Addus Homecare Corp (ADUS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2012 Addus HomeCare Corp. earnings conference call. My name is Tahisha and I'll be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Greg Swanson, Corporate Controller. Please proceed.

Thanks, Tahisha. 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'll 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 on our most recent Form 10-K or Form 10-Q 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 statements, whether as a result of new information, future events, or otherwise.

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

Thank you, Greg. And welcome to Addus HomeCare's third-quarter conference call.

I'd like to begin my comments this afternoon by first asking that we all keep in our thoughts and prayers those suffering the consequences of Hurricane Sandy, which devastated our northeastern coastline earlier this week. Many of those that we serve are elderly. They're alone, they're vulnerable, and too often they're plainly helpless. But, in fact, they are at home.

I am proud to report that our teams in the storm-hit areas began preparing for this event last week. We knew who needed help every day, who was the most vulnerable, who could help and how, and then together, we could make sure we could keep our consumers home and healthy. We know that some of our consumers and employees suffered significant losses from the storm. But, as best we can tell at this time, our consumers are safe at home and our employees are accounted for and continuing to help. And for that, I'm both proud and grateful.

Having commented on that which is most important, let me turn to our overall performance in the quarter. In our reports over the past few quarters, I've characterized our performance as encouraging, steady, improving. I would use those terms again to describe our performance in the third quarter. Total revenues were $71 million, a 2.3% increase over the prior-year Q. Net income was $1.8 million or $0.17 per diluted share.

Summarized, you see continued steady up in our Home and Community segment, and I'm pleased to report, improving sequential performance in our Home Health division, resulting from the hard work of the division leadership and the staff as they execute on their recovery plan. Dennis and Daniel will provide additional specifics on our financial performance over the Q in their comments.

On our past few calls, I commented on our continuing dialogue with managed care organizations in our current and new markets. These conversations continue. They are numerous, they are substantive, and they are positive. Over half of the states are in some stage of evaluation or converting all or sizable portions of their elderly populations to managed care under dual eligible pilots or in managed long-term social service programs.

We see managed care replacing our states as our payers over the long-term. We are convinced that managed care will favor larger, like-thinking, more technology-oriented providers. We believe that managed care will provide home and community-based care to more persons than do the states as a part of their approach to managing risk and driving healthy outcomes.

We know that managed care will require its home and community providers to generate proven health outcomes and to take risk as a part of its compensation. We are excited about the opportunities provided to us as states shift to an outcomes-based-driven managed care delivery model.

Homecare -- both home and community, and Home Health, are important parts of the solutions as this country wrestles with the problem of how to most cost-effectively serve the un- or under-served. At the same time, both home and community and Home HealthCare face tremendous challenges -- lower utilization, increasing oversights and regulation, tightening reimbursement, increasing expectations, and measurement of outcomes.

While a provider of both Home Health and home and community services, we are especially large, experienced, and effective provider of home and community-based care. As states move to managed care to serve the millions of elderly and non-elderly disabled, we see ourselves as uniquely situated to participate in this important growth opportunity.

Taking advantage of this opportunity will require us to increase human, financial, and creative resources, and focus on our home and community offering. That being the case, we have decided to initiate a strategic evaluation of our Home Health division, weighing the opportunity for sustained growth and profitability, the resources required, and the prospects for success in our plan. This strategic evaluation could conclude in our continued investment in the Home Health division, or it could conclude in a plan to divest of some or all of our Home Health operations.

Let me be clear. Our Home Health offering is a good business. We deliver very good care. Our team has done a very good job developing and executing on a plan to return this division to reasonable levels of profitability. But, as noted, the pressures before this sector suggests to us that scale will be an essential ingredient for a sustained performance.

Additionally, and importantly, whatever we decide with regard to our Home Health business, we remain committed to our concept of integrating care on the pre-acute side. We integrate care now in all of our locations and we offer Home Health in only half of them. Integrated care is a pre-acute practice approach before it is a business model. We can practice as an integrative provider as effectively in strategic partnerships with quality providers wherever we deliver care.

To assist us in our evaluation, we've engaged The Braff Group. While commencing immediately, and while no specific timeline has been set for completing this evaluation, we do intend to complete the process expeditiously.

As you may have seen in our press release, I am sad to report that Daniel Schwartz, our COO for the past almost-two years, will be leaving the Company on November 16. You may know that Daniel came to us with 20-plus years of experience in senior housing. Daniel was offered and has accepted an outstanding opportunity with a growing senior housing organization in the upper Midwest. It's a tremendous opportunity for Daniel and his family.

