Addus Homecare Corp (ADUS) 2013 Q4 法說會逐字稿

Good afternoon. My name is Whitley and I will be your operator for today. At this time, I would like to welcome everyone to the Addus Q3 2013 earnings conference call.

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 call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Dennis Meulemans. Please proceed, sir.

Good afternoon, everyone, and sorry for the slight delay in getting started. My name is Dennis Meulemans, and I will be your conference -- oh, that's you. Thanks operator. Good afternoon. This is Dennis Meulemans, and thanks for joining us again.

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 development, 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 are all 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 turn the call over to Mark Heaney, our CEO.

Thank you Dennis. Good afternoon and thank you all for attending Addus HomeCare's investor call covering our performance in the fourth quarter of 2013. Here with me in our support center is our CFO, Dennis Meulemans, whom you just heard from, and Darby Anderson, our Senior Vice President.

Let me also acknowledge the many management and staff of Addus HomeCare listening in from our 100-plus locations in the 23 states across the country. These are the healthcare professionals that make it possible for our 28,000 deserving consumers to live where they want to live for as long as they want to live there. I know I speak for our board and our long-term shareholders when I express my gratitude for the efforts they have undertaken to produce what I think was another good quarter for the company.

In the fourth quarter, revenues were $69.9 million, representing a 9.6% increase from the prior quarter. Same-site revenues increased 6.9% from the prior year. Net income from operations was $3.1 million, or $0.28 per diluted share.

Our fourth quarter had the look and feel of the previous three quarters completed over the past year, steady, steady improvement, consistent, consistent to plan, and most importantly, focused.

Over the past year, I have made a point of reminding our shareholders of our focus items. We will become a sales organization. We will position ourselves to be a leading provider to managed care. We will reengineer our system of care delivery. We will lower our costs, drive health outcomes, and connect our direct care staff and our at-risk consumers to the healthcare system. Essentially, we will play an important role in the shift to population management. We will be opportunistic in pursuing strategic acquisitions, and we will do these things in an intensified and discernible culture of accountability.

The team accomplished much in the past year, all consistent with these objectives. We started the year executing on our strategic decision to exit home health. Census has been steady up.

We completed two acquisitions in four states and expanded our operations into two new states. We have pursued and signed managed-care contracts, including entering into two announced pilots with Centene and Aetna.

We continued our investment in technology by deploying and supporting our telephony-based change in condition reporting approach to over 75% of our agencies. We built a 24/7 contact center now supporting 33 of our locations. And we ended the year with a healthy balance sheet and cash to deploy. This is great, and we are truly proud of what we have started, but we are not done and there are issues and obstacles and concerns that we have to face and to face down.

We remain in a challenged and challenging environment. Payors, both states and managed care, are not likely to pay more. Regulation is increasing. Our SG&A costs need to come down as we centralize and expand. Related to SG&A, while we continue to modify our care delivery system, the fact is we are not getting the efficiencies we know we can get. We are focused on getting the expected efficiencies. And our public company costs are increasing. Dennis will talk a little bit about that. So a good year and, despite the challenges, a sense that we are headed in the right direction.

And speaking of challenges, most of us on this call work in a single temperature controlled and comfortable location most of our day. At no time in my 34 years in home care do I remember a winter like the one that our 16,000 employees have endured delivering home care to a population living in urban, rural and intensely rural communities across the country and especially throughout the middle, Southern and Eastern markets we serve. So, I say God bless you and thank you for what you do, especially considering the environment in which you had to do it.

And with that let me turn the call over to Darby Anderson, who will talk a little bit more about the just completed quarter.

Thank you Mark. Good afternoon, everybody. I too want acknowledge and thank our employees across the country who help our consumers remain safe and supported at home, where they want to be.

It was a good quarter from the sales and operations perspective as we successfully integrated the acquired locations in South Carolina and New Mexico while continuing to put up solid census growth numbers, moving forward on our new care system model, and further our relationships with managed-care organizations as we move closer to implementation of the duals and managed Medicaid long-term care in key states.

