Addus Homecare Corp (ADUS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Addus HomeCare Corp. Earnings Conference Call. My name is Tania, and I will be your event moderator for today. At this time, all participants are 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 hand the presentation over to Carol Ruth, of The Ruth Group.

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 reimbursements, 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 Factor 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'll now turn the call over to Mark Heaney, President and CEO. Mark?

I, too, would like to welcome all of you to Addus HomeCare Second Quarter 2011 Conference Call. I'm joined today by Daniel Schwartz, our COO and Dennis Meulemans is our CFO.

In my comments during these calls over the past several quarters, I have outlined the key objectives that have been our focus. And to remind you, these focus items are and have been to improve our AR performance, resolve the Illinois receivables issue, place the best people in the key positions, monitor and manage our costs, create a sales culture, and continue to develop our integrated care program.

I hope that my comments and those of Daniel's and Dennis' today combine to communicate the view that we continue to work to make steady progress in advancing these key areas of our operation.

In the second quarter, net revenues were $63.8 million, an increase of 1.6% over the prior year quarter. Net income was $1.3 million, with EPS of $0.12 per share. Our days outstanding reduced by 19 days to 65 days, in large part owing to a significant payment we received from the State of Illinois. And while we're pleased with this payment, we must and we will continue to work with the State of Illinois until the state is, once again, a consistent and predictable payer. Dennis will have more on Illinois and AR in general during his comments.

We're very pleased to have announced that Greg Breemes has joined Addus HomeCare as our Vice President for Home Health. Daniel we'll have more on this very positive news, but I do want to take this moment to welcome Greg to the Addus team. I can tell you that this is a guy that hits the ground running.

We continue to develop as a sales organization with quarterly sales contests. We've improved our account executive programs, expanded our use of the CRM, and our ongoing efforts to improve coordination between sales and service. Recently -- and we're excited about this -- we engaged a search firm to recruit for a Chief Sales Officer.

In addition to continuing to energize the Home Health Sales Program, over time, our expectation is the CSO will identify and expand on untapped growth in our home and community business and other lines of business. We think brining on a top sales leader is an important next step in our development as a sales organization.

We continue to work on our integrated program where we are identifying additional health care needs among our elderly home and community consumers as early as possible, reducing pain and suffering and before the cost of care increases. Daniel will have more on this important line of work in his comments.

Before I turn the call over to Daniel, I think it is important to comment generally on how our various programs faired now that the 2012 budgets have been decided in our 19 states. We all agree it's obvious that the states are going through a very difficult period balancing current and continuing obligations with often lower revenues to match.

While there is and will continue to be significant pressure on all government funded programs, we are encouraged to report that at the end of the 2012 state budget cycle, the impact on our business was minimal. We believe the actions in the states toward forming community-based care over the just-completed budget cycle affirms our long-held position that home and community based care for the growing elderly population is the lowest cost in consumer preferred long term care option.

With that, let me turn the call over to Daniel, our COO, for a little more detail on our operating performance.

Thanks, Mark. We continue to work to solidify our foundation and improve the effectiveness and efficiency of our operations. We have a solid, well-performing home and community business and are continuing to enhance the performance of this division. We are making measurable progress in stabilizing, strengthening, and growing the home health business.

I'd like to reiterate Mark's comments on Greg Breemes, our new Vice President of Home Health and welcome him to our team. Greg brings 30 years of health care experience and a track record of success, including senior operating roles, at Gentiva and Odyssey Health Care. And most recently, as Chief Operating Officer at Alacare Home Health and Hospice. He adds significant strength to our leadership team and will be a major asset to Addus.

We're executing on the key initiatives Mark mentioned to strengthen our foundation and drive growth and profitability. Let me now add some more specifics. We continue our transition to a sales and service culture, what we call Addus Achieve. In our Home and Community Division we are increasing our focus on penetration and share in existing programs, evaluating additional opportunities in the current serviced areas, and improving growth in markets where we see greater potential.

In Home Health, we are focused on more effectively generating leads and converting these leads to admissions. Home Health [starts of care] continue to positive growth trends experienced over the past six quarters, and sales per account executive continue to show modest improvement.

