Good morning and welcome to the Addus HomeCare Corporation Fourth Quarter 2016 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 are 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 2017 or beyond. For this purpose, any statements made during this call whether or not statements of historical fact may be deem to be forward-looking statements. Without limiting the foregoing discussions of forecast, estimates, targets, plans, belief, expectations and the like are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by the important factors among others set forth in Addus' filings with the Securities and Exchange Commission and in this 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. Let me begin with some general comments and then Brian and I will discuss the fourth quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions. As we have discussed in prior calls, 2016 has been a year focused on bringing in a team of executives who will help us achieve our strategic goals. Today, I want to welcome Brad Bickham, our new Executive Vice President and Chief Operating Officer to this team. Brad is an experienced healthcare executive whom I have worked with at four different companies. He is already making a difference with our field operations and I am confident that Brad and his operations team will continue to progress that we began in 2016. With Brad's addition, I feel our executive team is now complete and we have the leadership we need to continue to progress and grow. In addition with this new team, we have been able to add some terrific talent at our vice president-level. As CEO, I am excited about our management team and believe we are well-positioned to meet our strategic goals. The earnings announced yesterday show we have increased our margins to 7.2% for income from continuing operations and 9% for adjusted EBITDA even reserving a higher bad debt percentage than we should experience on an ongoing basis. Brian will share more information concerning our earnings including the increase in our bad debt reserve. I'm very excited by the progress we have made with our increasing adjusted EBITDA margin. Our fourth quarter results give us confidence that we are within reach of our annual 9% adjusted…

Thank you, Dirk, and good morning, everyone. For the fourth quarter of 2016, net service revenues increased 22.3% compared with the fourth quarter of 2015. This growth reflected a 22.2% increase in billable hours per business day and a 1.6% increase in revenue per billable hour. Our revenue growth for the quarter was also impacted by one less business day in the fourth quarter of 2016, than in 2015. The growth in average billable hours per day for the quarter was primarily due to the impact of acquisition of South Shore, which was completed in February 2016. In addition, our same store base made a meaningful contribution to growth and average billable hours per day as same store revenue increased 5.1% for the quarter. Consistent with the third quarter of 2016, same store results for the fourth quarter benefited primarily for continued growth in the mid-West. The company's net income from continuing operations was $7.5 million for the fourth quarter of 2016, an increase of 144.9% compared with $3.1 million for the fourth quarter of 2015 and $0.65 per diluted share, up 140.7% from $0.27 per diluted share. Adjusted net income from continuing operations per diluted share was $0.43, up 34.4% from $0.32. The adjusted per share results for the fourth quarter of 2016 excluded several items as follows: $0.17 of prompt pay interest income from the State of Illinois related to their past due accounts receivable; a $0.04 benefit related to the normalization of our effective tax rate; $0.03 related to a positive reversal of prior estimated restructuring charges; a $0.01 benefit related to the reversal of non-cash stock-based compensation; $0.02 related to M&A transaction expenses and $0.01 per severance in other costs; and our adjusted per share results for the fourth quarter of 2015 excluded a $0.09 benefit…

[Operator Instructions] Your first question comes from the line of Mitra Ramgopal with Sidoti.

Yes. Hi, good morning. Just a couple of questions. First just on the State of Illinois, if you could give us an update in terms of how far are you along with the state in terms of the transition and as it relates to other states paying on time et cetera, is it only to State of Illinois?

Yes, Mitra. This is Brian. I'll answer that one. As far as the transition to MCO, right now about 25% of our revenue with the state in the quarter came from MCOs, so we would expect that to continue to trend upward toward 50%, I believe is the mandate by 2018. So we'll continue to see that progression, we believe in 2017. As far as just the receivable with the state itself, I think we know without the budget being passed for this year, the general revenue fund AR continues to climb on a monthly basis, but we would note that the state was a little behind as far as their true Medicaid payments in the quarter as well, which helped to impact the growth in AR. I will say that right after the first of the year, we did receive a fairly sizable payment from the state, around $9 million in early January. So that was good to see.

