Addus Homecare Corp (ADUS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 4th Quarter 2010 Addus Homecare Corporation Earnings Conference Call. My name is Tom and I'll be your coordinator for today. At this time, all participants are in listen only mode. We will be conducting a question and answering sessions towards the end of today's conference.

(Operator Instructions)

I would now like to turn the presentation over to Amy Glynn, with the Ruth Group. Please proceed.

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 regulation, changes in Addus Homecare relationships with referral sources, increased competition for Addus Homecare services, increased competition for joint venture and acquisitions, changes in the interpretation of government regulations and other risks set forth in the Risk Factors section in Addus Homecare 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 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. I'd like to welcome all of you to Addus Homecare's 4th Quarter Conference Call. I'm joined today by Daniel Schwartz, our newly appointed Chief Operating Officer, and Dennis Meulemans, who joined us in December as our CFO.

On behalf of the Board and our investors, I'd like to take the opportunity to welcome both Daniel and Dennis to our executive team. Both of these gentlemen bring us the combination of experience that drives commitment and passion. Both executives have hit the ground running and are already making a significant difference within the company and we are thrilled to have them on board. You'll be hearing from both Daniel and Dennis shortly.

Looking at the 4th quarter 2010 results, our home and community business, which makes up 80% of our revenue, performed reasonably well in what continues to be a challenging environment over all. As we all know, the states continue to face budgetary pressure which, in turn, puts -- has impact on our business. While the states continue to work on their budgets, we remain cautiously optimistic about the state budget environment.

Home and community-based care makes it possible for at-risk elderly persons to live at home, where they want to be, at substantially lower costs to the state and Federal government. Few programs pay the government such a compelling dividend. In every state budget cycle over our 32 years, but especially in these tough budget times, we have to continuously remind the governors and legislatures in our states of that fact.

We continue to make this case, along with other home care providers and trade associations in the states in which we operate and we think we've been pretty effective in our efforts overall.

But the real solution for properly funded and valued home and community-based programs have to be made in Washington, DC where upwards of half of all Medicaid spending originates. To that end, we are pleased to be among a group of national and large regional providers who, along with the National Association for Homecare, NAC, are forming an industry Medicaid advocacy group to lead a comprehensive Washington based advocacy effort intended to advance the case for rational, effective and more uniform Medicaid policies in the states.

Medicaid spends five times what Medicare spends on home care, very often serving the very same patient. The time has come for Congress to understand how much more effectively billions in Federal dollars can be administered in the states. I'll report on the progress of this important effort in future calls.

Getting our largest payer, Illinois, to more promptly pay its past-due receivables has been one of our highest priorities. Due to recent actions in the state, we are cautiously optimistic here too that that situation may be improving. Daniel and Dennis will have more comments on our Illinois payment situation when they speak to us.

Revenues in our home health business increased 7.9% over the prior quarter and 12.9% year-over-year. While Daniel and Dennis will comment further on home health, I can say that our results flow from our efforts at sales generation and cost management.

On our last call, I highlighted six specific areas that we wanted to focus on in the quarter. These focus items were, one, to continue to work on a solution for the Illinois receivables problem; two, to improve our overall accounts receivable collections; three, to develop our people and strengthen our account especially at the local level; four, to continue our efforts to create a real sales organization; five, to continue to develop our integrated services model; and, six, to continue to monitor and manage down our costs. These remain our top priorities.

Now to give you an update on these priorities, I'd like to turn the call over to Daniel Schwartz, our COO. Daniel?

Thank you, Mark. I am very excited to join the Addus team. For those of you who do not know my background, let me give you a quick overview. I have more than 20 years of healthcare operations experience, the past 15 years at Sunrise Senior Living. Addus is very similar to Sunrise in that both are decentralized, multi-state businesses providing care and services to seniors. While the location of the delivery is spread across many individual homes rather than multi-unit facilities, there are significant similarities between the two.

Many of the profitability, quality and other operating practices we implemented at Sunrise are applicable to Addus. As a result, I have been able to hit the ground running. I look forward to sharing our progress with you in future quarters. Now let me touch on each of the key priorities Mark outlined.

We are making progress converting Addus into a sales and marketing-focused organization. We have branded this cultural transformation Addus Achieves. We must ensure that we not only generate new starts of care but also serve these clients effectively and efficiently. We refer to this simply as "pitching and catching."

