Addus Homecare Corp (ADUS) 2012 Q2 法說會逐字稿

Welcome to the second-quarter earnings conference call. My name is Christine and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Mr. Greg Swanson, Corporate Controller. You may begin.

Thanks, Christine. Good afternoon and thanks for joining us, everyone. With me on the call today are Mark Heaney, Addus's Chief Executive Officer; Daniel Schwartz, 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 we file with the Securities and Exchange Commission. These reports are available at www.SEC.gov. The Company undertakes no obligation to update publicly any forward-looking statements 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, everyone, and thank you for attending Addus HomeCare's 2012 Q2 investor call. Greg identified who is with us, so I don't have to do that.

I would characterize our performance this past quarter as having made progress overall. We are improving with a lot of work still left to do.

Total net revenues were $70.3 million, a 3% increase over the prior year quarter. Home & Community net revenues were $58.7 million, a 6.6% increase over the prior year quarter. Home Health revenues were $11.6 million, a 12.2% decrease from the prior year quarter. Net income overall was $1.5 million or $0.14 per diluted share.

Cost management measures are continuing especially in our Home Health division. Home & Community, our largest division, had another solid quarter. 95% of our revenues come from government. Government is not paying more for the services we provide.

While cost management in Home & Community continues to contribute, I am especially positive about what the team is doing to generate census growth through their increased focus on external sales.

While cost management in our Home Health division saw progress over the quarter with much work left to do, revenue generation in Home Health is not where we want it to be. We have made the necessary investments in our Home Health sales program and it's time for that investment to generate consistent, steady growth.

Beyond our focus on cost containment and sales throughout the organization, important highlights coming out of the second quarter would include most of our state's budgets have been concluded in the second quarter, overwhelmingly supportive of continued investment in Home & Community services. Several of our states and others continue to execute on their plans to shift to long-term managed-care especially focused on the dual eligible population. We are continuing to meet with managed care organizations about opportunities in our current or other states.

Technology, data will be crucial to successfully manage patient care from the home under managed care. This past quarter we completed our search for a new Chief Information Officer. Inna Berkovich started with Addus back in June and we would like to welcome her. This past quarter we initiated a search for a Vice President of Home Health sales to replace our interim sales leader, who has been consulting to us.

I would like to conclude my opening comments reminding our investors of the imperatives in which this organization is focused -- continue our conversion into a sales organization; centralize non-patient activities and increase our use of technology to lower operating costs, increase income, and improve consumer outcomes; improve Home Health performance by lowering costs and increasing profitable revenues; and position the Company to take advantage of this country's shift to long-term managed care serving the dual eligible population. These are the important matters in which we are focused and we should be measured.

With that, I would like to turn the call over to Daniel Schwartz for his more specific comments on our operations in the second quarter.

Great. Thank you, Mark. The Home & Community division, our core business, continues to perform solidly and we had another good quarter. Division operating income increased 17.6% and margin increased 1.2 percentage points over the prior year quarter.

Gross margin increased 0.5 percentage points in the prior year quarter but slightly lower payment rates. Since this increased 2.3% from Q1 of 2012 and 4.2% from prior year quarter, billable hours increased 7.7% from prior year quarter. These improvements are the direct result of our strategy to grow this core business by transforming to a sales-oriented culture, increasing our field staff productivity, and reducing administrative costs. We continue the positive trend in this division that we shared last quarter.

The telephony rollout and centralization of administrative processes continues with positive trends in both effectiveness and efficiency. We are not seeing any meaningful reductions or negative proposals from state legislators, rather an increased recognition that Home & Community services are an important component of the states' cost-reduction solution. We are excited about this core business, its improved profitability and continued growth opportunities.

Turning our attention to Home Health, we have made measurable progress to improve this business during the quarter. We have much work yet to do, but I characterize the quarter as a good start.

As we shared last quarter, our action plan is focused on five key areas -- increasing skilled labor productivity; reducing administrative labor, capital, and mileage expenses; increasing sales volume and mix; improving conversion effectiveness through central intake; and assuring episodic clinical accuracy and appropriate reimbursement.

While Dennis will discuss the financial results in more detail, during the quarter, we improved division operating income from a Q1 loss of $1.2 million to a Q2 loss of $47,000 essentially achieving breakeven in the quarter.

We improved gross margin to 45.5% from 35.9% in Q1 of 2012. We executed the first stages of our administrative labor and other cost reductions and we completed transitioning our field staff to a per visit compensation model and achieved the increased productivity standards for our salaried clinicians and therapists.

We are executing on our plan to improve sales effectiveness and business mix. The rollout of the Addus referral center, our central intake center, continues with stronger conversion rates and more timely response as compared to the branches with decentralized intake. This rollout will be completed on schedule in mid-August.

