Addus Homecare Corp (ADUS) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Addus HomeCare Corporation Fourth Quarter 2017 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 2018 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 of forecast, 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 -- by 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, our Chief Financial Officer. I will begin with some overall comments and then Brian will discuss the fourth quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions.

We ended 2017 with a strong operating performance which led to solid financial results. Revenue for the fourth quarter was $112 million compared to $103.7 million for the same period in 2016, an increase of 8%. Our adjusted earnings per share for the fourth quarter of 2017 was $0.46 compared to $0.43 for the same period in 2016, an increase of 7%. Our adjusted EBITDA for the fourth quarter of 2017 increased 14.5% from $9.3 million to $10.6 million and adjusted EBITDA margin of 9.5%.

For 2017, our adjusted earnings per share was $1.60 compared to $1.46 for 2016, an increase of 9.6%. For 2017, our adjusted EBITDA was $36.8 million as compared to $32.1 million for 2016, an increase of 14.6%. As of today, we have approximately $65 million of cash in the bank with approximately $44 million of debt.

Our cash collections have been strong from all of our payors, including the state of Illinois. Illinois continues to do a nice job of keeping our company relatively current on our business with the state. We look forward to the state leadership passing its annual budget for fiscal 2019 this summer, which should enable the state to continue paying us in a timely manner in which they have been doing for the past 8 months.

Last earnings call, I discussed the issues we are facing in the state of New York related to the increase in minimum wage and the change in the Wage Parity Law to cover consumer-directed caregivers. These changes required our team to work closely with our managed care partners in the Long Island market to ensure that we are being reimbursed at a rate needed to cover these mandated changes. I'm happy to report that our team has continued to do a great job in obtaining the necessary hourly increases to allow us to meet the challenges of these wage increases. While New York will continue to have minimum wage increases over the next couple of years, we feel good about our ability to work with our MCO partners and the state to offset these hourly adjustments.

Most of you know that over the past 2 years, we have undertaken a number of initiatives, including cost reductions, creations of a new management team, conversion of important software systems and a dedicated effort to improve operating performance at the agency level. These initiatives have helped us to improve our operations leading to higher profitability. Our focus on completing these initiatives led to our decision to delay our acquisition strategy for the first half of 2017.

While we continue to work on various initiatives to enhance our operations, during the second half of 2017, we began to execute on our growth strategies, including our acquisition strategy. Prior to the last earnings call, we had closed on Options Home Care, a New Mexico personal care provider. Since that time, we have closed on 2 small private pay providers, further strengthening our ability to offer care to private pay clients. All of these acquisitions continue to meet or exceed our expectations. With the addition of these 2 private pay providers, our annual private pay revenue has doubled to approximately $16 million. While we will continue to look for more private pay providers to acquire, we are also busy evaluating potential transaction involving Medicaid personal care providers.

This past week, we announced that we had signed a definitive agreement to purchase Ambercare, a leading provider of personal care, hospice and home health services in the state of New Mexico. Ambercare had annual revenues of approximately $57 million in 2017 comprised of personal care, hospice and home health. Approximately $30 million of this revenue came from their hospice division. At the closing of this transaction, which we anticipate will occur in our second quarter, we will be the largest provider of both personal care and hospice services in New Mexico. This acquisition is a great example of our ability through acquisitions in a fragmented industry to execute our strategy of becoming the #1 or #2 largest provider of personal care services in each of our states while starting to add hospice services in selected markets. All of us at Addus are excited about the team at Ambercare joining us as we continue to build our presence in New Mexico. In addition to Ambercare, we continue to be very active and disciplined as we look for potential acquisitions. Our team is currently involved in various stages of the acquisition process with other companies. We are well positioned, giving our cash on the bank, minimum debt and existing credit facility to continue to take advantage of the acquisition opportunities we are finding.

