Addus HomeCare Corporation (ADUS) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Addus HomeCare Corporation Earnings Conference Call. My name is Colby, and I will be your operator for today. [Operator Instructions] And as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Greg Swanson, Corporate Controller. Please proceed, sir.

Thanks, Colby. Good afternoon, and thanks for joining us, everyone. With me on the call today are Mark Heaney, Addus' Chief Executive Officer; Daniel Schwartz, Chief Operating Officer; and Dennis Meulemans, our Chief Financial Officer. Before we begin, I'll briefly read the Safe Harbor statement. This presentation will contain forward-looking statements within the meaning of the Federal Securities laws. Statements regarding future events and development, 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 our most recent Form 10-K or Form 10-Q, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. And with that complete, I'd like to now turn the call over to Mark Heaney, our CEO.

Thank you, Greg. Good afternoon, and thank you for attending Addus HomeCare's 2012 Q1 investor call. As Greg mentioned, I'm joined on this call today by Daniel Schwartz, our Chief Operating Officer, Dennis Meulemans, our Chief Financial Officer, as you just heard from Greg, our Corporate Controller. I'd characterize our performance over the past quarter as mixed. Total net revenues were $67.9 million, a 1.6% increase over the prior Q. Home & Community net revenues were $56.9 million, a 5% increase over the prior Q. Home Health revenues were $11 million, a 13.4% decrease from the prior Q. Net income was $629,000 or $0.06 per diluted share. On a very positive note, our Home & Community division, which makes up 80% of our revenue, had a very solid quarter attributable to: continued efforts and improvements in cost management; increased productivity at the site level; and an overall increase in census. These significant outcomes are directly attributable to continued execution on the part of division, regional and site management who have been consistently executing on the performance improvement plans we've been describing over the past several quarters. It should be noted, I think it's important, that the earnings improvement in Home & Community where states are our largest payer, is accomplished without the benefit of rate increases which states have not offered during the economic downturn. While there remains significant operational improvement to be realized in all of our Home & Community sites, this division is now beginning to focus on shifting from a high quality Service and Order-taking business to a high-quality Service and Sales business. Daniel will talk a bit more on our move to increase to outside sales on the Home & Community side. As we all know, states continue to consider, or make plans to, ship to comprehensive, long-term managed care programs, focused especially on the dual eligible population. We continue to talk to managed care organizations at both the operational and senior levels, about ways our low-cost personal care services can help managed care improve health outcomes among their members at the lowest possible cost. We think we're an important part of a long-term managed care solution. On a less positive note, our Home Health results are disappointing. We deliver really good care, but our costs for doing so are just too high. Direct costs of labor are too high. Admin costs are too high. Our mix of higher and lower margin business has to improve. Sales and capture rates are not where they need to be. Now there are positives in Home Health. The management team we need is in place. Recruitment of quality health care professionals is solid, we have no continuing staffing or inventory problems. The call center is rolling out and capture rates are improving. And we're adopting technology to help us manage the Home Health business much more effectively. Daniel will talk to Home Health in his comments. But relative to Home Health, from my perspective, we know what drivers to attack. We have a good plan and are executing against that plan. Now I wasn't satisfied with our Home Health results, but I am more than cautiously optimistic that we are making progress. Now let me turn the call over to Daniel for his comments on our operations in the Q.

