Addus Homecare Corp (ADUS) 2016 Q4 法說會逐字稿

Good morning. Welcome to the Addus HomeCare Corporation fourth-quarter 2016 earnings conference call. Today's call is being recorded.

To the extent any non-GAAP financial measures discussed in today's call you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the Company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements among others regarding Addus' expected quarterly and annual financial performance for 2017 or beyond. For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements without limiting the foregoing discussions or forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by the important factors among others set forth in Addus filings with the Securities and Exchange Commission and in its fourth-quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

I would now like to turn the call over to the Company's President and Chief Executive Officer Mr. Dirk Allison. Please go ahead, sir.

Thank you, Scott. Good morning, everyone, and thank you for joining us for our fourth-quarter conference call. With me today is Brian Poff, are Chief Financial Officer.

Let me begin with some general comments in the Brian and I will discuss the fourth-quarter results that we issued yesterday afternoon. After that we would be happy to respond to any questions.

As we have discussed in prior calls, 2016 has been a year focused on bringing in a team of executives who will help us achieve our strategic goals. Today I want to welcome Brad Bickham, our new Executive Vice President and Chief Operating Officer to this team.

Brad is an experienced healthcare executive whom I have worked with at four different companies. He is already making a difference with our field operations and I am confident that Brad and his operations team will continue the progress that we began in 2016.

With Brad's additions I feel our executive team is now complete and we have the leadership we need to continue to progress and grow. In addition, with this new team we have been able to add some terrific talent at our vice president level. As CEO I am excited about our management team and believe we are well-positioned to meet our strategic goals.

The earnings announced yesterday show we have increased our margins to 7.2% for income from continuing operations and 9% for a adjusted EBITDA even reserving a higher bad debt percentage than we should experience on an ongoing basis. Brian will share more information concerning our earnings including the increase in our bad debt reserve.

I'm very excited by the progress we have made with our increasing adjusted EBITDA margin. Our fourth-quarter results give us confidence that we are within reach of our annual 9% adjusted EBITDA goal based on our current revenue volume.

During the fourth quarter of 2016, we received $2.8 million of prompt paid interest from the state of Illinois. This along with over $68 million in past due receivables that we collected in our third quarter of 2016 supports our belief that the state of Illinois will pay for contracted services.

However, as we saw with the Illinois 2016 fiscal year, the leadership of the state has not yet been able to agree on a fiscal 2017 budget. This has left Illinois' social services in addition to many other programs without a current appropriation for payment of services provided.

Effective July 1, 2016 hour non-Medicaid receivables with the state of Illinois grew approximately $5 million per month and continue to do so. We were hopeful that the November state election would provide more clarity and persuade state leadership to pass a budget which would allow for payments for this service. This has not happened as of yet, but we remain hopeful that the leaders of the state will put aside politics and pass a budget to allow Illinois to begin its much-needed financial recovery.

While we look to continue to diversify our revenue geographically, Illinois is still an attractive market for Addus. And we are not seeking to reduce our business there.

One of our most important ongoing projects is the conversion of our payroll process to ADP. This project will improve service levels for our employees, enhance our ability to bill in a timely manner, reduce our overall expenses and help strengthen our internal controls. We have been working on this project since the middle of 2016, and I am pleased to announce that we are on target to complete this conversion by July 1 of this year.

This undertaking has been a very difficult one due to the many pay rules we are required to follow. With over 23,000 employees and multiple union contracts our payroll process is very complicated. I am grateful to the many employees who have been working on this effort and look forward to updating you on this project at our first-quarter earnings call.

During our third-quarter conference call we announced that we had closed three of our six adult day sites during the quarter as we continue to refine our corporate strategy to focus on services based in our consumers homes. As part of this refinement process we agreed to sell our remaining three adult day sites to Active Day Senior Care Centers of America, a leading provider of this service. We are pleased that Active Day will continue to operate these centers and look forward to working together to serve the needs of our consumers in those markets.