Organic census growth is up on average 464 consumers, or 1.7%, over Q3 of 2013, and up 2014 consumers, or 7.9%, from a year ago. At year's end and including acquisitions, total census growth was 3379 consumers, or 13.2% from a year ago. We are pleased with these overall organic growth rates and the fact that we are seeing improved growth from more locations and states across our footprint. This tells me that our sales efforts, our conversion to a sales organization is taking root. We are not done, and know that this is an ongoing process. Lori Cabbage, our Vice President of Sales, has settled into her new role and has a solid plan on which she is executing through our regional and agency directors.

We continue to have positive meetings with managed-care organizations in our markets targeting both near and midterm projects. Since we last spoke, we issued releases regarding two pilot projects with Aetna and Centene. These projects continue to develop positively, we believe, for all entities involved. We are preparing for expansion of existing managed-care projects in Illinois in Q2 and the initiation of duals projects in Illinois by Q3 based on the most current enrollment timelines provided by the state.

California pilot counties begin in Q2 and continue enrollment according to that state's guideline timelines into 2015. New Mexico's Centennial Care Program, a Medicaid managed long-term service and supports program, became operational January 1 and we continue to further enhance relationships with those health plans.

We continue to reengineer our care delivery and see increasing evidence of the effectiveness of that model. We are more proactive and responsive to the needs of clients through our contact center and more aware of client condition changes through the increased home visits of our supervisory staff. There remains work to be done on the efficiency of that model, but we remain pleased with progress to date and are committed to completing the job.

Our care system is deployed in locations targeted to those states with managed-care initiatives and the majority of our direct care team is utilizing some form of electronic visit verification. We also continue to develop and deploy enhancements to our mobile device applications for our caregivers.

On the legislative front, we are monitoring the status of proposals to increase the minimum wage, both federally and in our states. We are fortunate today not to have as much minimum wage sensitivity as we have had historically. In large part, this is due to the increased value placed on home and community-based services by governors and state legislatures. We will ensure appropriate advocacy efforts in states where rate increases may be needed to fund any minimum wage increase mandates.

We are also evaluating the recent changes to the employer health insurance mandate under the Affordable Care Act. The recent regulatory changes impacting employers improves our position in terms of 2014 and 2015 compliance, but we continue as all employers do, to examine avenues to mitigate costs associated with this mandate.

I'm very excited about the prospects for 2014 as we take important steps into managed-care model in key states. However, and as Mark mentioned, 2014 started with a run of unprecedented inclement weather. At this point in the quarter, there are not signs that the weather significantly impacted the acquisition of new census, but there is no doubt that units of service and corresponding revenue will be impacted in Q1. Despite this unforeseen start to the new year, our team is poised to execute on the opportunities before us in 2014.

Again, I want to thank the entire team for their collective and collaborative efforts, especially those of you who went above and beyond normal expectation in the care of clients. We're very proud of all of you and thank you for choosing to work at Addus HomeCare.

I will now turn the call over to Dennis for more detail on the numbers.

Thank you, Darby, and good afternoon. We had a good quarter, a very good year. Census is up. Revenues are up, two acquisitions closed. Income is steady on an adjusted basis. The balance sheet remains solid.

Highlights were net service revenues from continuing operations for the quarter increased by 9.6% to $69.9 million compared to the same period in 2012, and up 3.9% from Q3 reported revenues of $67.3 million. This includes approximately $1.7 million in revenues added from our CHHC acquisition closed on December 1.

For the year, our revenues have increased 8.9% to $265.9 million. Our revenue growth for the quarter has been driven by a 7.9% increase in census, a slight increase in average billing rates offset by a modest decline in average billable hours per consumer.

