Addus Homecare Corp (ADUS) 2014 Q3 法說會逐字稿

Good afternoon, and welcome to the Addus HomeCare Third Quarter 2014 Earnings Conference Call. This presentation will contain forward-looking statements within the meanings of the federal securities laws.

Statements regarding future events and developments, the company's future performance as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws.

These forward-looking statements are subject to a number of risks and uncertainties, including factors outlined from time to time in the company's recent Form 10-K or Form 10-Q, earnings announcement and other reports filed with the Securities and Exchange Commission and available at the SEC's website. The company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

I would like now to turn the call over to the company's Chief Executive Officer, Mr. Mark Heaney. Please go ahead, sir.

Thank you, Scott. Thank you very much. Good morning. No, it's actually afternoon, isn't it? Yes, so let's do the afternoon. Good afternoon, everyone, and thank you very much for joining us for Addus HomeCare's Investor Call for the Third Quarter of 2014.

I'm joined today by Darby Anderson, our Senior Vice President; and Dennis Meulemans, our Chief Financial Officer. I also want to welcome our management staff listening into today's call and to thank them each for the good, difficult and important work they do every day, seven days a week, providing essential continuous care to this older, aging, changing, at-risk and deserving population.

We're pleased to report today another good quarter for -- both financially and operationally for Addus. Our financial results were highlighted by revenue growth for the quarter of 21% to $81.7 million, which was driven by very solid same-store growth and the acquisitions we've completed since Q3 last year. We saw a 16% growth in net income per diluted share from continuing operations. Our adjusted EBITDA grew at a rate of over 27% for the third quarter.

At the close of the third quarter, our 17,500 employees were serving almost 33,000 consumers from our 133 locations in 22 states. Ours is a highly fragmented industry that is undergoing substantial change, with increasing regulatory pressure, outcomes, expectations and reimbursement complexity. We believe the opportunities today, and more so in the future, will go to providers who utilize technology to complement and further enable their service offerings to lower their cost of delivering care while generating positive health results.

We believe we are shifting from an acute-focused healthcare delivery system to a pre-acute model, focused on identifying and acting on health needs early in the home, where disease and health challenges originate. We believe this is the right approach to health care delivery and we believe this shift provides Addus significant long-term opportunities.

We're working to make the most of this opportunity by continuing the strategic initiatives we've discussed previously. Our focus on building our sales capabilities and culture is contributing directly to solid organic growth in our same-store census and revenues. We're continuing to invest in technology to enable our aides to provide care more efficiently and, even more importantly, more effectively.

Our care delivery system assures consistent, continuous care while freeing up our community care supervisors to be in the community, in our consumers' homes and engaged with our direct care aides where our consumers are and where health outcomes can be driven. This approach to care is necessary and differentiates Addus in the market, whether the payer is an MCO or the traditional state system.

Darby will address our continuing to make progress in the managed care market, although at an uneven pace, as the differing states navigate their transition of their dual eligible populations to managed care.

Finally, we're pleased with the performance of our Coordinated Home Health Care acquisition in New Mexico and our Aid & Assist acquisition in Tennessee. We're always evaluating potential transactions that will broaden our reach in existing markets and/or provide entry into new states, especially where managed care is the payer.

In summary, Addus produced a significant profitable growth for the third quarter, and we made further progress on our strategic growth initiatives. We believe we remain well-positioned to benefit from the changes occurring in our industry and we're focused on leveraging our opportunities to produce additional profitable growth and increase shareholder value.

Again, thank you very much being with us today. And now let me turn the conversation over to Darby Anderson to provide more detail on the third quarter. Darby?

Thanks, Mark, and good afternoon, everybody. It was a good quarter, and another in which I feel we made progress improving operations and driving our strategic initiatives. Highlights include -- solid census growth, increased engagement with managed-care payers and improvement in underperforming locations.

Average census within same-store was up 665 consumers or 2.3% over Q2, 2014 and 2,060 consumers or 7.6% from Q3, 2013. Including acquisitions, average census growth was 1,509 consumers or 4.9% over Q2, 2014, and 4,974 or 18.4% year-over-year. The large sequential quarter growth inclusive of acquisitions is largely attributable to three months of Aid & Assist census in Q3 versus only one month in the second quarter.

