Addus Homecare Corp (ADUS) 2013 Q1 法說會逐字稿

Good afternoon. My name is Ian, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Addus Q1 2013 Earnings Conference Call.

(Operator instructions)

Thank you. Dennis B. Meulemans, Chief Financial Officer, you may begin your conference, sir.

Thank you, Ian. Good afternoon. This is Dennis Meulemans. And thanks for joining us. 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 develops, 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 our other reports with file 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 the result of new information, future events or otherwise. With that complete, I'd like to now turn the call over to Mark Heaney, our CEO.

Thank you, Dennis. Good afternoon. And thank you all for joining Addus Homecare's investor call to review our 2013 first quarter results. I am joined today by Dennis, whom you heard, our CFO. And Darby Anderson, our Senior Vice President.

For our listeners' information, we asked our senior leadership from around the country to listen in on this call so they can hear first-hand from our investors and so they can hear what we are communicating.

I thought we had a solid quarter. Revenues were $63 million, compared to $58.9 million. Income was $1.23 per share, which includes the gain on the sale of our home health business, with earnings from continuing operations at $0.25 per share.

These results tell me that we have the right goals and objectives, are focused on them, and that we have the right folks on the team executing on the plan.

We are not done. We are not half-way done. And no one is taking the rest of the year off. There are headwinds out there. Change is upon our segment. And we think for the good, overall. The choice is to run ahead of it or get run over by it.

Our balance sheet is as strong as it has been in memory. Darby and Dennis will reference the State of Illinois' payment performance, but it continues to be steady and predictable, as has been the case with our other payers.

Here's what our company is focused on. First, increase census in every office. Personal care is the fastest growing segment of homecare. And homecare is the fastest growing segment of healthcare. And, frankly, there's more personal care being provided in our markets right now than when this call started.

Every one of our locations is expected to generate consistent census growth. There are more and more people in need. While that is true, as a percentage, fewer are going into nursing homes. Our goal is a simple one. We should get more than our fair share.

Second, continue to prepare our company for the inevitable developing shift away from state-funded care to managed care. Managed care will put pressure on providers to generate health outcomes with the same or even lower spending per patient. There are efficiencies managed care will pursue, which, in fact, may improve consumer outcomes.

We are aggressively redesigning our care system to take advantage of technology. We are managing to implement these changes within our existing operating cost structure. And we are meeting with and proposing to every managed care provider we know to be in our markets.

We think that the shift to managed care favors larger providers willing to invest in technology, convert to a utilization management model, accept responsibility for health outcomes and, ultimately, to take or to share in risks.

Third, we are concluding the transition of our home health business to LHC Group. I think that that transition has gone very well. And I want to compliment the teams from both companies for their hard work and unselfish approach to the transition. Next, we look forward to exploring opportunities where our two organizations can work together to serve at-risk persons at home.

And, finally, for 2013 we have made becoming more accountable to each other, to our direct care staff, to our consumers, their families, our referral sources an expectation -- a more important part of our culture.

I mentioned, and it's obvious, that our balance sheet and availability are strong. While not our primary focus, we continue to look for acquisition opportunities which will contribute to scale or add to our footprint where opportunity exists. That said, organic growth and positioning for managed care remains our highest revenue development objective.

Before I turn the call over to Darby, I wanted to comment on and thank one of our board members who will be leaving us on June 30. Wayne Lowell has been on Addus' board since shortly after our going public. Wayne joined Addus as our audit chair.

Wayne is leaving because his other professional obligations preclude him from further serving on our board.

I feel Wayne has made an enormous contribution to Addus in his role as audit chair. He is passionate and committed to the responsibilities inherent to his role in representing the shareholder. And through his advice and sweat, he has done much to improve our company. We will miss his contribution, and thank you greatly for his service.

As was recently announced, we're pleased that our board and committee member, Dirk Allison, has agreed to serve as audit chair. We feel very good about Dirk's assuming leadership of this important committee, and we are lucky that we have him on our team.

Now, to talk just a little bit about what has generated our first quarter results, let me turn the call over to Darby Anderson.