Net income from continuing operations was $3.1 million, or $0.28 per diluted share. However, the comparisons for this quarter are a bit challenging. In this quarter, we had substantial one-time transition costs incurred to execute on our M&A strategy, increased costs for SOX 404 compliance efforts which we did not have last year, the lost margin as a result of technical changes to the Illinois payment process, and the benefit of a favorable tax position. On an adjusted basis, our EPS was $0.32 per diluted share, essentially equal to the $0.32 per diluted share for 2012.

Gross profit margins declined by 1.6% of revenues when compared to fourth quarter of 2012 with approximately 1% of that decline attributable to the billing process change in Illinois and the remaining decline attributable to increased labor costs. We are experiencing higher wages in Washington and Alabama, and the correct application of the EVV system for payroll has resulted in slightly increased payments to our home care aid.

General and administrative expenses increased $2.4 million, or 21%, over the prior-year amounts, reflecting increased costs related to legal and consulting expenses for our M&A efforts, increased G&A expenses related to the CHHC operation, costs incurred for our SOX 404 compliance efforts, and the rollout of our electronic visit verification system in Illinois in response to the state's July 1 mandate, all costs which were not part of our expense profile in 2012. Aside from the disclosed one-time M&A expense, which we will have from time to time going forward, over the near term, our G&A expenses will remain at this higher absolute dollar level, but we have every intention to continue to scale the business.

Income from continuing operations but before taxes was 4.8% of revenues, a 32.7% decline over last year when compared to the 7.8% for the prior year, reflecting the increases in G&A expenses noted earlier.

Our effective tax rate was 5.8%, substantially below the prior year's tax rate of 29%. As you recall, we could not take the benefit of work opportunity tax credits in our 2012 financial results. The benefit this year from the certainty of the credit for financial reporting is a result of the renewal of the credit after January 1. That said, our taxes continued to benefit from the higher amounts we realized for both 2012 and 2013 related to employee tax credits. Our effective tax rate for 2012 of 34.1% is a better indicator of our true effective tax rate.

We recorded a reserve for contingent liabilities related to the estimated Medicare and Medicaid billing recoveries from our home health business totaling $3.2 million, or $2.2 million net of tax in the quarter, which was taken as a reduction of our gain on the sale of the business. This provides a reserve for up to six years of recovery by these payors and is a prudent accounting estimate to support a contingent liability required under our agreement with LHCG. We also incurred some expenses related to the wind down of the business, which is now substantially complete.

Now let's turn to our balance sheet and cash flow. Cash flows from operations during the quarter were a positive $2.3 million, reflecting positive cash flow for continuing operations less the decrease in payments from the state of Illinois. Payments from the state of Illinois were slow in the quarter as they continue to delay payments to us due to the large payment received in Q2, but have become more stable recently. Our Accounts Receivable net of reserves increased $6.8 million in the quarter to $61.4 million as of December 31, 2013. I want to say we are very pleased to see that the year-over-year balances, however, have declined nearly $10 million, reflecting positive collection of nearly all of our own health receivables of $7 million and improvements in collections from our other payors.

At December 31, we had $15.6 million in cash on our balance sheet, no long-term debt, and availability under our credit facility. We expended $11.8 million in the quarter to complete the MSA and CHHC acquisitions.

404 compliance is something that's been hot here for at least the last three to four months. As a result of our increased stock price last year, we became an accelerated filer and are now subject to increased requirements under SOX 404 regulations. We hired a director of internal audit and engaged consultants to assist us in these efforts. They all came on board at the end of the third quarter. They have worked hard to document and test our systems and control processes in advance of our first time audit of our internal controls. I am personally pleased with their efforts to date. We've gone through the audit process and have determined that, at these higher recording reporting standards, we have material weaknesses in our control environment in two areas, general IP controls and payroll process controls. We have already entered into an agreement to implement a new payroll system this year that should mitigate those controls, and are engaging a firm to assist us with mitigating our IT controlled efficiencies. This conclusion has no effect on our audited results for the year. We will receive a clean audit opinion from our auditors on our financial results.