Some of our Q4 achievements include increasing Medicare starts of care 9.6% over Q3 2010 and 24.0% over Q4 2009. Our account executives now report directly to our sales leadership. We added a regional sales manager for the West, engaged a C- suite level consultant to provide mentoring and support for our VP of Sales, conducted two nationwide video conferences introducing Addus' achieves to our local leaders, and implemented a CRN to assist our account executives.

We also continue to strengthen our integrated services model. During the quarter, we stabilized integrated starts of care after the decrease in Q3 of 2010, shifted our VP of integrated services to report directly to me, filled our open care coordinator positions and ended Q4 fully staffed, continued our telephony pilot program and adjusted our 2011 incentive compensation program to align with our focus and reward success.

We also continued to invest in our people. During the quarter, we were developing our agency and regional managers to ensure that our vision, culture and operating practices are effectively and consistently executed across our business. We're ensuring we're hiring winners at all levels of the organization. Developing our high potential operators. Our VP of home health search continues on plan and our interim VP of home health continues working with us to strengthen our home health business.

Dennis will provide more detail on our accounts receivable collection but we did see some progress in this area. We decreased our overall DSOs and our Illinois DSOs. We effectively lobbied for the Illinois legislation to increase the state income tax and we continue leading a coalition of provider organizations to support the Illinois bond issue intended to pay the state's aging payables.

Lastly, we continue working to lower our operating costs. During the quarter, we completed a 23 (inaudible) administrative staff reduction that started in Q3 of 2010. We revised our standardized agency staffing model, which is intended to further reduce head count as appropriate. We established targeted reductions for overtime, travel and mileage management and we substantially completed centralizing accounts receivable.

Looking ahead as [CEO], I will focus my energies on driving the following changes through being a conduit to ensure our priorities are understood and executed through our divisions, our regions and our agencies. Work with our regional leaders to improve the consistency across our portfolio. I plan to visit the agencies continuously to assess our progress, ensure we manage costs as effectively and efficiently as possible.

We also have formed, and will continue to work with, a cross-department and cross-division team to evaluate and recommend deficiencies through centralization. In closing, we continue in the right direction. We know what we need to do next and will remain focused on these priorities. With that, I'd like to turn the discussion over to Dennis to review the financial performance. Dennis?

Thank you, Daniel. Good afternoon. I am pleased to have joined Mark and to be part of the Addus team and look forward to getting to know all of you on the call. Our consolidated revenues for the 4th quarter 2010 increased by 6.7% to $70.1 million compared to $65.7 million for the same period in 2009. Our acquisition of CarePro, or Advantage Healthcare, contributed $3.2 million in revenues for the quarter. Excluding CarePro, our consolidated revenue grew by $1.2 million, or 1.8%.

For the year ending December 31, 2010, our consolidated revenues increased by 4.8%, to $271.7 million, from $259.3 million in 2009. The CarePro acquisition contributed $5.7 million of this increase, with organic growth representing $6.7 million, or 2.6%.

Fourth quarter net income was $1.5 million, or $0.14 per diluted share. This compares to a reported loss for 2009 of $3.7 million, or a negative $0.48 per diluted share. Excluding certain one-time items related to the IPO and prior to the deducting of preferred stock dividends in the fourth quarter of 2009, net income was $600,000, or $0.07 per share.

For the year ending December 31, 2010, our consolidated net income was $6 million, or $0.57 per diluted share. This compares to a net loss after preferred stock dividends of $1.8 million, or a negative $0.66 per share for 2009. Excluding one-time items and prior to deducting preferred stock dividends, net income for 2009 was $6.0 million, or $2.16 per diluted share.

Let's look at what else contributed to our net income on a consolidated basis. Excluding $2.6 million in IPO related interest charges recorded in the fourth quarter of 2009, net interest expense decreased by approximately $300,000 to $681,000 in the fourth quarter of 2010. The decrease was attributable to lower credit facility debt levels and lower interest rates on our credit facility.

In addition, our interest expense in the fourth quarter was reduced by approximately $170,000 for prompt payment interest received from the state of Illinois for its delay in the state's payment of our outstanding accounts receivable in 2010.

