Addus Homecare Corp (ADUS) 2014 Q1 法說會逐字稿

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Addus quarter-one 2014 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

And now I'd like to turn the conference over to Mr. Larry Wyrobek, Corporate Controller. Please proceed, sir.

Thank you, Jason. Good afternoon. This is Larry Wyrobek, Corporate Controller. And thanks for all of you for joining Addus HomeCare Q1 2014 earnings conference call.

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 feature 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 available at www.SEC.gov. The Company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events, or otherwise.

With that complete, I would like to now turn the call over to Mark Heaney, the Company's Chief Executive Officer.

Larry, thank you very much. Good afternoon, everyone, and thank you all for attending the first-quarter 2014 investor call for Addus HomeCare. In addition to Larry, I'm joined in our support center by Darby Anderson, our Senior Vice President; and Dennis Meulemans, our Chief Financial Officer. I'd like to provide a special welcome to our management staff around the country, who are always encouraged to listen in on this presentation; so, welcome to you.

Measured on a number of different levels, I think we had a good quarter. Revenues were $71.7 million, representing a 13.8% increase from the prior year. Pre-tax operating income from continuing operations was up, at $3.6 million, even while we make investments in sales, technology, and SOX compliance. Income was $0.21 per share. We are especially grateful to our teams across the country, who did their very best every day to deliver essential services to our at-risk populations in the midst of a protracted and especially harsh winter. So, thank you all so much.

We continue to focus on the following objectives: becoming a sales organization, to positioning from managed care; to do that, to redesign, then, our care delivery system; in doing this, looking for important and strategic acquisitions.

On these objectives, our census trend continues to steady up, even with the harsh winter. Same-store sales are up 5.6% year-over-year, and census is up 8% year-over-year. This population, our payers, are shifting to managed care. We believe that managed care will require much more from its providers in the form of data and technology and health outcomes. We continue to invest in technology and infrastructure, making it possible for us to connect what our aide is seeing and doing in the home with the managed care case manager; so that we can help -- that is, that we can be on the front of the need to drive health outcomes from the home, where disease and health care spending starts.

We believe these investments position us to win in the new managed outcome environment. I'm very pleased with our progress in identifying and then closing and transitioning our recent acquisitions. I'm pleased with our prospecting team, as they identify additional good, strategic opportunities. And our cash and our liquidity are good, positioning us to pursue strategic, accretive acquisitions. I think we had a good quarter, hitting on each of our strategic objectives.

With that, let me turn the call over to Darby so that he can provide some additional detail on our performance in the quarter.

Thanks, Mark, and good afternoon, everybody. I want to open my comments by welcoming our Addus HomeCare professionals listening around the country, and acknowledge the excellent work that you do helping people remain at home, safely and supported, where they want to be.

Despite the weather challenges we faced, we had a good quarter. We continue to put up solid census growth numbers, move forward on our new care system, and strengthen relationships with managed care organizations, as implementation of dual and managed Medicaid programs begin or grow nearer.

Organic census growth was up 350 consumers, or 1.3%, over Q4 2013; and up 2055 consumers, or 8%, from Q1 2013. Including acquisitions, census growth was 1522 clients, or 5.4%, from Q4 2013; and 3680, or 14.3%, year over year. I am increasingly pleased with our sales efforts and results. Although far from declaring victory, I am seeing increasing evidence of an emerging sales culture.

As an example, in Q1, we designed a team-oriented sales contest involving all of our locations, as well as our support center and even executive leadership. It is generating a spirit of healthy competition among our designated teams. It's a creative contest, and I think one that everyone is having fun with.

We completed the MSA Medi Home Private Care acquisition, with Ohio and Tennessee operations coming on board in January. These operations are performing to plan. We continue to work integrating the CHHC acquisition and New Mexico, and that business, too, was on-plan through the quarter.

In New Mexico and elsewhere, the pace of progress with managed care initiatives is quickening. Plans in California began voluntary enrollment in some of the pilot counties. Illinois continues expansion of its integrated care program, a Medicaid-only managed care effort. And then, based on state projections and timelines for the Illinois duals demonstration pilot, a substantial portion of our current Illinois consumer base will transition to managed care, with an effective date of September 2014.

