Addus Homecare Corp (ADUS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Addus HomeCare Corporation earnings conference call. My name is Melanie, and I will be your coordinator today. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Greg Swanson, Corporate Controller. Please proceed.

Great. Thanks, Melanie. Good afternoon and thanks for joining us, everyone. With me on the call today is Mark Heaney, Addus's Chief Executive Officer; Daniel Schwartz, our Chief Operating Officer; and Dennis Meulemans, our Chief Financial Officer.

Before we begin, I will briefly read the Safe Harbor statement. This presentation will contain forward-looking statements within the meaning of the federal securities laws' statements regarding future events and developments; the Company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties, including factors outlined from time to time in our most recent Form 10-K or Form 10-Q. Our earnings announcements and other reports will be filed with the Securities and Exchange Commission. These are available at www.sec.gov. The Company undertakes no obligation to update publicly any forward-looking statement whether as a result of new information, future events or otherwise.

With that complete, I would like to now turn the call over to Mark Heaney, our CEO.

Thank you, Greg. Good afternoon and thank you all for attending the Addus HomeCare Q4 2011 conference call. Along with Greg and I think you mentioned that I'm joined here by Daniel Schwartz, our COO, and Dennis Meulemans, the CFO, both of whom will be providing their comments followed by -- following my opening remarks.

2011 was an important and transformative year for our Company. In our quarter calls over the past year, we have outlined and commented on a set of drivers that when achieved should fundamentally both strengthen and position our Company for long-term success.

Over the past year, we have focused on managing and lowering our direct service and operating costs. The government pays 95% plus of the revenues that we enjoy. Governments are not paying more for services. Overall we have made progress lowering our costs and delivering and managing care.

We have made progress managing our Accounts Receivable and stabilizing our cash flow. While not yet a timely payer, over the year we have made significant progress, getting our largest single payer, the state of Illinois, to a more predictable and consistent level of reimbursement. We are becoming a sales organization. We have a team of regional sales leaders driving a group of enthusiastic, focused, motivated and fun sales professionals.

Home Health census is trending up. Our focus is now on improving mix. We are serving more consumers. We just want to be sure we are getting more than our fair share of the higher-margin patients.

We are a comprehensive provider of home care services. In a large and increasing number of our locations, we offer both Home Health and non-medical personal care services to our consumers, the majority of whom are dual eligible.

In our Integrated Care program, our goal is to monitor the changing needs of those we serve, always looking to identify changes in condition and report changes up into the healthcare system so that we can intervene as early into the disease process as possible. Identifying and interceding early into the disease process improves outcomes and lowers overall costs. We continue to make progress in our Integrated Care program. Our first goal is to be sure that our aides are looking for and reporting changes in condition among this frail population.

In a recent month as an example, our 10,000 aides made 800 reports of changes in condition. Each was triaged and addressed. Admissions from integrated care have been increasing.

Perhaps our most important objective over the past year was to build and assimilate a first rate management team. I don't declare victory on much because I don't think that anything that is really important is ever really done, but I like a lot what we have accomplished in this objective.

Our CFO started in November of 2010. Our COO started in January. Our Division Vice President for Home Health started in August. Our clinical leaders started in December. During the year we added or replaced eight regional sales and operations leaders. I like our management team very much, and I'm confident that they position us for the future.

Our largest payers are states. Our large elderly caseload is overwhelmingly dual eligible. As states struggle with increasing Medicaid populations and costs and an environment of flat to strengthening tax revenues, states are increasingly turning to managed care organizations to serve these consumers, our client base, through long-term managed care products.

In the state of New Mexico, when two years ago the state was our payer, today our contracts are with two managed care companies. California, Illinois, Washington, New Jersey and a host of other states are at some point in converting care of their dual-eligible population to integrated managed care. Managed-care sees the need and value in using low-cost personal care services to keep their members, our consumers, at home and out of more costly institutions as long as possible. We are talking to a number of managed care companies about how we can do even more to help keep their members safe and helpfully in the community at the lowest possible cost.