Outside of acquisitions, additional opportunities for growth continue to develop as our position as the lowest cost in-home provider is further recognized and valued. A recent example is the announcement by CMS that personal care services may be added by Medicare Advantage Plans to their care offering beginning in 2019. Through the transition over the past few years to manage Medicaid in a majority of our markets, we have developed strong relationships with our managed care partners, and our teams are already having conversations with them about this opportunity. While it is too early to tell what the potential impact could be for Addus, this is another positive step toward expanding the availability of our service in a value-based market.

Before I turn this call over to Brian for a more detailed review of our fourth quarter performance, let me thank all of the employees of Addus. It is important for each of us to realize that we provide a very important and much-needed service to our consumers at a very low cost. This enables them to stay in their homes where they want to be instead of progressing to much more expensive health care in a less intimate setting. This is made possible by the hard work of our 26,000 employees.

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

Thank you, Dirk, and good morning, everyone.

Addus completed 2017 on a strong note with our fourth quarter financial results. We continue to produce a positive sequential quarter growth progression in revenue and adjusted EPS while leveraging our margin. Our organic growth for the fourth quarter was driven by solid same-store revenue growth of 4.1%. With our focus acquisition strategy reflected in the Options Home Care deal completed in August, we produced meaningful nonorganic revenue growth for the fourth quarter benefiting from a full quarter of Options revenue contribution as well as our October acquisition of a small private pay provider in Arizona. We expect the impact of our growth from acquisitions to be strengthened by the anticipated completion of the Ambercare transaction in the second quarter of 2018.

As Dirk mentioned, we also continue to evaluate and work towards a number of other acquisition opportunities and expect to announce additional transactions later this year. With the anticipated revenue stream from acquisitions, combined with an ongoing expectation for same-store revenue growth for 2018 in a range of 3% to 5%, we believe we are well positioned to produce further profitable growth.

For the fourth quarter of 2017, net service revenues increased 8% to a record $112 million. This increase was balanced between a 3.6% growth in billable hours per business day for the quarter and an increase of 4.2% in revenue per billable hour. Our gross margin for the fourth quarter was 27.4%, relatively consistent with the fourth quarter of 2016. With increasing pressure from minimum wage requirements in certain states, we are pleased to report we have been mostly successful on our efforts to obtain corresponding reimbursement increases to offset and maintain our margins as we have historically. Our team continues to work diligently with our payors to ensure the continued delivery of these important services to their members in the future.

G&A expense for the fourth quarter was 17.6%, a 120 basis point increase from the fourth quarter of 2016. This increase was primarily due to higher transaction and stock-based compensation expenses. G&A expense adjusted for stock compensation, acquisition expenses, restructuring and severance was 16.1%. As anticipated, we experienced a 40 basis point improvement in our bad debt provision to 1.8% of revenue from 2.2% for the fourth quarter of 2016.

The company's adjusted EBITDA was $10.6 million for the fourth quarter of 2017, an increase of 14.5% from the same prior year quarter. This was the first time this has been above $10 million for a quarter and at 9.5% of revenue is the highest margin we've achieved since the management changes began in the first quarter of 2016.

Adjusted net income per diluted share was $0.46 for the quarter, a 7% increase from $0.43 for the fourth quarter of 2016. The adjusted per share results for the fourth quarter of 2017 excluded the following: a noncash increase in the provision for income tax of $0.12 due to a revaluation of our deferred tax assets under the Tax Cuts and Jobs Act, M&A transaction expenses of $0.04, noncash stock-based compensation of $0.04 and gain on sale and divestiture of $0.01. Our adjusted per share results for the fourth quarter of 2016 excluded prompt payment interest from the state of Illinois of $0.17, reversal of prior restructuring charges of $0.03, M&A transaction expenses of $0.02, severance and other costs of $0.01, reversal of noncash stock-based compensation of $0.01 and the positive impact from normalization of the effective tax rate of $0.04. Adjusted for the impact of tax reform, the company's tax rate for the latest quarter was 35.4%, primarily based on lower WOTC credits received during the quarter. Following tax reform, we expect our tax rate to be in the low to mid 20% range for 2018.

