Addus Homecare Corp (ADUS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Addus Homecare Corporation Earnings Call. My name is Modesta and I'll be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Carol Ruth with The Ruth Group. Please proceed, ma'am.

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, Ruth. I'd like to welcome all of you to Addus Homecare's First Quarter 2011 Conference Call. I'm joined today by Daniel Schwartz, our COO and Dennis Meulemans, our CFO.

To start my comments this afternoon, I first want to report that I am, and I continue to be very appreciative and excited about the significant and positive contributions that Dennis and Daniel have made to our organization. I think you'll find my view is justified as they report today, and as you get to know them going forward.

I would characterize our first quarter 2011 results as demonstrating continued progress toward accomplishing our fundamental goals and objectives. 90%-plus of our revenue comes from government. Despite a challenging environment, our business performed reasonably well.

In our largest division, home and community revenue was up 2.7%. Home health revenues were up 6.7% on a year-over-year basis, this despite imposed revenue reductions that Dennis will talk about later in our call.

It is an understatement to say that health care is changing. Exactly how in all cases is impossible to say with any degree of certainty except that we are as certain as we can be that the solution to the acute care problem is pre-acute health care, or, when there has already been an acute event, returning the consumer to the lowest cost setting as soon as possible. And care at home is, by far, the lowest cost and most preferred care setting.

This being the case, we remain committed to, and continue to work at, our goal of being a comprehensive provider of home care, practicing to the lowest cost of care.

I believe our first quarter results show continued progress toward these objectives. Assimilate our new senior management. Solve or improve the Illinois reimbursement problem. Become a sales organization. Advance our integrated model. Review and justify our operating costs. Increase the use of technology. And develop our mid-levels and site management.

Before I turn this call over to Dennis and Daniel to put a little more beef on those bones, in our last call I reported that we were a moving party in the formation of an industry group which currently includes several large and mid-size Medicaid home care providers, the National Association for Home Care, and, importantly, the forum of state home care associations.

The goal of this group is to focus attention on Medicaid home care issues and to advocate for rational solutions to Medicaid home care problems in Washington, DC, where half of all Medicaid funding originates.

I remind our investors, spending on home care under Medicaid is multiples of spending on home care through Medicare. The problem is, and the reasons that few home care providers concentrate on Medicaid home care, is that Medicaid is broken in many states, especially as compared to the Medicare home care benefit. And as an industry, we cannot succeed in a strategy that asks us to fix Medicaid on a state-by-state basis.

A home care delivery system where, in all states, public policy encourages the deferral and deflection from facility-based care, where there are uniform and enforced standards of care and where alternate site Medicare and Medicaid home care policies and procedures are aligned, taxpayers, consumers and we health care providers benefit.

I am pleased to report that this group is becoming active. In the past few months, we have raised funding, we've held our first formation meeting, we've elected a chair, appointed an executive director and we've begun to work on our strategy and resource deployment. I am excited about the potential for this group.

Medicaid policy is not broken by volition. The federal government states, and policy makers in general want to do the right thing. The problem is that there has never been a cohesive advocacy effort to consistently educate and advocate, in Washington, for rational Medicaid policies. I will keep you posted in future calls regarding the work of this group.

Now, to get to our performance in the first quarter, let me turn the call over to Daniel Schwartz, our COO.

Thanks, Mark. I want to start by thanking the 13,000 - plus Addus team members for their continued commitment to our clients and our company. We are a true people business and we are privileged to have a team of this caliber. We're working diligently on the key operations objectives Mark outlined and demonstrated meaningful improvement in each of these areas during the quarter.

First, we continue our transition to a sales and service driven culture, where we're calling Addus achieve, with solid progress including an increase in account executive generated Medicare admissions of 14.5% over Q1 of '10 and 4.3% over Q4 of '10. This reflects the investment we have made and continue to make in our sales team.