Our same-store Q3 census growth was the highest we have seen since Q3 of last year, and indicative of increasingly better execution on our sales plan and sales metrics. We also continue to advance our technology initiatives as we further develop the Addus Mobile Portal, or AMP, and serve more locations through our contact center.

AMP is designed to improve the effectiveness and efficiency of the care our aides provide on every consumer visit, driving health outcomes and reducing healthcare costs. The deployment of AMP is primarily focused on our managed-care markets. In addition, consistent with state mandates requiring electronic visit verification, or EVV, approximately percent 74% of our caregivers are using EVV to electronically record and transmit service data at each consumer visit.

Our contact center is the technology hub of our new care system through which we aggregate, analyze and respond to the data generated during consumer visits. The contact center also centralizes the back office activities historically performed in our branch location. By providing this support to our branch teams, we free them to focus on visiting and monitoring our at-risk consumers, especially our most acute. Additionally, the support from the contact center allows our directors to devote more time to the their sales efforts.

In the quarter, we completed the integration of the operations related to our Coordinated Home Health Care acquisition onto Addus systems and along with our existing New Mexico locations into our contact center. Our engagement with managed health plans continues to improve. Our New Mexico locations had another very good quarter of growth on top of a strong Q2. As communicated last quarter, the shift of our caseload to managed care in Illinois began in September. This transition will continue through the end of the year and into Q1 of 2015.

Additionally, I feel we made good progress this quarter on our opportunity in California, advancing the ball, communicating our role to the health plans within the Cal MediConnect demonstration projects. As I think many of you know, California has a very different and somewhat unique model for the delivery of personal care services, which contributes to the slower progress we're making in these markets.

Our sales program, including engagement with managed-care, made good progress, but we remain focused on continually growing and improving what remains the majority of our business, state-managed home care services. We continue to work on underperforming locations, sales effort, legislative advocacy and, importantly, quality service to our consumers.

In closing, I want to thank the team for their hard work, making it possible for people to live where they want to live and for as long as they want to live there.

With that, I'll turn the call over to Dennis for a closer look at numbers.

Thank you, Darby, and good afternoon. For the third quarter our net service revenues increased 21.3% to $81.7 million, from $67.3 million for the third quarter of last year. Net income from continuing operations per diluted share was $0.29, a 16% increase from last year's $0.25. Adjusted EBITDA increased 27.4% for the third quarter to $6.3 million, from $5 million for the third quarter of last year.

Our revenue growth reflects an 18.4% increase in average billable census for the quarter combined with a 2.9% increase in average billable hours for census month, offset by a slight decline in revenue per billable hour. The increase in billable hours per census is reflective of higher authorized hours in our new acquisitions. We continue to be pleased with our growth in same-store revenue, which increased 7.2% for the third quarter, driven by a 7.6% increase in same-store census.

Acquisitions made a substantial contribution to our comparable quarter revenue growth, adding 14.1% to our revenues. 59% of the year-over-year growth in average census for the quarter was generated by our acquisitions, up from 48% for the second quarter. This increase primarily reflects our benefiting from three months of the Aid & Assist acquisition for the latest quarter, versus one month for the second quarter of this year.

Acquisitions are substantially changing our payer mix. A full quarter of the Aid & Assist acquisition, when combined with the CHHC acquisition, both of which are primarily serving managed-care companies, contributed to our increase in revenues for managed care. Revenue for managed care increased to 9.5% of total net service revenues for the third quarter, up from 1% for the third quarter of last year. As Darby mentioned, we continued to make steady progress in expanding or transitioning census in our same-stores to managed care. Payer mix for same stores increased to 2.4% of total revenues from 1% in the prior year attributable to managed-care plans.

The company's gross profit margin for the third quarter increased 110 basis points to 26.7%, from 25.6% for the third quarter of last year. This increase is due to the phase out of select payroll taxes to continuing positive trends in our Workers Compensation program, as well as the impact of our acquisitions, which generally exhibit higher gross margins.