While we continue to sign contracts and meet with managed care payers across the country, our sales program is beginning to shift from securing contracts to caseload acquisition in these states.

We continue to make advances in our care system redesign. In the quarter, we established additional metrics to drive key actions intended to improve both effectiveness and efficiency of that system. We made progress rolling out new functionality in our software applications, and we also increased the frequency with which our supervisors are seeing consumers in the home. Seeing our at-risk consumers more frequently is crucial to identifying and acting on changes in condition.

On the legislative front, we continue to monitor status of proposals to increase the minimum wage, both federally and in all of our states. We are also monitoring progress toward the implementation of the Department of Labor rules change regarding the companionship exemption.

And just to reiterate my comments made in prior calls regarding the Department of Labor rule change, Addus does not rely on the companionship exemption. We pay both overtime and travel time to our home care aides, and are diligent in all ways to be in compliance with the rules, including the changes to be effective January 1, 2015.

Although, again, a challenging start to the year, I am very proud of our team for being up to the challenge. Thank you to the entire team for their collective and collaborative efforts, producing solid financial and operational results this quarter.

Dennis will now take us through the numbers in more detail.

Thank you, Darby, and good afternoon. As Mark and Darby have said, we had a good quarter. Net service revenues from continuing operations for the quarter increased by 13.8% to $71.7 million compared to $63 million for the same period in 2013. Net income from continuing operations was $2.4 million, or $0.21 per diluted share, essentially equal to last year's results after considering a one-time, $520,000 tax benefit realized in 2013.

Net income from same stores was $2 million, and acquisitions added an additional $400,000. Same-store revenues increased 5.6% to $66.5 million. These revenues were driven by an 8% increase in census, offset by a slight revenue loss attributable to the weather. Acquisitions added an additional $5.2 million, or 8.2% of our revenues, as they were essentially operating under Addus management for the entire quarter.

Gross profit margin percentage improved 900 basis points, to 26%, when compared to the prior year. This improvement was largely attributable to a 500 basis point improvement in our same-store operations, with acquisitions contributing 400 basis points to the overall average. The gross margin percentage for our acquisitions is higher than our same-store business. The revenue per billable hour of $16.92 declined slightly from the fourth quarter average of $17.03, as the acquired business has lower average billing rates than our same stores, which is partially offset by higher average hours per client. Gross margin is higher in our acquired business, as our overall labor costs are lower in this business as well.

General and administrative expenses increased by $2.9 million over the prior-year quarter. This increase includes $1.7 million attributable to G&A expenses related to the acquisitions; with the remainder attributable to increased costs for our investments in technology, our new care model, and to our SOX 404 compliance program, which was not required in 2013. Adjustments to EBITDA has been refined to include one-time acquisition costs, and increased 1.4% to $4.5 million when compared to 2013 results.

Now let's turn to our balance sheet and cash flow. Cash flows from operations were $2.7 million. We utilized approximately $1.5 million for the buildout of our new support center. Cash increased $1.4 million in the quarter after considering $200,000 in cash provided by executive exercise of vested stock options. Our accounts receivable, net of reserves, were $59 million as of March 31, 2014, representing a $2.4 million increase from the balance reported on December 31, 2013. Our payments from the state of Illinois were strong in the quarter.

At March 31, we had a $17 million in cash; no long-term debt; and approximately $43 million available under our credit facility, to be used for future acquisitions and other corporate purposes. This concludes my comments.

I'd like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis. Thank you. My closing comments are as much for our team that's listening in on this call as it might be for our investors and our analysts. We have to talk about the numbers, the trends, the investments, and every other measure necessary to evaluate our business. It's on these measures that we evaluate the opportunity and our execution toward it.

But the one measure that has the greatest long-term impact on the ability of this Company to grow and to thrive -- and this is even more certain, as managed care assumes responsibility for this population -- is the degree and consistency with which we keep our promise to deliver care to a population who, without someone to come to their home where they are often alone, to get them a meal or to help them with their medications or to help them with their personal care, and sometimes their -- often, frankly -- their most basic personal hygiene; to make sure that their heat is on; and that they are, in every way, safe.