The Integrated Services Program remains a significant competitive advantage and a critical element of our growth strategy. Integrated starts of care were flat, as compared to Q2 of '10, increased sequentially and are at the highest level over the previous four quarters.

During the quarter, we implemented a key program matrix and reporting, improved visibility of changing condition documentation and enhanced incentive program. We are pleased, but not satisfied, with this improvement in integrated services, and believe these actions will continue to translate and to improve the results.

Turning to face-to-face and therapy regulatory changes, we have one quarter of operating experience under our belts. We have been effective in minimizing the impact of face-to-face with minimal episodes lost due to a lack of timely physician visits. We are working to further reduce the impact of this regulation.

The therapy documentation and certification requirements are impacting Addus similar to that which as been reported by other providers. We continue working with our therapy and clinical staff to minimize the impact of this new requirement.

We remain focused on cost management and production. During the quarter, we achieved our goal for administrative staff reductions, improved field staff productivity, achieved overtime and travel cost targets in Home and Community, and consolidated four offices, reducing rent and administrative costs while continuing to serve these markets.

As a result of these actions, we've been able to maintain gross margin in both divisions and improve the operating margin in Home and Community. These efforts are continuing.

Operating expense in Home Health increased in the quarter. This is primarily due to temporary investments in intra-management and other resources to strengthen the operating platform.

We are increasing our use of technology to drive efficiencies and reduce costs. This includes continuing our telephony program implementation, leveraging technology to improve Oasis Documentation accuracy and timeliness, and implementing automated management tools to help maximize services as appropriate, minimize over-servicing and lower overtime and travel costs.

We continue to evaluate business processes and leverage technology where we can improve performance and cost management.

Finally, and most important, is our people. Quality home care aids, clinicians, and other leaders are our most significant differentiator. We want and need the best agency and regional directors. During the quarter, we strengthened our team filling two regional director positions in Home Health and one in Home and Community, in addition to adding Greg as the Vice President of Home Health.

We are executing our plan to develop these key leaders. They are critical to ensure we drive accountability, execute consistently, and achieve our performance goals. I remain excited about the opportunities ahead at Addus, and committed to driving further improvement in our operations.

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

I would like to remind our listeners that our results of operations for the second quarter of 2011 include the operations from our acquisition of Advantage Health Care Systems, also known as CarePro, which occurred on July 26, 2010, and were not included in our second quarter of 2010. I would also note that we have filed our 10-Q along with our earnings release, and many of my comments and detailed discussion points are included in the MD&A section of that document.

Mark and Daniel have provided you with a broad overview of our performance for the second quarter, and I will provide you with some additional insights into our results. Our second quarter results are highlighted by the following -- our consolidated revenues for the second quarter 2011 increased by 1.6% to $68.3 million, compared to $67.2 million for the same period in 2010.

Our acquisition of CarePro contributed $3.3 million in revenues for the quarter. Second quarter net income was $1.3 million, or $0.12 per diluted share, compared to a reported net income of $1.7 million, or $0.16 per diluted share for the same period in 2010.

Our cash flow has improved substantially over prior periods. Cash generated from operations was $17.6 million, a net income of $1.3 million. Improvements in collections of our outstanding accounts receivable with significant collections from the State of Illinois in the quarter have resulted in an overall sequential reduction in DSOs of 19 days to 65 days outstanding.

Our Home and Community segment operating income improved by approximately $500,000, or 80 basis points to $6 million on a quarter-over-quarter basis, largely due to lower segment G&A expenses.

Our Home Health segment operating income was down approximately $850,000 on a quarter-over-quarter basis to $800,000, primarily a result of the Medicare rate cut and increased segment G&A expense, partially offset by improvements in case mix and coding for Medicare cases.

Net Interest Expense declined by approximately $100,00 to $700,000 or 1% of revenues in the second quarter of 2011 when compared to 2010 as a result of lower borrowings throughout the quarter.

Turning to our segments, our Home and Community segment reported net service revenues increased by approximately $900,000, or 1.6% to $55 million in the second quarter of 2011 when measured both on a quarter-over-quarter basis and sequentially. The Home and Community segment benefited from the results of the CarePro acquisition which provided $2.4 million of the increase.