General and administrative expenses increased 26.6% for the third quarter, or about $3.3 million. The majority of this increase is related to general and administrative expenses for our two acquisitions. The increased cost or investments in our technology solutions and our SOX 404 compliance program, which was not required in 2013. The $576,000 increase in depreciation and amortization is primarily attributable to amortization expense related to intangible assets for our acquisitions and a slightly higher depreciation expense related to our new Support Center.

At the end of the third quarter, Addus was well positioned to fund its anticipated growth. We had $14.1 million in cash, no bank debt and $40 million of availability under a revolving credit facility. We had net cash -- we utilized net cash in our operating activities for the quarter of $7.4 million, primarily reflecting the historical payment flows from the state of Illinois. Also consistent with this payment flows, our net accounts receivable were $62.1 million, up $13.4 million from the second quarter, and our DSOs were 70 days.

This concludes my comments, I'll ask Mark, if he has any additional comments he wants to make, before opening the floor for questions.

Dennis, thank you very much, and, Darby, thank you. [Dee], no, I'm ready to go. If we have anybody who has a question or comment, we'd appreciate it. Thank you.

(Operator Instructions) And our first question comes from Brian Hoffman. Please proceed, sir.

My first question is on organic census growth. So 665 in the quarter looks pretty strong. Can give us some color as to the makeup of that growth? Maybe what states it comes from? What drove the growth? Was it part of any dual eligible programs or any other managed care initiatives?

Darby, do you want --

Yes, so this is Darby. Brian, thanks for the question. I'd say it's pretty much across the board in terms of our census growth, obviously we have up and down sites that be monitor on monthly basis. But there's no one particular state driving it, that growth is consistent across our locations as it has been. There are probably -- there definitely is within some same-store, part of that 665 would include the transitions in Illinois to managed care, but it would not be exclusive of just managed care.

Okay. Within Illinois, are you referencing the pilots that you have? Or is it something else?

No, this is the transition of the dual eligible consumers on a Medicare-Medicaid alignment initiative.

Okay. All right. And then, can you talk a bit about the current environment for M&A? Has anything changed materially since the last quarter? Are there any new states that you're targeting or looking at more closely in terms of the acquisitions?

Brian, it's Mark. We have a pipeline -- we have an organization sourcing for us. We have an -- our objectives are to get deeper where we are and need to be deeper, and/or to go into managed care states where we have an opportunity to differentiate ourselves. We have a pipeline. We have availability. And we continue to not just look, if there are opportunities, we evaluate them.

Okay, great. Thanks. And then one last question for me. As we head into the fourth quarter can you remind us of dynamics around seasonality? I believe it's impacted by the holidays, but does it impact growth in new consumers? Or is it more of a drag on potentially hours of services provided for the current base of consumers?

Any impact from seasonality would be around the number for work days, which is obviously affected by the holidays. It doesn't really impact census growth or acquisition -- census acquisition as much. So kind of baked into our historics and everything is that seasonality, so to speak, around the number of days to work in the quarter.

Yes. Obviously, as we all know especially from last year, you can have, right, weather can be a issue. But we're not -- obviously not predicting that. So I think Darby hit it.

Okay, great. Thank you very much for the questions. Congrats on a good quarter.

The next question comes from the line of Matthew Gillmor. Please proceed, sir.

Good afternoon. Darby, you touched on the transition of a chunk of the Illinois business to managed care, and I think this is one of the first sort of large transitions for you all. But I'm curious, have you had any initial observations after 1 month? And any sense for how that might impact the business going forward?

Well, actually I'll tell you that this is actually the second transition that we've gone through in New Mexico. They transitioned to Centennial Care, January 1, so we did already go through a transition there of consumers among plans in New Mexico.

But so far in Illinois, it's a little bit early to tell. The transitions are happening. We're obviously seeing an increase in our managed care revenue. But I think, it's just a little bit too early to tell.

I'm going add to those, so Darby, you can take credit. The fact of the matter is you and your team have been, I won't say, in the [faces] of, but the managed care payers coming on in Illinois know you guys, have seen you guys, have been to this office. You guys are on it.

Yes.

And I also, frankly, sat in a meeting and listened and say -- where a managed care plans said, "We love what you're doing and everything. And by the way, we haven't met another provider in our market." So I think we're being assertive in making sure that people know we're here and how we do and what we do.