Okay, thanks. I know you've talked about acquisitions and you're looking at a number of potential transactions, but what would you say is sort of the biggest over hang for you in terms of getting something done? Is it only price, or just maybe the mix of the business as it relates to say, the reimbursement, et cetera? Is there just any underlying factor that maybe not allowing you to get some deals done?

Yes. Mitra, this is Dirk. I'll talk for that. One of the things we have found s we've looked through probably three or four transactions that we would hope to close this past year is that a lot of these companies are smaller companies -- $20 million in revenue, $25 million in revenue -- and as we get into due diligence, we realized that the price expectation that the company desires is not only outside our range, but not wanting which we thought we could stretch, because it wasn't as strategic as it might be. Largely due to the fact that some of these companies want credit for a lot of the changes that Addus would need to make to get to the profitability level that they are stating in their document to us. So as we've gone through, we maintain pricing. That's one, which are very important to us, but at the same time, we've learned where these areas of concern lie. So as we've gotten to later companies to look at, we've been able to go into those areas pretty quickly and work with the other companies to identify those and negotiate. I would say it's not really the price expectation on a multiple EBITDA; it's more the adjusted EBITDA that these companies want to use to sell their company and that has been the most difficult. Now, you get a little bigger in size, that becomes less of a problem. We are looking at companies that are in that size ring, we also have some looks going on at a little higher revenue base that don't have some of those issues. Now, honestly the price on the larger issues, I think as we mentioned before could be a little larger outside than our desired range of five to six times. But again, we are willing to pay a little more if a transaction is strategic to our overall goal.

Great. Thanks, very helpful. And just on the margin again. We saw really nice margin improvement here and I was just trying to get a sense as we look out beyond into '17 and even with '18 a number of the initiatives you undertook. Is that pretty much behind you now in terms of the margin you're hoping to get out of at? Or is there still some more room to go there?

Yes, Mitra. I think you're right. I think by large; the material ones are behind us. One thing to keep in mind with margins, especially going into Q1 is the payroll taxes affects us quite a bit with our fairly large size sales force or employee base. But I would expect 120 to 130 basis point reduction into Q1 just for that reason and that will kind of continue through the year and toward the back half of the year. We'll see some relief there.

And Mitra, as we have said, our goal continues to be to get with solid 9% adjusted EBITDA margin on a continuing basis. Obviously the first quarter because you reset [indiscernible] for 23,000 employees, you get hit pretty hard. But after that, it's behind us in the third quarter. We'd like to see a 9% range for the year at all possible and then what we said is again eventually we would like to think we could get to 10%. To do that, we still got to increase our revenue base by about $150 million. So that's going to be a while down the road. But our initial target of 9% is well within our reach.

Right. Thanks. And then finally, if I look at the revenue for billable hour, I believe that might be the highest we have seen. I was just wondering what's driving that?

Yes. Mitra, part of that is we closed the three ADS locations which has a much lower billable hour rate, so that helped impact that in the quarter and the rest is really just mix in the business, nothing particular to note there.

Okay. Thanks again for taking the questions.

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

Hey, thanks. Good morning. Just Dirk, on that 9% target, I just want to understand how you're thinking about bad debt -- or Brian? Is it about 100 basis points higher in the fourth quarter than we had expected it to be? I'm trying to understand, are you expecting that to come down this year, or is that pretty much going to linger in that 2% plus range for the rest of the year? And what's incorporated in that 9% target?

Hey, Dana, this is Brian. I would expect -- I think you're right, right around that 2% range. We would expect to see that as they go through the transition probably for the first half of this year. Again, it will depend upon how quickly or how slow the state moves. That is a pretty big player for us. Our expectation right now is we'd be on that 2% range for the first part of this year, then we'll reassess and see where we are in mid-year.

Yes. And Dana, one of the things is again, once we are able to get past the issues related with the MCO transition that causes our receivables to have some issues as well as still cleaning up the final issues related to earning parts of our acquisitions we did a couple of years ago, that should come down and as it does, that certainly helps strengthen our ability to hit that 9% plus range go. So it probably won't happen for a few quarters, but certainly will be a positive effect at some point in the future.