Thank you, Mark. I, too, review the results in this quarter as solid. Mark has set forth our objectives as organic census growth, managed care, our care system and leadership development.

In the first quarter, our census trend was up in more locations than the previous quarter. To be clear, our objective is to achieve growth in all locations, and to not allow sites to drive with flat to down census. As part of our plan to achieve this, we are implementing a Customer Relationship Management software, or CRM, system to better monitor and evaluate the effectiveness of our sales efforts.

We're accelerating sales training programs to our agencies, implemented new growth performance metrics, and revised bonus incentive plans at all levels to reward that growth.

In positioning ourselves to maximize our opportunities in the shift to managed care, our focus is in our existing states. In October of this year, California begins enrollment into the approved Dual Eligible and Medicaid Managed Care Initiatives in eight of the largest counties in that state.

We're communicating with virtually all of these plans in all of these counties. And have opened an office in San Diego County in advance of implementation of the initiatives there.

New Mexico begins transition of consumers from an existing home and community-based service managed care program into a full risk, coordinated Medicaid managed care project called Centennial Care in the Fall of this year, as well. Again, we are meeting with all of the selected plans in that state.

Illinois enrollment of Chicago and central Illinois consumers into the Dual Eligible Project begins in January 2014.

We have completed, or are in the process of completing standard provider contracts with all of the selected plans as they complete their readiness reviews with the state. We have ongoing meetings with these organizations regarding the transition.

Personal care in New Jersey is already under managed care. We want to grow our census in this state, and are acting on our plan to do so.

And, finally, we opened a location in Detroit, Michigan, on April 1, which represents Addus' twentieth state of business. And Michigan has a managed care initiative scheduled to begin in 2014.

Turning to our new care system, we are adding to our centralized contact center an effective team to support 13 additional sites rolling into that system in the second quarter of this year. We've accelerated the roll-out of our telephony -- or EVV -- system, to meet a state mandate in Illinois that requires all providers to utilize an EVV system by July 1.

We also continue to receive very positive feedback from our employees and customers in our beta site for this care system.

Last week, we held a productive and engaged regional leadership meeting. And from that experience, I am confident our team understands, supports and is committed to achieving the objectives of the Company, the primary mission being census growth. While, again, implementing the care system and positioning for the shift to managed care.

Regarding Illinois, the state continues to purchase more and more homecare. As they do so, they proportionately reduce there nursing home spending on seniors.

I mentioned in our last call that the Department on Aging had exhausted this year's budget. A supplemental appropriations bill has passed both the House and the Senate on a combined vote count of 159 to two, demonstrating continued support for homecare. This bill and additional supplemental funding will be sent to the governor for his consideration.

In closing, I remain confident we have the right objectives in the right priority, as well as the right team to execute.

I'd like now to turn the call over to Dennis for more perspective on the financial results.

Thank you, Darby, and good afternoon. Just a reminder, consistent with our year-end reporting, we have changed our reporting for all years to include all revenues and expenses for home and community business as continuing operations, and the revenues and expenses related to the sold home health business as discontinued operations.

Mark and Darby both described our performance as solid. Let me summarize. Census was up. Revenues were up. Income was up. Cash was up. AR was down. Our debt was down. And, most importantly, the internal enthusiasm for the Company and morale is up.

Highlights for our first quarter were net revenues from continuing operations for the quarter increased 7% to $63 million, compared to $58.9 million for the same period in '12.

Net income from continuing operations was $2.7 million, or $0.25 per diluted share, an increase of 56% when compared to the reported net income from continuing operations of $1.7 million, or 16% per diluted share for '12.

Net income, including discontinued operations and the gain on the sale of the home health business, was $13.3 million, or $1.23 per diluted share, compared to the '12 results of $630,000, or $0.06 per diluted share.

As we have stated in our press release, our quarterly comparables are influenced by two one-time events.

Our first quarter of 2013 results were positively affected by one-time $520,000 credit for Workers Opportunity Tax Credits earned in '12, but realized in the first quarter of '13, with the passage of the American Taxpayer Relief Act in early 2013. This treatment of these credits substantially reduced our income tax expense for the quarter.