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

Take you very much. Operator, we will open up the call now for questions. Thank you.

(Operator Instructions). Brian Hoffman, Avondale Partners.

First of all, congratulations on the great quarter. So, you mentioned the dual eligible demonstrations in both California and Illinois, with California beginning in Q2 and Illinois in Q3. Can you talk a bit about the ramp-up of those programs and when you could potentially expect to see some impact there?

So right now in Illinois, we're going through a voluntary enrollment period. Then there are turns to a more mandatory or passive enrollment opportunity. So, we expect operational is really to be operational August, September. It's just very hard to predict. In Illinois, as you know, we serve already a large number of individuals that will be enrolled in the duals program. So it's just very difficult to put a timeframe or numbers on the benefits to Addus in that program.

Similarly in California, we're going through the process. It's a little more county by County specific, and in some of those counties, we don't currently provide care, so I think it's even harder to project timeframes and growth of around that.

Okay. And then related to acquisitions, with both of the two recent acquisitions closed at this point, can you talk about the integration process of those two companies going forward, and your comfort or bandwidth I guess for future acquisitions?

Do you want to address the integration, I'll touch on --

I'll comment on the first part of the question. I think things are going along well with regard to the integration and assimilation. I would say we are more in the assimilation process, getting to know our systems and people. We held a large orientation for leadership of those locations a couple of weeks ago here in our support center. So I feel good about the efforts to date on assimilation into our culture while also keeping the things that we admired about those businesses, and therefore the acquisition intact within those organizations.

Okay. With regard to -- just a question of bandwidth, the ability to do -- we believe there are acquisitions to do. We have a pipeline generator out in the community looking for opportunities for us. We review them. We have the resources, we have the cash and financial resources to do the deals that we are looking at. We have the bandwidth to do the acquisitions.

With that said, it's really about, first, you have to look at are these premium strategic opportunities for you? We have to stay focused on our fundamentals. The acquisitions will be there; they will always be there. We will do them if they make sense. We're going to stay focused on our fundamentals, but we have said this before, I've said this to you. We don't what to be seen as an acquisition story, though. We will do the acquisitions, but we are not an acquisition story.

Okay, great. Then last one for me. I believe, in the press release, it stated that South Carolina was included in the same-store results. Can you give us the increase in census, excluding the South Carolina part of the acquisition?

The census increase stated as new acquisitions did exclude the membership that we incorporated into our two offices in South Carolina, and that is in the press release at the roughly 1350 people.

Okay, great. Thank you.

Mitra Ramgopal, Sidoti.

Good afternoon. First, Mark, as you look forward to expansion in 2014 and beyond, could you give us a sense as to how far along you are as it relates to investing in your technology platform?

That's a good question. The only reason I'm hesitating is I want to be careful that I answer questions that I'm allowed to answer. We estimate that we are 40% into the design that we have drawn up and planned out.

Sorry, I lost --

So what I said is we estimate that we are 40% deployed on the plan that we are working from.

Okay. And as you look -- in terms of getting to say that 100%, is that going to be sort of a five-year plan or something more aggressive?

It won't be a five-year plan, and it will not be a five-year plan. It would be much more aggressive than that. Having said that, this is exciting, actually. Every day, we see that we could add to the plan. There's more opportunity to further improve our care delivery system. So, the plan that we have is -- I would put that in another year to 18 months, and we would say that we are substantially there. I hope that we are not there, because this thing -- we say that we are rubbing sticks together. We are doing things today that when we look and say, wow, this has capacity to do these things for us. So, we are not going to be done.

Okay, no, that's very helpful. And I know you mentioned one of the big targets for Addus going forward is transforming it now into more of a sales organization. I don't know if you can give us a sense as to how far along you are as it relates to headcount, or how much in terms of hiring you need with regards to your goals over the next couple of years.

I'm going to ask Darby to answer that. But just to kick it off, I will say that it's really not a headcount thing. It's a model. Darby, why don't you explain in terms of how we view the sales effort.

