Addus HomeCare Corporation (ADUS) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Ben, and I will be your conference operator today. At this time, I would like to welcome everyone to the Addus Quarter 1 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Thank you. Dennis Meulemans, Chief Financial Officer, you may begin your conference.

Thank you, Ben. Good afternoon. This is Dennis Meulemans, and thank you for joining us. 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 developments, the company’s future performance, as well as management’s expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties, including factors outlined from time to time in 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. With that complete, I'd like to turn this over to Mark Heaney, our CEO.

Thank you, Dennis. Good afternoon, and thank you all for attending Addus HomeCare's investor call covering our results for the second quarter of 2013. I'm joined in our support center by Dennis, our CFO; and Darby Anderson, our Senior Vice President. I'd also like to welcome and thank our management team from around the country who listen in on our Q calls in order to hear from our investors directly. In the second quarter, we saw a continued growth in both revenue and earnings, with continued progress toward achieving our strategic imperatives. Revenues were $65.8 million compared to $60.4 million. Income from continuing operations was $0.23 per share. We're very pleased with the State of Illinois having made a significant payment in the quarter, adding to an already solid balance sheet. Rightly, Illinois has been a concern for our company and our longer-term investors. However, for the past several quarters, Illinois has been a consistent, dare I say, almost dependable payer. The company's objectives remain: become a sales organization, drive census development, serve more consumers than our fair share, win in every market, position ourselves for managed care as states shift liability for their personal care programs to managed care organizations under the duals demonstrations and managed long-term care initiatives. We design our care system using technology to lower operating costs and drive positive health outcomes by connecting our aides and consumers to the larger health system and change as an organization, establish and ingrain a culture of accountability throughout our organization. We're going to make fewer promises, but we're going to keep the promises we make. We're not satisfied but we're pleased in that we believe that the management and staff listening in on this call are generating measurable progress in each of these objectives and we're grateful for the energy, the hard work and the passion that this team brings to the important work they do. In a bit, Darby will speak in a little more detail to what we are doing to drive our results. I mentioned in our call last quarter and again, in this Q, that our balance sheet is strong. The recent payment from the State of Illinois further improves upon that position, along with our significant availability under our line. As long as it does not distract us from meeting our goals and objectives as described, we will continue to pursue strategic acquisitions. With that, let me call -- turn the call over to Darby, who will provide us with some specifics on his team's focus, their work and results.

Thank you, Mark, and good afternoon, everybody. It was a good quarter for us, and I'm pleased with the overall performance of our operating team and our results this quarter. We continue to execute on the priorities, as Mark described them, organic census growth, managed care sales and our care system. Our average census in the quarter grew 1.4% from Q1 and 2013 and 4.5% over the second quarter of last year. Although positive, I believe we can do better and we're taking the following action to drive results: Full deployment on our customer relationship management or CRM system software; we're recruiting sales-focused leaders, including a director of sales position to accelerate our sales culture conversion; an ongoing sales plan, monitoring, coaching and training for our agency director and regional director team. Authorized service hours per client has held steady at 49 hours per consumer. We've been monitoring closely for deterioration in this metric since the change to the Illinois Department on Aging rounding rules. As I say, it has remained steady, which we attribute primarily to active efforts to improve service delivery percentage and the loss of some very low-hour consumers due to the sequestration impact on Older Americans Act funding. Within managed care, we continue to position ourselves for these projects, beginning at various intervals in 2014. Primary focus is on our large current states of California, Illinois, New Mexico and New Jersey, and we increasing -- have had increasing contact with plans in Michigan, Idaho, South Carolina, as those managed care projects begin to take shape. Other care coordination initiatives and states pursuing an ACO or Accountable Care Organization and other managed models. We continue to make steady progress in our NuCare system. We've moved 3 additional sites into the full care system in the quarter and plan to transition another 12 sites in the third quarter. We've completed deployment of our electronic visit verification system in all of our Illinois locations, ahead of the Illinois mandate we spoke of last quarter. This brings our total Home Care Aides on our EVV system to 10,000 or 70% of our direct care workforce. We've also deployed our Addus mobile portal or AMP applications within our beta site in Joliet, Illinois. We're receiving positive feedback on these self-service features from our Home Care Aides. We are through the legislative cycles in most of our states and all of our largest states. We're very pleased with the results of actions taken by the various state legislators as they continue to consistently support home care programs and efforts to rebalance long-term care spending away from institutional care and toward care in the home. Illinois provided a supplemental appropriation for FY 2013 services and full funding of the governor's proposed budget for in-home care in 2014. Federally, the Accountable Care Act mandate for employer-sponsored health insurance was pushed back to January 2015. While we appreciate the delay, as it allows us another legislative cycle to get this federal mandate funded, we continue to work on how to best comply with this mandate. In closing, again, I'm pleased with the team's effort this quarter, but we're not done. We can improve our organic census growth rate and I have the confidence in our ability to do so. I'd now like to turn the call over to Dennis for a closer look at the numbers.