If we don't do that, people suffer, and their families suffer, and as a community we suffer. If we don't keep our promise, these at-risk persons end up in a hospital or a nursing home, where in fact -- this is actually true -- it's actually easier to deliver these essential services in an institution. Now, they don't want to be there, and we don't want to be there, and I don't want to be there, and no one wants to go there. And if you go there, it costs four times as much to be there. But it is true that in these places, there is a relative certainty that you're going to be warm and you're going to get a meal.

We have to keep our promises. We have to deliver this care when we say we are going to deliver it, or the preferred and lower-cost home care option doesn't work -- harsh winters or not. We are responsible here for the services to 29,000 people. And I just want to say that I think that our staff did a great job on this measure in the last quarter. And for this, we are all just very, very grateful.

So, Jason, let me turn the call back to you. You can open it up for questions, and thank you.

Certainly. (Operator Instructions). Brian Hoffman, Avondale Partners.

Congrats on a nice quarter. My first question is on same-store census growth of 350 consumers. First of all, did that include any contribution from South Carolina? Or was South Carolina all accounted for in the fourth quarter? And secondly, was that number at all negatively impacted by the weather?

I think the simpler question -- in South Carolina, that census would have been captured in the fourth quarter. We essentially accreted the MSA operations into one of our existing operation. And to the latter point, caseload acquisition, I believe was substantially impacted by the weather. The seasonality, if any, to our caseload acquisition comes through the slowdown in the holidays of case management assessment, but I don't believe it was affected by the weather at all.

Okay. And then on the gross margin, for the same-store business it was -- looks like 50 basis points higher than in the first quarter of last year. And that's a little better than what I was expecting, given the full-quarter negative comp from the Illinois rounding rule. So I just wondered, is there anything you can call out there that allowed it to improve?

Brian, I can't call out anything specifically. We just did a good job at managing our costs, and it showed up in the numbers.

Okay. And can you break out the SOX compliance costs in the quarter?

Brian, that's a number we don't disclose specifically. We have previously stated that we estimated that to be $500,000 to $700,000 annually, and those numbers are pretty accurate.

Okay. And then, last question for me, we've heard a lot about developing, or turning the Company into a sales organization. So how far along would you say you are in that process? And from your perspective, is there any one key area that you'll really be focusing on over the next several months?

Brian, hard to put a number on something that will continually and always evolve. But I think to your latter question, I'm looking for more distributed growth. Our effort and our focus is around all of our sites being up in census; and continuous, steady up, increases in the number of consumers they serve on a daily/weekly/monthly basis.

Okay. Great, thank you.

Matthew Gilmore, Robert W. Baird.

Just a quick follow-up to the weather question. Your census was up 8%; your rates were flat; and you revenues were up 5%, which would imply a small decline in the hours per census. Is that probably where you saw the weather impact, if there was any?

Darby?

Yes, that would be exactly where we see it.

Okay, okay. That is kind of helpful in framing it up. And then, Darby, I think you mentioned that a substantial portion of the business would move -- your Illinois business would move to managed care in September. I was just curious, A, how you guys are thinking about that transition; and, then, is there any change to the payment model or rates as those clients move over?

Yes. First, no changes to the rates. We go from, as state systems go, a pretty good one in Illinois, to how we actually submit claims and get paid through one organization, primarily the Illinois Department on Aging, to up to seven managed health plans to bill and navigate their billing systems. We're getting a little bit of a preview of that in the integrated care program. So I think we're going to be ahead of the curve, come September. But that obviously is going to present some short-term challenges, just to figure those systems out and make sure it has no meaningful impact on collections, and et cetera.

In terms of just the transition itself, these are, just to be clear, consumers that we are already serving that we'll enroll into the dual projects. Again, our relationship-building with the health plans -- I won't say there won't be bumps in the road as things change. But I think we're very well positioned, with a good dialogue with those health plans, to get through those bumps quickly and execute on our model and deliver health outcomes.

Yes, Matt, this is Mark. If I could just close with a comment. Illinois, we get a lot of questions -- I expect we might get one here -- about how is Illinois doing paying its bills? This is a place where, to the degree that managed care is picking up, becoming the payer for these Illinois consumers -- frankly, some could look at it as a positive. We bill managed care, and they pay us.