Okay. And then on that, you said prior acquisitions impacting bad debt, is that any one-time clean ups this quarter? Or there's still some pressure there?

Well, I'm going to address this because Brian leads the AR efforts, so I'm going to speak for him and what I see him doing with his team. There were a lot of early problems in our Ohio and Tennessee acquisitions that because we did not have the process as tight as we should have lingered and have caused some write-offs -- they're proper write-offs for 2016, but they relate to periods of service a while back. And so as we have cleaned those us, one thing that is done is it taught us, what were the issues that originally caused those to come back to be a problem? And so as Brian mentioned in his comments, we have to have a solid process between operations which deals with the frontend on our billing issues. That's where most of our issues start, to the backend where Brian's team and reimbursement have to collect and as long as the information on the frontend is timely and accurate, it at least eliminates a lot of the issues on the backend. So, Brian has been working very closely with his team and with Brad's team and that we did hire a resource to come on board to sit between the two to help us make sure that going forward, those issues that related to those two acquisitions really are being cleaned up and won't be a problem in 2017 and 2018. Does that make sense?

It does. Yes, it's helpful. But those were just smaller, so I just want to -- on South Shore which was a much bigger transaction, you're not seeing similar-type issues?

No. And remember again, South Shore came on February 5th. We had already started. At that point we were changing the way we did acquisitions. We stopped the transition of South Shore at that point in time until we got some people to come on board to help Aileen and her team in Long Island complete that transition. We have not seen the issues related to the receivables in South Shore that we saw with our prior acquisitions which gives me comfort going forward that our team has a good process and procedure during the due diligence and transition phase to help eliminate those issues for any future acquisitions.

Okay. That's very helpful. Thank you. And on the billable hours, continuously good growth there. I know that's been a focus on growing that number to drive the organic growth rather than census, or just purely census. Just trying to get a sense. Has most of the low frank hanging fruit been picked on that front, or there's still plenty of opportunity to make internal improvements?

Well, we have made some improvements. We have worked hard. I have to give credit to our IT department led by Zeke and his team as they've given information to our ops team. Brad has really taken that project under his guidance and what more in the process of -- tweaking, is maybe not the right word -- but we're refining our internal database to focus in areas that we have not yet focused on. So we're getting down deeper into the areas related to both under served and over served and we're rolling out a new plan starting now that should help our sites understand where their issues lie and clean them up. Now to be honest with you, we still do a lot of payroll entry with paper. Any time you do something with paper, there's a delayed input between when the service is rendered and when we get the information at corporate to help the field. We are moving with the project to try to make our entry as electronic as possible and as we get a higher percentage of electronic entry from what it is today, we will be able to see more real-time information of the issues and address those issues prior to occurrence. I do think you have seen some really good strong work to drive us to the 5.1%, but I would say we still have opportunities in the future to keep strengthening -- not necessarily to grow that number, but keep that number strong.

Okay. It's good to hear. And then, Dirk, we hear some of the home health companies making more in-roads into the personal care business -- very strategic for them. I wonder if your pipeline include any other home health-based service lines or if you're looking at partnerships with other groups to deliver the same sort of service that some of these home health companies I'm talking about.

Yes, Dana, I'll be honest. Right now, we're not looking at partnership. We view Addus is a stand-alone company whose strategy would include servicing our consumers' needs in their homes. Today that includes personal peers you know, but I will tell you, we do have in the pipeline. We are looking at the opportunities to potentially add home health care, we would look at hospice. I think those two areas would be ones which we believe could make a lot of sense strategically. In other words, we don't necessarily want to enter into those service lines in markets where we wouldn't have personal care service, but if we could blink in additional service lines for our patients -- we spent over 21 months with our consumers in their home before they needed their home care, our hospice or other services. And if we've done our job and built that relationship with them, we feel that gives us an opportunity as they turn and need additional home care services.

Yes. That makes sense. Just a last one for me. Just an update on the Chicago minimum wage. I don't know if there has been any progress to get that funded and then I think it steps up again mid-year this year?