Thank you, Darby, and good afternoon. We filed our Form 10-Q, along with our earnings release earlier today. I hope our listeners have had the chance to at least scan the documents before this call. We had another solid quarter. Census was up, revenues were up, income was up, cash was up, AR was down, all good signs of continued progress. Highlights for our second quarter were: Net service revenues from continuing operations for the quarter increased 8.8% to $65.8 million compared to the $60.4 million for the same period in '12. This includes approximately $200,000 in revenue and gross margin benefit realized in April that will not continue as the State of Illinois implemented its technical change to its billing processes in May. Our average hours served per client continues to remain at levels consistent with the first quarter. Net income from continuing operations was $2.6 million or $0.23 per diluted share, an increase of 40.7% when compared to a reported net income from continuing operations of $1.8 million or $0.17 per diluted share in 2012. We incurred a net $150,000 in expense related to the wind-down of the Home Health business or approximately $0.01 per share recorded as discontinued operations. Our general and administrative expenses included a charge of $270,000 or $0.02 per diluted share related to severance payments made to a departing executive. Taxes were positively impacted by approximately $115,000 or $0.01 per diluted share, as our effective tax rate was reduced by 3%, the result of a one-time benefit realized in the quarter for an increase in the amounts we now believe we will realize in 2013 related to our work opportunity tax credit. Our effective tax rate, excluding this one-time adjustment, was 35.7%. Income from continuing operations and before taxes was 6.1% of revenues compared to 5.3% for the prior year, reflecting our ability to leverage our fixed costs as the revenue base increases. Cash flows from operations during the quarter were $21 million, which includes a large one-time payment from the State of Illinois received in late June and collections on our outstanding Home Health receivables. Interest expense was $142,000 representing standby fees related to our line of credit. Net service revenues increased by $5.3 million or 8.8% to $65.8 million when measured on a year-over-year basis. This growth was fueled by a 4.5% increase in average census, combined with an 8.6% increase in billable hours. Our gross profit margin for the quarter declined over the prior year by 90 basis points to 25.3% in the second quarter, driven largely by a favorable workers' compensation expense benefit realized in 2012. Had this benefit not been realized last year, our gross margin would have been consistent year-over-year. Our general and administrative expenses were essentially flat on a year-over-year basis, at approximately $12.1 million, reflecting our continued focus on cost management. We are particularly pleased that we were able to deploy our NuCare model and the use of telephony in more of our locations, while holding our administrative cost structure flat year-over-year. Based on our closing stock price on June 30, we are now subject to Section 404 requirements to have our internal controls tested and have our auditors provide an opinion on the adequacy of these controls. Based on discussions with our auditors, other organizations that have experienced this requirement have spent $500,000 to $700,000 in the year of this required change to comply with these requirements. Now let's turn to our balance sheet and cash flow statements. Our accounts receivable net of reserves declined $27.7 million to $43.6 million as of June 30, 2013. Our payments from the State of Illinois were strong in the quarter, including a large one-time payment received in late June, reducing our outstanding AR from this payer. We also made substantial progress on collecting our accounts receivable for our Home Health business, which we retained as part of the sale of this business. At June 30, we had $38.8 million in cash on our balance sheet, no long-term debt and availability under our credit facility. As Mark mentioned, we are continuing our efforts to explore acquisition opportunities to further the growth of the company. Adjusted EBITDA has been refined to exclude discontinued operations in addition to other adjustments. Adjusted EBITDA was $4.6 million in the second quarter of 2013, an increase of 18.2% from $3.9 million in 2012. This concludes my comments. I would like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis. Every day, I, and I think, frankly on all of us here, get more and more excited about what we are doing, how we are doing it and why we are doing it. The fundamentals for our business are overwhelming. We are making more older persons every day. We're making it possible for older persons to live longer and longer. As we age, we tend to become impoverished. I think we'd all agree that our older population deserves and has the right to live at home, where they want to be. It is, by multiples, less expensive to care for older citizens at home. These factors put pressure on governments, the primary payor. And the payor's reaction is to hold the line on spending and increasingly to generate health savings. We think these math facts favor larger providers willing to invest in technologies necessary to drive health and economic results. A week ago or so, Darby sent me an article out of Forbes, which kind of tells the story. The article is entitled, "Nursing Home Use by Seniors is Plunging." We feel very good about what we're doing and we are all committed to staying focused to our doing it. With that, Ben, we'd like to open it up for questions.