This sale was completed on March 1, 2017 with all of our adult day employees transitioning to Active Day. These three centers were immaterial to both our revenues and earnings.

Another area of management focused during 2016 was our internal controls. At the end of 2015 Addus determined that we had a material weakness in these controls. Our management team developed a plan to eliminate this weakness by the end of 2016.

Included in this plan was the partnering with KPMG to handle the internal audit functions for our Company. With a focused effort our team, working with KPMG, identified areas of weakness and undertook an extensive process which was designed to ensure we eliminated the material weakness by year-end. I'm happy to tell you that we expect to report that we no longer have any material weakness in our internal controls when we file our 10-K.

Now let me turn to our financial results for the fourth quarter of 2016. Revenues for the fourth quarter were $103.7 million compared to $84.8 million for the same period in 2015, an increase of 22.3% with same-store revenue growth of 5.1%. Our EPS from continuing operations was $0.65, up over 140% from the $0.27 for the fourth quarter of 2015 and adjusted EPS from continuing operations for the fourth quarter of 2016 was $0.43 compared to $0.32 in the same period in 2015, an increase of over 34%. Our adjusted EBITDA for the fourth quarter of 2016 increased 72.1% to $9.3 million from $5.4 million in the fourth quarter of 2015.

Let me update you on our activities as it relates to potential acquisitions. Over the past five months, we have been in discussions with multiple potential acquisition targets. As you would expect with a more detailed due diligence process, a number of these discussions did not work out for various reasons.

However, we have an active pipeline and are in discussions with a number of acquisition targets. A couple of these are in the latter stages of due diligence. While we are not at the point to make a definitive announcement today, we are hopeful that we will be able to close on our next acquisition within the next few months.

Before I turn this call over to Brian for a more detailed review of our fourth-quarter performance, let me thank the employees of Addus for their patience, support and hard work. We are building an exciting Company that provides important and often vital services to consumers at home and at a low cost, which enables them to stay where they want to be, in their homes while avoiding the need for much more expensive healthcare in a less satisfactory venue.

With that, let me turn the call over to Brian.

Thank you, Dirk, and good morning everyone. For the fourth quarter of 2016, net service revenues increased 22.3% compared with the fourth quarter of 2015. This growth reflected a 22.2% increase in billable hours per business day and a 1.6% increase in revenue per billable hour.

Our revenue growth for the quarter was also impacted by one less business day in the fourth quarter of 2016 than in 2015. The growth in average billable hours per day for the quarter was primarily due to the impact of the acquisition of South Shore which was completed in February 2016.

In addition, our same-store base made a meaningful contribution to growth in average billable hours per day as same-store revenue increased 5.1% for the quarter. Consistent with the third quarter of 2016, same-store results for the fourth quarter benefited primarily from continued growth in the Midwest.

The Company's net income from continuing operations was $7.5 million for the fourth quarter of 2016, an increase of 144.9% compared with $3.1 million for the fourth quarter of 2015 and $0.65 per diluted share, up 140.7% from $0.27 per diluted share. Adjusted net income from continuing operations per diluted share was $0.43, up 34.4% from $0.32.

The adjusted per share results for the fourth quarter of 2016 excluded several items as follows: $0.17 of prompt pay interest income from the state of Illinois related to their past-due accounts receivable, a $0.04 benefit related to the normalization of our effective tax rate, $0.03 related to a positive reversal of prior estimated restructuring charges, a $0.01 benefit related to the reversal of non-cash stock-based compensation, $0.02 related to M&A transaction expenses and $0.01 for severance and other costs. And our adjusted per share results for the fourth quarter of 2015 excluded a $0.09 benefit related to worker opportunity tax credits, a charge of $0.05 for a Worker's Compensation reserve adjustment, $0.03 cost for an IRS accrual, $0.03 related to M&A transaction expenses and $0.03 for non-cash stock-based compensation. Our gross margin for the fourth quarter improved 140 basis points to 27.6% from 26.2% for the prior-year fourth quarter, primarily due to efforts to control mileage cost and improve Worker's Compensation experience.

