Addus HomeCare Corporation (ADUS) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Addus HomeCare Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce Senior Vice President of Corporate Communications, Drew Anderson [ph]. Please go ahead.

Thank you. Good morning, and welcome to the Addus HomeCare Corporation second quarter 2017 earnings conference call. Today’s call is being recorded. To the extent any non-GAAP financial measures discussed on today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's Web site 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 that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its second 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, Drew. Good morning, everyone, and thank you for joining us for our second quarter conference call. With me today is Brian Poff, our Chief Financial Officer. Let me begin with some overall comments, and then Brian will discuss the second quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions. I would like to start our call today by thanking Brenda Belger, our Chief Human Resource Officer, for all of her efforts on behalf of Addus since joining us in June of last year. As we announced last week, Brenda will be retiring from Addus at the end of August. Over the past 13 months, Brenda has reorganized our HR and payroll departments, helping them to be much more effective than we have seen in the past. In addition, her team along with Jim Zoccoli and his team have done a fantastic job in implementing our new payroll system. We will all miss Brenda but we will always be grateful for the work she did while at Addus. At the same time, I’m very excited to welcome Laurie Manning to Addus as our new EVP, Chief Human Resource Officer. Laurie has many years of experience in healthcare, most recently with Epic Health Services. Laurie will start with Addus on Monday. I know she will be a great addition to both our company as well as to our executive team. I have no doubt that Laurie will continue the strong work that has begun under Brenda’s leadership. I know many of you have previously heard but let me update you on the state of Illinois. In early July of this year, the state finally came together and passed a full budget for the first time in two and a half years. Now that the state has a budget, we expect Addus to receive approximately $78 million in past due receivables relating to our general revenue funds services, which we have with the state of Illinois as well as approximately $3 million in prompt payment interest. Through August 4th of this year, Addus has already received approximately $70 million related to our GRF past due receivables. As a company, we have worked the state over the last two and a half years continuing to serve these GRF clients, while having to carry these receivables for periods exceeding a year. With this budget, Addus should now continue to receive timely payment for these services. In addition to approving payment of GRF services, the budget also included an increase in our hourly reimbursement rate in Illinois to help offset the cost of the required minimum wage increase in Chicago and Cook County. This revenue increase is effective this month. I want to say that we are very appreciative of the state leadership for finally coming together to pass the state budget. As a company, we look forward to continuing to help the elderly population in Illinois, be able to remain in their homes as they age. Over the past 14 months, I have been discussing our progress towards our ADP payroll conversion. I’m happy to tell you that we have completed this important system conversion. Effective July 1st, we made the transition from our own payroll system to ADP. This progress has gone well due to the meticulous planning and work of everyone involved. As of today, all of our employees have been converted to this new system with minimal disruption. While there are always issues that arrive when you have a major system conversion, our team has done a great job of creating these issues in a timely manner. We have now been through two complete payroll cycles and continue to see a decrease in payroll problems. With this transition, we are now positioned to continue our acquisition growth with no system limitations. It continues to be our expectation that this new system should lead to lower cost, as we continue to improve our process. Now let me discuss our financial results for the second quarter of 2017. Revenues for the second quarter were $103.6 million compared to $100.9 million for the same period in 2016, an increase of 2.6% with same-store revenue growth of 3.9%. Our same-store growth adjusts for the revenue we lost due to the sale and closings of the six ADS facilities that we operated in 2016. Our GAAP earnings per share were $0.23 as compared to $0.23 for the second quarter of 2016 and our adjusted earnings per share for the second quarter of 2017 were $0.38 compared to $0.31 in the same period in 2016, an increase of 22.6%. Our adjusted EBITDA for the second quarter of 2017 increased 14% to $8.6 million from $7.5 million in the second quarter of 2016. We ended the second quarter of 2017 with no outstanding balance on our line of credit. One thing I would like to clarify relates to the recent Medicare home health care rule changes proposed by CMS. Less than $400,000 of Addus annual revenue is from Medicare home health care that could be affected by this proposed change. We are subject to the various state rules pertaining to Medicaid that are not affected by rules applicable to Medicare. As previously announced, effective August 1st, we completed the acquisition of Options Home Care, a personal care service company in New Mexico. Options Home Care serves more than 20 counties in the state and produces annual revenues of over $20 million. The six Options sites are now functioning as a part of our Addus-New Mexico region. This transition has gone very well due to the efforts of many people on our due diligence and transition teams, as well as our new teammates from Options. We are excited to have the Options Home Care team as part of our company and we look forward to continuing to implement our acquisition strategy. Along those lines, we continue to be active with a pipeline of potential acquisitions. We are well positioned due to minimal debt and our new $250 million credit facility to handle increased acquisition growth. Currently, we have a couple of smaller deals that we are farther along than others. Both of these deals are in the private pay side of our business, which is a part of Addus that we want to grow. In addition to these two deals, we continue to look at multiple acquisitions that meet our strategic objectives. As we have stated before, our acquisition strategy is directed towards positioning Addus as the number one or two personal care provider in the states in which we operate. We will continue to pursue this strategy in our current states, while looking to move into new states whose demographics and financial outlook hits our objectives. Before I turn this call over to Brian for a more detailed review of the second quarter performance, let me say how exciting it is to be a part of Addus. We provide important and much-needed services to consumers at a very low cost, which enables them to stay in their homes avoiding the need for much more expensive healthcare in a less satisfactory venue. With that, let me turn the call over to Brian.

