Addus Homecare Corp (ADUS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Addus Homecare Corporation Earnings Conference Call. My name is Colby, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator instructions)

I would now like to turn the call over to Carol Ruth of 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 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 make 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 acquisition, changes in the interpretation of government regulations, and other risk factors 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 event, or otherwise.

With that, I'll now turn the call over to Mark Heaney, President and CEO. Mark?

Thank you, Carol. I, too, would like to welcome you to Addus Homecare's third quarter 2011 conference call. I'm joined here today by Dennis Meulemans, our CFO. Daniel Schwartz, our COO, is not with us today. Daniel is out of the country on a long-planned and well-deserved vacation with his family. He'll be back here next week.

In our last few calls, Daniel and I have crafted our comments around the matters of most importance to our company. Our team remains focused on monitoring and managing our operations to lower our direct and operating costs in grouping our accounts receivable performance, managing the continued Illinois delayed reimbursement problem, creating a sales culture, continuing to develop our integrated care program, and building and assimilating a top flight management team.

I hope that our comments today communicate to our investors that one, the Company remains focused on these key aspects of our business, and that, two, we continue to make steady and consistent progress in each.

In the third quarter, net revenue was $69.4 million, a modest decline to the third quarter of 2010. Home Health revenues increased by 5.6%, directly attributable to our investments and our sales program, which look to be taking root.

Revenue in the Home and Community division are down slightly year over year. However, after considering unprofitable site closures and utilization reductions over the year, same store sales are essentially flat.

Exclusive of the impairment charge, which Dennis will discuss, net income for the third quarter was $1.8 million or $0.17 per diluted share compared to $1.5 million or $0.14 per diluted share in the prior year quarter, a 21% increase in EPS.

In our Home and Community segment our results reflect consistent execution across the division, demonstrated by increased census and improving margins. Importantly, our operating margins in this segment improved by 180 basis points during the quarter to 12.1% of revenue.

In our Home Health segment, the investments that we have made in our sales program produced a 5.6% increase in third quarter revenues. Greg Breemes, our Vice President of Home Health, who joined the Company in July, has made significant progress instilling a culture of urgency, accountability and quality. We continue to effectively manage the face-to-face regulatory requirement.

Our operations and sales teams have coordinated nicely to pursue positions for needed signatures or documentation. As a result, we've had minimal episode loss due to lack of timely physician visits. Essentially, we choose to look at this as a sales opportunity.

While Home Health census and revenues are up, and while our margins have held, our Home Health operating costs have to come down. Our higher Home Health operating costs result from increased use of external consultants working with us on training, process evaluation, and interim administration, as well as our increased expenses related to our CarePro acquisition. These expenses are being reduced.

We continue to work on accounts receivable management. We have essentially completed the centralization of the home and community going in collection.

Now, we shift our attention to improving the efficiency and effectiveness of our home health billing processes.

In the quarter we received a $2.3 million payment from the state of Illinois for accrued interest on late payments through June 30, 2011. This payment, having been received after the end of Q3 will be reflected in the Q4 results. While pleased to have received this payment, we would naturally prefer that Illinois return to its historical more prompt payment practices.

On that note, while Illinois has been more consistent with payments, DSOs increased to 90 days from Q2 when, following receipt of a very large payment at the end of Q2, our DSO was unusually low at 65 days. Dennis will also have more comments on DSO when he speaks to us.

We are continuing our transition to a sales and service culture. We have completed filling out our regional sales management team. We completed a round of sales training programs facilitated by [Simeal] Consulting for all of our Home Health account executives and management. We have revised our sales incentive programs and we've held theme oriented sales contests in the quarter. Our focus on sales execution and service delivery has yielded positive results with home health census up 14% in the quarter.

Our integrated care program remains a key element of our business strategy. In the quarter, census from integrated care increased again over prior periods. We produced a home care - an integrated care training video that was distributed to all of our integrated sites for use in training new and existing home care aides. Daniel and his team are working on integrated care 2.0, a revision to some of our practices in integrated care affecting training, patient identification, reporting processes, and our continuous reinforcement program.

