Addus HomeCare Corporation (ADUS) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Addus HomeCare Q3 2013 Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Dennis Meulemans, Chief Financial Officer. Please proceed, sir.

Thank you, operator, and good afternoon. This is Dennis Meulemans, and I 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 all available to you 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 now turn the call over to Mark Heaney, our CEO.

Thank you, Dennis. Good afternoon and thank you, all, for attending Addus HomeCare's investor call covering our performance for the third quarter of 2013. I'm joined here in the Support Center by Dennis, whom you just heard from, and Darby Anderson, our Senior Vice President. In addition to Dennis' and Darby's attendance, I'd like to also welcome our management staff who listen in from our 100-plus locations in our 21 states. And on behalf of our board and our shareholders, I'd like to thank all of you for your hard and consistently outstanding work, making it possible for us to serve our 27,000 consumers, allowing them to live where they want to live, for as long as they want to live there. I also want to thank the entire team for producing what I would describe as very solid quarter of service and financial performance. In the third quarter, revenues were $67.3 million, representing a 10% increase from our prior year quarter. Gross margin was stable at 25.6%. Operating income from continuing operations was up 10.2% over the prior year Q to $4.3 million. And income per share was up 25.7% from the prior year Q at $0.25 per share. As you may have seen in our press release prior to this call, we are very, very pleased to be in the position to announce our having entered into definitive agreements on 2 important acquisitions: the Medi Home acquisition from MSA broadens our coverage in South Carolina, while giving us a foothold in Ohio and Tennessee, 2 significant managed care states. The Coordinated Home Health acquisition in New Mexico significantly extends our coverage in that state and provides us with a first-rate management team, positioning us very well as the state moves to its new Medicaid-managed care program. Of course, these acquisitions are subject to customary closing, but we expect them to close in the fourth quarter. Let me take this opportunity to welcome the management and staff from both Medi Home and Coordinated to the Addus family, and to let you all know how anxious we are to help, however, we might be able, to better serve your consumers, their families and their important referral sources. Each quarter, I like to remind our investors of our focus items, so that we can be held accountable for performance on them. We will become a sales organization. Darby will talk about progress we're making toward reaching that objective. We will position ourselves to be an important provider to managed care and the tools and managed long-term social service demonstrations. Darby will comment on our progress toward that objective. To drive health outcomes, and to lower operating costs and in so doing, we are redesigning our care system with a much greater reliance on technology, intended to link our aides and their consumers, to the larger health system. Darby will talk about progress toward that objective. Finally, we are committed to establishing a culture of focus and accountability throughout, and indeed, into our company. Our quarterly performance is one of the metrics by which you can measure our achievement in this critical objective. I think of our performance in the third quarter as reflecting continued steady census in revenue growth; stable and steady margins; stable and steady reimbursement, while we have remained focused on and measuring toward our core objectives. With that, let me turn the call over to Darby, who will provide some color to our quarter. Darby?

Thank you, Mark, and good afternoon, everybody. It was another good quarter and looking back, I'm proud of what we have accomplished in this quarter relative to our priority objectives in addition to signing 2 acquisitions. Average census was up 3.4% over Q2 of 2013, and up 12.1% from a year ago. We are pleased with these growth rates and the increasing focus of our agency leaders in executing on their specific sales plans, while recognizing that opportunity exists for improvement in a number of our markets. As Mark outlined, 1 of our priority objectives is to continually improve our organic growth and our conversion to a sales culture. I am very pleased to announce that in the quarter, we filled our sales leader position with the promotion of Lori Cabbage to the position of Vice President of Sales. Lori has been our Regional Director for the East Coast operations for over 2 years and her success in census and revenue growth in that region, in addition to her 20-plus years in home care sales and operations with some of the industry's leading companies, gives me great confidence in her ability to maximize opportunities across the country, and to accelerate our conversion to a sales organization. As we have fully deployed on our CRM system, Lori will be working with our agency and regional leaders to enhance sales plans and closely monitor performance. Additionally, her priorities will focus on underperforming locations, ongoing sales coaching and training, and developing incentive plans consistent with our 2014 objectives. We continue to meet with managed care organizations in our markets, and reaction to our NuCare system is consistently positive. We continue to pursue and sign contracts with these plans in our markets in advance of initiation of dual demonstration and managed Medicaid programs. I am particularly excited about the announced acquisition of assets from Coordinated Home Health Care in New Mexico. Coordinated is a very high quality organization that together, with existing Addus operations in that state, will provide us a much broader and deeper footprint as the state prepares for the launch of Centennial Care, a managed Medicaid program starting January 1, 2014. We are looking forward to welcoming Scott Wells and the entire team at Coordinated Home Health that will be joining us at closing. I am equally excited to welcome to the team from Medi Home Private Care, who adds to our already significant presence in the state of South Carolina, and will add locations in Ohio and Tennessee at closing. All 3 of these are important managed care states, and the addition of the Medi Home team will only enhance our ability to be better partners to managed health plans and the states, as they embark on these important and promising managed care and dual eligible projects. As Mark described, we continue to make progress on our NuCare system, by completing the transition of 13 additional sites within Q3, executing on uniform, home visit protocols and documenting protocols and best practices learned in our beta sites. Our care system is deployed in 31% of our locations, targeted to those states with 2014 managed care initiatives. One additional note: In the quarter, the U.S. Department of Labor issued final rules regarding the Fair Labor Standards Act and the Companionship Exemption. We have gotten some questions on the impact of this rule on us, but as we have stated previously, Addus does not, and has not, relied on the Companionship Exemption, and complies with all FLSA requirements and state labor laws. The new rules, effective January 1, 2015, will have no impact on our business other than perhaps, putting pressure on other providers who currently do rely on the exemption. In closing, I am very excited about our business and the achievements over the last quarter. Thanks to the team for their collective and collaborative effort. A lot of work and opportunity remains, and I remain confident in our team's ability to continually perform. Dennis, I turn the call over to you for a closer look at the numbers.