Thank you, Dirk, and good morning to everyone. Addus had a very solid financial performance for the second quarter of 2017. Our same-store revenue growth was within the 3% to 5% range we’ve targeted. We produced meaningful improvements in margins and our adjusted earnings per share increased over 20%. As we discussed previously, we’ve strengthened our financial position during the second quarter through the completion of our new $250 million credit facility. We signed a definitive agreement to purchase Options, a transaction which as Dirk mentioned closed on schedule last week. With this acquisition, the completion of the ADP conversion and significant boost to cash flow from the Illinois payments, we bring positive operating momentum into the second half of 2017. For the second quarter, net service revenues increased 2.6% to 103.6 million while same-store revenues rose 3.9% adjusted for the sale or closing of the Adult Day Services locations since the end of the second quarter last year. Growth in net revenues is due to a slight increase in billable hours per business day and a 2.4% increase in revenue per billable hour, which reflected the absence of the ADS business with its lower hourly rate. We do not have any revenues from acquisitions in the second quarter, as we lapped the 2016 acquisition of South Shore in the first quarter. The third quarter will improve in this regard with two months of revenue from the Options transaction. The company’s adjusted EBITDA was 8.6 million for the second quarter compared with 7.5 million for the second quarter of 2016, an improvement of 14%. Adjusted net income per diluted share was $0.38 for the latest quarter, a 22.6% increase from $0.31 for the second quarter last year. The adjusted per share results for the second quarter of 2017 excluded the following. The write-off of debt issuance costs related to our terminated credit facility of $0.09, non-cash stock-based compensation of $0.04 and M&A and transactions expense of $0.02. Our adjusted per share results for the second quarter of 2016 excluded severance and other costs of $0.04, restructuring charges of $0.01 and non-cash stock-based compensation of $0.03. Our gross margin for the second quarter increased 200 basis points to 27.5% from 25.5% for the second quarter of 2016. As we’ve seen for the past few quarters, we have benefited from improved efficiencies in mileage and travel expenses, but have also experienced improvements in cost control related to direct labor and overtimes, specifically in our New York operations. G&A expense for the second quarter of 2017 increased 80 basis points as a percentage of revenue to 18.4% from 17.6% for the second quarter last year, primarily due to investments in our infrastructure to support our growth strategy as well as investments to strengthen our compliance oversight. We should continue to see our G&A expenses as a percentage of revenue decrease as we continue to complete acquisitions. As previously discussed, our bad debt was consistent with the prior quarter at 2% of revenue and up slightly from 1.8% for the second quarter of 2016. Our leadership team is working together to improve the areas of our operations of revenue cycle which have caused the increase in bad debt expense, and we continue to expect a return to a more normal level over the next few quarters. The company’s tax rate for the latest quarter was 30.2% compared with 30.3% for the second quarter of 2016, largely the result of lower pre-tax income related to the debt issuance cost write-off. We continue to expect a tax rate of approximately 30% to 32% in the second half of 2017. We had a net cash usage from operations totaling 21 million for the second quarter and 15.9 million in cash on hand at the quarter’s end. We had no debt outstanding on our $125 million revolver at the end of the quarter with $45 million in term debt. Our DSOs increased by 18 days during the second quarter to 121 days from 103 days for the first quarter with DSO for the Illinois Department of Aging at 197 days at the end of the quarter. As Dirk mentioned previously, we have received approximately 70 million in payments from the state of Illinois so far in the third quarter and expect to see accelerated payments from the Illinois managed care plan as they receive their payments from the state. These past few collections represent over 60 days in our overall outstanding accounts receivable. In addition to these payments for our non-Medicaid business with the state of Illinois, we also anticipate approximately 3 million in interest from the state and a normalization of cash flow with the remainder of the state’s fiscal year as a result of the new budget. This concludes our prepared comments this morning. Thank you for being with us. I’ll now ask the operator to please open the line for your questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Mitra Ramgopal with Sidoti. Your line is now open.