Net interest expense for the year decreased by $1.2 million, net of the IPO related interest expense, to $3 million. Our effective tax rate in the fourth quarter of 2010 was 39.7% compared to a benefit of 36.1% in the prior year quarter and for the year, it was 32.9% compared to 28.0 for 2009. The higher tax rate for the fourth quarter and for the year is due to the higher pre-tax income earned in both the fourth quarter and for the year.

Turning now to our segment information. In the home and community segment, net service revenues increased $2.9 million, or 5.4% to $56.6 million in the fourth quarter of 2010. The CarePro acquisition represented $2.6 million of this increase, leaving organic growth of $300,000. However, the organic growth number is a bit misleading. If we exclude the impact of locations closed in 2010 and measure same store sales only, our same store sales growth was $1.2 million, or 2.3%. For the year 2010, our revenues increased by $10.6 million, or 5.1% to $220.8 million. CarePro represented $4.6 million of this growth with same store sales increasing $7.2 million, or 3.5%.

Home and communities gross profit margin declined 80 basis points to 25.6% in the fourth quarter due to timing of certain benefited adjustments for workers compensation and other employee-related costs. Home and communities operating income before corporate allocations was $5.8 million for the fourth quarter of 2010, up 25.2%. Operating margin expanded 160 basis points, to 10.2%, primarily the result of an overall decline in our G&A expenses. This decline is predominantly the result of a reduction in our bad debt expense, reflecting the year-end adjustment recorded in the fourth quarter of 2009.

Turning to our home health segment, home health fourth quarter 2010 revenues increased $1.5 million, or 12.9%, to $13.5 million. CarePro contributed $600,000 of this increase and organic growth was $900,000, or 7.7%. For the year, home health revenues increased 3.6% with CarePro representing $1.1 million of this growth and 1.4% coming from organic growth.

Home health fourth quarter gross profit was $6.7 million, up 23.6%, primarily attributable to improved margin expansion realized in the fourth quarter of 430 basis points to 49.5%. This margin expansion is due to a 10.5% increase in Medicare admission, the benefits of a revenue recovery program reported in the fourth quarter, a 5.2% increase in our average episodic rate and improved utilization of our field staff.

Home health operating margin increased 180 basis points to 11.5%, due primarily to the increase in gross profit margin discussed earlier. This improvement in profitability would achieve despite an increase in operating expenses for costs related to the management of CarePro, our investments and our sales, and the integrated service programs. Now let's turn to our balance sheet and cash flow statement.

Our accounts receivable net of reserves were $71 million for the year ended December 31, 2010, and compares favorably to the $75.7 million reported as of September 30, 2010. This $4.7 million improvement in the fourth quarter is primarily due to increased payments received from the state of Illinois and continued focus on improved collection.

The DSO at year end was 90 days, a reduction of seven days from the 97 days at September 30, 2010, and six days when compared to the 96 days as of December 31, 2009. While we have seen improvement in the payments received from the state of Illinois, they remain our largest customer with outstanding receivables of $41.6 million on December 31, 2010. This represents 141 days service outstanding, a reduction of 16 days from the 157 days at September 30, 2010, and three days when compared to the 144 days as of December 31, 2009.

At December 31, we had total debt of $45.2 million, compared to $49.4 million at the end of 2009, a net reduction of $4 million. At December 31, 2010, our availability under our revolving credit facility was $13.5 million, an increase of $4.3 million over our September 30th levels.

Cash generated from operations for 2010 was $10.7 million on a $6 million in net income. We have used this cash to reduce our debt obligations by $9.2 million and for partially funding our acquisition activities. Adjusted EBITDA was $4.4 million in the fourth quarter of 2010 and $16.3 million for the year.

Home and community segment contributed $6.5 million and $25.4 million to the quarter and year, respectively. Home health segment contributed $1.7 million and $5.9 million to the quarter and year while the corporate expenses and stock-based compensation reduced EBITDA by $3.8 million and $15 million for the quarter and the year.

As we look at 2011, we expect continued gross margin pressure in our home and community segment, as all states where we do business are looking for ways to balance their budgets. Our home health unit will experience margin pressure as the Medicare rate cuts of 4.6% fully affect approximately 65.0% of our home health revenues.