Thank you, Darby, and good afternoon. As a special note to our investors, our Form 10-Q will be filed later this evening and available tomorrow. We had another solid quarter, census up, revenues up, margins stable, income up, balance sheet remains solid. Those are the highlights, but more specifically: net service revenues from continuing operations for the quarter increased 10% to $67.3 million compared to the same period in '12. For the year, our revenues have increased 8.6% to $196.1 million, our revenue growth for the quarter has been driven by a 12.1% increase in census and a modest decline in average billable hours per consumer. Net income from continuing operations was $2.8 million, or $0.25 per diluted share, an increase of 25.7% when compared to the reported net income of $2.2 million, or $0.20 per diluted share for 2012. Gross profit margins remained stable at 25.6% of revenues when compared to the third quarter of '12, reflecting stable revenue streams and consistent expense management. General and administrative expenses increased $1.2 million, or 11.1% over the prior year amount, reflecting increased costs related to our stocks, or for our compliance efforts, legal and consulting expenses related to our M&A effort, and the roll off of our NuCare system in Illinois, in response to the state's July 1 mandate. We anticipate our G&A expenses will remain at these higher levels on a -- for the foreseeable future. We received prompt payment interests from the State of Illinois for late payments on invoices for their fiscal year ending June 30, 2013, totaling $183,000. This income was recorded as an offset to our interest expense. Income from continuing operations, but before taxes was 6.4% of revenues, a 700-basis point improvement when compared to 5.7% for the prior year period, reflecting our ability to leverage our fixed cost as the revenue base increases. This improvement came despite the increase in G&A expenses noted earlier. Our effective tax rate was 35.4%, a 900-basis point improvement over the prior year's tax rate. Our taxes continue to benefit from the amounts we will realize in 2013, related to various employee tax credit programs. We incurred a net $203,000 in expense related to the wind down of the Home Health business, or approximately $0.02 per diluted share, all recorded as discontinued operations. Now let's turn to our balance sheet and cash flow statement. Cash flow from operations during the quarter was a negative $9.1 million, reflecting the seasonal decrease in payment from the State of Illinois. If you recall, we had a large onetime payment from the State of Illinois received in late June, that positively impacted our cash flow for the second quarter. Payments from the State of Illinois continue to be stable, despite this quarterly timing issue. Our accounts receivable, net of reserves, increased $10.9 million in the quarter to $54.5 million as of September 30, 2013. At September 30, we had $29.5 million in cash on our balance sheet, no long-term debt and availability under our credit facility. Adjusted EBITDA has been refined to exclude discontinued operations, in addition to other normal adjustments. Adjusted EBITDA was $5 million in the third quarter of 2013, an increase of 8.7% from $4.6 million in 2012. We filed an S-3 shelf registration today. This universal shelf registration is part of a strategic financing plan, and is intended to provide the company with greater financial flexibility, generally, and as we evaluate future acquisitions. As normal for these offerings, certain existing shareholders are registering their shares as allowed under the registration rights agreements with the company. We have no immediate plans to issue any securities through this vehicle. We announced today 2 acquisitions, which both Mark and Darby have commented on. These 2 acquisitions represent approximately $20 million to $22 million in aggregate revenues for the calendar year ending December 31, 2013. We expect to close on these acquisitions in the fourth quarter. We do not anticipate these acquisitions will add materially to our 2013 revenues or income, but do anticipate they will be accretive to earnings in 2014. This concludes my comments. I'd like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis. Dennis and -- while I'm thanking you, I'd also like to thank you and your team for all the effort that you have been sacrificing -- for instance, that you and the team have put in over the last couple of months, in addition to managing the finances of the company, board meetings and audit meetings and Q calls and overseeing the relocation of the Support Center, coordinating the '14 budget, year end and yes, we did 2 concurrent acquisitions. Darby and I just are -- just very, very appreciative of your effort, Larry's effort and your whole team's effort. This is why your golf game is as bad as it is, but we're really, really appreciative.