After excluding the impact of locations closed during the second half of 2010 and program eliminations in select states, same store sales growth was approximately $200,000, or 0.4% higher. Growth in this segment is challenging; as well, we are experiencing stable pricing for services provided, we are seeing increased attention to limiting utilization through lowering the hours authorized on individual cases.

Home and Community's gross profit margin was consistent with prior year results at 25.3% in the second quarter. Gross profit margin increased sequentially from the first quarter by 60 basis points as a result of reduced payroll taxes paid in the quarter for both federal and state unemployment benefits and reductions in our workers' compensation costs through our programs for aggressively managing this expense.

Home and Community's general and administrative expenses decreased by approximately $300,000 on a quarter-over-quarter basis to $7.3 million, or 13.3% of revenues, a decline of 70 basis points from the second quarter of 2010. This reduction is after considering the added expense associated with the CarePro acquisition of $400,000. General and administrative expenses related to same store operations declined by approximately $700,000 reflecting our continued focus on improving our operations in managing our administrative costs.

Home and Community's operating income before corporate allocations was $6 million, or 10.9% of revenues for the second quarter of 2011, compared to $5.5 million, or 10.1% of revenues for the same period in 2010. Operating income as a percent of revenues improved sequentially by 110 basis points, primarily the result of improved gross profit margins and the reductions in our G&A expenses.

Turning to our Home Health segment, second quarter 2011 revenues increased by approximately $200,000, or 1.7% to $13.2 million, with CarePro contributing $900,000 in revenue for the second quarter. Revenues increased sequentially 4.3%. We estimate the impact of the Medicare rate reduction to be approximately $400,000 in the second quarter of 2011 on a same store basis.

After we adjust revenues for the impact of the Medicare rate reduction, our Home Health revenues were down approximately $300,000 on a quarter-over-quarter and same-store basis as a result of a conscious decision to end services to our Vets Deserve and VA programs.

Home Health second quarter gross profit was $6.2 million, with a gross profit margin of 46.6%, an increase of 20 basis points over prior year results and an increase of 180 basis points sequentially. This increase in gross profit margin is primarily due to stronger margins related to the CarePro acquisition and improved pair mix with an increase in the percentage of Medicare revenues and improvements in our coding for Medicare billings.

Home Health's general and administrative expenses increased $1 million to $5.2 million in the second quarter to 39.3% of revenues, compared to 32.9% in the prior year quarter, with $400,000 of this $1 million increase associated with the CarePro acquisition.

The remainder of the increase is due primarily to the use of consultants to provide interim management while recruiting for full time employees, for field staff training, and for other initiatives to improve our Home Health operations. We are focused on reducing this expense as we transition to permanent employees and are continuously reviewing the level of staffing in our agencies.

Home Health's operating income was approximately $800,000, or 6.3% of revenues, a decrease of 670 basis points on a quarter-over-quarter basis, but an improvement of 80 basis points on a sequential basis. These changes in operating income are due primarily to the increased general and administrative expenses discussed earlier.

Now, let's turn to our balance sheet and cash flow statements. Our accounts receivables net of reserves were $51.3 million as of June 30, 2011, which compares favorably to the $64.8 million reported as of March 31, 2011. This $13.5 million improvement for the second quarter is primarily due to increased payments received from the State of Illinois and improved collections from all other payers. The DSO at June 30 was 65 days, a reduction of 19 days from the 84 days at March 31, 2011.

At June 30, we had total debt of $40 million compared to $34.2 million as of March 31, 2011. At June 30, 2011, our availability under our revolving credit facility was $14.1 million. Subsequent to June 30, we made a debt payment on our revolving credit facility totaling $25.5 million. Cash generated from operations was $17.6 million for the quarter on $1.3 million of net income, largely due to this improvement in accounts receivable collection.

Adjusted EBITDA was $3.7 million in the second quarter of 2011, compared to $4.3 million in the prior year period. The $600,000 decrease in EBITDA was related to a decline in Home Health segment's EBITDA of $900,000 for the quarter, offset by increases in our Home and Community segment's EBITDA of $500,000 on a quarter-over-quarter basis, plus $200,000 related to increases in our corporate costs.