Okay, thanks. Really helpful. And kind of along those lines, I just want to ask you about the governor's race in Illinois. I know the polls are fairly tight, but are there any implications there for Addus either way?

No. Short answer is no. At first, I thought your question is going to be a prediction, which we would not give. The way we look at it is that home care is somewhat of a bipartisan service. It is a third of the cost of the alternatives, and that is nursing home placement. So we've seen changes in administration that haven't impacted our business. So we're obviously going to monitor and see what happens, but we're not concerned about it.

Yes, personal care is one of the fastest-growing segments of health care. It has been since 1980. And there've been Democrats and Republicans in every mansion across the 50 states. We think -- if a Libertarian wins, we're going to have a friend in home care.

Okay. And then last one, I'll hop the -- you mentioned the AMP technology initiative, but I'm curious what the -- and Dennis touched on this a little bit, but what the incremental cost in terms of implementation has been this year? And sort of how far along are you with rolling this out?

Darby, you can talk about it -- you can talk about the rollout. Dennis, you have to address the question.

Yes, so the rollout is, as I said in my prepared remarks, really kind of focused around our managed care markets, the size there, and then also to meet the Electronic Visit Verification mandate. I reported this number of 74% of our caregivers, that's probably not quite proportionate, it wouldn't be equal to the number of locations, which would be fewer. A lot of our larger locations have already been deployed on this technology in Illinois, et cetera. So we're continuing to implement our technology where most make sense, and at the right pace, we can make sure that it gets deep within our caregiver community.

And on the cost front, Matt, we have always said that we are deploying the technology and managing our cost profile within our current G&A cost structure, and we will continue to do that.

Okay, great. Thanks so much.

The next question comes from Mitra Ramgopal. Please proceed, sir.

Good afternoon. First, I just wanted to get a sense as to when you look at the census, how much of it is managed care? And as you look at the payer mix, I think it was 10% the quarter, well up from a 1% a year ago. If you had to give a sort of rough guess, where do you see that number being maybe a year from now?

Mitra, Darby, you -- I didn't get the first part of question. So I'm going to ask, Mitra, can you give me the first part of that question again? I want to make sure we answer the right question.

Oh, yes. Of your current census, how much of it is managed care?

Mitra, we don't break out the census by payer class. But recognize that our managed care payers are essentially paying us the equivalent of state rates. So you can pretty much use a proxy of revenue percentage for census percentage.

So you can also look at where's the population. Go ahead, Darby.

And the largest populations we have, obviously Illinois and -- sorry, New Mexico and Tennessee, which are all managed care states. But what we reported on or are reporting on is the increase in our managed care revenue, that went up above 3.5%. I think Dennis' prepared remarks talked about the largest part of that increase was the full quarter of Aid & Assist, which is largely managed care. But we also saw left from same-store locations of --

1% to 2.5%.

1% to 2.5%, which obviously would encompass the large -- well, almost exclusively Illinois and New Mexico.

Mitra, I'm going to -- do you mind if I want to add something that maybe you weren't going to, but I know you and I want to say this.

We're very excited about the opportunity presented through managed care. A payer that's going to measure outcomes and in going to favor the very engaged providers technology, and we're just -- we're excited.

The investments that we're making in reengineering of our care system, and enable it -- and putting devices with software, supporting it in the hands of our caregivers, we would do it whether it was managed care or whether it was traditional state. Because our objective is that it will increase efficiency. It'll increase health care effectiveness, we're going to be more effective in driving a health outcome. And frankly, we know that it's going to help us. We have a whole set of ideas about how we think it's going to help us with employee engagement. So the disparate workgroup that goes off and we don't see them for a week and two weeks at a time, this technology enables us to connect with them. And that makes a more -- a loyal and even more capable employee. So that's a commercial, I want to throw that in here.

No, I definitely appreciate the color. Just a follow-up on -- I wanted to go to questions in terms of how far along you are with the technology investments. Is it sort of going to be an ongoing thing depending on the opportunities that come up? Or do you anticipate sort of -- most of the spending being done probably over the next 12 months and it's going to be a lot smaller going forward after that?