As to our performance in the fourth quarter, I would describe it overall as positive on a consolidated basis, but only because our Home and Community division, which makes up 80% of our revenue, performed very well. Having said that, that division has to focus on and improve its topline growth. Our Home Health results are plainly not acceptable. Home Health direct labor costs and G&A costs have to come down.

Total net revenues for the fourth quarter were $68.6 million, down about $1.5 million year over year and down $600,000 sequentially. Net income of $2.5 million represents a $1 million increase over the 2010 results. Reported EPS was $0.23 a share, an increase from $0.14 reported in 2010.

At this time, I am going to turn the call over to Daniel Schwartz, our COO, for his comments on our operations in the queue. I will have some closing comments after we hear from Dennis Meulemans, our CFO. Daniel?

Thanks, Mark. As Mark mentioned our Home and Community division had another solid quarter. Division operating income increased 42%, and margin increased 4.2 percentage points over prior year quarter. Our agency level administrative expense reduction plan is on track. Same-store census increased 1.2% from the prior quarter and 2.8% from the prior year quarter. State legislative sessions are now in progress, and things are looking good so far. Illinois has increased its home care spending, and Washington State and Oregon will have no rate reductions. It is a positive sign that given the financial pressures in the states that they continue to fund these home-based services.

Same-store revenue increased 0.5 percentage points for the quarter. We need to get that growing more, and we are on it. We are executing on opportunities to increase profitability, including strengthening our regional leadership team, increasing census in both our core contracts and new programs, rolling out telephony and centralizing the payroll and scheduling efforts to improve effectiveness and reduce costs in this division.

Home Health continues to be a challenge. Division revenue decreased $1.1 million in prior year quarter, driven by the Medicare rate cut and an increase in contractual allowances that together total roughly $1 million. While we continue to effectively manage the face-to-face regulatory requirements and are seeing minimal episodes lost, we recognize that we are getting paid less per episode. We need to decrease our field and administrative expenses and improve our business mix.

Our expenses both direct and administrative are too high. Gross margin deteriorated 4.5 percentage points from prior year quarter. We need to improve the productivity and flexing of our field labor to more closely align with revenue. We are doing so. Administrative expenses increased 11% from prior year quarter due to the increased expense of our fully staffed leadership team, interim consulting costs and an increase in bad debt reserves. Consulting expenses decreased in the quarter and were essentially eliminated by the end of December. Our team is working from and executing on an administrative headcount reduction plan.

We continued transitioning to a sales and service culture with our focus on sales execution and service delivery yielding positive results. We had a solid increase in starts of care from the prior quarter, and the pace of growth is accelerating. Starts of care from our account executives increased 4.1% from the prior quarter. Starts of care from our Integrated Care program increased an impressive 11.4% from the prior quarter, due in large part to the actions discussed on the Q3 conference call.

Sales conversion is improving with more than 80% of qualified leads converting to a start of care. Our referral center, the centralized intake team for our four Chicago market branches, was launched in October and is proving out with starts of care increasing 6.5% over the prior quarter.

Monthly starts of care within the quarter increased 20% from October to December. We are pleased with the Chicago referral center. It is a real game-changer for Addus and an important aspect of our sales growth plan. We are moving on a schedule to roll out all Home Health -- to all Home Health offices by Q4.

We are selling more, and we are focused on improving the business mix of these sales. Much more to do, but we are headed in the right direction.

Our operations and sales leadership teams are now fully in place with the Vice President of Clinical and Quality Services, Beverly Kelley, hired in late Q4, along with the remaining regional sales and operations directors. Each of these leaders has hit the ground running. The increased level of focus, urgency and accountability is evident.

We are also seeing improvement in the quantity and the caliber of our clinical and therapy professionals. We are confident in this team and their ability to improve the profitability and performance of the division. Lots more to do to execute this turnaround, but we have the right team in place that can drive consistent growth and profitability as we go forward.

With that, I would like to turn this discussion over to Dennis for additional detail on the financials.