We also saw a 10.2% sequential increase in integrated Medicare admissions. We began increasing our investment in this area in late Q4 and into Q1, and we're seeing the outcome in our Q1 growth. We achieved a modest 3.3% increase in home community census and a 40 basis point increase in service hours over Q1 of '10 despite program reductions in several states.

We continue the implementation of our CRN management tool. This resource enables us to improve our strategic selling and provide measurable performance metrics on sales, productivity and effectiveness.

Additionally, we're working to lower our operating costs. Highlights from the quarter include meeting our goal for administrative staff reductions planned for Q1 with the bulk of these reductions occurring late in the quarter. These adjustments are consistent with our administrative staffing model and do not impact patient care. We continue to evaluate these opportunities and will make changes as appropriate.

We completed our telephony pilot, validating both the service improvement and cost reduction benefits of this tool and are moving forward with the roll out. Finally, we continue to reduce real estate expense through consolidation and integration of our branches.

We are proactively engaged with state governments during their current budget season. Addus has a strong history of effective advocacy and we are engaged in each of these key states to demonstrate the value of the home and community programs. About 50% of the states have completed their budgets. We continue to monitor the remaining states and do not see anything overly concerning at this point. This is obviously a very fluid process and we remain focused on this effort.

Last, and perhaps most important, we continue to invest in our people with a focus on our agency and regional managers to ensure that our vision, our culture and operating practices are effectively and consistently executed across the business.

We believe that our efforts to date have been effective, with employees at every level more focused on achieving our performance goals and our key objectives. This is an important and ongoing focus area.

Our search for a VP of home health is proceeding and we are narrowing in on the right candidate. Our interim VP of home health and team continue to make progress in this division and working effectively with the rest of the leadership team.

I do want to provide an update on the face-to-face and therapy regulations implemented April 1 of 2011. We've undertaken several months of preparation and believe these efforts have effectively positioned us to comply with the regulatory requirements. We have detailed reporting and monitoring to assist in tracking this effort. We realize it's too soon to assess the full effect of these new requirements, but the impact on Addus is less significant than companies more heavily concentrated in home health.

Home health represents less than 20% of our total revenue. Within home health, roughly 30% of our patients are receiving personal care services that include transportation, thus easing one of the challenges with the new requirement. While we remain focused on these new regulatory requirements and we support any effort to improve reliability and quality, we do not believe that these regulations are of good public policy.

I came to Addus about 100 days ago, with 20 years of experience in facility-based long term care, and a belief that home based care and services must play an increasingly important role in our health care delivery system. I'm even more confident of that fact today.

I spent a significant amount of time working with the regional and agency directors around the company, including prioritized site visits out to each of our major markets, monthly business review calls in February and March with each agency director, and an even more focused review of our underperforming agencies.

Overall, we have a solid, well-performing home and community business with some opportunity to improve. We need to focus our attention on the home health business and we are on it. I remain excited about the opportunities ahead at Addus, and committed to driving further improvements at our operations.

With that, I'd like to turn the discussion over to Dennis to review the financial performance.

Thank you, Daniel, and good afternoon. I would like to remind our listeners that our results of operations for the first quarter of 2011 included operations from our acquisition of Advantage Health Systems, also known as CarePro, which occurred on July 26, 2010 and were not included in our first quarter results for 2010.

I would also note that we have filed our 10-Q along with our earnings release, and support for many of my comments and detailed discussion points are included in that document.

Mark and Daniel have provided you with a broad overview of our performance for the quarter. Our quarter is highlighted by the following three points. Our cash flow has improved substantially over prior periods. Cash generated from operations was $11.5 million on income of $853,000.

Improvement in collections of our outstanding accounts receivable across all payers has resulted in an overall reduction in days sales outstanding of six days to [eight more] days in total. We have utilized our operating cash to reduce our outstanding debt obligations by $11 million.

Lastly, we have continued to improve our operating performance, where efforts to improve sales and controlling costs are reflected in our business segment operating results.

Despite rate reductions from Medicare affecting our home health segment estimated to be $400,000 and program cuts in various states affecting our home and community segment totaling $2 million, our revenue grew $4.2 million on a year-over-year basis.