[Operator Instructions] The first question we have comes from the line of Alexander Renker from Sidoti & Company. Alexander Renker - Sidoti & Company, LLC: I just had a question first about the census metrics. So based on the filing for June 2012, I think that had census of -- hang on, let me see here -- it looks like, at that point, it was reported as 23,700 versus 26,000 this year, which gives, based on those 2 filings, 10.4%, but you guys mentioned that the number was 4.7%. What accounts for that reporting difference from -- is there an adjustment that happens in the subsequent period?

Alexander, this is Dennis. The statements that were provided last year did not reflect the 3 offices that we retained from the Home Health division, and the comparative in the earnings release schedule has the -- those offices included, so it's an apples-to-apples comparison. Alexander Renker - Sidoti & Company, LLC: Okay, excellent. So given that, that -- given that the number is coming in pretty strong still, yet it's not exactly where you guys want it, what are some of the steps you're taking to strengthen that number?

Alexander, this is Mark. And what number is it that you're referring to? Alexander Renker - Sidoti & Company, LLC: Census growth, sorry.

Go ahead, Darby.

Yes. So really, our focus is on our organic census growth in all locations. Some of the steps that I described in my comments, a CRM system that really gives us visibility into the actual sales activity of our agency directors on a day-in, day-out basis. We're hiring a director of sales to really help us to convert to a sales culture. We've been in that sales conversion process for a better part of 2 years now. It's not been an easy transition for us as historically, we've been kind of an order-taking business, and that's been the nature of home care. We need to get more aggressive, we need to go out and sell our services on a continuous basis. That requires us recruiting new staff at the agency level, regional director teams that are focused on driving those sales results, ongoing sales, planning and monitoring and coaching. And that's going to be the major -- the responsibility of this director of sales under my direction. Alexander Renker - Sidoti & Company, LLC: Okay, excellent. And then last one for me is, can you guys speak sort of generally about the strategic acquisition plans you mentioned and maybe what you would be looking towards there?

Alexander, we are -- we have been retaining a list of properties that are for sale in the markets we're in. We look for tuck-ins in those markets that make sense and we are exploring opportunities in some new markets. So if you had to prioritize, it would be California and New Jersey, New Mexico as tuck-in markets, South Carolina. And then if you've looked at new markets, we're exploring opportunities in other states where we're seeing an emergence of managed care as a leader or a driver for change in those markets.