Thank you, Daniel, and good afternoon, everyone. Highlights of our fourth quarter were our consolidated revenues decreased by 2.1% to $68.6 million compared to $70.1 million for the same period in 2010. Quarterly revenues declined $560,000 or 0.8% sequentially. Fourth-quarter net income was $2.5 million or $0.23 per diluted share compared to a reported net income of $1.5 million or $0.14 per diluted share for the same period in 2010.

Our fourth-quarter results include three items of note. As previously reported but recorded in Q4, we received a $2.3 million in prompt payment interest from the state of Illinois, increasing earnings by $0.14 per diluted share. We recorded a gain on the revaluation of contingent consideration related to the acquisition of CarePro of $469,000, increasing earnings by $0.03 per share. And lastly, as a result of the intangible impairment charge taken in Q3, our effective tax rate is 55.6%, substantially above our historic rates, effectively reducing earnings by $1.3 million or $0.12 per share. Accordingly, on a pro forma basis, our earnings per share was $0.19 after excluding these noted items.

Cash flow reflects continued improvement. Cash generated from operations in the fourth quarter was $4.1 million on net income of $2.5 million. These improvements were primarily the result of increases in non-cash expenses recorded in the quarter. Modest increases in working capital needs were the result of overall DSOs increasing by four days over the quarter to 94 days at the end of the year.

Home and Community segment operating income improved by approximately $2.3 million or 420 basis points to $8.1 million, largely due to lower payroll taxes incurred in the quarter, lower workers compensation expense, lower health insurance expense and lower general and administrative expenses. Home Health segment operating income was down approximately $1.5 million on a quarter-over-quarter basis with $1.1 million is related to lower revenues, of which $400,000 is the result of the Medicare rate cut and $600,000 is related to increase contractual allowances, plus increased direct field labor and travel costs and increased segment G&A expenses.

Interest expense declined by approximately $240,000 to $600,000 or 0.9% of revenues in the fourth quarter of 2011 when compared to 2010 as a result of lower borrowing throughout the quarter.

Now turning to our segments. Home and Community reported net service revenues for the quarter declined by approximately $439,000 or 0.8% to $56.2 million when measured on a quarter-over-quarter basis. Revenues were flat when measured sequentially. After excluding the impact of locations closed during the first half of 2010 and programming eliminations in select states, same store sales growth was approximately $280,000 or 0.5%. Growth in this segment is challenging as while we have experienced stable pricing for services provided, we anticipate increased attention by states to managing utilizations as they finalize their fiscal year 2013 budgets.

Home and Community's gross profit margin improved over prior period by 290 basis points to 28.5% in the fourth quarter. Gross profit margin increased as a result of a positive worker's compensation expense year-end adjustment totaling 140 basis points, of which 75% of the adjustment relates to improved performance over the course of the year. Lower payroll taxes paid in the quarter provide an 80 basis point improvement and reduced health insurance for field staff 50 basis points with the remainder attributable to savings in various expense categories.

Home and Community's general and administrative expense decreased by approximately $650,000 on a quarter-over-quarter basis to $7.3 million or 13% of revenues, a decline of 100 basis points from the fourth quarter of 2010. $340,000 of this reduction relates to decreased labor costs with $300,000 related to lower bad debt expense. Home and Community's operating income before corporate allocations was $8.1 million or 14.4% of revenues for the fourth quarter of 2010 compared to $5.8 million or 10.2% of revenues for the same period in 2010. Operating income as a percent of revenues improved sequentially by 230 basis points, primarily the result of improved gross profit margins.

Turning to our Home Health segment, fourth-quarter 2011 revenues decreased by approximately $1.1 million or 7.8% to $12.5 million. Revenues declined sequentially 5.8%. We estimate the impact of the Medicare reduction on the year-over-year basis to be approximately $400,000 or 3% of revenues with the remainder of the reduction related to the increased contractual allowances taken in the quarter.

Home Health fourth-quarter gross profit was $5.6 million with a gross profit margin of 45%, a decline of 450 basis points over prior year results and a decrease of 200 basis points sequentially. This decrease in gross profit margin is primarily due to the effects of the contractual allowance charge discussed above and a negative trend in our field labor costs.