Moving to G&A expense, with the full realization of the impact of our cost savings initiatives in the third quarter, we produced a 260 basis point improvement in G&A expense for the fourth quarter to 18.6% from 21.2% for the fourth quarter of 2015. The benefits of our cost-saving initiatives for the quarter were somewhat offset by an increase in bad debt to 2.2% of revenue from 1.8% for the third quarter. This increase is primarily related to issues with the ongoing transition to managed care in Illinois as well as the impact of aging receivables from prior acquisitions.

While we anticipated bad debt to stabilize at approximately 1.2% to 1.3%, by the fourth quarter, ongoing transition issues the state is experiencing does not allow this to be realized. As a result, our expectation is bad debt will remain above our targeted levels until the transition is materially complete.

As part of our plan to return our bad debt to more historical levels, finance is working closely with Brad and his operations team to more quickly identify and correct the problems caused by the state's transition. We have added an experienced operational reimbursement resource to focus on this effort.

The Company's tax rate for the latest quarter was 25.3%, primarily due to the impact of additional WOTC credits. We had a tax benefit for the fourth quarter of 2015 primarily due to the WOTC benefit I mentioned earlier. With the restructuring charges largely behind us, we continue to expect our tax rate to normalize to approximately 30% to 32% in 2017.

We had a net use of cash provided by operations of $31.7 million for the fourth quarter primarily due, as Dirk mentioned, to the growth in our accounts receivable with Illinois. Our DSOs increased by 32 days during the fourth quarter to 104 days from 72 days for the third quarter with DSOs for the Illinois Department of Aging at 152 days.

At December 31, 2016, we had cash of $8 million, no outstanding debt on our revolver and availability under our revolving credit facility of approximately $79.7 million. We also had $24.1 million outstanding on our term loan primarily related to the South Shore acquisition.

This concludes our prepared comments this morning and thank you for being with us. I will now ask the operator to please open the line for your questions.

(Operator Instructions) Mitra Ramgopal, Sidoti.

Yes, hi, good morning. Just a couple of questions. First, just on the state of Illinois if you could give us an update in terms of like how far are you along with the state in terms of the transition and as it relates to other states paying on time, etc., is it only the state of Illinois?

This is Brian. I will answer that one.

As far as the transition to MCO, right now about 25% of our revenue with the state in the quarter came from an MCO. So we would expect that to continue to trend upward toward 50% I believe is the mandate by 2018. So we will continue to see that progression we believe in 2017.

As far as just the receivable with the state itself, I think we know without the budget being passed for this year, the general revenue fund, AR continues to climb on a monthly basis. But we would note that the state was a little behind as far as their true Medicaid payments in the quarter as well which help to impact the growth in AR. I will say that right after the first of the year we did receive a fairly sizable payment from the state around $9 million in early January, so that was good to see.

Okay, thanks. And I know you have talked about the acquisitions and you are looking at a number of potential transactions, etc., but what would you say is the biggest overhang for you in terms of getting something done. Is it really price or just maybe the mix of the business as it relates to the reimbursement, etc., or is there just any underlying factor that may be not allowing you to get some deals done?

Yes, this is Dirk. I will talk to that. One of the things we have found as we have looked through probably three or four transactions that we would hope to close this past year is that a lot of these companies are smaller companies.

$20 million in revenue, $25 million in revenue, and as we get into the due diligence we realize that the price expectation that the Company desires is not only outside our range but not one in which we felt we could stretch because it wasn't as strategic as it might be largely due to the fact that some of these companies want credit for a lot of the changes that Addus would need to make to get to the profitability level that they are stating in their document to us. So as we have gone through we've maintained pricing discipline, which is very important to us, but at the same time we have learned where these areas of concern lie. And so as we've gotten to later companies to look at we have been able to go into those areas pretty quickly and work with the other companies to identify those and negotiate.

