake out on a quarter to quarter basis? And if so, how do you plan to address that from a management level? How do you -- do you have a plan intact to hopefully do a better job trying to forecast specifically that business going forward?

Thank you for that easy question. The short answer is we have to work on getting better at forecasting our Home Health business. We're pretty good at 80% of our business. We have to get better and more consistent in forecasting our Home Health business.

And I -- we -- relative to this specific business of the integrated services, we think that the -- we'd expect that the changes we've made and the continued emphasis that we're going to continue to invest in the integrated service program will -- we would obviously do that because we hope to grow the business. And so we would look for the business to grow.

We have to get better at forecasting it. And I think we have to be careful in our forecasts. I don't know what else to say to that.

Okay. Thank you very much. That's all for me.

There are no other questions at this time. Mark Heaney, are there closing remarks.

No, other than to thank our listeners and we are available. You certainly can call us if you wish to follow with us. We'd be happy to talk to you. We very much appreciate your continued support and we look for improving results.

Operator, thank you and thank everyone on the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.