Home Health's general and administrative expenses increased $560,000 to $5.5 million in the fourth quarter to 44.5% of revenues compared to 36.8% in the prior year quarter. General and administrative expenses decline sequentially $372,000. We continue to focus on reducing these general and administrative costs. Home Health operating income was approximately $59,000 or 0.5% of revenues representing a decline of $1.5 million over 2010 results. We remain focused on improving the operational performance of this business.

Now let's turn to our balance sheet and cash flow statement. Our accounts receivable net of reserves were $72.4 million as of December 31, 2011, representing a slight increase from the $69.9 million reported as of September 30. The DSO at December 31 was 94 days, an increase of four days since September 30.

At December 31 we had total debt of $31.5 million compared to $34.7 million as of September 30. At December 31, our availability under our revolving credit facility was $21.8 million.

Cash generated from operations was $4.1 million for the quarter with $3.1 million used to reduce long-term debt and our bank line of credit. Adjusted EBITDA was $4.4 million in the quarter, essentially flat with 2010 results.

This concludes my remarks. I would like to return the discussion back to Mark for closing comments.

Thank you, Dennis. I sum up our performance in this way -- we are making progress on our key drivers. Through increased use of technology and basic conservative cost management, we are positioning ourselves to perform for a payer who wants to pay less.

We have put together a very strong management team. Performance in the Home and Community division is steady up. Home Health is not performing to potential. Daniel and his team know that direct labor and administrative costs have to come down. They have a plan, and they are on it.

And finally, I think our Company is and is increasingly well positioned as states expand their use of Medicaid managed care.

With that, we can open up the lines for any questions.

(Operator Instructions). Whit Mayo, Robert W. Baird.

Can you guys first maybe start with providing a little bit more color on the higher contractual allowance adjustments in the quarter?

Whit, the basis for the increase in the reserves is a function of an increased aging in our Medicare receivables. We have intentionally extended our billing processes to accommodate a higher level of review of the required documentation before submitting our final billings.

Accordingly our days for Medicare are the bulk of our increase in our A/R. Our processes are still substantially paper-oriented, and we are evaluating methods to move this into electronic mediums to improve these processes. But it is a function of our aging in the A/R.

Okay. So this is just a higher reserve on the receivables that have complications from face-to-face? Is that what you are saying?

No, I would not say it is a result of complications from face-to-face. It is a higher reserve on the receivables, that is correct, but it is -- we have a predetermined formula that we abide by as receivables age. We naturally increase our reserve.

Has your collection rate deteriorated for Medicare receivables?

Not substantially. It is just that we are taking longer to get those bills out the door.

Okay. We can probably talk off-line about that one. Do you have an idea right now as to what you think the Medicare rate cut will be for you in 2012?

We have budgeted, I believe, along with the industry about a 2.5% reduction in the rate. We have also included a 1.5% reserve for contractual adjustment. So our budget would assume about a 4% reduction.

Okay. Obviously I can hear a level of disappointment, Mark, in your tone with the Home Health segment. What do you see as the key or I guess the most important strategic initiatives that you are funneling through the organization right now to really try to improve the volume since the cost there? I mean it seems as if there is a lot of emphasis on taking the costs down. So maybe just elaborate a little bit more there would be helpful.

Well, I will do that, but I was careful to characterize how I felt about Home Health. And whatever comments I make here are not to detract from how I and we view the performance of the division, having said that.

We know -- and we have talked about this in prior quarters -- we know that we have to get better, we have to get good at our managing of productivity direct labor costs, one. Two, we have to get good at managing our administrative processes such as cost of administration.

I am confident we are going to do that. I think the people that we have in place -- Daniel, Greg, the team that they have put together -- they will do it. They are focused on it.

On the more positive side, I like what we are doing in sales. I like that our salespeople and our service people are coordinating and working well together. We have to change mix. We are selling more. Our census is up. We have to sell -- we have to knock on the right doors. We will do that. And I like very much, as Daniel referenced, our movement. So I like very much our beta work and call center in Chicago, and as Daniel indicated, we have a schedule to roll that out across the country, and it is important. I mean these are the things we need to do. It is broken, but we will fix it.