In community-based services, it is not as an environment which we believe individual sales representatives thrive. It is a service and sales in companionship effort. So, our sales force is our local leadership, our agency directors who maintain the relationships that generate the majority of our referrals, and then network and branch out into the communities to do community education about the services we provide. So Mark is right. It's not a headcount kind of issue.

To your question, I'd say that we are very pleased with the progress that we've made this year, and see that progress increasing with Lori Cabbage's focus and the focus of our regional and agency directors. But in terms of being done, we talk about a culture. Cultures need to be nourished and sustained, so I don't think we are ever going to be done. Add to the mix the change to a managed care model, I don't think that fundamentally changes that sales and service strategy, but it certainly does create new referral source opportunities for us to engage and develop very deep partnership relationships with.

Thanks, no, that's very good. And finally, regarding the pilots at Centene, I know it's still very early here. But is this sort of more of a 2015 sort of initiative where you think it could sort of move the needle for you?

One of the things that we are expecting to get out of those pilots, both us and the two payors, is evidence around the effectiveness on enhanced personal care delivery model, connecting that aid to the healthcare team and the impacts that that can make on overall health and wellness, health outcomes, and of course spending related to acute care costs. So, that would be something we would hope to have evaluated in 2015. In terms of our increasing relationships with those two payors obviously beneficial to us, that's really the outcomes we are expecting from those pilots.

I would also add that we feel very good about the pilots. The most important thing in a pilot is to make sure that we meet the objectives. And both Centene and Aetna intend to publish on their results.

What's exciting is these are smaller populations, but they are capped. There is a cap to the agreements. We are already exceeding the caps, the intended caps. That is we're receiving more referrals than were put into the proposal.

When we initially started. We are seeing case load growth. Yes.

And we attribute this to the Aetna and Centene caseworkers dealing with what they deal with, imagine, and saying, look, they need somebody responsible and responsive to handle these serious cases. And so we are excited on that measure alone.

Okay, thanks again for taking the questions.

Dana Hambly, Stephens.

Thanks, good afternoon. Just following up on the two pilot programs, is that anything different than really what you guys have been talking about for the last 18 months, or is it really more of a validation of what you've been talking about and this is kind of an initial buy-in from some of the managed care guys?

I couldn't have said that better myself. You're exactly right.

Okay. Good. I can move on.

It is exciting, because that's the answer. They believe in this model. They want to see it. And my point on the census is already increasing in it which was not in it, it was not an objective of theirs anyway. It's because it works. And so it's exciting.

Okay. And you say the increase in census, I've got to believe that's pretty moderate right now. Were you currently serving a lot of these consumers?

No, we didn't have a large population of the integrated care program. This is a Medicaid-only so duals are excluded from that element of Illinois' managed care strategy. So predominantly the consumers we serve are older adults, which we will see in the duals. So this was a good opportunity to get a manageable population and really study it.

It's an important number of consumers, period. You wouldn't move the dial companywide much. But more important is where it is, who it's with in the population. It's in Illinois', backyard, Aetna and Centene hugely important, national implications, a population that we want to serve.

I would also add that we expect that we're going to publish on the results, which we think will be a positive.

Okay, that's helpful. Dennis, on the modified billing procedures in Illinois, was that just on the quarter, or are we going to get a $600,000 drag in Q1 through Q3 of this year?

You will see a comparative drag in Q1 and then it goes away. There's 100 left in Q2, but then we're transitioned out and the comparisons will be the same.

Okay. What is that related to? What exactly happened there?

It had to do with a technical change in how they pay us. Previously, for every minute over the hour, they paid us to the quarter hour. And now they pay -- so if we worked a minute past the hour, they would give us another 15 minutes, and now it follows federal mandate.

Okay, all right. And then just on that front, anything we should be thinking about for either Illinois going forward or any of your other contributing states, either on changes to billable hours or changes to rates per hour?