Our consolidated revenues for the first quarter of 2011 increased by 3.5% to $66.8 million compared to $64.6 million for the same period in 2010. First quarter net income was $853,000 or $0.08 per diluted share. This compares to a reported net income for 2010 of $1.4 million, or $0.13 per diluted share.

Net interest expense has remained flat at about $700,000 in both the first quarter of 2011 and 2010. While amounts borrowed on our credit facility and other debt instruments were lower in the first quarter of 2011 than in 2010, we had a favorable adjustment to a credit swap instrument in 2010 that lowered our recorded interest expense in that period by approximately $200,000.

Our effective income tax rate for the first quarter of 2011 was 34% compared to 31% in the prior year quarter. The higher income tax rate is due to the higher effect of state income tax rate in Illinois as a result of a tax increase that became effective on January 1, 2011.

Turning to our segment information, our home and community segment reported net service revenues increased $1.4 million, or 2.7% to $54.1 million in the first quarter of 2011. The home and community segment benefited from the results of the CarePro acquisition, which provided $2.5 million of the increase. After excluding the impact of locations closed in late 2010 totaling $900,000 and program eliminations in select states totaling $1.1 million, same store sales growth was $900,000, or 1.9%.

Home and communities' gross profit margin declined by 80 basis points 24.7% in the first quarter, due primarily to increased tax rates for both federal and state unemployment benefit taxes and increases in our worker's compensation costs in the state of Washington, where we are required to participate in a state-mandated program which passes its cost increases onto employers in the form of increased worker's compensation tax rate.

Home and communities general and administrative expenses, when measured as a percentage of revenues, decreased 20 basis points to 13.7% on a year-over-year basis. Actual expenses increased by $100,000 to $7.4 million. After considering the general and administrative expenses associated with the CarePro acquisition of $400,000, general and administrative expenses related to same store operations declined by $150,000, reflecting our continued focus on improving our operations and managing our administrative costs.

Home and communities' operating income before corporate allocations was $5.3 million or 9.8% of revenues for the first quarter of 2011, compared to $5.5 million for the same period in 2010. Operating margin declined 60 basis points, primarily the result of the tax increases discussed earlier and offset by the reduction in our G&A expenses.

Turning to our home health segment, first quarter 2011 revenues increased $800,000, or 6.7% to $12.7 million, with CarePro contributing $1 million of this increase. We estimate the impact of the Medicare rate reduction to be approximately $400,000 in the first quarter of 2011, suggesting a rate-adjusted increase in same store sales of $200,000, or 1.8%.

Home health first quarter gross profit was $5.7 million with a gross profit margin of 44.8%, a decline of 50 basis points. This decline in gross profit margin is primarily due to the reduction in Medicare reimbursement rates, the increased cost of both federal and state unemployment tax rates discussed earlier, offset by overall improvement in coding for Medicare and in general improvement in our overall payer mix.

Home health's general and administrative expenses increased $600,000 to $4.9 million, or 38.3% of revenues compared to 35.4% in the prior year quarter, with $300,000 of the increase associated with the CarePro acquisition. The remainder of the increase is due primarily to increased investments in our sales team and amounts expended for consultants utilized to manage and improve our home health operations.

Home health operating margin was $700,000 or 5.5% of revenues, decreased 300 basis points due primarily to the decrease in gross profit margin and our increased general and administrative expenses discussed earlier.

Now, let's turn to our balance sheet and cash flow statement. Our accounts receivable net of reserves were $64.8 million as of March 31, 2011 which compares favorably to the $71 million reported as of December 31, 2010. This $6.2 million improvement in the first quarter is primarily due to increased payment received from the state of Illinois and improved collections from our other payers.