All right. Maybe just your comment around mix that you need -- you feel like you need to change mix. We often don't hear that from providers. So can you maybe elaborate a little bit more on that topic?

We have -- it is no secret that over the past year and a half, we have said that we want to become a sales organization, and we have done a lot of work in becoming one. We are actually selling better than we ever have in terms of we are selling very well. I mean we are selling better than we ever have in terms of marketing to physicians, hospitals, etc., getting referrals and admitting them.

What we -- which is great, but what we need to do is make sure that our sales plans are focused on and include an increased percentage of Medicare referrals. But, as you know, we take as -- if accounting approves our taking cases based on the math, then we tell our people they are authorized to take those cases.

What we need to do is on the sales plans we need to make sure that we are knocking on the right doors so that we are increasing our Medicare mix. We are selling more, we need to sell more -- go and sell more of the right things.

Okay. I think I follow you there. Dennis, the CarePro adjustment, what is that, is that just a reversal of an earnout? I don't know if I follow exactly what that was.

The accounting treatment for contingent consideration on an acquisition requires an estimate to be made at the time you closed the acquisition as to what you think is going to be paid out. And we had estimated that payout to be about $1.1 million, and it was subject to their hitting certain targets for profitability.

They did well against our internal plans. Those profits per profitability were longer. The result is that the difference between the booked amount and the amount we will finally pay, which is around $640,000 I believe, is recorded as either a gain or if we had underestimated that amount would be a charge to earnings in the period when it is finally determined.

Okay. So just a trip to book for (multiple speakers) that was? Okay. Got it. And the worker's comp adjustment, what state was that?

Our worker's comp, we are self-insured in all states but the state of Washington. In Washington we are required to pay the state worker's comp tax and participate in their pool in that state. This is the cumulative effort of all of our other offices working to manage this expense. A portion of it has to do with annual actuarial estimates that are developed to support our reserve balance. As we parsed out that adjustment, 75% of the adjustment related to lower expenses incurred throughout the year with 25% related to the fourth quarter.

Okay. Illinois, can you talk a little bit about the DSOs there or the collections? Is it getting better or worse? Just the conversation with the ILDOA, just where you are there and sort of expectations going forward?

They are stable and steady. The DSO for that is down actually slightly on a quarter-over-quarter basis sequentially. But I think it is more a reflection of the fact that we are getting increased revenues from them and not necessarily a reduction in the absolute A/R.

Got it. And going forward do you think -- where do you stand in the queue for payments right now?

Well, I would like to be at the front but --

They are steady, and they are responsive to our requests. I think that they are juggling their payables, and -- but with us, they are steady. They recognize that we are very dependent upon their cash flow to serve their client base.

How much A/R do you have out with them right now that is subject to that interest payment?

Subject to the interest payment is minimal. They have changed the rules. It used to be that we earned interest after 60 days of non-payment. As of July 1, that is now 90 days, and generally speaking they pay within that period. It is a minimal number going out past that.

Okay. Maybe just a couple other ones here. Sorry, I presume I am the only one in the queue. So the $17.4 million of G&A in the fourth quarter, is that a decent run-rate going forward, or should we really expect that to come down with some of the initiatives you have underway?

That is the overall G&A, and, as Daniel alluded to, we would expect some reduction in our Home Health side. And for the rest, we are feeling pretty good about where we are. We are always working on that.

Sure. Okay. So Home and Community you had $7.3 million, that is probably a decent run-rate and then Home Health it was $5.5 million. Is there any way for us -- I mean how should we think about where that number can go or should go?

You know, figure out what it is going to take for us to be profitable.

Probably all of it. The last question I had -- oh, I had one more. The D&A change or the charge that you took in the quarter -- I'm sorry, the intangible charge you took in the quarter, will that impact your D&A going forward?

Yes, there will be a slight reduction for that.

Meaningful or not?

About [200] a quarter.

[200] a quarter. And the last one I had is just for Mark. I'm really curious about the comments you made around the managed-care relationships and being able to help to manage the dual population more. Just how for at risk would you go with those patients? Are you capitated? Is it too early to really discuss anything? I guess maybe conceptually just give us a peak into what you are alluding to?