There has been a lot of efforts being put around, getting that funded. There has been some of the legislatures that put forth bills to take care of that problem. I actually feel like that if we could get a budget in Illinois, we'd have a much better opportunity to offset minimum wage. I don't think the governor nor the speaker which tend to be the two that are the impediment to getting a deal. I don't think either one of those think that raising the rate to offset of mandated increase in the minimum wage is a problem. I think they understand the necessity of that so that service providers don't eventually have to go elsewhere. We're very positive that there's work towards offsetting the minimum wage July 1, but I will be honest in telling you nothing has been passed as we sit here today.

Okay. All right. Great. Really good work. Thanks for taking my questions this morning.

Thanks, Dana.

Your next question comes from Whit Mayo with Robert Baird.

Hey, thanks. Dirk, I wanted to go back to your comments on M&A diligence, the onboarding process, et cetera. Can you elaborate on maybe two or three fundamental changes that you brought to the diligence process? Not so much the post close onboarding. How can you put proper guard rails just around the efforts so we don't see any of these issues going forward? I hear you're on the revenue cycle and sort of timed that back into ops and onboarding. But just curious, more like pre-deal, how you brought some fundamental changes to the diligence process?

Sure, Whit. Well, one of the first things I did, was bring on a team that had done it, had been very successful in acquiring companies in the past successfully. You know as well as I do that an acquisition can turn out to be something you should not have done very quickly. So this team spends a lot of time planning, we have this dedicated -- dedicated team in that, any time we have a transaction apart of their job is to do that. It's not their only part of their job, but it is a big part of their job. As part of the due diligence process, we have strengthened our quality of earnings reviewed. We have moved into lately using ENY to come on board and do this work for us. They're a little more expensive than what we were using before, but quite honestly, we feel they -- have more product that they give us has really been strong and it allows us to then know some of the pitfalls that can occur going forward. So we spent time on putting a team in the nose, we spent time on upgrading our QV and then probably one of the things you should see, the transition following it should be much crisper and more detailed. Because today, one of the things we've added -- before we did reviews -- but we strengthened our clinical review, we've strengthened our legal review and we've also been added and strengthened a market look, too. One other thing and this is just in the side and I have to thank one of our board members for this, Darren Gordon, as you know joined us as one of our new board members at the end of last year. He and Susan Weaver, they both are excellent board members. Susan deals with our clinical side and compliance, it's been wonderful. Darren understands that, but he also understand state Medicaid systems and he's had the ability to work with us to help understand what a particular acquisition's state plan may be thinking in the future so that we understand, 'are there issues with the financing? Are there issues with usage utilization?' So that we can avoid stepping into a situation where we purchase something and then all of a sudden we start seeing reductions in revenues. So I would say all those aspects together have got us to the point where we're very comfortable today that when we propose our next transaction, we have great confidence in it.

That's helpful and maybe shifting to the payroll conversion. Will all the branch locations be converted on July 1? I had on my notes that perhaps South Shore wasn't going to be ready yet. So if you could comment on that and then just any expectations for potential cost savings, productivity after the conversion? That would be helpful.

Yes. First off, I want you to understand, before we get to the 07/01 date, we'll spend the previous 60 days running duplicate payrolls in a testing environment to ensure that when we flip the switch on July 1, we think we're in a solid position. Now, we are not going to convert South Shore on July 1 and the reason is their system is working okay right now, working well. The team out there is doing fine. We looked at their controls, had very strong controls for their company. So we've delayed their conversion till August 1 so that we can the first 30 days flip over all of the ultimate users that need to be converted, then we will go out and we will convert South Shore over to the system. We're very comfortable that we will have a solid conversion at that point in time and a solid transitioned ADP. Now as far as the cost, let me be honest with you, we've not really speculated, nor tell the street. I will say there's a lot of issues related when you have a system that was designed that wasn't as flexible as you need. So a lot of things we have to do with our 23,000 employees and our numerous union contracts today are very difficult with our current system to get done in a correct manner, which causes a lot of rework. So our payroll team has done an extraordinary effort this last six months of trying to eliminate as much of that as they can, but there's a point which they just can't do anymore because the system itself is just a problem. So with the ADP system, we believe that a lot of this rework -- have them send out checks, FedEx to sites because they were incorrectly calculated -- will go away. We also feel like there will be some personnel gains. As we grow, our hope is that we don't have to add as many new payroll people going forward because their productivity level will be much higher once we get on the ADP systems. So while we're not really able to give you a dollar amount today, we do think there's some upside there that we're excited about.