We have a lot of work left to do before we come close to reaching our potential. However, if I could declare victory in any one of our focus areas, and I am not, it would be in the success we've achieved in recruiting, attracting, and engaging high quality, enthusiastic, proven successful leadership to our Company.

In our last call and earlier in this call I referenced Greg Breemes who joined us in July as Vice President of Home Health. A quarter later and Greg is making us look pretty darn smart for hiring him. I mentioned that we have filled two regional sales management positions. Both are experienced, strong sales leaders. They hit the ground running. In the quarter, Daniel recruited and brought on another regional operations on the home and community side. This is a leader who also fills an important position that we had made available for upgrade.

Along with our already veteran team of executives, including Darby Anderson, our Vice President of our largest division who recently celebrated his fifteenth year, Daniel Schwartz, our COO is in his eight month, and Dennis Meulemans, who you'll eventually be hearing from in a moment, our CFO, is completing his first year. We believe we have the right team in place to build on our foundation driving consistent growth and profitability going forward.

With that, I'd like to turn the call over to Dennis Meulemans for our financial review.

Thank you, Mark; and good afternoon. I would like to remind our listeners that our results of operations for the third quarter of 2011 include the operations from our acquisition of Advantage Health Systems, also known as CarePro, which occurred on July 26, 2010. Accordingly, our third quarter 2010 results includes only two months of CarePro operations.

Mark has provided you with a broad overview of our performance for the third quarter. Highlights are our consolidated revenues for the third quarter 2011 were $69.4 million, $458,000 below our results for the same period in 2010. Our acquisition of CarePro contributed $3.3 million in revenues for the quarter compared to $2.5 million in 2010.

Our third quarter net income increased 21% to $1.8 million or $0.17 per diluted share when compared to a reported net income of $1.5 million or $0.14 per diluted share for the same period in 2010. This result is before considering a $16 million preliminary goodwill and intangible impairment charge related to our home health division.

We conducted a preliminary evaluation of our goodwill and intangible assets for both our reporting units and determined we are not impaired in our Home and Community division. However, because of the known changes in federal reimbursement for our Home Health division and the overall climate for continued pressure on reimbursement for this business unit, we determined that our goodwill and intangible assets were impaired.

To be clear, the majority of the goodwill and intangible assets associated with the Home Health Division are related to the transaction where [EOS] acquired the company in 2006.

Our Home and Community segment operating income improved by 14.9% or $882,000 to $6.8 million on a quarter-over-quarter basis due to improved gross profit margins and lower segment SG&A expenses.

Our Home Health segment operating income was down approximately $880,000 on a quarter-over-quarter basis to $180,000, primarily the result of the 2011 Medicare rate cut and increased segment G&A expense. This result excludes the $16 million goodwill and intangible impairment charge.

Net interest expense declined by approximately $307,000 to $548,000 or less than one percent of revenues in the third quarter of 2011 when compared to 2010 as a result of lower borrowing throughout the quarter.

In October we received a $2.3 million payment from the State of Illinois for prompt payment interest on invoices that were not paid by the State within the legislated 60-day required payment period during the State's fiscal year ended June 30, 2011. As is our policy, this payment will be recorded in the fourth quarter as a reduction to our interest expense.

Turning to our segments, our Home and Community segment reported net service revenues of $56.2 million, a decline of approximately $1.2 million or two percent in the third quarter of 2011 when measured on a quarter-over-quarter basis. The Home and Community segment included approximately $2.4 million in revenues attributed to the CarePro acquisition compared to $2 million in 2010.

After excluding CarePro and the impact of locations closed and program eliminations in select states, same store sales were equal to the prior year results of $53.8 million.