The seasonal resetting of certain payroll taxes result in higher expense in the first half of the year with the corresponding reduction in the second half of the year. The first quarter will also be affected by the severe weather experienced in the mid-West and East in February.

Finally, while we are pleased with the Illinois tax increase, we anticipate a 1% to 2% increase in our effective tax rate as a result of the new tax law recently passed in Illinois. Those are the end of my comments. I'd like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis. At this time, operator, we would like to open the lines for questions from our listeners.

Ladies and gentlemen

(Operator Instructions)

And your first question comes from the line of Whit Mayo with Robert Baird. Please proceed

Hey, thanks. The first question is just -- Dennis, you mentioned, I think in the home health segment, that there was a revenue recovery. Can you provide a little bit more clarity as to what that was and maybe size that up for us?

Whit, we -- on a routine basis -- engage a consultant to evaluate the coding for receivables submitted to Medicare, and if appropriate, we re-submit those bills to the -- to the Federal government for increased reimbursement and we do that on a routine basis annually. This year, the benefit for that, if I recall correctly, about $175,000.

Okay. And do you happen to have what the total bad debt number was in the quarter? Maybe how that compares to the third quarter of 2010 and maybe also the fourth quarter of 2009, just to kind of refresh us.

One second while I pull that information. The -- our bad debt as a percentage of revenue in the fourth quarter of 2010 -- was 1.63%. That compares with our 2009 fourth quarter bad debt percentage of 1.74% but if you recall, we had a significant charge in 2009. When we compare our reserve as a percent of our receivables, it's 18.13% in 2010 compared to 11.23% in 2009.

Okay. And that 18.13 isn't -- that has been relatively steady over the past couple of quarters?

Yes, it has.

And maybe -- sorry, one other little number question -- is it the tax rate and you mentioned that's going to take up a little bit in 2011 with the - with Illinois -- is there a spot number that you can give us to think about in terms of the effective tax rate or just anything that would be helpful to help us kind of work that through the model?

I believe your models are reasonably accurate or relative to the overall tax rate. If you look at our experience for the year ended 2010 and add 1.0 to 2.0% to that, Whit, you're probably going to be pretty much on the mark.

Okay, that's helpful. And then, maybe for Mark or Dan -- just wanted to get an update on the -- a little bit more color on the integrated care model and how that's evolved and sort of where the structure -- just the organization of that model is and whether or not you feel like you're making progress, moving forward, spinning your wheels -- and just any color that you can provide to help us kind of understand how that's evolved.

This is Daniel, this is Daniel Schwartz. We are making progress here. We do feel good about this, this, this, this piece of the business. We do believe there is material outside in this piece of the business and we've made a handful of the needed changes to -- to align, align the organization and we saw that we bottomed out -- the decline that we saw for Q3 we bottomed out and stabilized in Q4 and there has been a number of action steps -- some I mentioned previously -- that Addus is looking forward to seeing the starts of care return to the steady growth we've seen historically.

What was the start to care number again? I may have missed that.

I don't know that we reported --

We didn't report it.

We didn't provide a specific number, Whit.

Okay, that's fine guys. Thanks a lot.

We thank you

Your next question comes from the line of Ellen Spivey with Stephens. Please proceed.

Actually guys, it's Andreas Dirnagl. Just a couple of questions. Let me start off with my one sort of more numbers oriented. Mark, when we look at sort of the location closures that you did in 2010, would you sort of characterize those on the (inaudible) community space as sort as normal course of business closures or were they part of some sort of program that you undertook to really sort of look at your individual locations and decide to close the unprofitable ones?

It would be the effort to look at the more challenged sites and to close them if we didn't feel that they warranted continued investment.

And do you think that you've gone through that process now or do you think that we'll get some more location closures sometime in 2011?

I'd say substantially we're through that. We don't want to -- we're optimistic -- but there are sites that are certainly yellow and we're going to keep an eye on them and try and build them but if we -- if they don't turn around, why then they -- we'd close those offices also.

Okay. And then, turning to Illinois for a moment. Can you just sort of update us on what the latest thinking is in terms of the debate in the legislature about the bond offering and where you think or what you think the chances of that going through are?

We are, let me just backward drop on that. You do realize that what happened is the legislature in the state of Illinois increased the state income tax by, I think, 77.0% with the hope that that would result in the state's ability to pay its current obligations on a go-forward basis in a much more timely manner, leaving the problem of a sizeable backlog of bills that are due and owing.