No, nothing we can -- no. Nothing at this point.

Okay, great. Thanks guys.

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

I guess, first, on the Sarb-Ox costs, I guess, just to be clear, what's the difference in the $280,000 in the quarter from the incremental cost that you've already communicated previously?

We had been communicating that we anticipated that this expense annualized would be in the $700,000 range. This first time through, these are expenses for our internal audit function as well as the consultants that help them. And a portion of the increased audit fees that we will have, it's a new step up and expense level for us.

Okay. So, we knew it was coming. It was just maybe $100,000 more than you communicated. And can you just remind me? Is that an accrued number, or is that an expense item that is very specific and isolated to the fourth quarter?

That is an expense item that is specific to the fourth quarter that will -- with that will remain at near that level every quarter going forward.

Okay, all right. I just wanted to get a sense of the recurring nature of that. And on the material weakness, and I guess I want to focus first on the payroll conversion, just how much that's going to cost you. And also can you talk more about IT controls? I guess I don't have a great idea for what the issue is there and the plan to correct that.

I'll take that and in reverse order. The IT controls really deal with segregation of responsibilities and access controls. We've got a small team here, and we ask them to do a lot of things. And from a control environment, that's not a good thing. So, we have to have more specific responsibilities for people that are doing development can't be in the operating platform making changes real-time. We've just got to do a better job at documenting that sort of process.

In the payroll area, it's documentation of the checks and balances you would normally expect in a payroll process. We are implementing a commercial solution. We've done our cost-benefit analysis of it. There will be some capital expended this year to assist through the implementation, and it will take us six months to get through that process. We have completed an ROI. We're working to make this to be cost neutral going forward.

Okay. I Guess the important thing is it's not a financial weakness. So on the contingent liability issue with the old legacy home health business, can you walk me back through that again? Sorry. I was kind of in and out when you were making your comments.

Where are under Medicare and Medicaid law, they have the ability to do RAC audits, they can ask for additional documentation. And if we are not compliant with -- if our clinical record does not support that, the compliance with those regulations, they can recover monies from that. It took us a while to make this estimate because we wanted to base it on some fact base of experience, so we've been actually monitoring the recovery rate by the intermediaries over about the last three years. And this estimate of $3.2 million is on a revenue base of over $153 million. And that liability extends from six years from the date of the close, so they can go back six years prior to the date of the close. Obviously, we are a year into it, so there's now about five years of exposure there, so one year is gone. But this is what we think it's going to take so that we are not charging earnings each and every year or every quarter for what would be a recovery under this process. We wanted to get it all behind us, set up a reserve. We think it's prudent and that's where we are at.

No, that makes sense, okay. And just a couple of modeling questions, just tax rate and also CapEx, how to think about those going forward.

The tax rate is certainly a challenge. I would refer you, as I made in my comments, to our effective rate for 2012. This year is unusually low because of that, and that's around 34%.

You asked on the tax rate and the second question was on --

CapEx.

Our CapEx is -- you are aware that we are moving into a new contact center. We're going to have some capital there. I can't really -- we haven't disclosed that going forward, but there will be some -- CapEx this next year will be high, but then we will go back down to our normal level.

Okay. And I guess my last one here is you don't give guidance, which I can respect. But is there anything, Dennis, that you want to say while you have our attention in a public forum, just in terms of modeling, just anything that comes to mind?

Darby and Mark both commented on the weather in the first quarter. We will see a little bit of a drag on topline as a result of that. I think of it -- we are generating, if you think of workdays in the year, we generate about $1 million a day in revenue. We had 65%, 65% to 70% of our offices affected in January and February. We are still trying to tabulate the net impact of that, but there is going to be a day or two that's going to affect that.

Okay. All right. Thanks guys.

There are no further questions in the queue at this time.

Let me thank everybody for your attention and support, and we look forward to speaking with you in 90 days. Thank you all very, very much.

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