Addus HomeCare Corporation
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Good morning, and welcome to the Addus HomeCare Corporation first quarter 2017 earnings conference call. Today's call is being recorded. To the extent any non-GAAP financial measures discussed on 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 financial -- 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 of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its first 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.

[Dirk Allison:]

Thank you, Scott. Good morning everyone, and thank you for joining us for our first quarter conference call. With me today is Brian Poff, our Chief Financial Officer. Let me begin with some general comments, and then Brian and I will discuss the first quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions. Our first quarter results continue to show the company's steady financial improvement. Even with the seasonality of our first quarter and the resetting of unemployment taxes for over 23,000 employees, we still had an adjusted EBITDA of $8 million and an adjusted EBITDA margin of 7.8%. For the last year, we have been focused on overhead cost improvements. While this will continue, 2017 will also include a renewed focus on operational improvements, led by Brad Bickham, our Chief Operating Officer. As you can see in our press release, we have changed our corporate logo. During April, we made changes to our logo as well as to our mission statement and our corporate values. We feel this is a very important step as we look to the future. Addus has a rich history of -- over the past 38 years, and we wanted to embrace that legacy while refining our mission and establishing new corporate values. Our mission statement

[Brian Poff:]

Thank you, Dirk. Good morning, everybody. The past few weeks have been an exciting time for Addus as we were able to announce our agreement to purchase Options as well as the expansion of our credit facility led by Capital One, both of which I will provide some additional color for in a few moments. First, on our financial results for the first quarter of 2017. Net service revenues increased 9.7% compared with the first quarter of 2016. This growth was driven by an 8.3% increase in billable hours per business day and a 1.3% increase in revenue per billable hour on the same number of businesses. 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. Our increase in revenues per billable hour was related to the sale of our adult day business, which has a lower per hour rate. In addition, same-store revenue increased 4.1% for the quarter, primarily from growth in the Midwest and Northwest regions. The company's net income from continuing operations was $4.3 million or $0.37 per diluted share for the first quarter, compared with $157,000 or $0.01 per diluted share for the first quarter of 2016. Adjusted net income per diluted share was $0.34, a 21.4% increase from $0.28 for the first quarter of 2016. The adjusted per share results for the first quarter of 2017 excluded several items as follows

[Operator:]

[Operator Instructions] And our first question comes from Whit Mayo from Robert Baird.

[Whit Mayo:]

Hey, thanks. Dirk, maybe just first, any background you can provide on the acquisition of Options? I heard the prepared comments, but was this a shop deal? Was this something that you sourced? So maybe if you can just expand more on the strategic rationale and how this fits into what you're doing in New Mexico, which is a pretty heavy managed care state, if I recall.

[Dirk Allison:]

Yes, Whit. When we had the opportunity to work with the ownership of Options to acquire that division of their company, we had the ability to keep it out of a process, which we felt was very important. As we've looked at the strategic states for growth, we've been out telling our investors that New Mexico is one of the states where we felt like there was a great opportunity. It is a state that we do very well on from a business standpoint, and it was an area where we worked very well with the managed care providers in the state. So when we had the opportunity to work with Options, it made a lot of sense from what we're looking to do as a company to acquire that -- to acquire Options. So if you think about it, what we've always said is we really want to be very strong in the states in which we operate as opposed to being just in a state. And this allowed us to consolidate into New Mexico. It gave us coverage in Santa Fe that we didn't have before. So it was an opportunity for us as a company to really strengthen an area that does very well.

[Whit Mayo:]

In terms of the margin profile, anything you can share? And then are they on ADP at this point, or will you transition them onto that through the integration?