Thank you, Mark.

While I'm doing that, one more recognition before we turn the call over for questions. I want to acknowledge as previously announced, our founder, Andy Wright, has left our board to pursue his other personal, family and community interests. Beyond his giving me and others here, our opportunities to do what we are passionate about, Andy founded and has etched his person deep into this organization. We are very grateful, and we're in his debt. With that, Lisa, we'll open the call up for questions.

[Operator Instructions] Your first question comes from the line of Whit Mayo with Robert Baird. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Maybe just for a start with the acquisitions. If -- it'd be helpful, maybe, if you could give us a sense of the financial profile, what the growth has been, maybe the mix of business, purchase price? Anything to give us an idea of potentially how accretive this could be to you?

Whit, as we have disclosed, our combined revenues for the 2 businesses are $20 million to $22 million. The economic profile of the business is very consistent with the rest of our profile. We have not disclosed the purchase price, in part, because it was not required. But secondarily, because one of the sellers requested, as a condition of close, that we not disclose that at this point in time. And as we are looking to the business, we do see it as accretive in nature. And lastly, to give you a little bit of guidance, the purchase price was in the range of purchases we've made historically, and we are really pleased with these 2 acquisitions.

And with this, Darby, just in terms of the profile of the businesses, consistent with the personal care services that is our focus. Many in New Mexico and a lot of the same are -- almost all of the same programs where we operate, the same thing in South Carolina. So this is -- these are personal care businesses. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Got it. And maybe, Dennis, if you could remind us, within a range, what a typical multiple is, that you've historically paid for deals? You could, perhaps give us a sense of within a range of what these 2 could be?

Whit, we typically look to buy in EBITDA multiples of 4 to 6. That's a strategic acquisition, it might be a little on the higher side, but that's the normal range. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Got it. And were these structured with any earnouts? And also, do you plan on filing financials for these? I just -- I'm not sure of the materiality behind them, or whether or not those disclosures are needed.

We are not required to file, because they're not material as defined by the SEC for filing financials for them. So you will not see anything of that nature. There are earnouts on one of the transactions. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay. And maybe for Mark, just to give us a sense for how critical M&A will be, going forward with your strategy, just how aggressive should we expect you to be over the next 12 months? And were these 2 transactions that came to market, or were these deals that you sourced internally, or with a third-party?

Darby, I'm actually -- we looked at a lot of opportunities, and I want to be correct. Darby, generally, do you know whether these were --

One was brought to market, and the other was kind of identified internally.

In terms of -- we've been very consistent in our communications with regard to acquisitions. We are very focused on our core objectives, and I've stated those. We're going to become a sales organization, we're going to focus on managed care business development, and we're going to convert our care system, to the extent that we are not distracted by opportunities, that we will pursue acquisition opportunities. I would say that in the past 6 months, we have become more assertive in the market in pursuit -- in looking for and pursuing. But we -- I don't want Addus to be perceived as an acquisition story. We are in the market, if we see it, we'll hook it. But we have our core objectives. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Got it. And maybe just my last question is, as you have articulated in the strategy, I think numerous times, that you're trying to get the organization in a position to capitalize on, let's call it, risk-based payment models, if you will. Are there any investments that you need to make, or will be making, on actuarial capabilities? I guess, I'm just wondering if there's going to be anything either, call it unusual or usual, that we should be paying attention to in terms of spending over the next 12 months?

Not relative to -- not material, not relative to our pursuit of managed care opportunities. And with -- relative to risk, we are encouraging managed care organizations to look at risk gain share and other types of reimbursement models rather than traditional fee-for-service, hours-based programs, case capitation is a nice one. Managed care is responsive. They appreciate it even if they -- appreciate our bringing this to their attention as a possibility. We are asking managed care organizations if they want to demo any of this. But right now, managed care is focused on bidding, being -- getting ready, and in case load or member accumulation. They're well into the -- into '14, before we would think that we -- anybody would be -- we would be engaged in a risk model. But there would be an acceleration, we think, as you -- into '15 and '16, we think that will be the payment methodology required on personal care providers.