So I would say it's not really the price expectation on a multiple EBITDA. It's more the adjusted EBITDA that these companies want to use to sell their company and that has been the most difficult.

Now as you get a little bigger in size that becomes less of a problem. So we are looking at companies that are in that size range. We also have some looks going on at a little higher revenue base that don't have some of those issues.

Now honestly the price on the larger issues I think as we mentioned before could be a little, maybe a little larger outside than our desired range of five to six times. But, again, we are willing to pay a little more if a transaction is strategic to our overall goal.

Thanks. Very helpful.

And just on the margin, again we saw really nice margin improvement here and I was just trying to get a sense as we look out beyond into 2017 and even into 2018 a number of the initiatives you undertook. Is that pretty much behind you now in terms of the margin you are hoping to get out of it or is this still some more room to go there?

I think you are right. I think by and large the materials are behind us. One thing to keep in mind with margins especially going into Q1 is the payroll taxes impacts us quite a bit with our fairly large size salesforce -- sorry, employee base.

But I would expect 120 to 130 basis point reduction into Q1 just for that reset. And that will continue through the year. And it's toward the back half of the year we will see some relief there.

And as we have said our goal continues to be to get to a solid 9% adjusted EBITDA margin on a continuing basis. Now, obviously, the first quarter because you reset SUTA and FUTA for 23,000 employees you get hit pretty hard. But after that is behind us in the third quarter we'd like to see a 9% range for the year if at all possible.

And then what we said is, again, eventually we would like to think we could get to 10%. To do that, we've still got to increase our revenue base about $150 million. So that's going to be a while down the road, but our initial target of 9% is well within our reach.

Right. Thanks.

Then, finally, if I look at the revenue per billable hour I believe that might be the highest we have seen. And I was just wondering what's driving that?

Yes, part of that is we closed the three ADS locations which has a much lower billable hour rate. So that helped impact that in the quarter. And the rest is really just mix in the business, but nothing particular to note there.

Thanks again for taking the questions.

(Operator Instructions) Dana Hambly, Stephens.

Hey, thanks, good morning. Just, Dirk, on that 9% target just want to understand how you are thinking about bad debt, or Brian? So it was about 100 basis points higher in the fourth quarter than we had expected it to be.

And I'm trying to understand are you expecting that to come down this year or is that pretty much going to linger in that 2 plus range for the rest of the year? And what is incorporated in that 9% target?

Yes, Dana, this is Brian. I would expect I think you are right, around that 2% range we would expect to see that as the state goes through the transition probably for the first half of this year.

Again, it will depend upon how quickly or how slow the state moves. It's a pretty big player for us. So our expectation right now is we would be in that 2% range for the first part of this year, then we will reassess and see where we are midyear.

And Dana, one of the things, again, once we are able to get past the issues related with the MCO transition that causes our receivable to have some issues as well as still cleaning up the final issues related to the early parts of our acquisitions we did a couple of years ago, that should come down. And as it does, that certainly helps strengthen our ability to hit that 9%-plus range goal. So it probably won't happen for a few quarters, but certainly will be a positive effect at some point in the future.

Okay. And then on that, so you said prior acquisitions impacting bad debt. Is that any kind of one-time cleanups this quarter or there's still some pressure there?

Well, I'm going to address this because Brian leads the AR effort, so I'm going to speak for him and what I see him doing with his team. There were a lot of early problems in our Ohio and Tennessee acquisitions that because we did not have the process as tight as we should have had lingered and have caused some write-offs, they are proper write-offs for 2016 but they were late to periods of service a while back. And so as we have cleaned those up it's done, one thing that it has done is it taught us what were the issues that originally caused those to come back to be a problem.

So as Brian mentioned in his comments, we have to have a solid process between operations which deals with the front end in our billing issues. That is where most of our issues start to the back end where Brian's team and reimbursement have to collect. And as long as the information on the front end is timely and accurate it at least eliminates a lot of the issues on the back end.