Yes, hi. Good morning. Just a few questions, first on the acquisition front, given Illinois’ resolution regarding the budget, does that make you now more aggressive in terms of pursuing some larger deals? And secondly, Dirk, I know you mentioned you’re for long and couple of smaller deals. I was wondering if you can give us a sense of the type of size we’re talking about from a revenue standpoint.

Yes, Mitra. Let me address the first part of your question concerning to our aggressiveness to do a bigger deal. One thing we have said consistently since we got here is while we’re not opposed to larger transactions we’re going to be very careful as it relates to doing deals of a lot of size, a lot of revenue. Not that we’re opposed to it, it’s just we want to be very careful to make sure we can get the return on invested capital that we believe as the management team is important for our company. That being said, it does make us more comfortable in the amount of debt we could use for appropriate transactions due to the fact that this state of Illinois is now paying currently their GRF revenue. So we don’t have to plan on the bill for the 60 million, 65 million of revenue over the next 365 days. So from that standpoint it gives us comfort to look at deals but we’ll continue to remain a disciplined approach to the size of transaction and to the return we get from that particular transaction. As it relates to the smaller deals, in private pay one of the things we have found across the country is that most of the companies in this private pay side of the business are smaller. If they are larger, they tend to be franchised model businesses which we have no interest in pursuing. So for us, these are transactions that are under 10 million of revenue that we would add to our company hopefully over the next three to four months.

Okay. Thanks. And regarding the ADP conversion, I was wondering if you can give us a sense in terms of what is it really bringing for you now that you didn’t have before?

Yes. The ADP conversion is – I can’t overemphasize the importance of that transaction or that conversion to this company. One of the things we found with our past system is we just didn’t have visibility into issues. When there were incorrect paychecks that led to incorrect billings, we didn’t always have the ability to determine what was the root cause of those problems and correct them. One of the things we’ve seen in the 30 days that we’ve been on the ADP system is now we have clear visibility to attack those issues, which should lead down the road, as Brian mentioned, to a lower bad debt reserve as we’re able to take care of the frontend issues that sometimes cause the write-off. So working with Brad Bickham, our COO and his team, we now have data that allows us to go back and work on the issues that we find. And again, ADP is a big reason for that. In addition, ADP allows us to transition acquisitions much, much easier than our previous system. In fact, we were very uncomfortable bringing any acquisitions onto the old system. We now are very comfortable with ADP. In fact, we were able to on August 1st of this year not only bring on Options as an acquisition into our company but we also converted to ADP our South Shore transaction which we closed on in February of last year. So ADP has been a real improvement to the company.

Thanks. That was very helpful. And I was wondering if you can give us an update as it relates to the dual eligible transition. I know it’s been going slow and I don’t know if you have anything new to add there?

We really don’t, Mitra. I think one of the things while it has been going slow, I think there’s a couple of things. Remember the state had gotten way behind on paying the MCOs for the Medicaid business in Illinois and that caused some slowdown in the transition. We had a number of the MCOs very concerned if they were going to be able to continue in the state. Now that that has been rectified with the budget passing and the new debt that the state will take on, we feel like that will help with the transition. Also don’t forget that the state is in the process of rebidding that transition and going to a lot fewer MCOs in the future, so that somewhat hampered in the speed. I think the state still is saying no. I believe their old goal was 50% of their business through MCOs. I think they’re now saying 80%. So we do hope over the next 24 months, we’ll see that continuing to speed up

Mitra, this is Brian. Just to add a little color to Dirk’s comments. So in the quarter, it was kind of a quiet quarter as far as the transition was concerned. So our percentage of [indiscernible] actually slipped back under 24%. So we saw kind of a leveling off of that forward momentum that we’ve seen in the previous couple of quarters.