When the state passed the tax increase, they also passed -- a portion of that tax increase was for the purposes of funding an anticipated bond offering that would -- that would be -- for the purposes of paying off bad bills. That same legislature did not pass the bond and passed that off to the next legislature. They're dealing with it now.

We're -- we are very active -- I'd say we are leading among human service providers -- in support of that bond offering. We have government relations people that we work very closely with on this and they, not I, last estimated this -- passage of that bond at plus 50%.

Okay. And just to be clear then, so what we're -- what you're saying is that with the passage of the increase and the tax rate, you would expect Illinois would, from here on forward, be current with their payment and it's just a question of trying to get the funding to repay that portion that's in arrears in effect?

I can -- what I didn't say, Andreas, is that the legislative intent of the tax increase -- but they still have a backlog and the state has to -- they're doing what they can to pay off some of the -- especially the older of the backlog and so whether or not they have enough money coming in to pay continuing obligations, it is only possible to the extent that they don't use any of their current revenues to pay off old bills. So I'm not in -- I'm not projecting as to whether they'll pay us more promptly continuously going forward or not. I just know the legislative intent of the bon -- of the tax increase.

Okay, great. And in --

It's a positive, though, Andreas, and obviously, obviously -

Right.

Look, here's a math fact. The state of Illinois has a backlog and it's -- in everybody's -- on both sides of the aisle, the Republicans and the Democrats, want that cleared out. The -- what they -- it -- what they're going to do to in this legislative cycle, I can't predict but everybody agrees that they're not proud of that situation and that they're hurting businesses in this state.

Right. Bottom line it's a question of whether they can stay current or not but it's -- it's definitely an improvement and it is unlikely that you'll see sort of a significant increase in those DSOs at this point.

I hope you're right.

Yes.

In all three of your prepared remarks, you made a number of different comments about looking at various things -- investments that you're making, growth in your sales force, and in the outside consultants and things like that. At the same time, you talked about some administrative staff reductions that you've already done, some headcount reductions that you're planning on doing.

I'm just curious, maybe Dennis, you're the person to ask, whether or not you think that those two sort of pushes and pulls kind of offset each other as we go through the year or do you think we'll see a little bit of margin pressure in the first part of the year and then the benefits coming in the second half of the year.

I think that letter comment would an accurate statement.

Okay, great. And, Dennis, now that you've been in place for a couple of weeks or couple of months, I'd just be curious as to any color you could give in terms of whether you've seen any surprises in the organization. You know, we had a hiccup in sort of the conversion of the billing systems during last year --whether you think that controls and procedures are in place that are adequate at this point or is that something you're going to continue to focus on and strengthen?

I don't think we're going to take our eye off the ball relative to the receivables and we are continuing to work that process as the organization continues to work through some of the backlog and continues its efforts for smoothing out and improving all of that collection activity.

We had -- if you look at the receivables over the course of 2010 and make some comparisons with revenue growth and the magnitude of the dollars that are left, the reality is that collections across all the payers have improved and there -- I -- there's not a payer that I'd looked at and I do look at this at the payer level, where I am not -- where I'm -- where I have not seen what I would say "marked improvement" in the performance of the people that are collecting those receivables. Bar one, in particular, receivable type and that would be the best deserved, which continues to be a challenge for this organization. But all in all, we are not going to take our eye of that ball and our goal is to collect that Illinois receivable and turn that capital into dry ammunition for M&A activities.

And that actually leads me to my final question. I was wondering if you could just give sort of an update as to the M&A sort of environment, the outlook, your pipeline?

We maintain an active list of interested organizations that are in the market. Some of their pricing expectations are maybe a little bit higher than we might want to pay for them but we continue to manage that. We're not actively pursuing anything until we get this Illinois resolved. And I think once that happens, then we'll probably be more -- more active in the marketplace.

Okay, great. That was all very helpful. Thank you.

Andreas, thank you.

(Operator Instructions)

Since we have no further questions, I would like to turn the call back over to Mark Heaney for any closing remarks.

Operator, thank you. I'd like to thank everybody on the call for joining us on our fourth quarter and year end call. We look forward to speaking with you about our results next quarter. Thank you all so much.

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