Mitra, I think that our investments in the technology and maintaining the platform will continue in the foreseeable future. As we have deployed certain AMP applications, we realized that they are not perfect and we are constantly working to improve them. So I would not, in your modeling, anticipate some reduction.

Okay. Thanks. And Dennis, were there is any onetime expenses in the quarter?

No. It was a pretty clean quarter that way.

Okay, thanks.

And the next question comes from the line of Dana Hambly. Please proceed, ma'am.

Good morning, Mark and good afternoon, everyone else. Just back to Matt's question, Darby, on managing the transition and some of these large programs. You talked maybe about -- some of the subtleties of what the discussions are like with managed care. Do you anticipate picking up volume as this transitions? Why would you do that? And how do you make sure you're not losing some of your consumers as well.

So the first thing around it is measuring, right, so we've actually put some work in this quarter around making sure we're measuring the transitions in and out, so that we know where we stand and are keeping score.

To your first point, Mark said it earlier, it's really about engagement with the plans. I mean, we're trying to be as communicative with them as possible, as helpful. Remember, I think we've said this before, but in a lot of cases this is a new covered benefit for these health plans. They haven't covered personal care. They're not familiar with the provider network, the community-based nature of this work. So we're really doing everything we can to be a resource for them, to help them navigate successfully through this, and universally across the plans. And I think that's demonstrating and that's showing in just kind of the engagement I see happening between our branch offices, our regional directors, our sales folks, myself, everybody here, and all levels within the plans.

So I think if we stick to that track record and just keep the dialogue open, they're going to rely on us to solve problems and help them navigate this.

Okay, now that's helpful. Again, some questions -- can you just refresh my memory, especially you've seen it -- reading more articles about the minimum wage and potential hike at the federal level or at certain state levels. Can you just remind me Addus' particular exposure to the minimum wage?

So right now, we don't have a significant impact from minimum wage or other -- said better, most of our employees are paid considerably above the minimum wage. Obviously, we're monitoring these proposals. But any proposal that comes out would have to be evaluated separately. It depends how high the minimum wage goes.

Okay, that's fair enough. So we'll stay tuned on that. Darby, you mentioned a couple of times about improving underperformers. Maybe I'm reading too much into it. Are there a handful of these? Or is it I'm just thinking too much about you mentioning that twice?

It's a good criticism, maybe I shouldn't have mentioned it twice. I don't want you to read more into that, really I think in my prepared remarks, it's really, again, managed care is exciting and sexy and fun and gets us excited. But we've got businesses to run and they're steeped in the tradition of state-run Medicaid services. So we're keeping our eye on that ball, and I guess I just wanted to reinforce that we're doing that. And a big part of that is our continued efforts, turnaround plans and monitoring those that are underperforming. But we've always had them, we probably always will.

And we don't give up on them easily, and we can turn them around. But Dana, we have 130-plus locations. We have hundreds of payers. Some of our locations are more concentrated in a payer is either stuck in the 19th century or doesn't yet appreciate adequately home care. And there is a point at which it is not our duty to underwrite state government. And when we make that determination, it's the right thing for us to do something about it. We don't like doing it, but it's our job.

Okay. Fair enough. I know, I think last quarter you had mentioned you'd exited New Jersey and then some platforms in Washington. But we'll hear about that when you let us know about that.

Just last one for me, Dennis, Sarbanes-Oxley, you started incurring those costs, was that in the fourth quarter of last year?

That's really the first full quarter we had a full cadre of expenses for it. If you think about it, it tends to be a timed around year-end audit work. It's a third and first quarter increase, but we've worked the program throughout the year. But this is the last quarter that you would have a step-up in your cost. Starting next quarter, they're going to be more equalized.

Okay. And remind me, I think you said -- was it somewhere in the neighborhood of $275,000 or something like that?

I think I've communicated that this is between $700 and $1 million a year.

Annually, okay. All right.

Annually.

Very good. Thank you very much.

At this time, there are no further questions. (Operator Instructions) At this time, we have no questions.

All right. Dee, thank you very much. And thank you, all, very much for listening in and for your questions. We look forward to speaking with you at the close of the fourth quarter and the new year. So thank you, all, very, very much.

Thank you for participating in today's conference call. This concludes the presentation. You may now disconnect. Good day.