[Dirk Allison:]

Yes. They are not on ADP today. They're on a different system. One of the reasons we're anticipating a close around August 1 is that we will be converting our company to ADP on the 1st of July. And because it's a division of a company we're buying, we needed to make sure that on day 1, when we had them, they came over on to our systems. So on August 1, they will come over on ADP and McKesson and will be entirely converted into the Addus way of doing business. And then talk about the margin profile, so you alluded to that, they do have a little higher margin profile than some you might have seen, which is why, as Brian stated, our price was around $23 million. We paid just slightly over 7x. You can see from anticipated EBITDA margin, they're a little higher than what we normally see in personal care.

[Brian Poff:]

Right. And Whit, I'll just add to that briefly in talking about margin profile. I mean, this is a division of a parent company, so it doesn't come with a lot of corporate overhead that would need to be synergized. But it'll fit in nicely into our profile in the state that won't require a lot of additional corporate adds on our end as well.

[Whit Mayo:]

My next question, just back to the managed care mix, it was the highest we've seen, and then I think you've noted some higher bad debt. Can you just flesh out what's happening there and whether or not this is just the receivables just aging out, which is requiring a higher reserve? Or is this something about -- is there any deterioration in kind of like the collectibility, whatever issue it is?

[Brian Poff:]

Yes. It's really two issues there. So in transitioning to managed care specifically in Illinois, we stated previously that, that process has not gone exactly smoothly, moving over authorizations from the state agencies into the MCO plans. So we have to work upstream to get everything documented properly. So in the meantime, some of those receivables are aging out, and so we're making sure to be conservative on our reserves related to those. And then we've had some prior acquisition AR that has aged out that we've had to take some additional reserves on kind of in the interim as well. And we've referenced that. But nothing else from a collectability standpoint in the state. We actually made good progress in April with a couple of big MCO plans in Illinois, I got some decent-sized payments from them. So we bring some catch-up there. So we're hoping to see that continue. Again, our teams are very focused on working with the state and the plans to make sure that, that transition is as smooth as possible. Again, just trying to make sure that, that happens quickly.

[Whit Mayo:]

So it sounds like this is just more normal movement within the quarter. And maybe just the last one, Dirk, high level. How are you thinking about the potential for block grants in the context of an ACA repeal/replace and, just broadly, how you guys think about the implications on personal care services in general? I'll hop off.

[Dirk Allison:]

Yes. Thank you, Whit. It's awfully hard to know how to react at this point to the potential changes, if any, in Medicaid. I do know this, that our team is very convinced and worked hard to be a low-cost provider. If you look at home personal care itself, we are the lowest cost service in the home. And so we don't know exactly how we would play if Medicaid states had block grants, but what we do know is at that point in time, they're going to be looking for ways to service their residents in the state within the guidelines of those block grants. And we believe we can be a player in that market. We are a low-cost provider. We help keep these Medicaid residents in their home, right now, on average of around 26 months and keeps them out of the higher-cost setting, whether that be an emergency room or a Medicaid paid nursing home. So while we don't have an exact understanding of what the changes may be in the future, we believe we're well positioned to be a player when they occur.

[Operator:]

[Operator Instructions] And our next question comes from Mitra Ramgopal from Sidoti.

[Mitra Ramgopal:]

Dirk, I just wanted to follow up on Illinois first in terms of, how far along are you on the transition? Or when do you think you might be able to complete that?

[Dirk Allison:]

The transition of the Medicare -- I mean, of the MCO states?

[Mitra Ramgopal:]

Yes.

[Dirk Allison:]

It varies in different states. Right now, and let's look at Illinois, I think Illinois wants to eventually get -- I think they said at one time, their goal was 50% of their Medicaid program in MCOs, and they've change that, I think, to a target of 80%. Today, we're around -- that's around 25%. So we're still somewhat in the early third of a conversion in the state. I will tell you, Illinois is probably the most difficult state as far as transition probably somewhat due to their financial condition because it's tough when you -- to get everybody working when a lot of the folks aren't getting paid. So we've spent a lot of time and effort on our side working with MCOs, working with the state to make sure that the authorizations and the transfer of patients from the state to the MCOs are documented and are done in a timely manner so that we don't have issues. So we think it will continue to get better as we go forward.