So Brian has been working very closely with his team and with Brad's team and we did hire a resource to come on board to sit between the two to help us make sure that going forward those issues that related to those two actions acquisitions early are being cleaned up and won't be a problem in 2017 and 2018. Does that make sense?

It does. It's helpful. But those were much smaller, so I just want on South Shore which was a much bigger transaction you are not seeing similar-type issues?

No. And remember, again, South Shore came on February 5. We had already started at that point we were changing the way we did acquisitions.

We stopped the transition of South Shore at that point in time until we got some people to come on board to help Eileen and her team in Long Island complete that transition. So we have seen, we have not seen the issues related to the receivables in South Shore that we saw with our prior acquisitions which gives me comfort going forward that our team has a good process and procedure during the due diligence and transition phase to help eliminate those issues for any future acquisitions.

Okay, that's very helpful. Thank you.

And on the billable hours continue to see good growth there. I know that has been a focus on growing that number to drive the organic growth rather than census or just purely census. Just trying to get a sense of has most of the low-hanging fruit been picked on that front or there is still plenty of opportunity to make internal improvements?

Well, we have made some improvements. We have worked hard. I have to give credit to our IT department led by Zeke and his team as they have given information to our ops team.

Brad has really taken that project under his guidance. And we are in the process of, tweaking is maybe not the right word, but we are refining our internal database to focus in areas that we have not yet focused on. So we are getting down deeper into the areas related to both underserved and overserved, and we are rolling out a new plan starting now that should help our sites understand where their issues lie and clean them up.

Now to be honest with you, we still do a lot of payroll entry with paper, and any time you do something with paper there is a delayed input between when the service is rendered and when we get the information at corporate to help the field. We are moving with a project to try to make our entry as electronic as possible, and as we get a higher percentage of electronic entry from what it is today we will be able to see more real-time information of the issues and address those issues prior to occurrence.

So I do think you have seen some really good strong work to drive us to the 5.1%. But I would say we still have opportunities in the future to keep strengthening, not necessarily to grow that number but to keep that number strong.

Okay. Good to hear.

Then Dirk, we hear some of the home health companies making more inroads into the personal care business, very strategic for them. I wonder if your pipeline include any other home health-based service lines or if you are looking at partnerships with other groups to deliver the same sort of service some of these home health companies are talking about?

I will be honest, right now we are not looking at partnership. We view Addus as a standalone Company whose strategy would include servicing our consumers' needs in their homes. Today that includes personal care, as you know, but I will tell you we do have in the pipeline, we are looking at the opportunity to potentially add home healthcare.

We would look at hospice. I think those two areas would be ones which we believe could make a lot of sense strategically.

In other words, we don't necessarily want to enter into the service lines in markets where we wouldn't have personal care service. But if we could bring in additional service lines for our patients, we spend over 21 months with our consumers in their home before they need either Homecare or our hospice or other services and if we have done our job and built that relationship with them we feel that gives us an opportunity as they turn and need additional home care services.

That makes sense. Last one for me, just an update on the Chicago minimum wage. I don't know if there has been any progress to get that funded, and I think it steps up again midyear this year.

There has been a lot of efforts being put around getting that funded. There has been some of the legislatures have put forth bills to take care of that problem. I actually feel like that if we could get a budget in Illinois we'd have a much better opportunity to offset minimum wage.

I don't think the governor nor the speaker, which tend to be the two that are the impediment to getting a deal, I don't think either one of those think that raising the rate to offset a mandated increase in the minimum wage is a problem. I think they understand the necessity of that so that service providers don't eventually have to go elsewhere. So we are very positive that there is work towards offsetting the minimum wage July 1, but I will be honest in telling you nothing has been passed as we sit here today.

Okay, all right. Great, really good work. Thanks for taking my questions this morning.