Our effective tax rates for future quarters will not include this benefit, and, accordingly, our effective tax rate will be approximately 39%, the calculated rate, as if this benefit had not been realized in the quarter.

Our first quarter '12 results from continuing operations included the gain on the sale of our Portland Home Health License for $495,000, or $0.03 per diluted share.

For comparative purposes, our pro forma earnings from continuing operations were $0.20 per diluted share in 2013, after normalizing for the WOTC credits, compared to 13% earned in '12, after normalizing for the sale of the Portland Home Health License. This represents a 54% improvement in adjusted earnings on a year-over-year basis.

Cash flows from operations during the quarter were $13 million, which includes the gain on the sale of the home health business and the losses incurred in the discontinued operations. Interest expense was $208,000, or 0.03% of revenues in the first quarter of 2013, a decline of $196,000 when compared to '12.

We eliminated all outstanding debt balances with the proceeds of the sale of the home health business, but retained the flexibility afforded the Company through its bank line of credit, which remains unchanged as of 3/31/13.

Our home and community business reported an increase in net service revenues of $4.1 million, or 7% to $63 million when measured on a year-over-year basis. This growth was fueled by a 5.3% increase in average census, combined with a 7% increase in billable hours.

We would point out that the average billable hours per census per month increased in the first quarter, a trend we anticipate will decline to 2012 levels as the Illinois Department of Aging implements technical changes to their payment processes, which we estimate will reduce our revenues and operating income by approximately $600,000 per quarter. The net effect of this change will be to compress our gross margin percentage by approximately 75 basis points.

Our gross profit margin for the quarter declined over the prior year by 40 basis points to 25.1% in the first quarter, driven largely by unfavorable auto claim expense in the quarter, when compared to experience in this area in 2012. Our general administrative expenses were down slightly on a year-over-year basis to $11.5 million, substantially attributable to our continued focus on cost management.

Now, let's turn to our balance sheet and cash flow statements. Our accounts receivables, net or reserves, were $60.6 million as of March 31, 2013, representing a $10.7 million reduction from the balance reported on December 31, 2012.

Our payments from the state of Illinois were strong in the quarter. And we made substantial progress on collecting our accounts receivable for our home health business, which we retained with the sale of that business unit.

At March 31, we had no long term debt, compared to the $16.5 million as of December 31, as we used the proceeds from our home health sale to reduce debt. We retain flexibility under our bank line of credit, which remains unchanged from the end of the year. We had $17.8 million of available cash on our balance sheet at the end of the quarter.

Adjusted EBITDA has been refined to exclude discontinued operations, in addition to the other adjustments. Adjusted EBITDA was $4.4 million in the first quarter of 2013, an increase of 9.4% from $4 million in 2012.

This summarizes my comments. I would have to say our quarter was solid. I'd like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis. I said on our last call that we are excited about the opportunity before us, the clarity and the focus that has come to our company since the sale of the home health business is palpable. And this should be increasingly evident in our performance.

We should serve more people. We should scale the business. We should configure our system of care to meet the new demands of the emerging market. We think that coordinated managed care is the right public policy for serving our population. We accept that we providers have to and can do more, better with the same.

We think the providers who embrace the challenge of the opportunity will provide better care. Will be better stewards of the limited human and financial healthcare resources that need to be spread more efficiently to a growing at-risk population, that these providers will generate better health outcomes. And, in return, these organizations will grow consistently and profitably.

We're very proud of our team. And they are each excited about the opportunity before us. And, like all of us, they very much appreciate the support of our investors and our partners.

With that, let us open the call up for questions and comments from our listeners.

Thank you. (Operator instructions). That first question has come through from the line of Whit Mayo at Robert Baird. Please go ahead.

Okay. Thanks. Sounds like a brand new company now.

I'm not even going to say it --

Maybe just start with Detroit and San Diego. Aside from the large number of duals in those two markets, you've got a number of providers that are involved in a lot of the Medicare ACOs as well. Just maybe talk strategically about those two markets.

Why those two? Was this just a function of the pace of the conversion of duals in those states? Or was there anything else, perhaps, driving it?