[Brian Poff:]

And Mitra, I'll just put some color to Dirk's comments as well. So in Illinois, we had a big shift in Q4, really slowed in Q1. I think we've talked about previously, there's been a lot of ebb and flow in the state. So we're still around -- over 25% of our revenues in the state come from MCOs. So what you saw really in the first quarter is the tick-up over 30% or 32%. It was really just a mix in New York rather than a continued shift in Illinois.

[Mitra Ramgopal:]

And then I had just a couple of questions on the acquisition front. Obviously, Options looked like a nice addition here, but I think in the past, you have mentioned states like Florida, Texas, Arizona that you would be looking at. I was just wondering, in terms of other states now that might be on your radar in terms of as you look at opportunities.

[Dirk Allison:]

Well, we still believe that those states represent a good opportunity for growth in the future. There are additional states. What we look at is a state that, one, has a population -- a growing population of the elderly. The states are well run financially, which we've learned can be a big issue in states we operate in. And then another issue relates to the minimum wage pressure that various states face. And so for us, as we look at those markets where we want to grow, we need to check those boxes as well as being in states preferably where we are today and can grow our strength in that state. Now we would enter into a new state to check all those boxes if we could do so in a way that we knew there was future growth. So those states still stay on the list, but we continue to look at others that may also meet the criteria for growth.

[Mitra Ramgopal:]

And now that you have exited the ADC business, is the focus going forward pretty much going to be just on the personal care market? Or are you exploring ancillary areas?

[Dirk Allison:]

What we have done, as you saw with our change in our mission statement, is we revolve around the home. And so while personal care certainly is a very important aspect in that home and will be our prime area of growth for the future, we also would be looking at other avenues of home growth, such as hospice and others, that we have experience with. And so we would do that strategically in conjunction with us being strong in a market with personal care. So we will look at other areas but as a strategic aspect of our personal care business.

[Operator:]

[Operator Instructions] And our next question comes from Dana Hambly from Stephens.

[Dana Hambly:]

Dirk, you mentioned in your prepared comments a new COO and more focus on operational improvements versus overhead. I was just wondering if you could elaborate on the distinction between the two.

[Dirk Allison:]

Yes. When I think of overhead, what we've really been focused on there is cost controls from a corporate aspect, whether it be mileage that we can control from here, renegotiating telephone expenses, changing policy as it relates to cellphone, things like that. When I talk about operational improvements, I'm talking about the way we actually do business in the market. How do we staff our sites? Is there a consistent staffing model based on the size of the sites? How do we move our employees from turning in time with paper into turning in time electronically, which would then give us management information much more quickly while, at the same time, lessening our costs as it relates to issues related to payroll? So operational improvements is more along those lines, Dana.

[Dana Hambly:]

And then I'd just add, as you -- external growth looks to become a bigger part of the overall growth profile, just thinking about the types of assets you're looking for. Appreciate the detail on Options. It sounds high quality. But I'm wondering, some of the other stuff as we think about layering this in and what the margin profile would look like, should we expect all the deals to be accretive immediately? Or are you willing to take on some fixer-uppers? Just what are you seeing in the pipeline?

[Dirk Allison:]

Well, honestly, we're not looking to take on fixer uppers. I'm not saying that there might not be a strategic one that comes up and would make sense, but that's not our focus. Our focus are to find relatively well-run personal care hospice, others that we can bring on board and would be accretive. Now as you know, Dana, anytime you bring on a deal, the first 2 or 3 months, there's going to be costs related to bringing that on that are going to add to -- through the P&L. But if you look at it without those costs, we anticipate doing accretive deals going forward.

[Operator:]

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

[Dirk Allison:]

Thank you, operator. I want to thank everyone for their participation on our earnings call today. You have a good week.

[Operator:]

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.