We generated net cash from operations totaling $10.2 million for the fourth quarter and $52.8 million for full year 2017. At year-end, we had $53.8 million in cash on hand, $105.1 million of availability on our revolving credit facility and $44.4 million in term debt. DSOs at year-end were 73 days compared with 82 days at the end of the third quarter. DSOs for the Illinois Department of Aging were 75 days at year-end compared with 90 days at the end of the third quarter. With a budget in place, we have continued to see consistent payments from Illinois through the first half of their fiscal year and are very pleased with their efforts to keep us as current as possible. We have not yet received our prompt pay interest from the state, however, but anticipate it to be processed over the coming months as the state works through its backlog of payments to other vendors.

As a final note before we go to Q&A, Addus adopted ASU 2014-09 as of the 1st of January, which affects our revenue recognition. Under the regulation, the bulk of our provision for doubtful accounts will now be treated as a reduction to grow service revenues rather than as an operating expense. While this change will have an effect on year-over-year revenue comparisons for 2018 and on comparisons of line items as a percentage of revenue versus prior periods, it will not impact adjusted EBITDA and adjusted earnings per diluted share.

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

(Operator Instructions) And our first question comes from Dana Hambly of Stephens.

Dirk or Brian, could you talk a little bit on the census for the quarter? A little bit weaker than what we were expecting. Was it broad-based? Or were there any pockets, anything that you could speak on?

Yes, Dana. Good morning. I -- we can. You realize that starting 2 years ago, we really started directing our attention towards hours as opposed to census, changing the culture of the company. And so as we did that, some of what you've seen is a focus on making sure that the census we have onboard have the amount of hours necessary for those consumers to work in our company. That being said, other than just the overall vision we've had over the last couple of years as it relates to ADC, we've had a couple of areas that specifically caused the lower ADC this time. One happens to be in our 2 acquisitions we made a number of years ago up in the Eastern region, the Ohio market and the Virginia market. We have gotten out of a few contracts that didn't make sense, which means we lost some ADC. All in the idea of trying to increase the performance of those 2 areas, and we're very pleased that these changes are starting to have an effect and moving us where we want to be. In addition, we did talk about at the last call some of the challenges on the Long Island market we were having not only related to work -- the minimum wage and the living wage, but also we had one of our largest managed care providers on Long Island decided to leave the market. That meant a lot of the census we had with that particular provider went to other providers in the market. We were able to keep a lot of those clients as we were moving them to other MCOs. We did lose some, however. In addition, there was a question during the last year about what we call live-in consumers, how much that you get reimbursed for those versus how much you pay the caregiver. There were some questions all throughout the state of New York about that, that has just been clarified recently. So we quit taking these type of consumers for a number of months. We now are starting to take them back again. So really, if you think about it, it's the Ohio, Virginia area and then the changes on the Long Island market that led to the majority of the ADC decrease.

Okay. That's helpful. And then on the rate increase is actually pretty strong. I imagine that has something to do with your ability to get rate increases to offset minimum wage, which is a good thing. Could you just remind me in Illinois, I think, Chicago for the next few years raises their minimum wage if the budget would include increases every year, if that's something you have to fight every year and then that's the same in New York. I think you said you're doing pretty well in '18, but that -- I think the rate goes up again in '19 and just what the process is for -- do you have to go back to them again next year as well?

Yes. Dana, this is Brian. I can take that one. In both of the markets you mentioned, you're right, there are continued step ups in minimum wage in those markets. We've done a great job working with the legislature in each state and the payors to get corresponding reimbursement increases to keep us whole so far. But that is not baked into their plan for the future. Those are continuing conversations that we'll have to have year-to-year. But we've historically always been very successful in keeping our margin whole. This is more of a year-to-year process rather than something they would kind of put into their budget years out. So we're working today with the legislature in Illinois. Our guys have been in contact with them and having those conversations and the same thing with all of the payors up in the New York area.

Okay. And just a last one from me, Brian. On the tax rate for this year, the -- are you -- you're still getting credit for the WOTC tax credits. And can you -- or do you know if those extend beyond 2018?