Yes. This is Darby. With regard to San Diego first, we operate in southern California. Have for a long time -- Riverside, San Bernardino Counties. We do have some experience in San Diego.

Opportunity came along to bid on a more traditional fee-for-service contract. And we took that opportunity and were awarded. So, opened the office there. Lots of health plans. San Diego is one of the more unique in California with five, I think, designated health plans there.

So, felt like the time was right to take advantage of that contract, open the location, start services so we can speak to the health plans more directly about what we can provide there.

With regard to Michigan, it is a state that we've been looking at for a long time. It's a good solid homecare state. Detroit, I think, is on the rise in terms of its rebirth as a major metropolitan city in the United States.

Again, sort of combined with the move to managed care, it was a very ease of entry that prompted us to bite the bullet and start that operation now in advance of managed care.

Was that an acquisition in Detroit or --

No.

Okay. And on the fee-for-service contract that you won in San Diego, how different is that than what you're doing in Riverside County?

It's very similar in terms of the nature of the services provided. It's just a slightly different funding stream. It's not the Medicaid Personal Care IH Assess program. But Older Americans Act funding and some, I believe, San Diego county funding.

Okay. And maybe from Mark, just a general update on the status of the various conversations you're having day-to-day with the health plans. And at what point do you think you can come back to the market and potentially communicate some milestones or contract wins as it relates to the duals?

Sure. Of course, the duals projects come online -- as they come online, Darby mentioned in his comments, that California begins to phase in its duals project in the Fall -- September or October.

And we would hope that as this very large population shifts into managed care, and to the extent that there are consumers who need agency-directed care rather than self-directed care, that we will be a preferred provider. So, we would hope to see things in the third and fourth quarter.

Illinois comes along in the beginning of the new year. All the readiness is underway. With one of the things that we expect to come out of this is we just believe that the demand for service will remain high and increase because we are all getting older. But the demand put upon the providers by managed care will think the herd. And it'll be harder for the smaller providers -- God love them -- to sustain and meet the challenge.

Darby mentioned New Jersey. New Jersey has managed care and we haven't gotten our fair share. And we expect to see -- we put some people in place there. We should be increasing there also in these initiatives that Darby has initiated. We see those as beginning to show green shoot -- some third quarter, fourth quarter start.

Okay. And maybe one more and I'll hop in the queue for anyone else to ask questions. I was curious about the telephony mandate in Illinois with the Department of Aging. I think you said everyone had to be in compliance by July -- if I heard that correctly. Just curious what the cost to achieve that will be for you and whether or not you think all providers for Illinois and the Department of Aging will be able to comply with that?

Whit, this is Darby again. In terms of our costs, there's the pluses and minuses out of the EVV technology. We do see some cost reductions and efficiencies. Those are kind of baked into our care system. And it's kind of -- sort of pay as you go technology. There's no CapEx expenditures or anything like that.

It's a per-visit charge that we're incurring. And then some of the efficiencies offset that. So, I couldn't give you any kind of a number on our cost of implementation at this point.

To your second question, it's a question I've pondered a lot. I absolutely believe that there are providers that either won't be able to comply or, frankly, will choose not to. Without an existing IT infrastructure, you don't gain those efficiencies that I described from the EVV technology. So, I'd be concerned about those providers continuing.

We do expect to see consolidation and providers exiting the program. To what extent is very difficult to predict at this point.

This is Mark. I agree with Darby completely. In sum, I would tell you that it's easier for us because we're so far down the line already. We've already done so much investment in EVV, frankly, beyond what the state of Illinois is requiring by far.

And second, there are providers who, with this notice, have informed the department that they're done already. And it's just starting.

Okay. Great guys. Thanks.

Thank you, Whit.

Thank you.

And we have another question for you. This one from the line of [Alexander Ranker]. Please go ahead, Alexander.

Hi, guys. Congrats. Great quarter.

Thank you.

I just got a quick question regarding the trends on state (inaudible) spending relative to homecare. Is this something that Illinois on a state level is kind of ahead or behind the curve on? What are you seeing in other states?