Home and Community's gross profit margin has improved 100 basis points over prior year results to 26.3% in the third quarter. Gross profit margin also increased sequentially from the second quarter by 100 basis points as a result of reduced payroll taxes paid in the quarter for both federal and state unemployment benefits and continued reduction in our Workers Compensation costs through our programs for aggressively managing this expense.

Home and Community's general and administrative expenses also declined by $489,000 on a quarter-over-quarter basis to $7.4 million or 13.1% of revenues, a decline of 60 basis points from the third quarter in 2010. General administrative expenses related to same store operations declined by approximately $532,000 reflecting continued focus on improving our operations in managing our administrative costs.

Home and Community's operating income before corporate allocations was $6.8 million or 12.1% of revenues for the third quarter of 2011 compared to $5.9 million or 10.3% of revenues for the same period in 2010.

Turning to our Home Health segment, third quarter 2011 revenues increased by 5.6% to $13.2 million with CarePro contributing $980,000 in revenue for the third quarter compared to $483,000 for 2010. This increase in revenues is attributable to a 9% increase in Medicare admissions combined with an overall 14.3% increase in total census for the division, offset by an 8.3% decline in the average revenue per Medicare admission.

On an annual basis, our Medicare rate decline is 3.6%, consistent with the overall rate cuts enacted by Medicare at the beginning of the year. We estimate the impact of the Medicare rate reduction to be approximately $400,000 in the third quarter of 2011 when measured on a same store basis.

Home Health third quarter gross profit was $6.2 million with gross profit margin of 47%, an increase of 200 basis points over prior period results, an increase of 40 basis points sequentially. This increase in gross profit margin is primarily due to an improved payer mix with an increase in the percentage of Medicare revenue and improvements in our coding for Medicare billings.

Home Health's general land administrative expenses increased $1.5 million to $5.9 million in the third quarter or 44.7% of revenues compared to 35.2% in the prior year quarter, with $252,000 of the increase associated with the CarePro acquisition.

The remainder of the increase is due primarily to the use of consultants to provide inner management for staff training and for other initiatives to improve our Home Health operations. We are focused on reducing these expenses as we transition to permanent employees and are continuously reviewing the level of staffing in our agency.

Home Health operating income was approximately $180,000 or 1.4% of revenues compared to $1.1 million or 8.5% of revenues before considering the $16 million goodwill and intangible impairment charge. 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 reserve were $69.9 million as of September 30, 2011, which compares to $51.3 million reported as of June 30, 2011. This $18.6 million increase for the third quarter is primarily due to decreased payments received from the State of Illinois as payment since the large payment received in the second quarter, while steady, have not been equal to our billings.

Our accounts receivable, which is essentially flat with our December 31, 2010 balances. The corresponding DSO at September 30 was 90 days, an increase of 25 days from the 65 days at June 30, 2011.

At September 30, we had total debt of $34.7 million compared to $40 million as of June 30, 2011. At September 30, 2011, our availability under our revolving credit facility was $18 million.

Cash used in operations for the quarter was $17.3 million on the reported net loss of $9 million, and reflect the increased need to fund working capital. Cash provided from operations for the year was $11.8 million with the majority used to reduce outstanding debt obligations.

Adjusted EBITDA was $4.2 million for the third quarter 2011 compared to $3.9 million for the prior period.

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

Operator, thank you very much, and we are available for any questions.

(Operator Instructions). Your first question comes from the line of Matthew Gilmore with Robert Baird. Please proceed.

Good evening, everyone. Just a question on the trajectory of the census both Home Health and the Home and Community segment. It looked like it jumped, both on a year-over-year basis and sequentially. Can you describe some of the factors that are impacting that? I assume some of it is the sales effort. And then also could you talk about the - what was the progression through the quarter? Was it higher towards the end of the quarter or was it kind of better throughout?

Mark Heaney. Thanks for the question. The driver is really our push on sales, the leadership team focusing on sales, working with our operations and sales management, working together. Better management, better metrics. But it really is good old fashioned just selling. It's leaders driving sales people.