Whit Mayo, Robert Baird.

Hey, thanks. Dirk, I wanted to go back to your comments on M&A diligence, the on boarding process etc.

Can you elaborate on the maybe two or three fundamental changes that you brought to the diligence process, not so much the post-close onboarding, how can you put proper guardrails just around the efforts so we don't see any of these issues going forward? I hear you on the revenue cycle and tying that back into ops and onboarding, but just curious more like pre-deal how you've brought some fundamental changes to the diligence process.

Sure, Whit. Well, one of the first things I did was bring on a team that had done it, had been very successful in acquiring companies in the past successfully. You know as well as I do that an acquisition can turn out to be something you should not have done very quickly.

And so this team spends a lot of time planning. It's a dedicated team in that anytime we have a transaction apart of their job is to do that. It is not the only part of their job, but it is a big part of their job.

As part of the due diligence process we have strengthened our quality of earnings review. We have moved into lately using E&Y to come on board and do this work for us. They are a little more expensive than what we were using before, but quite honestly we feel, the work product that they give us has really been strong and it allows us to then know some of the pitfalls that could occur going forward.

So we spent time on putting a team in that knows. We spent time on upgrading our QofE.

And then probably one of the things you should see, the transition following it should be much crisper and more detailed. Today one of the things we've added, before we did reviews but we've strengthened our clinical review, we have strengthened our legal review and we've also then added and strengthened a market look too.

We also, one other thing, and this is just an aside I have to thank one of our Board members for this. Darin Gordon, as you know, joined us as one of our new Board members at the end of last year, he and Susan Weaver, and they both are excellent Board members. Susan deals with our clinical side and compliance has been wonderful.

Darin understands that but he also understands state Medicaid systems and he has had the ability to work with us to help understand what a particular acquisition's state plan may be thinking in the future so that we understand are there issues with financing, are there issues with usage, utilization so that we can avoid stepping into a situation where we purchase something and then all of a sudden we start seeing reductions in revenue. So I would say all those aspects together have got us to the point where we are very comfortable today that when we close our next transaction we have great confidence in it.

That's helpful. Maybe shifting to the payroll conversion, will all the branch locations be converted on July 1? I had in my notes that perhaps South Shore wasn't going to be ready yet, so if you could comment on that and then just any expectations for potential cost savings, productivity after the conversion that would be helpful.

Yes, first off, I want you to understand before we get to the 7/1 date we will spend the previous 60 days running duplicate payrolls in a testing environment to ensure that when we flipped the switch on July 1 we think we are in a solid position. We are not going to convert South Shore on July 1 and the reason is their system is working okay right now, working well. The team out there is doing fine.

We looked at their controls, they have very strong controls for their Company. So we have delayed their conversion until August 1 so that we can the first 30 days flip over all of the ultimate users that need to be converted, then we will go out and we will convert South Shore over to the system. So we very comfortable that we will have a solid conversion at that point in time and a solid transition to ADP.

Now as far as the cost, let me be honest with you, we have not really speculated nor told the street. I will say, there's a lot of issues related when you have a system that was designed that wasn't as flexible as you need. So a lot of things we have to do with our 23,000 employees and our numerous union contracts today are very difficult with our current system to get done in a correct manner which causes a lot of rework.

So our payroll team has done an extraordinary effort this last six months of trying to eliminate as much of that as they can, but there is a point at which they just can't do anymore because the system itself is just a problem. So with the ADP system, we believe that a lot of this rework, having to send out checks FedExed to sites because they were incorrectly calculated will go away.

We also feel like there will be some personnel gains. As we grow our hope is that we don't have to add as many new payroll people going forward because their productivity level will be much higher once we get on the ADP system. So while we are not really able to give you a dollar amount today, we do think there is some upside there that we are excited about.

Got it. And G&A has been pretty consistent around $19 million a quarter for the past two or three reports. Is this a good run rate at this point in time or any reason why that would begin to go back up?