Daniel was asked to come to Addus HealthCare to help us change our Company. Along with his intellect, his work ethic, and passion for serving the elderly, Daniel brought us an approach to our work -- emphasizing plan, measurement, and accountability. These qualities will remain long after Daniel leaves.

Upon his departure, I'll assume Daniel's responsibilities. The decision regarding replacing the position has not been made. Daniel will have some comment or two on his departure at the conclusion of his comments. As a matter of fact, why don't I just turn the call over to Daniel, where he'll provide our third-quarter operations report. Daniel?

Thanks, Mark. The Home and Community division performed solidly in the quarter and delivered another strong quarter. Division operating income increased 10.7% over the prior-year quarter. Division G&A decreased 4.1% over the prior-year quarter, continuing the positive trend.

Census increased 4.8% from Q3 '11 and 1.8% of sequentially from Q2 of '12. Additionally, we're seeing growth in the billable hours per plant. Gross margins decreased 1%, and this is pointing to an increase in Workers' Compensation costs in the quarter. And Dennis will provide more detail in his comments.

We continued increasing sales staff productivity, growing census, and controlling administrative costs. We see no meaningful reduction in services or rates on the horizon. And as we reported last quarter, a continuing and growing recognition by the states and managed care organizations of the importance of Home and Community-based services as a core component of their cost reduction solutions. We're proud and appreciative of a focused and disciplined leadership of our agency, regional and divisional leadership teams in Home and Community in delivering another strong quarter.

We're excited about centralization. This is a foundational change in our practice model, leveraging technology to remove administrative processes in the branches, including intake, billing, scheduling, and payroll; decreasing G&A expenses; improving effectiveness of these processes, while freeing the branch teams to be wholly focused on care quality, customer service, and business development.

Our new CIO, Chief Information Officer, is leading this effort, leveraging extensive project management skills and managed care experience. We're 80% complete with our beta location and we're excited to continue rolling this out across the division.

Finally, we're developing our regional leaders, especially in the area of the business development and community outreach. This group gets stronger each and every quarter.

We're making solid, steady progress in executing our Home Health recovery plan to restore that division to profitability and competitive margins. And while Dennis will discuss the financial results in more detail, the momentum we reported last quarter continues.

Here are the few highlights. The division was profitable for the quarter, generating $214,000 in operating income, excluding $300,000 in severance costs, up from a $47,000 loss in the second quarter and a $1.16 million loss in the first quarter 2012. Gross margin improved another 50 basis points in the quarter, growing to 46% from 45.5% in the second quarter and 39.5% in the first quarter.

We achieved our administrative labor and other cost reduction targets. We improved our Medicare revenue mix to 68% from 66.4% in the second quarter. Our focus on integrated services is paying off, with the division achieving the greatest number of admissions for our CE than we have seen in the past several quarters.

Our external sales, our revenue per episode, and our total revenue remained flat, and we need to get more traction in these areas. In the quarter, we developed new sales plans, facility and physician account targeting, productivity expectations, and compensation plans to facilitate this growth. They are beginning to be executed now.

The recovery plan also includes -- the ongoing recovery plan also includes the following areas. First, sustaining the improvements we've made in field labor productivity. Second, maintaining the decreased levels of administrative labor, travel, and mileage expense, and identifying and executing on additional opportunities.

Third, increasing conversion effectiveness through our central intake program or referral center. And fourth, assuring episodic clinical accuracy and appropriate reimbursement through use of a benchmark data and improved (technical difficulty) and therapy training for our field clinicians and therapists.

So as a summary, the Home and Community business had another strong quarter, and continues executing on their business plan. Our Home Health division continues executing their recovery plan, achieving profitability and measurable progress, and turning around this underperforming business. We are executing this plan with rigor and urgency, and expect continued, measurable, and steady financial improvement in this division.

Before turning to call over to Dennis, as Mark shared and we reported today, that I have resigned as the Chief Operating Officer. As Mark mentioned, I've spent the bulk of my career in senior housing, and was recruited by and accepted an executive and ownership opportunity with a terrific senior living company.

While this and the strategic review announcements are concurrent, I want to be clear that they are absolutely unrelated. It's been a privilege to serve this Company. The progress being made by this organization is foundational, and I'm confident will continue. I'm excited for the team and the best days are still to come.

With that, I'd like to turn the discussion over to Dennis for additional detail on the financial performance.

Thank you, Daniel, and I want to reiterate Mark's comments. Good luck on your new endeavor.