Thank you, Mark. As Mark mentioned, Home & Community division, our core business, continued to perform solidly and had another good quarter. Division EBITDA increased 16% and margin increased 1.5 percentage points over the prior-year quarter. Gross margin increased 40 basis points in the prior-year quarter on slightly lower payment rates. These improvements are the direct result of a plan put in place in Q2 of 2011 to increase sales staff productivity, grow census and control administrative costs. I want to thank the agency, region and division leadership and teams in Home & Community for achieving these impressive results. We continue to make progress on becoming a more effective service and sales organization. Each agency has a focused business development plan, and we expect our agency directors to spend the majority of their time educating their community about these important programs. Same-store census in the quarter increased 1.3% from Q4 '11 and 3% from prior-year quarter. While there's more to do, Q1 results demonstrate the impact of this focused effort. The state legislative sessions are in progress. There are no meaningful reductions or negative proposals currently. Given the financial pressure in the states, we view continued funding for home-based services as positive. Home & Community services are an important component of the state's cost-reduction solution. Consistent with this view, we are very pleased that the Governor of Illinois, our largest state, is proposing more funding for Home & Community services. We continue executing on opportunities to increase profitability, including strengthening our regional leadership, increasing census in existing business and new programs, continuing telephony rollout and the centralization of administrative processes to improve both our effectiveness and reduce costs. We're excited about this core business and the continued growth opportunities. Q1 Home Health performance was disappointing. Dennis will discuss the financial results in more detail, but the bottom line is we must improve both our expense and revenue performance. While we have been working on this and making some progress, we must and have pick up the pace and are executing more urgently and more immediately. Our action plan is focused around the following 5 key areas: increasing field labor productivity; reducing administrative labor, travel and mileage expenses; improving sales volume and mix; improving conversion effectiveness through our central intake center; and assuring episodic clinical accuracy and appropriate reimbursement. Field staffing must be more flexible to changes in census, and we've transitioned our hourly clinicians and therapists to a per-visit compensation model and we've increased the productivity standards for our salaried clinicians and therapists. We need to reduce are administrative costs immediately. These reductions are being executed and will be completed this month. We need to improve our business mix by focusing the sales force on increasing Medicare volume and case complexity to generate higher episodic values. We are doing so. Medicare Starts of Care from our account executives increased 4% from Q4 '11 to Q1 '12, with a slight increase in Starts of Care for account executives. Medicare Starts of Care from our integrated program remained stable both sequentially and the private year quarter. The Addus referral center, our essential intake center, is demonstrating positive results in the Chicago market beta site, with Medicare Starts of Care increasing 15% from Q4 '11. Q1 conversion rate is 5 to 7 percentage points higher than our offices with local intake. Central intake is being rolled out across the division and will be completed by July. Finally, we've engaged a technology partner to enable us to improve both our patient outcomes and our financial performance. Before turning the call over to Dennis, I want to reiterate the Home & Community business had another strong quarter and continues executing on the business plan. Our Home Health division performance was, as we stated, disappointing. We have a solid plan in place and we have the right team to execute it. We are doing so with discipline and urgency. I expect measurable steady financial improvement in this division. With that, I'd like to turn the discussion over to Dennis for additional detail on the financial performance.