Yes. And that leads to the next question, which is -- and I know we are early into this -- but Illinois doesn't pay you on a very timely basis. I suspect some of the managed care payers pay you a little bit quicker. Is that true?

That's a true statement.

But just to be fair, you can only beat up on one state so long.

Okay.

Can you describe, Dennis, how (multiple speakers) Illinois is an important payer to us? How have they been for the last several months?

Illinois is -- their payments increase with tax revenues. Year-end tax revenue increases for the state definitely benefit us. They've been steady, and continue to be steady going into the second quarter. But we do disclose our overall DSOs for Illinois and others, and Illinois is higher than our other payers. So I would expect that as the transition occurs, we will get a little bit of cash out of that.

Okay. And then -- I know we're in the middle of the legislative session for a lot of states -- but is there anything to call out as you assess the temperature of each state, in terms of rate or enrollment in any of those programs, as you look out over the next couple of months?

Nothing material at this time.

Okay, great. Thanks a lot, guys.

Prashant Raykar, Oppenheimer.

I just have a quick question around health IT spending. Can you put a number around that amount for the quarter? And should we think about that as a one-time in nature?

Prashant, our IT expense is included in our G&A expense. And part of that number that I alluded to, we don't break it out. It's not one-time. As we deploy our technology, we're giving a smartphone to every aide, and that adds up fairly quickly when you have 16,000 aides. And then there's the infrastructure behind it. So we see this as an increase in our G&A.

Great. Thanks a lot.

Mitra Ramgopal, Sidoti.

Just a couple of questions. First, it's my understanding that at least half of your Medicaid recipients in Illinois must move into managed care by January 1. But at this point, you're not seeing any of that, right? Is it fair to assume it's probably after September?

Darby?

I'm sorry, I missed the first part of your question. You're talking about --.

Yes, hi, Darby. I'm under the impression that about half of the Medicaid recipients in Illinois must move into managed care by January 1. I'm not sure if that's still correct. And I'm just wondering if you are seeing that already, or it's not going to be until towards the end of the year.

Yes, I'm sorry. That's a legislative mandate. That's actually a law, that under the SMART Act that you're citing; and the state is continuing to take all kinds of efforts to move their Medicaid population into managed care. The duals and the integrated care program that I talked about are a big part of that. So to the question, we're seeing it in a small way. We'll start seeing that to ramp up with significant change in September, as I referenced, with our community care program, consumers in the duals project.

Okay, thanks. Very helpful. And, again, with regards to the acquisitions in the fourth quarter, you've had one quarter now. Would you say it's meeting your expectations, or exceeding it? Or, again, feeling more confident you can go forward and do some more of these deals?

They are meeting our plans through the quarter. We continue to work on integration. Both New Mexico and Tennessee are important managed care states. So as we look at the MCO opportunity as an organization, we look at it enthusiastically in those states as well, and we'll continue to work on it.

In terms of acquisitions, Mitra, the fact is that, as Darby described, we transitioned these sites, brought them on, I think, very, very well. We have a prospecting team that is first-rate. We have a pipeline. We have cash, and we have a line, and we are looking for good, strategic acquisitions.

Okay, thanks. And, finally, as it relates to the internal controls and Sarb-Ox, how is that coming along? And what timeframe do you think you will be able to have that completed?

Mitra, We do have a plan, and we have brought in some outside assistance in areas where we needed that help. It is being monitored by our Audit Chair, our performance against that plan. We are in the process of making those process changes and remediation efforts. We will begin testing in the third quarter. BDO signs off on that test on an annual basis, and that will be at year-end.

Okay. Thanks again.

(Operator Instructions). Dana Hambly, Stephens.

Good afternoon. Mark, could you just give an update -- or Darby -- on the care system technology, how many sites it has been deployed at? I think maybe you were trying to roll out 2.0 this year. Just any update there.

Darby?

Yes, so, about 30 of our sites are currently up on our care system. And about -- we have a majority of our employees in some form of an electronic visit verification system, which goes hand-in-hand with that care system. And I think some of the developments that I referenced earlier, we have established some more key metrics around the utilization of our applications that we've talked about as self-service to our employees. And so we're really driving and enhancing that application to give them greater options, in terms of communicating changes in condition, and just other elements of service delivery; sort of the logistics of the business, as well.