Highlights of our third quarter were consolidated revenues increased 2.3% to $71 million, compared to $69.4 million for the past same period in 2011. Net income was $2 million or $0.19 per diluted share before considering $320,000 in severance costs related to management changes in our Home Health division. This compares to reported net income of $1.8 million or $0.17 per diluted share in 2011, which excludes the effect of the $16 million goodwill and impairment charge taken in that quarter.

Cash flows from operations during the quarter were $3.6 million, of which $3 million was provided by operations, and $600,000 generated from working capital. Our year-to-date cash flow from operations is a positive $9.3 million.

Home and Community, our largest segment, reported operating income of $7.5 million, an increase of 10.7% over prior-year results. Home Health segment operating income was approximately $210,000 before considering the severance costs of $320,000, related to the management changes made during the quarter. These operating results are essentially flat with Q3 2011.

We are pleased that on a sequential basis, Home Health performance has shown steady improvements over the course of 2012, reflecting the continued positive efforts of our team on our turnaround activities. Interest expense declined to $407,000, or 6/10 of a percent of revenue in the third quarter of 2012, a reduction of $141,000 when compared to 2011, the result of lower borrowings throughout the quarter.

Now turning to our segments. Home and Community, as Daniel reported, had an increase in net service revenues of $3.4 million, or 6.1%, to $59.6 million when measured on a year-over-year basis. This growth was fueled by a 4.8% increase in average census, combined with a 6% increase in billable hours, reflecting our continued efforts to improve the level of services provided to our clients.

Home and Community's gross profit margin declined over prior-year by 100 basis points to 25.3% in the third quarter, driven largely by an unfavorable Workers' Compensation claims experience realized in the quarter, and very favorable comparisons -- comparables into this area in 2011. Home and Community's General and Administrative expenses were down $303,000 on a year-over-year basis to $7.1 million, attributable to a positive adjustment for a bad debt reserves of approximately $600,000, offset by planned expenses related to the implementation of our centralization initiative.

Home and Community's operating income before corporate allocations was $7.5 million, or 12.6% of revenues for the third quarter of 2012, compared to $6.8 million, or 12.1% of revenues for the same period in 2011.

Turning to our Home Health segment, third-quarter 2012, revenues were $11.4 million, a decline of $1.8 million, or 13.6% on a year-over-year basis. Of the $1.8 million decline, approximately 50% relates to revenues generated in agencies closed, sold, or with substantially reduced operations since Q3 of 2011.

On an overall basis, Medicare admissions declined 10.1%, due to the closed operations and lower admissions from our remaining sales team, offset by a 6% increase in Medicare revenues per case, driven by changes in the case mix for these clients. Other admissions declined by 22.1% as we continue to focus on improving our payer mix.

Home Health third-quarter gross profit was $5.3 million, with gross profit margin of 46%, a decline of 100 basis points over the prior-year, results driven largely by our Workers' Compensation expense -- experience. Home Health General and Administrative expenses declined $550,000 to $5.3 million in the third quarter to 46.9% of revenues compared to 44.7% in the prior-year quarter. Over half of the decline is attributable to reduced expenses related to the office sale and closures I spoke to earlier, with the remainder of the decline attributable to expense management as a result of our turnaround efforts.

Home Health reported operating income for the quarter was $210,000 before considering the severance costs of $320,000. This compares to an operating income of $180,000 in 2011 before considering the goodwill and impairment charge we recorded in that quarter, totaling $16 million. We are pleased with the continued improvements over our Q1 and Q2 results in this division, and we remain focused on continuing to turn around the operating performance of this business.

Now let's turn to our balance sheet and cash flows. Our accounts receivable net of reserves were $71.4 million as of September 30, representing a $2.2 million increase from the balance reported on June 30, but a $1 million decline from December 31.

Our payments from the State of Illinois remain stable, relative to the increased business with them, with noted improvements in collections from our other payers. At September 30, we had total debt of $22.4 million, compared to $25.5 million as of June 30, as positive operating cash flow was used to reduce our debt levels. Cash provided from operations was $3.6 million for the quarter, with $3.1 million used to reduce our debt, and $259,000 used for investments in fixed assets. Adjusted EBITDA was $4 million in the third quarter of '12, down from $4.2 million in 2011.

This concludes my remarks. I would turn this back to the operator for questions and answers.

(Operator Instructions) And it appears we have no questions at this time.

Operator, thank you very much, and thank you all for attending our call for the third quarter. We look forward to hearing you at the end of the year. Thank you all very much.

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