Alexander, I'm sorry. We didn't hear you real well. Could you just try that one more time a little louder?

Sure. Hang on. Let me switch to my handset here.

That's even better.

Okay. Great. So, regarding shifting nursing home spending to homecare, you mentioned that this is something that seems to be well underway in Illinois. Where are they relative to other states with this trend?

You know, Alexander, there's the Department on Aging actually commissioned a study a number of years back that I can send to you. And we can make available on our website. But it does demonstrate the Community Care Program and the number of seniors that reside in nursing homes and the lowering of that spending.

I was careful in my comments to talk about the department -- the state is shifting, proportionately spending less for seniors in nursing homes.

If we went out and looked at the actual nursing home expenditures, you wouldn't necessarily find that line going down because other populations are filling those beds. But the study I was talking about is specific to seniors. And I'd be happy to share that with you.

It is a tough question. I will tell you that just because we do a fair amount of public policy work, I think that the mega trend -- the states that are investing and have been investing in home and community based services, are seeing a flattening of nursing home placement against an increasing elderly population.

Yes.

That's clearly the trend.

Okay. Excellent. That's helpful. Thank you.

Thanks for the question.

Thank you for your question. We have a further question from Whit Mayo, Robert Baird. Please go ahead, Whit.

Hey, thanks. Dennis, can you talk a little bit about the SARBOX compliance costs? At what point do you begin to incur those costs? And can you help, maybe, frame up the size for us?

With the technical process is that we measure the value of the non-controlled shares as of June 30. And if the market value of those shares exceeds $75 million, we are obligated to test and remediate all internal controls. And the auditors are required to audit those results. You can look at our proxy and do the math. But I'll help you on it.

The price is approximately $13.00 a share. So, if we're at that price on June 30, we would have to have the results of our internal controls audited for the year ending 12/31/13. We are in the process of exploring the additional costs. And to estimate what the impact would be.

I've heard from others that have gone through this process that it could be $0.5 million to $700,000 in additional costs.

Okay. But to be clear, that's not a cost that you would likely incur until after you close the books on 2013? Correct?

No. It would be a cost we would incur in 2013.

Okay. So, after June 30, that's when you would have to begin to bulk up for SARBOX?

That's correct.

Got it. Okay. And any other costs to be mindful of as we look at our model for the next couple quarters, just as you invested in some of your care systems? Just anything to maybe highlight to help us out, get the sequence of quarters, maybe, in line?

Whit, I know I've looked at your model and I think the trend you have for the remainder of the year is reasonable. But we don't -- as Mark indicated, we're trying to manage within our cost structure all of the additional costs for moving our technology forward.

Okay. So, outside of the $500,000 -- that's an annual number. So, outside of the incremental SARBOX compliance costs, there's nothing that major to think about?

Well, I would point out, as we did in the earnings release, this change in reimbursement from the state of Illinois.

Yes. That's fair. That's fair.

That's a number that you need to be cognizant of.

Got it. Okay. And maybe one last one here. Mark, you mentioned acquisitions coming back to the forefront of the strategy. Or, I guess you're beginning to see some opportunities out there. Just curious what you're looking at, what markets? You know, kind of how you think about evaluating some of these opportunities. Thanks.

Well, I want to emphasize that our job one is organic census growth. Two is staying dead-eye focused on revamping our care system to configure for managed care because that is flat out where the opportunity is for the organization. We have availability. And there are opportunities.

The opportunities that we would want to look at would have to make sense in terms of footprint and opportunity post-acquisition. Would reduce risk relative to change. And second would be that which would give us diversification and scale. You know, there are 12,000 homecare companies out there. And there's some really good ones. And we will look at the opportunities as they are presented to us.

Okay. All right. Thanks a lot, guys.

Thank you, Whit.

Thank you.

Thank you. There's no further questions at this time.

Ian, thank you very much. I'd like to thank everybody for participating on the call. Good questions, and we look forward to speaking with you in 90 days. Thank you all so much.

Thank you, ladies and gentlemen. That concludes your conference call. You may now disconnect. Thank you for joining us. Enjoy the rest of your day today.