Yes. This is Mark. I would -- I agree with that. It's really kind of simple. We have the capacity. We think that the overall environment is one that is hostile to smaller and free-standing organizations increasingly. And with the capacity, and that being the environment, we expect that -- you should expect us to be more assertive and frankly aggressive in this area over time.

The next question comes from the line of Dana Hambly from Stephens.

Mark or Darby, when do you think you would hire a sales director?

It's always difficult to say. We are actively interviewing candidates. My goal would be, certainly, before the end of the third quarter, but we're looking to do it as quickly as possible.

All right. And when you do hire, is the target market the insurers? Or is it your existing referral sources, both? Could you just kind of give us an idea of once he or she is hired, how they're going to hit the ground running?

It's really kind of a classic marketing approach of a push-and-pull strategy. We have relationships with case managers who go out and assess and refer cases to us. We need to maintain close relationships with those individuals, keeping our promises, serving the clients that they have referred to us and making sure they are aware of our capacity to serve additional clients. At the same time, there are opportunities to go out into the communities and describe the benefits of home care, the availability of programs, all different types of funded programs from private pay to Medicaid to Veterans Care and just really service that community education resource among large populations within the markets we serve and hopefully identify folks that are having parent care, grandparent care issues that we can help with, and then linking them up to the appropriate pair of source and services. So it's really a grassroots effort out in the communities, beating the streets. And I think we need a little bit more focused attention on how we go approach that relationship development. And that's what this director of sales will bring to us.

Let me add to that. I agree with everything Darby said. And I also heard a little bit in there about the insurance. And so let me just say, we already have, in managed care, I think, at rather sophisticated managed care sales and marketing effort underway. It's been for a full year and we have an experienced sales leader, insurance sales leader heading that. One other just little adjustment. The effort that the -- is necessary to win caseload in the current environment is quite similar to the process that's necessary to win consumers, win referrals under a managed care environment, especially as managed care begins to move into states where they would very likely maintain the status quo.

Okay, that's helpful. Switching gears a little bit. On the census for the quarter, Darby, you mentioned sequestration, its impact on the billable hours. What did it do to your billable census in the quarter? Was it a couple of percentage points or it's just -- that's way too much?

No, that would be too much. It -- we do -- the Older Americans Act funding that flows primarily through the area agencies on aging is subject -- it's all federal funds and subject to sequestration. It funds things like home-delivered meals, senior centers, very valuable home and community-based services. And also, some respite care services and homemaker chore housekeeping services, things that we also do provide. It represents a relatively small portion of our overall caseload. So although we are seeing loss of some clients there, it's not impacting to any significant degree the overall growth that we've quoted here. It does, though, have an impact on their very -- typically very low hour and sporadic care plans. So it does have kind of a more significant impact on the hours per consumer.

Okay. And then on the billable hours, should we -- I know it's probably higher than -- it's certainly higher than what we were looking for in the quarter. Should we continue to think about that coming down over time, billable hours per census per month?

Dana, you're going to have to make your own judgment on that. We've -- we do have some concern about it. It's higher than we expected it to be and -- but we don't give guidance going forward.

Yes, no problem. And then, Dennis, on the 404, so you're going to start incurring those charges in the third quarter, I imagine?

That's true. I'm interviewing consultants to help us with it and we're in the process of looking for either a director or Vice President of Internal Control.

Okay. And that's somewhere in the $500,000 to $700,000. That's all for 2013?

Yes.

Okay. Where would that flow through? G&A?

It'll come through G&A.

Okay. And just -- I'm sorry, last one on the tax rate. You said it would've been 35.5% adjusted?

I've got to look at it. It's 35.7% adjusted.

That is all the questions that we have in the queue at this time. [Operator Instructions] At this time, we have no further questions, Lucas [ph].

Well, then thank you, and thank you all very much and thank you for your support and we'll talk to you in 90 days.