Yes. They're through '18 and into -- I believe into '19. But it is not a permanent fixture. It's something that we'll have to continue to look at to see if they're going to continue to extend. They've gone through that process the last couple of years as well and have continued to move that forward. But we'll see how that shakes out. But yes, for 2018 then in 2019, those are still in place. So that's why we expect to see our tax rate in the low to mid 20% range.

(Operator Instructions) Our next question is from the line of Mitra Ramgopal of Sidoti.

First on the Ambercare acquisition. I know it included obviously an entry into the hospice market and some home health. I was wondering if you could give us a sense in terms of the opportunities you see on the hospice side of the business and also any potential expansion into home health.

Yes, Mitra. We were very excited when we were able to work out a deal with Ambercare because it not only strengthened our personal care market in the state of New Mexico, but it also allowed us to enter into hospice and home health in a market in which we had strong personal care presence. And if you'll remember, we've been saying for the last 18 months that we wanted to enter into clinical care in the home, but we wanted to do it in a way that works strategically with our personal care presence. So either moving into hospice, home health and predominantly hospice in markets in which we operate or if we went into hospice in markets where we didn't operate, we saw the way to open up or acquire personal companies around the hospice company to give us the complete offering in those particular markets. And Ambercare was the first one that we have found that is allowing us to do that. So going forward, I mean, we certainly have an interest in hospice, and home health will be interesting. We have that now in New Mexico once we close the Ambercare transaction, and we'll be able to see how that works with our personal care and hospice markets there and whether or not that is something that can be transferred into other markets where we operate. But we'll continue to look at the clinical side preferably in those acquisitions that come with personal care, but not absolutely exclusively.

Okay. And I don't know if you can give us a little flavor in terms of the hospice market itself in terms of the growth, et cetera, on that side of the business relative to, say, maybe personal care.

Yes. The team here has a lot of experience in hospice. Most of us have been out of it for a few years now. But it's a market that was growing similar to personal care, 3% to 5%. My last year in hospice, probably 2% to 3% was more appropriate as far as organic growth. But I would say similar growth profile to what we had in the personal care side. Now margins are different. Gross margins are higher and EBITDA margins are higher. Where we operate right now in the 8%, 9% EBITDA range with a target of 10%, if we can -- once we get up a little bigger. Hospice companies tend to operate in the mid teens as far as EBITDA. So as we enter into that particular market as -- if we continue to do a good job in operating those businesses, we should see the hospice side help our margins a bit.

Okay. No, that's very helpful. And I was wondering if you had any thoughts from a competitive standpoint. I know LHC had acquired AFAM or they're merging, and if you -- in terms of the acquisition pipeline you have, are you seeing any other interests, third parties maybe driving up prices or potentially doing that for you?

Well, I think hospice is an area that we all are aware has had expanded purchase multiples for a period of time. There seems to be a lot of people interested in that, folks that typically would not be considered a hospice provider seem to be looking as do a lot of PE firms. So those multiples tend to be higher. No question if you buy a stand-alone hospice provider. We typically are looking towards really personal care service that might have a division of hospice and we intend to -- the multiples tend to be slightly lower than what you'd see on a pure-play hospice. So for us in the personal care market, we believe we are still very comfortable in the 5% to 7% multiple range. Hospice is going to be somewhat higher than that. But again, we're not really looking to go out there and just compete on pure-play hospice in most instances. So we'll continue to focus mostly on what we see as these multiples that we can acquire and be very accretive to our company.

Okay. And Brian, I don't know if you can give me a sense of you -- and 2017 now, what percentage of the business was coming from the state of Illinois?

With the rate increase, that actually still is just, I think, over 50% of our overall business. Obviously, that profile will change when we bring Ambercare into the fold in the second quarter. But yes, just over 50% at year-end.

And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Dirk Allison for the closing remarks.

Thank you, operator. I want to thank you for your interest in Addus and for your participation on our earnings call today. Hope you have a great week.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.