Well, just to take off a couple of those questions, how far would we go at risk? It is too early to tell. We have a team that will help us formulate that. Frankly, we are not -- we also talked to managed care companies about straight gain share.

So we are willing to take risks. We have to -- we are going to be careful about that. We are not obviously afraid to take gain share. And we think we can affect -- we think that we can help managed care companies that are assuming these dual-eligible populations, and along with their doing so, they are assuming the contracts that the personal care providers have currently with the states, they get transferred over to the managed-care organizations. We think we can help them with utilization. We think we can help them with integrating care, helping -- making sure that they are connecting their aides, the power of having that aide and the value of having that aide in the home with that high risk population. If you connect that aid to the MCO's health system or to the health system for early identification and intervention, it is just zeroed out that you positively affect out-of-home placement both on an acute and on a long-term care facility basis.

Beyond that, this is not unimportant. We have systems in place for telephony and for data transmission that MCOs can tap into. We speak state. They don't speak social service state programs. We speak that, and we have I think a very strong reputation in the industry for doing so.

We also have outstanding relationships, understand and speak with the advocates, which are important in the social model programs, including the union, which is very important. I think they look at us and say, there is a foreign language to be spoken here and they speak it.

Okay. No, that is helpful.

And you know -- look at the numbers, look at -- they are moving over. In California literally hundreds of thousands of their duals will be moved over if they follow their plan in January of 2013. Illinois is looking at -- it is converting in three years. New Jersey is moving. You know, if you cover the managed care organizations, you know what they are facing and the opportunity they are facing.

No, it is clearly a very large opportunity. So I guess we will just look forward to hearing more about that over the coming quarters and years.

We hope so, too.

Jim Fronda, Sidoti.

Gross margin continues to trend up. Do you expect this to continue going up, or will it remain more flat now? Is there a target margin you are shooting for?

There is actually gross margin, if you study our quarters, you will see that it tends to decline in the first quarter and then increases over the course of the year. That is largely a function of payroll tax requirements that require taxes to be paid on the first wage dollars in the form of unemployment tax, in the form of FICA taxes and those items.

We did point out in the earnings release an expectation for increased state and federal unemployment taxes next year, which will be about a $1 million charge to earnings per dominantly in the first part of the year, and that is just a function of the fact that tax rates in nearly all of the states are up. And, as you think about unemployment benefits now available for 99 weeks, people just take longer, and we see it in our expense profile, in large part because we have a lot of lower income employees and the predominant number for the amount that their wages are subject to those taxes.

It is Daniel. The only thing I would add is that it's a key metric for us. There are a handful of levers that our teams manage. They are on it. They watch it with terrific focus and regularity. So we are going to continue to watch and manage gross margin.

Okay. And you were also able to make another big paydown on the debt in the quarter. Will that strategy continue in 2012? Is there a certain debt level you want to be at the end of the year?

We have scheduled payments for a couple of our notes, and they are clearly identified in our footnotes to the financial statement. Our approach to cash management, especially given the great rates you can get on interest, is that any excess cash that we have in the quarter we tend to pay down the working capital note. As it becomes -- as cash becomes more stable, we will begin to look at opportunities for acquisitions.

Okay. And one last question. Do you have any timeframe for rolling out telephony?

We are in the process of rolling out telephony. We have a pilot operating here in our Chicago market. We also have it deployed in the state of Washington and California.

At this point we are fine-tuning some of the backend practices -- the scheduling, the payroll and whatnot -- validating our assumptions. Again, the play here is both improved effectiveness, but it really is reducing expenses. And so we are validating some of those assumptions.

Once we are set with that, we will be able to -- we will have more clarity on the rest of the rollout schedule.

(Operator Instructions). Sir, I am showing no further questions at this time. I would like to turn the call back over the management if you have any closing remarks.

Very well, we don't. But, Melanie, thank you, and thank you all for joining in for the good questions. We are available. If folks have a follow-up, please don't hesitate to give us a call.

Thank you all very much. You guys have a great weekend.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.