Got it. G&A has been pretty consistent around $19 million a quarter for the past two or three reports. Is this a good run rate at this point in time? Or any reason why that would begin to go back up?

No, and I don't think we see that going back up. Most of our thoughts getting initiatives, we begged in by Q3 over last year. Part of G&A is bad debt. If you look at Q4, where it was, that may be pretty consistent we think moving forward. So we think that's a good run rate.

Got it. And just one last one. Just an update maybe on the contracts. You hope to get a sublease in place, so just to know if there's any update on that topic? Thanks.

Yes. On the contact center, again I understand that part of the problem with leasing anything in the State of Illinois is the people are really shaky because the government has not approved to be effective as far as putting together a budget. So it's hard for companies to make capital expenditure decisions when they don't know what the tax rate is going to be, is this taken to pay its bills? What's going to happen? So we've had some opportunities that have come by that have fallen out of [indiscernible] we are currently, but we do have a couple right now that have made proposals to us on the contact center. We're working with their real estate broker, through our real estate broker to see if we can come to conclusion. We don't have anything definitive today, but we have a couple we're working on.

Great. Thanks, guys.

We have a follow-up question from the line of Mitra Ramgopal with Sidoti.

Yes, hi. Just a couple on managed care again. Funding South Shore, are you having more conversations now with other managed care companies looking to use you to do the services, or no change there really?

We've had conversations ongoing with managed care companies -- this is Brian -- but nothing material to report at this time. We saw the change really for this quarter up to 30% as far as the mix of our business, a lot of that was largely due to the Illinois transition. But nothing, anything else material, really, to report at this time.

But again, as you know, we brought on some folks to work with us, specifically around the managed care relationship that we had and to try to drive those going forward. That team is actually been working with the managed care providers in Illinois, as well as in New York particularly to do things such as work on driving both weight as well as volume. So while there's nothing material to state here that has happened with that, I will say we're very excited that a lot of their work has been able to maintain rights and talk to the base managed care providers, also as it relates to the bad debt payment or the payment of our receivables in the somewhere our managed care environment in Illinois, while this difficulty in transition between the state and the MCOs, this team has been a real resource in going in and talking to the MCOs and explaining the difficulty being caused by the state as it relates to us being able to bill as quickly as we need to bill and that's been very helpful. So there's nothing material to report on the manuscript transaction, but the teams are ready to pay in dividends.

Thanks. And then finally on the competitive landscape, I'm wondering if you're seeing any changes there and especially as you look at potential transactions, are you seeing ADUS looking to also consolidate in this space?

The competition for acquisitions, the ones we have been looking at not really been difficult as you may might think. In certain states, I know Massachusetts has been very competitive and there was a little look in New Jersey but some of the other states we are looking at has not been, in fact the couple of the ones we are dealing with, we are a single source of negotiator with the other side to determine if they want to come out and sell to us. So right now, I wouldn't say consolidate the competition is difficult as you might imagine although as we get into bigger transactions I am sure we will have competition for those.

Okay, thanks again.

Your next question comes from [indiscernible].

Hey, thanks for taking my question. Just a couple of quick ones. On the AR balance, I think in the past you have talked about the burn in lieu of, roughly $5 million, but of step up from Q3, a little more than that would imply. So is that $5 million still a good number? I think you mentioned that they are a little behind on the true Medicaid, so is the fifth for Q1 and just looking at working capital for the year for that $5 million feel good if you don't get paid?