I don't think we see that going back up. Most of our cost-cutting initiatives we baked in by Q3 of last year. Part of G&A is bad debt, so if you look at Q4, where it was, that is going to be pretty consistent we think moving forward, so we think that's a good run rate.

Got it. On one last one just on an update maybe on the contract center, I think you've hoped to get a sublease in place, I just didn't know if there was any update on that topic. Thanks.

Yes, on the contact center, again, understand that part of the problem with leasing anything in the state of Illinois is that people are really shaky because the government has not proved to be effective as far as putting together a budget. So it's hard for companies to make capital expenditure decisions when they don't know what the tax rate is going to be or is the state going to pay its bills, what's going to happen.

So we've had some opportunities that have come by that have fallen out at the end. We are currently, we do have a couple right now that have made proposals to us on the contact center.

We are working with them with their real estate broker through our real estate broker to see if we can't come to a conclusion. So we don't have anything definitive today, but we have a couple we are working on.

Great. Thanks, guys.

Mitra Ramgopal, Sidoti.

Yes, hi, just a couple. On managed care again, following South Shore are you having more conversations now with other managed care companies looking to use you to do the services or no change here really?

We've had conversations ongoing with managed care companies, Mitra, this is Brian. But nothing material to report at this time.

You saw the change really for this quarter up to 30% as far as the mix of our business. A lot of that was largely due to the Illinois transition. And nothing other, anything else material really to report at this time.

But again, we do, as you know we did put folks we brought on a group of group. We brought on some folks to work with us specifically around the managed care relationship that we had and to try to drive those going forward. So that team has actually been working with the managed care providers in Illinois as well as in New York particularly to do things such as work on driving both rate as well as volume.

And so while there's nothing material to state to you that has happened with that, I will say we are very excited that a lot of their work has been able to maintain rates and talk to these managed care providers. Also as it relates to bad debt payment or the payment of our receivables, in some of our managed care environment in Illinois while there is this difficulty in transition between the state and the MCOs this team has been a real resource in going in and talking to the MCOs and explaining the difficulty being caused by the state as it relates to us being able to bill as quickly as we need to bill and that's been very helpful. So there is nothing material to report on the managed care transaction but the team is already paying dividends.

Thanks. Then finally on the competitive landscape wondering if you are seeing any changes there and especially as you look at potential transactions are you seeing others looking to also consolidate in this space?

You know, the competition for acquisitions, the ones we have been looking at have not really been, it's not really been as difficult as maybe you might think. In certain states, I know Massachusetts has been very competitive and there was a little look in New Jersey that was competitive but some of the other states we are looking at has not been.

In fact, a couple of the ones we are dealing with we are a single source negotiator with the other side to determine if they want to come out and to sell to us. So right now I wouldn't say the competition has been as difficult as you might imagine, although as we get into bigger transactions I'm sure we will have competition for those.

Okay, thanks again.

Brian Rath, Walthausen & Co.

Hey guys, thanks for taking my questions here. Just a couple of quick ones. On the AR balance, I think in the past you have talked about the burn in Illinois of roughly $5 million a month, but it looks like the step-up from Q3 was a little more than that would imply.

So just is that $5 million still a good number? I think you mentioned that they were a little behind on their true Medicaid, so is the, for Q1 and just looking at working capital throughout the year is that $5 million still good if you don't get paid?

Yes, Brian, this is Brian. You are correct, in the general revenue fund component of the business in the state it is about $5 million a month.

There was a slowing just on the Medicaid portion of the state's bill in Q4. So the total increase for IDOA in the quarter was over $30 million, so about double what we would normally expect. But we have seen them pick up some payments early in Q1, so like I stated earlier we got $9 million from the state right at 1 January.

We've seen another $7.5 million payment in February. So the burn hasn't been at a Q4 level in Q1 so far. I think probably that helps answer your question.