Right, okay. Thanks. And then finally, I know given the tight label market out there, I was wondering what you’re seeing as you look to expand your network if you’re having to pay up a little in terms of getting more recruiting?

Well, remember the majority of our caregivers are union employees and we negotiate those rights directly with the union and in a lot of cases, the minimum wage that are coming into this state dictate our pay scale. So quite honestly for us, mostly it relates around minimum wage and union contracts as opposed to the tight labor market that’s out there. Now that being said, there are markets in which we operate where probably our most difficult aspect of growth kind of revolves around the fact that finding caregivers is difficult at times. So we have an effort underway to continue to improve our recruiting out in the field, but it is an issue not so much in ways; just finding people that are willing to come onboard with us.

Good. Thanks for taking the questions. I’ll get back into queue.

[Operator Instructions]. Our next question comes from the line of Ben Natter with Emrose Capital. Your line is now open.

Hi, guys. Thanks for the continued strong execution. Just a question on the ADP transition. Any sort of initial metrics you guys could share about how that’s impacting your – any sort of metrics around that, perhaps check mail, air rates or recruiting rates or anything like that?

Ben, I can tell you that with our old system we were three years into it and we had an error rate that was still occurring with that system. In our first month of transaction with ADP, we have reduced that error rate somewhat. We were very proud to see that, because remember when you come out of the gate with the new system like ADP, it’s very complicated. We have a lot of pay rates with the various union contracts we have across the country. So you expect to have some errors that will occur at first and hopefully one time we correct and we move forward. So the fact that in the first quarter we have already seen a reduction in the air rate is very exciting and long term we believe will continue to come down. That should lead to lower costs in the future as that continues to occur. Also, again as I mentioned, the fact that we now believe we can attack process improvements as it relates to the whole cycle of revenue from when we hire somebody when they serve, when we bill, when we collect due to the information we’re getting from the ADP system, we think that will be a very important thing going forward. So I can say we’re very excited at least about lowering initial error rates.

All right, that’s great. And I think in the past you guys have talked about attaining perhaps a 10% EBITDA margin, perhaps 500 to 600 maybe in revenue. Any update on whether that’s still sort of the objective and what the – if there was any sort of management goal around attaining that level of revenue?

Ben, this is Brian. We still believe that a 10% EBITDA margin for our company is attainable at the right size of scale. So our goal and certainly as the management team is to exit the end of the next year and pushing $600 million revenue runway which we believe should be attainable to hit that 10% target.

Okay. Well that would be tremendous value creation for your shareholders, so best of luck and really appreciate it.

Thank you.

And we have a follow-up question from the line of Mitra Ramgopal with Sidoti. Your line is now open.

Hi. Just a quick question. I believe you’re completely out of the adult daycare business now and I was just wondering longer term if there are areas you might be interested in entering aside from what you’re in right now?

Yes, we are out of the adult day and as we said when we exited or sold that business, it was due to the fact that we want to be home-based. So you can look for us strategically as we go forward to do what we do in the home of our consumers. As we look at other service lines which we would be interested in, we have mentioned that we want to grow our private side of the business and while that’s still personal care, it is an area that’s only run about 2% of our revenue that we think has some strong momentum if we can continue to look into that area. And as we said, the two small businesses we’re looking at are there. As it relates to other services, we’re really not interested in home health honestly. We don’t believe home health works as well as with personal care, maybe some folks do. We do think that hospice could work well with personal care and it is an area that we would be interested in looking at in the future, if the multiples were right for our company.

Okay. Thanks, again.

And I’m showing no further questions at this time. So with that, I’d like to turn the call back over to President and CEO, Dirk Allison, for closing remarks.

Thank you, operator. We want to thank all of you for your participation on our earnings call today and hope you have a great week.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.