Okay. And this -- and Dennis, on the spend there for the technology -- I know you're not breaking out numbers specifically. But are there any significant enhancing features that you're going to have to spend on this year? Or are we at a pretty steady state these days?

Dana, the spend is twofold. When we're developing an application that is going to be deployed, we capitalize that. And you'll see that come through in amortization and that. And you'll see that in the cash flow statements as investments there. The investment in our operating infrastructure, to make that go, is -- and think about it this way, Darby said 30 sites. We give everybody a cell phone; that's $18 a month as that costs. So, as we deploy, that cost will increase.

Okay, that makes sense. And then, Darby, can you give an update on the two pilot programs you have going in Illinois? I know they were in their infancy last time we talked. And I think you, at some point, wanted to publish some results on that.

Yes, so, we continue to talk with -- well, we continue to work through the day-to-day and utilizing that technology to enhance the personal care services, which is the goal of the program. We've had ongoing discussions with both plans, and I think have come to an understanding on the evaluation metrics that we want to use. I don't see us, though, getting the data fully under our belt towards the end of the year. And I think I've said this in our last call, but publishing results out of that pilot, I would expect end of this year or into the first quarter of 2015.

Darby, you've met with leadership from the MCOs.

Yes.

Even recently, and you'd characterize -- how are they feeling about things?

Very positive. It's an exciting opportunity. In your previous question, Dana, I should have maybe answered a little bit more enthusiastically. I love what our IT department does. And I think we have the right balance of people that understand systems and technology, but understand home care; and understand and take a very creative approach to problem resolution, utilizing technology, which is really an advantage to us. And I think in the conversations in these pilots and with managed care, they see that. They see it, even from their seat, so it's very positive.

Okay, that's helpful. And going back to the weather, I just want to understand. You answered Matt's question on the lower hours per census. I think I know the answer, but if you can just confirm. If you miss that visit, those hours are gone, is that right -- that you can't make them up on the back end?

The way I look at it this way, first of all, we prioritize our emergent clients, and they get care. It doesn't matter what the weather is; there are folks that just have to get served. Other consumers, when the weather is inclement, roads are closed, et cetera. Family is with them. And to be honest with you, oftentimes the clients call and say, please don't send somebody, because it's not safe. So we love to get those calls from our consumers, caring about our aides.

When it comes to service make-up, there are specific rules in all of our different programs across the country about making up hours. So we do that within those regulations, but only to the degree that we can make up hours for tasks that actually need to get completed, or can get completed on a subsequent day.

We have hours built into our care plans for bathing or meal preparation. It's not like we're going to go out and give somebody two baths in a day, or two lunches. So there is some opportunity to make up those hours, but certainly not completely.

Okay, that makes sense. And last one for me, Dennis -- I think you answered it in the prepared remarks -- but the gross margin differential between the same-store and the acquisition, it's a function of lower labor costs in the acquisition. So you don't see where there's an opportunity to close that gap and get the same-store closer to where the acquisitions are?

No, I don't, on that particular point. It would be nice, but I don't think we can get there.

No. I appreciate the honesty, thanks.

Thank you so much for your questions. I will now turn the conference over to the management for closing remarks.

Thank you, Jason. I'd be remiss if I didn't tell you getting ready for the call and putting the press release together, Dennis comes in to me and says, should we put that we're in Palatine or Downers Grove? And I said, well, today we're in Palatine, so put Palatine.

Today is the last day we'll be in our current corporate offices. We don't call them corporate, we call them support center. We are moving tomorrow. If you are familiar with the Chicago area, we're moving directly West of the city in the Western suburbs, a couple miles west of Oak Brook in a town called Downers Grove.

We are just excited about it. We're moving into a much larger space, with space to grow. The technology infrastructure is multiples of what we're experiencing where we are. Built out a large, first-class contact center, training, and AV material. It's right in the center of the Chicagoland area. We are really excited about the move. And I just wanted you to know that -- so, today, we bid adieu to Palatine, and we move to our new digs in Downers Grove, Illinois. So we'll talk to you from there in 90 days or so.

With that, thank you all so much. Thanks for your support, and we'll talk you in a bit.

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