We are seeing measurable improvement in mix and conversion from prior quarter and a positive trend within the quarter. Referral and admission volume continues to be a key focus area for both our external salesforce and integrated services. We did experience a slight decrease in volume in the quarter versus -- in Q2 versus prior quarter. We are executing on specific action plans and tactics to address this issue.

Again, a good start. We have much more to do and we continue to execute on our plan both urgently and effectively.

Before I turn it over to Dennis, I do want to reiterate the Home & Community business had another strong quarter and they continue to effectively execute on their business plan. Our Home Health division has taken the first steps in turning around this underperforming business. The agency, region, and division leadership are driving all aspects of this plan with rigor and urgency. I expect continued measurable and steady financial improvement in the division.

With that, I would like to turn it over to Dennis for additional detail on the financial performance.

Thank you, Daniel, and good afternoon, everyone. Highlights for our second quarter were consolidated revenues increased 3% to $70.3 million compared to $68.3 million for the same period in 2011. Net income was $1.5 million or $0.14 per diluted share compared to $1.3 million or $0.12 per diluted share, a 16.7% increase over the same period in 2011.

Cash flows from operations during the quarter were $7 million, reflecting positive timing differences in our cash collections from the state of Illinois received during the quarter, offsetting shortfalls in Q1. Our year to date cash flow from operations is a positive $5.7 million.

Home & Community, our largest segment, reported operating income of $7.1 million, an improvement of approximately $1.1 million or 17.6% over prior year largely due to increased census, an increase in billable hours, improved field productivity and lower bad debt expenses, offset by an increase in general and administrative expense.

Home Health segment operating loss was $47,000, down approximately $887,000 on a year-over-year basis. The operating loss is a result of declining admissions from both Medicare and other payers and a 1.1% deterioration in gross profit margin percentage. We are pleased that on a sequential basis, Home Health's operating loss declined by $1.1 million; however after considering the previously reported adjustment in Medicare revenue accruals in Q1, our operating loss declined by $353,000.

Interest expense was $426,000 or 0.6% of revenues for the second quarter of 2012, a decline of $242,000 when compared to 2011, a result of lower borrowings throughout the quarter.

Turning to our segments, Home & Community reported an increase in net service revenues of $3.6 million or 6.6% to $58.7 million when measured on a year-over-year basis. Despite challenged state environments and a slight decline in our billable per hour rate, this growth was fueled by a 4.2% increase in average census combined with a 7.7% increase in billable hours as our efforts to improve the level of services provided to our clients continue to be realized.

Home & Community's gross profit margin improved over prior year by 50 basis points to 25.8% in the second quarter reflecting continued focus on managing our field staff productivity and related costs.

Home & Community's general and administrative expenses were up $281,000 on a year-over-year basis to $7.6 million with scheduled declines in depreciation and amortization. Home & Community's operating income before corporate allocations was $7.1 million or 12.1% of revenues for the second quarter of 2012 compared to $6 million or 10.9% of revenues for the same period in 2011.

Our efforts to improve field staff productivity and to leverage our fixed administrative costs are continuing to provide margin expansion within this division.

Turning to our Home Health segment, second-quarter 2012 revenues were $11.6 million, a decline of $1.6 million or 12.2% on a year-over-year basis. Of the $1.6 million decline, $661,000 or 41% relates to revenues generated in agencies closed or sold since Q2 of 2012.

On an overall basis, Medicare admissions declined 11.5% while Medicare case revenues per case increased 1.4% despite lower Medicare reimbursement schedules. Other admissions declined 27.6% as we continued to focus on improving our payer mix.

Home Health's second-quarter gross profit was $5.3 million with a gross profit margin of 45.5%, a decline of 120 basis points over prior year results, 110 basis points. This decrease in gross profit margin is primarily due to lower field staff productivity and increases in other field expenses.

Home Health's general and administrative expenses increased $130,000 to $5.3 million in the second quarter to 45.9% of revenues compared to 39.3% in the prior year quarter.

General and administrative expenses were down $169,000 from first-quarter results. Daniel has commented on our efforts to lower these administrative expenses.

Home Health operating loss for the quarter was $47,000, less than 1% of revenues, representing a decline of $887,000 over 2011 results. Despite the improvements over our Q1 results, we remain focused on continuing to turn around the operating performance of this business.

Now let's turn to our balance sheet and cash flow statements. Accounts receivable net reserves were $69.1 million as of June 30, 2012, representing a $4.7 million decline from the balance reported on March 31 and a $3.2 million decline from December 31, 2011. Our payments from the State of Illinois remained stable.

At June 30, we had total debt of $25.5 million compared to $31.9 million as of March 31 as positive operating cash flow was used to reduce our debt levels. Cash provided from operations was $7 million for the quarter with $6.4 million used to reduce our debt and $466,000 used for investments in fixed assets. Adjusted EBITDA was $3.3 million in the second quarter of 2012, down from $3.7 million in 2011.