The DSO at March 31st was 84 days, a reduction of six days from the 90 days at December 31, 2010. The state of Illinois is our largest customer with outstanding receivables of $42.8 million as of March 31, 2011. This represents 122 DSO outstanding, a reduction of 19 days from the 141 days at December 31, [2011]. At March 31st, we had total debt of $34.2 million compared to $45.2 million at the end of 2010, a net reduction of $11 million.

At March 31, 2011, our availability under our revolving credit facility was $20 million, an increase of $6.5 million over our December 31st levels. Cash generated from operation is $11.5 million for the quarter on $853,000 of net income. We have used this cash to reduce our debt obligations by $11 million.

Adjusted EBITDA was $3 million in the first quarter of 2011, compared to $3.7 million for the prior year. The reductions in EBIDTA were related to decline in our home and community segment of $200,000, home health segment of $300,000 and increases in our corporate expenses of $200,000 on a year-over-year basis.

As we look to the balance of 2011, we expect continued gross margin pressure in both our home and community and home health segments. We are dependent upon government reimbursements for the majority of our revenues with states where we do business looking for ways to balance their budgets.

Our home health unit will continue to experience challenging comparisons to 2010 as the Medicare rate cuts of approximately 4.9% affect 65% of this business segment's revenues. The potential exposure from face to face and therapy documentation presents new risks to this business unit. Both our home and community and home health divisions will experience increased margin pressures as we adjust our mileage reimbursement to our employees due to the higher cost of fuel.

While these issues present challenges to our organization, we will continue to emphasize our expectations for profitable sales growth and effective management of our costs of doing business.

This concludes my comments. I would like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis, and Daniel, thank you also. In sum, the takeaways for me come down to this. We very much like our senior management additions. I've been here 26 years. They, and along with their team, are focused on the fundamentals of home care in a manner such that I've never seen here before, both on home care delivery and in sales generation.

We are, as an organization, we are pleased -- cautiously optimistic. We are pleased with the improvement in DSO, and we're cautiously optimistic about the situation in Illinois. We are encouraged that, despite program cuts and rate reductions that we've experienced in Medicare cuts and others, our business still grew.

The -- with that, operator, I'd like to turn the call back to you and ask for questions. Thank you.

(Operator Instructions)

Your first question comes from the line of Whit Mayo with Robert W. Baird. Please proceed

Hey, thanks. Good afternoon. I just wanted to first focus on cash just for a minute. The A/R balance is the lowest we've seen in two years now on a dollar basis. You had $1.00 of free cash flow that poured in this quarter and maybe just to start with the 800-pound gorilla, how confident are you that the Illinois A/R balance can decline more? Maybe just talk about some of the swing factor there.

Whit, this is Dennis responding. Thank you for the question. First, we remain cautiously optimistic regarding the situation with the state of Illinois. There are three initiative that are being pursued at the state level to address their outstanding payables issues.

The first initiative really deals with the state passing a general obligation bond to pay off all old payables on their part. Like all states, this is a politically sensitive issue and we are cautiously optimistic that some action may take place on that front.

A second initiative is being undertaking by the Illinois financing authority whereby they would essentially factor our receivables and any other payers receivables in the form of a factoring arrangement. They are working through the details of this potential solution and our -- and are currently attempting to line up investors for that particular facility. We do see this as somewhat of a back stop on the part of the state should they be unable to get their general obligation bonds passed.

The third initiative that the state is pursuing is what I'm going to call a sweep of accelerated payments for all Medicaid payers in an effort to maximize the match from the federal government which expires at the end of June.

So for this next quarter, we do anticipate that we should continue to see some improvement in this area and hopefully by the time they pass their budget, which is expected to be towards the end of May, we'd have higher clarity around the long term financing situation.

Is there, Dennis, any time that -- I guess I'm trying to understand the time line for the GO bond and if that doesn't pass -- maybe a time frame to think about the factoring opportunity?

Whit, this is Mark. The -- as Dennis described, the bond is subject to the legislature and the legislature, I think, runs through --

May. End of May.