If we learn something new it would be that while we want to develop a sales culture here, we can also be better at our service. It's saying yes when the phone rings. And so there's been a lot of attention on what we call 'pitching,' which our sales people out there getting folks to throw us a referral. And then answering the phone promptly and catching it.

We are watching production on a daily basis. So it's really - I'd like to say it was fancy, but it's really kind of basis. Do you want to address this?

I was looking at that. And Matt asked if it was kind of at the end or not. It was steady over the course of the quarter. A steady increase in growth, a steady increase in census. All our graphs would indicate that.

Okay. So I guess you ended at a higher level than at the beginning.

Yes.

And then in terms of how that would impact the financials, would you, I guess, then expect to see a higher benefit to revenue through the fourth quarter, or do you think it's sort of a de minimis difference between the third and the fourth? Just a trajectory of the census?

As you know, Matt, the Home Health revenue is essentially a 60-day sale with 35% might carry on for an additional period. So that you have to continually go to the well and continue to add. And we are focused on that effort. For that business the tale is there but not real long. On our Home and Community side census growth continues on for, on average, over two years. And for that any sort of lift in census is substantial increase in long term revenue for the company.

Okay. And then I know you guys discussed the increase in the SG&A on the Home Health segment. And it sounds like you expect that to continue maybe for a quarter or two and then to trail off. Is that kind of a fair interpretation? Or do you think it will be a more rapid decline?

The answer is we are very pleased with the results of the investments that we made and what they're producing. So we look at it this way. We are excited that our sales are up, our census is increasing, especially on the Home Health side. That's what we intended to do. We're pleased that we're holding on our direct cost of sales. That's good too. It's hard to fix, so that's good too.

We have to bring our operating costs down. We are going to work to get those down in the fourth quarter and going forward. The business has to be competitively profitable. As to the timing of it, we don't give guidance in that way. But we know what we have to do. We have a specific plan. Our Board is focused on this and we will respond.

Okay. Great. Thank you.

Thanks for your questions.

(Operator instructions). Your next question comes from the line of Jim Fronda with Sidoti and Company. Please proceed.

Hi, gentlemen. Thanks for your time tonight. Do you have any idea on when the delays in payments from the State of Illinois will get back to more normal levels?

No. We don't. That's a question as to what are the economics in the State of Illinois. And we're laughing because how can you tell. But we're very focused on this. We're very focused on working with the State and making certain that they understand the implications on Home and Community, home services providers.

The legislature is working on more business-friendly tacks, plans. We know that it's tough in Illinois right now. And we're continuing to work on it. We're very optimistic that they understand our situation and they're very responsive to us. And we're grateful for that. But when is Illinois going to turn around? Boy, that's a tough one.

Okay. And second question, what are your plans for paying down debt going forward?

Tim, our capital structure is such that we utilize a revolver and in essence keep cash balances at minimal levels. So there are scheduled debt payments for our notes and our secondary notes. Those we will pay according to those schedules. But whenever we have excess cash, we pay down the revolver and, literally, that is a daily activity. So any excess cash we generate go there.

Okay. And final question. Do you have any potential targets for acquisition?

Tim, we are always looking for opportunities to grow and expand. We maintain an active list of properties that we know are for sale. I will say that from a management priority standpoint, we are focused on improving our existing core operations.

But if an opportunity presents itself that one, is priced right, which is a key factor; but, two, is either accretive in earnings in terms of being additive to an existing market or allows us to develop a platform to grow into new markets, we're going to look at it. But, again, it has to be priced at a price point where we can complete the transaction and it would be accretive to shareholders.

Great. Thank you.

(Operator instructions). At this time there are no further questions appearing in queue.

Operator, thank you. And thank you all for joining us and thank you for your support of the organization. We look forward to talking to you again in 90 days. Thank you.

This concludes the presentation. You may now disconnect.