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

Operator, it's been a long day for everybody. We're ready for questions.

(Operator Instructions)

Our first question will come from the line of Ellen Spivey with Stephens Inc. Please proceed with your question.

Hi, guys. Good quarter. I have a question. Obviously, a very good cash flow this quarter and nice DSO improvements. Can you just give us an update on what the state budget situation is in Illinois? And just kind of your level of confidence being able to continue getting these payments from the state?

The fact that we've been struggling with the State of Illinois working on prompt payment, as you know, for a year and a half now -- two years. The State of Illinois is troubled. Everybody knows that. We have established clear lines and continuing communications with them. They are very sensitive and understand that as a home and community based provider we are essential, frankly, to their continued good health.

That is the perpetuation of these important deferral and collecting programs. They understand that we make payrolls every two weeks. They are committed to prioritizing home and community over other types of state services. They have in the past -- I think you'll see that in the past two quarters have been a little more prompt in helping us with payment. And we're appreciative of this payment.

But we continue to work with them, and will continue to work with them, until they are returned to being a consistent and predicable payer. And I really would not want to predict what's going to happen down the road. But I will tell you that we continue with the same kind of energy that we have over the past year or two to work with them.

It seems like it's getting more positive. This is the second quarter that you've received a pretty hefty payment from them, whereas before we weren't seeing much of anything.

As most of you know, the state did pass the budget that raised a tax increase and obviously that helps. But to be fair, it is also true that the tax increase alone did not cover their continuing obligations. And they have like the rest of us do. They have trimming and cutting to do and they're working on it. But, yes, I agree that we have been a little more optimistic of late. But we're not resting.

As far as the tax increase - forgive me, I haven't followed - but what's the situation with the debt issuance? I know last time that was still kind of pending and caught up in the legislature.

Ellen, the state has not passed a general bond issue. The legislature is kind of out of session until the Fall. So, it's kind of a quiet period in Springfield on that.

Yes. No new updates. Great. Second, just kind of an M&A update. I know last quarter you guys mentioned that you had a pretty good looking pipeline and that you'd looked at around 30-odd deals, mostly with less than about $1 million of revenue, but some that were on par a little bit larger than CarePro. Can you just give us an update on what you're thinking about that pipeline and if your appetite has changed on that front?

Ellen, our situation remains the same. We are looking at opportunities where if presented with a good revenue stream at a reasonable price, it's something we will move on. I think the sellers are still a little bit optimistic in their purchase prices; but we continue to monitor several different activities. But, really, no change in our posture there.

Okay. And would you say that the pipeline is probably more geared to acquisitions on the home and community side or home health, or is it kind of split between the two?

I would say it's split. We're seeing a lot of combined companies that have a little bit of both, which is a real good match for us for obvious reasons. But I would say we're not focused on one over the other.

And then, again, if I'm looking at the model, I know last quarter you guys kind of guided toward a meaningful step-up profitability in the third quarter and the fourth quarter. I'm looking at the rest of the year, is that the still the way that we should be thinking about progression in the third and fourth quarter from here?

You know that we don't give forward guidance. But I think that the information that we've communicated in the past relative to tax changes and those are facts that you're seeing in the second quarter relative to margin improvement. And I think our fact base that we've communicated in the past is consistent.

And as you said, you did see nice sequential margin improvement in the Home and Community segment. So, going forward, is this a good level to think about or are we going to see improvement off of these levels?

You know, the reality is that tax phases out as people hit certain income levels and it doesn't continue to phase out to go negative. That would be a very nice thing to happen. But the reality is that that will taper off. That level of improvement will taper off as the year progresses.

I'll hop off and let any other questions.

Thank you, Ellen.

(Operator Instructions)

We have no additional questions at this time. I would now like to hand the call back over to Mark Heaney for closing remarks.

Operator, thank you very much. Thank you, team, here. And I appreciate everybody's dialing in and your interest. Please do contact us if you have any follow-up questions. Thank you all very much. Enjoy the rest of the week and weekend.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.