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

Thank you very much. With that, operator, we will open it up for questions.

(Operator Instructions). Tim Fronda, Sidoti & Company.

Thanks for taking my questions. I know you are implementing a plan to reduce expenses specifically in the Home Health segment. What are your specific plans for increasing revenues for this segment?

We had said in our calls that becoming a sales organization is our highest priority or among our highest priorities. We have the pieces in place, Tim. We have the leadership. We have the data. We have the AEs. We have the plans. It's time for us to execute.

It's grind it up. There is nothing more fancy about it than that. We have got to knock on more doors. We've got to say yes and we have to respond promptly. There's nothing fancy about it.

Okay, with the difficulties in the Home Health segment, can the gross margin for the Company overall get over 30% for the next couple quarters or is 29% around the top right now given those difficulties?

Tim, we don't give forward-looking statements. I will say that as in the past, our gross margin percentage tends to improve in the third and fourth quarters. The result of the shift in employment and payroll taxes that decline over the course of the year for all companies, those sorts of trends will continue for us in the foreseeable future.

And if opportunities present themselves to expand your presence and increase facilities in certain states that you want to be in specifically with Home Health, would you look to increase your presence at this point or focus on the business as it stands right now first?

That's a good question, Tim. We have a pipeline. We are -- we look at businesses. Our primary focus as an organization is as we have described. It is on sales centralization and cost reduction. If an acquisition comes along that is attractive, accretive, we will do it. At this moment there is nothing imminent but our pipeline is open.

Okay, final question. With the current rollout of the referral center, can you explain how it has improved your business so far?

Tim, it's Daniel. It's a great question. What we have found is it's improving the responsiveness, so we have a group of folks here in Palatine, 100% of their energy is focused on responding to -- receiving and responding to referrals. So they are responding more quickly, more urgently. We are able to process and qualify more quickly and we're able to connect the referral to the branch more quickly. And so both the rate of our responsiveness and the professionalism of our response and the speed of that response has improved.

Great. Thank you for the time, guys. I appreciate it.

Matthew Gilmore, Robert Baird.

Good afternoon, everyone. Mark, I was hoping you could provide an update just in terms of the nature of the discussions with some of the managed care companies around the integrated care opportunity. So just sort of any update there would be helpful.

Sure, let me begin with we are really excited about the country's shift to long-term managed care. We just see it as a tremendous opportunity for Home & Community providers. We have a very detailed plan. We have a plan coordinator who is an experienced managed care insurance, managed care sales coordinator who is coordinating our plan. We have identified every state that has -- is at any point in moving to managed care or considering doing so. Those that are further along, we have a list of the plans that are involved. We have talked -- all is a big word. But we've talked -- I can't think of any that we have not talked with more than once.

I have been doing this business a long time and I wanted to talk to the managed care companies and insurance companies about the value of the personal care program, to their risks in a meeting now and then.

Matt, I -- our team, we are meeting -- we have several meetings a week with plans across the country and we are getting very, very positive reaction from them. It's nice to be loved.

As a follow-up to that, could you just give us a sense for where you are geographically positioned and maybe the states or the counties where their managed care is going to take those lives from the state? I know for instance Illinois is one of those states. I was just curious how many regions year-end where the lives are actually moving or you can look out a year and say okay, managed care will be here.

Okay, Illinois has already put out there -- they have already taken in their bids. They are evaluating proposals from the plans for what would be we estimate about 40% of the population in Illinois. We are actively talking to all of those plans that submitted.

California has awarded. We are actively talking to those plans. We are in those geographies. Other states that are in some play -- New Mexico, New Jersey, Idaho, Delaware, all have active plans. The state of Washington is moving in this direction. We're talking to plans in Washington. Oregon, South Carolina, and the reason I can do this, Matt, is I am looking at the list.

It is -- I want to make another point, Matt. These are states where we have a presence. We are letting the plans know what our capacity is. The response is very positive but I'll make the point also that we don't have to be in the state.

If the state of Arizona was to go managed care, we talked to a plan and the plan liked our approach and wanted us and committed to a program with us, you know that the barriers to entry are limited. We can be in and up and operating in Arizona pretty quickly. And if the plan will partner with us, we would see patient flow.

That's really helpful, thank you. Just one other question. Daniel, I think you had mentioned moving some of the home health clinicians to a pay per visit. I was just curious, did that happened at the beginning of the quarter or end of the quarter? It was just curious about the timing of when that occurred during the second quarter?

Sure, it was primarily towards the latter third of the quarter, so most of that work was done in June.

Okay, thanks very much.

(Operator Instructions). We have no further questions at this time. Do you have any final remarks?

I don't. Christine, thank you very much. Thank you all. Thank you, our investors and our analysts, we really do appreciate your support. We look forward to talking to you next quarter. Thank you.

Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.