Thank you, Daniel, and good afternoon. Highlights for our first quarter were: our consolidated revenues increased 1.6% to $67.9 million compared to $66.8 million for the same period in 2011; first quarter net income was $629,000 or $0.06 per diluted share compared to a reported net income of $853,000 or $0.08 per diluted share for the same period in 2011. Our first quarter results, however, included 3 items of note. We recorded a gain on the previously announced sale of a Home Health agency in Portland, Oregon for $495,000. This property was determined not to be a strategic value to the company. We received $128,000 in prompt payment interest from the State of Illinois and lastly, we adjusted estimates for accrued Medicare revenues recorded in 2011 as the realized payments on final billings were lower than previously estimated, reducing revenues by $862,000 and operating earnings by $763,000. Had these 3 items not occurred, the pro forma EPS would've been $0.07 a share. Cash flow during the quarter was negative $701,000 due primarily to increased working capital needs to fund our accounts receivable. Cash generated from operations before considering working capital needs were $1.7 million on net income of $628,000. Cash used to fund working capital needs totaled $3 million. Home & Community segment operating income improved by approximately $1.1 million or 150 basis points to $6.4 million, largely due to management's efforts to improve margins, to improve field staff productivity and aggressive management of field staff expenses and leveraging the fixed, general and administrative cost of the division. Home Health segment operating income was down approximately $1.1 million on a quarter-over-quarter basis after adjusting for the reduced Medicare revenues discussed earlier, resulting in an adjusted operating loss of $400,000. The adjusted operating loss is the result of lower field staff productivity, increased field cost for travel and other expenses and increased segment G&A expenses during the period of lower admissions from all payers. Interest expense declined by approximately $181,000 to $532,000 or 0.8% of revenues when compared to 2011, the result of lower borrowings throughout the quarter. Turning to our segments, Home & Community, reported an increase in net service revenues of $2.8 million or 5.1% to $56.9 million when measured on a year-over-year basis. Revenues increased $766,000 when measured sequentially. Despite challenged state environments and a slight decline in our revenue per billable hour, this growth was fueled by a 3% increase in average census and improved staffing effectiveness of our field staff. Home & Community's gross profit margin improved over the prior year by 40 basis points to 25.1% in the first quarter, reflecting management's continued focus on improving field staff productivity and proactive management of overtime, worker's compensation and despite increased unemployment taxes. Home & Community's general and administrative expenses were essentially flat on a quarter-over-quarter basis at $7.4 million, with scheduled declines in depreciation and amortization. Home & Community's operating income before corporate allocations was $6.4 million or 11.3% of revenues for the first quarter of 2012, compared to $5.3 million or 9.8% of revenues for the same period in 2011. Operating income as a percent of revenues improved sequentially by 150 basis points, the result of improved gross profit margins discussed earlier and the effective leveraging of the fixed general and administrative expenses. Turning to our Home Health segments, first quarter 2012 revenues decreased by $836,000 after considering the Medicare revenue adjustment discussed earlier or 6.6% on a year-over-year basis to an adjusted $11.9 million, driven largely by a 4.5% decline in Medicare admissions, a 3.3% decline in revenue -- Medicare revenues per episode, the result of the lower Medicare reimbursement rates enacted at the beginning of the year, and a 15.7% decline in other payer admissions. Adjusted revenues declined sequentially 4.8%. Home Health gross profit -- Home Health first quarter gross profit was $4.3 million, with a gross profit margin of 39.5%, a decrease of 530 basis points over the prior-year results. After considering the revenue adjustment discussed earlier, the adjusted gross margin would be 43.1%, a decrease from the prior year of 170 basis points. This decrease in adjusted gross profit margin is primarily due to lower field staff productivity and increases in other field expenses. Home Health's general and administrative expenses increased $645,000 to $5.5 million in the first quarter, to 46.4% of adjusted revenues, compared to 38.3% in the prior-year quarter. General and administrative expenses were essentially flat with fourth quarter results. Daniel has commented on our efforts to lower these administrative costs. Home Health's operating loss for the quarter was $1.2 million, but after considering the impact of the revenue adjustment, the adjusted loss was $400,000 or 3.4% of adjusted revenues, representing a decline of $1.1 million over 2011 results. Now let's turn to our balance sheet and cash flow. Our accounts receivable net of reserves were $73.8 million as of March 31, 2012, representing a $1.5 million increase from the balance reported on December 31, 2011. During April, the State of Illinois paid a total of approximately $16 million in excess of amounts normally received in a month. It is important to note that Illinois has, over the past 7 to 8 months, become a more predictable payer for us. We appreciate their continued support of our programs. At March 31, we had total debt of $31.9 million compared to $31.5 million as of December 31, 2011. Cash used for operations was $1.3 million for the quarter, with $375,000 net increase in long-term debt as we utilized our bank line of credit to support our working capital needs while reducing our long-term debt. Adjusted EBITDA was $2.2 million in the first quarter of 2012, down from $3 million in 2011. This concludes my formal comments. I would like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dan. In sum, I look at our quarter. That's why I say Home & Community, our largest division, is managing its business continually more effectively. I also pointed out that there's growth opportunity in Home & Community, we're going to hold the division responsible for taking advantage of it. Home Health, as been pointed out, is currently underperforming but I believe that management has a plan and is executing on it and I look for steady and continued improvement in that division. Importantly, I think we're positioned, and this is really important, I think we're positioned for managed long-term care as it moves across the country, and it definitely is. And finally, and most importantly, we've changed this company greatly over the past 2 years but in no way more positively than in the changes and additions we've made to our management and execution staff, and I think with a good team, you can win some ballgames. On that, Colby, we will turn the call back over to you for questions from our listeners.