But on a go-forward without a budget you are correct. We will have the underlying $5 million month to month, and then where they are with Medicaid funds would be in addition to that.

And Medicaid funds tend to be, historically if you look at our Company and the Medicaid program in Illinois, they have been somewhat spotty where they would hold you for a couple of months then they would catch you up, catch you up. We are hoping that -- we are working with the state to try to make that more, a more smooth process.

They did a great job in 2016 keeping their Medicaid pretty well up to date as they had the GRF problem. We did see that it slowed down a bit maybe in November and December. But we've gotten payments in January and February, so we will continue to work with them but Medicaid is a pretty solid program, as you know, because the federal government pays so much of it.

Sure, sure. That's helpful. I was just trying to think through how much cushion you really have as you go through the year and your deal pipeline and if you are burning $15 million a quarter and not getting paid, just trying to see how much real cushion we have to pursue M&A.

So then on I think maybe a week or two Bruce Rauner came out with some thoughts or an update, an agenda around the Medicaid Managed Care program and there's a couple of points in there around reducing the number of MCOs in the state from I think roughly a dozen to four to six. But then also I saw it looks like a greater emphasis, at least in the language of the document, was putting a focus on more prevention and population health. And I think broadly it was challenging just whether the MCO program was actually saving the state money.

So in that context just curious your thoughts around that shift from smaller number of MCO providers, does that cause any disruption in your services either repeat (technical difficulty) or whatever else might be? But the component around him pressuring around cost savings from the program and wanting to focus more on prevention, does that accelerate maybe the utilization from managed care for what you offer?

Well, I will try to answer that question as best we can because, again, it is just opinion. First off, we believe that Addus is a low-cost provider, that we are in the right place in the home care environment should states, including Illinois, start looking at how do they limit their cost exposure to Medicaid and the residents they have been covering. So we believe with any disruption will be opportunity and we want to be prepared for that.

That being said, obviously, Illinois has a lot of issues besides Medicaid. It just happens to be one of their bigger ones. And Rauner does appear to be focusing on that, and so we will continue to look at that and we will continue to make sure we understand what is going to happen.

I don't think anything will happen quickly. Nothing happens quickly in the state of Illinois due to the fact that there is differing viewpoints on each side.

Now I do understand Rauner can do some things as it relates to MCOs and Medicaid and if they do we feel that's good. One, we have a good relationship with MCOs, so we are proud of that. But we will continue to keep our costs as low as possible so that if a governor is looking for ways to save money with Medicaid we think we are the answer.

Because remember if we can keep a consumer in the home versus going into nursing homes, which are covered by Medicaid, you are probably a third or less cost per day and the particular consumer stays in their home which is a much better environment for them. So, again, if Rauner, and he is a smart individual, if he looks at the overall cost of Medicaid our belief is he will look and see well, if I make a change to personal care and drive people into nursing homes that's not good for the state.

So we will see. It's still to be determined but we are staying as aware as we can.

Okay. And the last one for me, just I think you made a comment around on margins with mileage, some control around mileage reimbursement. Was that controlling or reducing the reimbursement that you offer to employees or was it just doing a better job around mapping routes and just logistics side of it?

This is Brian. I will answer that one.

So really it was more of an operational focus on just making sure we had good tight controls around mileage submission from the field, just making sure that everybody was adhering to our policy and really scrutinizing and making sure the miles that we had coming out of the field were necessary. So really more of a control and operational aspect, not any reduction in rates or anything like that.

How meaningful is that? Does that move the needle on margin or is that just a side comment that you made in the prepared remarks?

It had a small move the needle in Q4. We would expect that to be continuing into Q1 where we are now.

We don't probably see a lot of additional improvement there. It was more of a one-time focus in Q4 for us.

All right. Thanks, guys.

I am showing no further questions in queue at this time. I'd like to turn the call back to Mr. Allison for any closing remarks.

I want to thank each of you for being on our call today. We appreciate your support. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.

You may now disconnect. Everyone have a great day.