- end of May, so if it's going to happen, it's going to happen in that period. It's very fluid. It depends on who you talked to last. We are represented by two government relations people. We meet on a weekly basis. The last report they gave us was -- they thought that something might happen under the bond, but they've changed their mind and thought differently under different political circumstances.

So it's just - we don't know. The -- and then with the IFA, the -- as we understand it, and I would want you to confirm this or anyone to confirm this with the state -- as we understand it, the -- that process, if they were to follow their own time line, would make it possible for Medicaid providers to take advantage of that option sometime after May.

But, Whit, like I did with the bond, this too is government and I'm giving you the most recent information that we have. We feel good about it but we're not spending that money yet.

That's helpful. But just maybe thinking about the IFA and the factoring. How would that be structured? Would they -- is it like a $0.90 on the dollar type of financing? I guess that's what I'm trying to get a better sense of. And maybe, Dennis, if you help me understand from a --?

Sure. Whit, the current concept is that we would receive $0.90 on every dollar that we would submit to them for financing immediately. The $0.10 remaining would be held in escrow and then when the receivable is actually paid by the state, the interest on that amount of financing would be paid to the lender along with the repayment of the principal amount and the remainder ideally would be remitted to us.

There is some thought that the remainder may be held in escrow until the prompt payment interest is paid by the state because the lender is accepting the prompt payment interest as their interest payment for the bonds.

So we may have to wait for that last - we estimate it to be about 7 %. We have to make -- we may have to wait for that 7 % until the state actually pays their prompt payment interest, but we would get $0.90 on the dollar on day one.

If I might, I just want to comment that we have, without a bond, without an IFA, we have obviously seen improved payments from the state of Illinois.

Yes.

In part, that comes from -- frankly, we tend to be a little -- very, very active in the legislature and in the state on advocacy matters. And I can say that, for the first time in my experience, regardless of your political affiliation, the -- all segments of government involved in payment understand, are sensitive to, and doing the best they can to prioritize home care providers. And I think that's really important.

That's what -- that is what the impetus is for the improvement we've had over the last couple of months.

No, that's helpful. And I hate to continue to talk about this one --

No, please.

Yes, I hate to talk about this one topic but it's so important. How much -- can you remind me, Mark or Dennis, what -- doesn't Illinois owe you interest payments at some point in time from some of the aged A/R and how does that work? I don't think you're booking the interest yet. I'm just trying to get a sense for what that number is.

With the state has passed a law that when the payables or receivables go over 60 days as being non-paid, they start accruing interest payable to us at 1% a month so that anything over 60 days is subject to that interest -- we call it the prompt payment interest - amount. We received, at the end of 2010, approximately $170,000 in prompt payment interest. We have not received any for this year.

We have taken an accounting treatment approach and certainly with the blessing of our auditors to treat this prompt payment interest as cash based we will record it when paid, in large part due to the uncertainty of the timing of the payment. We do believe that the state does owe us some money and they by, under legislation, that those payments will come. The real question will be when.

Just to underscore, they know they owe the payment and it is important -- it's an important part of the argument in favor of the factoring that they would undertake because obviously the market rate is lower than their own statutory rate.

Yes, that makes sense. And maybe one last question in here, just -- how much Illinois A/R is over 60 days now and is there an idea that you can get us for what may be the average age of that is just so we can get a sense of what the potential opportunity is for that interest payment?

We're going to look for that number in a second, hold on.

Whit, I'm looking at a schedule and it's not totaled in that way.

Maybe just a ballpark if I look at --

I'm looking at -- I'm ballparking it in my head. As of March 31, about $11 million.

That's current and he's asking about the -

No, that would be -- oh --

And then he's asking about historical average.

I'm going to ballpark historical average in the $16 million to $20 million range.

Remember the DSO in Illinois, and I'm not going to throw it out there, but it was a big number.

We can talk about some of that offline. And maybe my last question -- I don't want to eat up too much time here. But you don't give quarterly or annual guidance, but it just might be a little bit helpful to think about it this way. If we take the $3 million EBITDA that you generated roughly in the first quarter that's a run rate of $12 million off of a pretty depressed base.