[Operator Instructions] Your first question comes from the line of Tim Fonda [ph] with Sidoti & Company.

Just on the Home Health segment, so it sounds like you have a pretty good plan in place. How long do you think before you're able to turn things around there?

It's Daniel. I think what I can share is we expected continued, steady improvement. We expect improvement in the course of the quarter. And we are, as I mentioned in my comments here, we are executing on the expense side of the plan immediately, but the theme I would take away is continued, steady improvement in margins and profitability.

Yes. And I think also, look, the -- fortunately, I -- the most important part of solving a problem is identifying what the problem is. I think this team has identified the big drivers. I think -- I know they're on it, I know that they are measuring that on a daily and weekly basis. I think, Tim, they're making headway and I think that's what we should look for, just steady, continuous process.

Okay. With the payments on the State of Illinois in April, will any of that go towards an interest payment, or that's just straight revenue top line?

Tim, that cash will be used to pay down our revolving line of credit, which obviously reduces our -- will reduce our interest payments, but that's -- with the State of Illinois, these large payments are part of the process with them. And I'll be straight, we were a little surprised. This is more than we expected.

[Operator Instructions] At this time, there are no further questions -- correction. Your next question comes from the line of Matthew Gillmor with Robert Baird.

I was hoping you, guys, could -- I know you've discussed it a little bit in the prepared remarks, but could you comment a little bit more on the Illinois government budget proposal, and just from our reading of it, it looked like that there, obviously, are some cuts to Medicaid, but it looks like they were potentially expanding some of the services you all provide. So I just wanted to see if you had any commentary around the budget specifically. And then just kind of a legislative process as we stand today.

And that legislative process specific to Illinois or generally?

Illinois, specifically.

Yes. We -- here's -- the bottom line is the Home & Community budget which is all that we care about in Illinois relative data [ph], will -- had -- the governor is proposing to increase spending again this year without a rate increase, serving more people. They increased spending last year also. As you well know from trying to analyze our business, yes, it's broadly lumped in the Medicaid program, but it's not Medicaid as we traditionally know it. Medicaid Home Health, Medicaid nursing homes, mothers and kids, all important programs, but that's not our program. Home & Community had significant growth spending in the part of Illinois last year without a rate increase, just serving more people and it's going to do so again this year. In terms of the legislative process, we are not aware, we monitor that on all the states closely. We're not aware of any legislative processes, regulations or anything else that give us too very much concern.

Okay. And then in Illinois again, are there other -- I'm sure that there are, but are there other competing proposals that are being discussed that would impact the programs you participate in, or is it -- is there mostly action around the governor's proposal?

It's about the governor's proposal.

Okay. And then, Mark, I might have missed this at the beginning. I think you've provided some commentary on the discussions you've had with some of the managed care companies on the dual eligible program. Are those discussions still going on and -- I was just kind of curious to hear you talk through that.

They are indeed. And that as you all know, and the number is in the 30s, but north of -- it's in the high 30s, number of states who are involved in planning or examining, moving their dual populations to long-term managed care programs. We all know who the big managed care organizations are. We have a team headed up by Daniel and his folks focused on managed care targets. We have people -- we're talking to them, we're making meetings with them, we're making repeat meetings with them. We've changed our -- we've developed a managed care presentation that we're using to describe our services. We have entered into LOIs in states where proposals are going in and managed care is looking for provider partners. We're -- frankly, now we tell people that our day has come. We think that -- we don't think it, we know it, that the solution for managed long-term care is for plans to keep people at home at the lowest possible cost paid [ph], if possible, keeping people out of ambulances. And the best way to do that is to connect that, our aid, to the managed care case manager, so that together, they can help direct the health and well-being of that person. And we make that connection, and managed care has been responding very positively to our -- think [ph] learning about us.

At this time, there are no further questions in queue.

Colby, thank you very much. And our listeners and investors, thank you very much. We look forward to a good quarter coming forward and to speaking to all of you 90 days from now. Thank you, all, very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.