Yes, Brian, this is Brian, and you are correct. In the general revenue fund component of the business in the state, it is about $5 million a month. There was a slowing on the Medicaid portion of the state's bill in Q4 so the total increase in IDOA in the quarter was over $30 million so double what we would normally expect. But we have seen them pick up some payments early in Q1 so like I said earlier we got $9 million from the state right at the 1st of January, they did another $7.5 million payment in February so the burn hasn't been to keep our levels in Q1 so far. Probably that answers your question, but you want to go for without a budget, you are correct. We will have that $5 million underlined month-to-month and then where they are with Medicaid funds would be an addition to that.

The Medicaid funds tend to be historically if you look at our company and the Medicaid program in Illinois, they have been somewhat spotty where they would hold you for a couple of months and they would catch you up hoping that, we are working with the states try to make that more smooth process. Did a great job in 2016 keeping their Medicaid pretty well up to date as they had the GRF problem. We did see that it did slow down a bit maybe in November and December but we have gotten payments in January and February so we will continue to work with them but the Medicaid is a pretty solid program as you know the Federal government pays so much of it.

Sure, that's helpful. No I was just thinking how much push you can really have as you go through the year and you deal pipeline and if you are burning $15 million a quarter, just trying to see how much cushion we have to pursue M&A. But okay so then on, maybe a week or two Bruce came out with some thoughts or update or an agenda around the Medicaid program, couple of points there around reducing the number of MCOs in the state from I think roughly a dozen to 4 to 6 but then also a greater emphasis at least on the language of the document, putting a focus on the prevention of population, I think broadly it was challenging whether the MCO program was actually saving the state funding. So in that context, was just curious on your thoughts around shift from smaller number of MCO providers as that could cause any disruption in services either prepaid or whatever else it might be but the component around him pressuring around cost savings from the program and wanting to focus more on prevention, is that accelerate maybe the utilization from what you offer?

Well, I will try to answer that question as best we can because again it's just opinion but first of we believe that ADUS is a low cost provider, that we are in the right place in the homecare environment, should states including Illinois start looking at how do they limit their cost exposure to Medicaid and the residents they have been covering. So we believe with any disruption will be opportunity and we want to be prepared for that. That being said obviously Illinois has a lot of issues besides Medicaid, it just happens to be one of their bigger ones. And Rowner does appear to be focusing on that and so we will continue to look at that and we will continue to make sure what's going to happen. I don't think anything will happen quickly. Nothing happens quickly in the state of Illinois due to the fact that there's different viewpoints on each side. Now I do understand Rowner can do some things as related to MCOs and Medicaid and if they do we feel that's good. One we have a good relationships with MCO and we are proud of that but we will continue to keep our cost as low as possible so that governor is looking for ways with Medicaid, we think we are the answer. Because remember if we can keep a consumer in the home versus going into nursing homes which are covered by Medicaid, you are probably a third or less cost per day and the particular consumer stays in their home which is a much better environment for them so, you know again if Rowner, he is a smart individual and he looks at the overall cost of Medicaid, our belief is he will see if I make a change to personal care and drive people into nursing home, that's not good for the states so we will see, it's still to be determined but we are staying as where as we can.

No problem, the last one for me, I think you made a comment around margins with mileage, some control on the mileage reimbursement, was that controlling or reducing the reimbursement you offer to employees or were they just doing a better job round mapping routes and just the logistic side of it?

This is Brian. I will answer that one so really it was more of an operational focus on making sure we had good tight controls around mileage submission from the field just making sure that everybody was adhering to our policy and really scrutinizing and making sure the miles we had coming out of the field were necessary, so it is more of a control and operational aspect not any reduction in rates or anything like that.

How [indiscernible] was that? Does that move the need on margin or is that just a slight comment that you made in the prepared remarks?

It had a small move to the needle in Q4. We would expect that to continue into Q1, we don't probably see a lot of additional improvement there with more of a onetime focus in Q4 for us.

Okay. Thanks for this.

I am showing no further questions in queue this time. I would like to turn the call back to Mr. Allison for any closing remarks.

I want to thank you for being on the call today. We appreciate your support. Have a good day.