Can you point us, maybe Dennis, to a couple of the swing factors that could push that up or down over the next several quarters just so we kind of get a sense of the sequential progress?

The - we are anticipating continued growth in our home health sales and Daniel gave you some ideas as to what our growth rate was -- sequential quarter-over-quarter, excuse me. We will see some improvement in margin because of the payroll taxes will naturally subside as people hit their limits.

A lot of our employees are part-time people so we end up paying taxes for the bulk of the year but, as an example, the state unemployment tax here in Illinois end after, I believe, it's $7,000 of income. So we anticipate some of that will accrue to us. We'll still have taxes in this second quarter. We believe that they will reverse in the third and fourth quarter.

Okay. The whole $700,000 reversed at that point? That accrued expense goes away from the second into the third?

The -- I haven't quantified the dollar of that but the -- I have given you some guidance with respect to the percentage. It, it's -- kind of like a -- or I should say, highest in the first quarter, about halfway down in the second quarter and then we start going positive in the third and the fourth. If you think of it as being flatlined.

Yes, yes, no, I got it. Thanks a lot guys.

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

Thank you. To follow on what Whit was saying, I know we talked about it last quarter. The 1%, how the interest payments occur at 1% a month on those receivables over 60 days, will you just remind me what the -- if that's the market rate -- what the lower rate is if they forego this and the bond issuance passes? I'm trying to figure out what you're saying that the benefit for them is, what the savings for the state is if they pass this.

I believe that the state's issuing debt at - currently they're issuing debt and they're at about 5% --

Okay.

- and this is 12% so you -- there's a big improvement for the state to do it.

Right. And I know you just kind of hedged it last quarter, saying that you think that there's probably a 50/50 chance of that passage. Do you still feel that way? Is that -- do you feel incrementally more positive, more negative on that?

On which on -- which aspect?

Just on the odds of this bond issuance passing through the legislature by the end of May.

I don't have any more recent estimates. We're -- when I say to you that -- I'm just reporting to you what our government relations people have told us.

Right.

I was in a meeting of -- I think 10 days ago -- with -- that was still their estimate. I don't want a lock on the estimates. It's just -- it's what -- but I'll tell you what, stick your finger up in the air in 10 minutes and then do it again in 12, because it's political.

Got it. And this is maybe a little further out. But just kind of how are you thinking about M&A? I know that your number one priority -- you have to have the cash, first of all obviously the state's tying up a lot of your dry powder. But you pay down debt this quarter.

Once you do start receiving these payments, since it's a question of if and not when, how would you prioritize these of that potential cash that could be coming your way in the medium term future?

Ellen, this is Dennis. I think our first -- our first focus for this management is a continued focus on improving our core operation and, as we thought about it, that, in and of itself for this year with Daniel and I both being new here is a challenge in and of itself. So any sort of influx with cash we're going to use to reduce our line of credit and lower our borrowing costs.

That being said, we are tracking several acquisitions, but they'd have to be a deal like our CarePro deal -

Right.

- where it's accretive to our earnings and, as Mark would say, it's got to be a leprechaun giving us a pot of cold for free, almost. But it's going to have to be a really attractive deal to take our focus away from improving our core operations and getting those things in place.

Good.

I'm just going to add one comment and that is that you'd want another factor to ask at that time is, how certain are we about Illinois at that time? Because we want to be prudent.

Right, okay, thank you. Pretty much Whit covered all the other stuff -- the small things are just nitpicky modeling stuff I can talk about offline. So, thanks very much.

Thank you.

Thank you, Ellen.

Ladies and gentlemen, this concludes our Q&A portion of the call. I would now like to turn the call back over to Mark Heaney for closing remarks.

Operator, thank you. And I don't have any other comments other than we do appreciate your interest and support. We look for -- continuing as Dennis and Daniel have pointed out -- continue to work on the basics of the business and that's our focus.

Thank you all. We'll talk again in 90 days.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.