[Operator Instructions] Your next question comes from the line of Dana Hambly with Stephens.

Just on the organic growth, the billable census up 12% year-over-year, we saw that the first couple of quarters tracking mid-single digits. So I know, you were a little disappointed last quarter actually, and I would imagine you'd be very pleased this quarter. I know you don't like to give guidance, but just trying to get a sense of -- was there anything unusual there? Or is this kind of just collective good work? And maybe we should be targeting something higher than maybe we had been, previously?

I'm going to -- let me start this, guys, if you don't mind, with just a statement that, Dana we have been talking about what it -- we want to become a sales organization, and for those new to us, the history of this organization is coming out of the social service model. You've built your business based on being a really good and responsive provider, you didn't market the business so much. You were an, basically, an order-taking company, and I don't mean to diminish the importance of the order that we're taking. But it is, as the world has evolved, it's necessary for us to be -- to compete and to grow, and we're out into the community telling people about our company and the opportunity for elder care services. It's marketing. We have been working on this. Darby has been working hard with his people, it takes change. And I would -- we should see steady -- Darby, I'm going to say, we should see steady, consistent, continuous improvement, and I also say that we have sites, Darby, you would -- a fair number of sites that need to turn it around. So I don't know if you want to add to that?

No, I think that's a good historical perspective. Absolutely, we've been undergoing this change and change does takes time. I think we're seeing incremental progress, quarter-over-quarter. Was the third quarter better than previous quarters? Hard to look for it, and we don't give that kind of guidance, as you stated. But there were a few ups and downs within the different regions across the country. So it's hard to estimate actually the specific impact on what drove the number up. I have to attribute it to a more diligent and consistent effort, more focus, more oversight and monitoring of our sales plans, as Mark described, getting out into the community, telling people what we do and then continuing to be responsive when they call upon us.

All right. Dana, I'm going to close out this question with not cold water, but recognize Q3 for us, is our biggest quarter as far as days -- or days for our people. Q4 tends to be a bit of a lower quarter, largely driven around the holidays this year, with both Christmas and then New Year's falling midweek, families tend to come and visit our consumers, so our need is a little bit less. So fourth quarter tends to be a little bit more tepid. So I would put that in your thought process as well.

Okay, very helpful. And just staying on some of the drivers here, too. The billable rate up almost 1% year-over-year, it looked like. I guess, I would've thought that the billable rate looked kind of flat to declining over time. Anything unusual in the third quarter?

We did -- state budgets, or most of our states start their state budgets in July, so it's usually when rate increases become effective. And I was just looking at your comment of a significant increase. I'm seeing $16.99 to $17.01. Is that what I'm seeing there?

Right, $16.93 to $17.08.

Something like that.

Right, yes, no. Big for what it has for -- what it has been in prior quarters and I guess I, I felt like that's a number that probably trends down over time.

Well, I think in July, with the start of fiscal years, we did get some rate increases in some of our states, no one state is really a material rate increase, kind of percentage increases on rates. I think that's reflective of both recovering state economies, as well as states commitment to rebalancing their long-term care spending into home and community-based programs versus institutional, which is the most cost-effective way to -- and the preference of the consumers we serve.

I'd just add one last point. We're seeing growth in states where we have higher rates.

Okay, it's good to hear it. And on that topic, we're still a little ways from these pilot -- dual demonstration pilot programs rolling out. Has anything changed with any of the pilots? Or have we stalled on it? Or, not stalled, but have any of them been pushed back or moved forward? Any kind of changes from where we were a quarter ago?

Since the last time we spoke, I think Illinois may have drifted 1 month. I'm not exactly sure about that. It's to start April 1. It's my most recent information, I believe it's accurate. So no, is the short answer. No significant pushbacks on dates in any of our key states.

I want to -- Dana, I want to take the opportunity, as Mark wants to comment on it. The -- and when they come in, they're going to come in and affect us gradually. The state government did not intend this to ratchet their systems. So we expect them to be steady, we expect them, though, to be consistent, continuous and we, as you've probably heard us say publicly, we expect over time, we're going to shift from a state payer to an insured payer, to a managed care payer.

Yes. That makes sense. And thanks for clarifying that. Last one, Dennis, can you just remind me, the -- what is your -- the capacity on your credit facility?

We have about $43 million available.

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Mark Heaney.

Lisa, thank you. Thank you all, very much. We appreciate your support, to our investors and our staff and teams listening. We look forward to speaking with all of you again in 90 days. Thank you all, very much.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. Have a great day.