Ladies and gentlemen, thank you for standing by and welcome to the Addus HomeCare Corporation's Third Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. [Operator Instructions]. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Dru Anderson, Investor Relations. Please go ahead.

Thank you. Good morning and welcome to the Addus HomeCare Corporation third quarter 2020 earnings conference call. Today's call is being recorded. To the extent any non-GAAP financial measure is 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 by 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 2020 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 third quarter 2020 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. At this time, 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, Dru. Good morning and thank you for joining us for our 2020 third quarter earnings call. With me today are Brian Poff, our Chief Financial Officer; and Brad Bickham, our Chief Operating Officer. As usual, I will begin some overall comments and then Brian will discuss the third quarter results in more detail. Following our comments we would be happy to respond to any questions. As you already know the pandemic has created many challenges over the past eight months and I expect the environment to remain operationally difficult until there is a solution to the COVID virus. In spite of these challenges my optimism about the future of the HomeCare industry and Addus's opportunity with in it are as great as ever. I'm especially proud of our dedicated team of leaders and team members that have demonstrated their ability to continue to meet our mission and execute upon our strategy. We continue to provide quality care to consumers and patients with an added focus on safety. We continue to business both organically and through acquisition, and we have continue to generate strong operating performance including the most recently reported third quarter 2020 results. As you saw with the financial results we announced yesterday, Addus continued our solid operating performance in the third quarter of 2020. Our revenue for the third quarter was a $194 million as compared to $169 million for the third quarter of 2019, an increase of 14.8%. Adjusted earnings per diluted share for the third quarter 2020 was $0.76, up from $0.75 for the third quarter of 2019 despite the impact of COVID-19 on revenues during our latest quarter. Our adjusted EBITDA for the third quarter 2020 was $19.5 million as compared to $17.4 million for the third quarter of 2019, an increase of…

Thank you, Dirk, and good morning everyone. Addus had a very solid financial performance for the third quarter of 2020 demonstrating consistent profitable growth in this challenging conditions. As Dirk noted, total net service revenues for the third quarter were $194 million. The revenue breakdown was as follows. Personal Care revenues were $165.9 million, or 85.5% of revenue, hospice care revenues were $24 million or 12.4% of revenue, and HomeHealth revenues were $4.1 million or 2.1% of revenue. These results demonstrate our ability to continue executing our organic growth strategy with favorable results. While we are still facing a dynamic environment with the ongoing impact of the COVID-19 pandemic, we saw some improvement in volume sequentially during the quarter. We have a strong business model in place and believe we are well-positioned to meet expected demand with additional safety protocols in place and will continue to support our patients with the care they need in the face of a rising number of cases across the country. Our results also reflect the incremental benefits of the four acquisitions we completed in 2019 and the one acquisition we completed earlier in 2020, with combined total annualized revenue of approximately $140 million. We continue to evaluate and pursue other acquisition opportunities and have a pipeline of potential transactions. As Dirk mentioned, on November 1, we closed on the acquisition of county homemakers, a personal care operator in Pennsylvania, with 2019 revenues of $14.8 million, and we expect this acquisition to be immediately accretive to our 2020 financial results. Other financial results for the third quarter of 2020 include the following. Our gross margin percentage was 29% compared to 26.7% for the third quarter last year. During the quarter we saw an impact of approximately 40 basis points from the increase in minimum wage…

[Operator Instructions] Our first question comes in the line of Brian Tanquilut from Jefferies. Your question, please.

Good morning, guys. Congrats on a good quarter.

Thank you.

Dirk, I guess my first question for you. Obviously, you've done a couple of deals already. One in Montana and then this one in Pennsylvania. But we have investors asked me about your deal appetite in terms of geographies and size. Are you focused primarily on deals kind of in this size range? Or would you be open to larger deals? I just wanted to ask, how we should be thinking about your strategy on M&A going forward?

Yes. Concerning our acquisition strategy, one of the things we have said and continue to try to do is to build density and geographic markets. And that would include not only personal care service, but also looking to try to add say, HomeHealth and hospice in other states as opposed to what we mainly have in New Mexico today. So, I think what you'll see, Brian, going forward, we will continue to look in the personal care market, which is obviously the biggest part of our business trying to fill out states in which we currently have strong operations. But at the same time, we want to continue to look at the clinical side of our business, adding Home Health and hospice in those markets, because we find that as we have all three legs of the stool, so to speak all three levels of care in a market, that is something that our managed care providers, managed Medicaid providers, there that's something that they're very interested in. So right now, I would tell you that the personal care assets we think, tend to be in the sizes. So we were glad to be able to close both of the ones we've done this year. Some of the clinical care deals we're looking at are somewhat larger.

Got you. Okay. And then shifting gears. So as I think about -- obviously elections today, Supreme Court review of the ACA. Can you just remind us what your exposure is to Medicaid expansion. I know, obviously, your payer mix is very heavily tilted towards Medicaid. But how should we be thinking about the risk? If the ACA is invalidated by the Supreme Court?

Yes. If you look at the expansion of Medicaid across a number of the states that occurred over the last four or so years -- four or five, six years, it didn't really affect us positively or negatively. Most of our consumers and patients that we take care of our average age on the Medicaid side is around 75 plus. And so most of our, a large, very large percentage of our patients are bill eligible. And so they qualify for Medicaid prior to the expansion through ACA. So for us, I mean, obviously, we like having ACA out there. It is certainly something that we think helps. But it is not something that if there was a change to that it would not affect our company much at all.

Last question for me. You touched on the moving parts of New York reimbursement. So I guess for Brian, as we think about the different moving parts, New York reimbursement changes, Illinois, rate increase in January. And then I'm guessing there's another Chicago minimum wage increase in July of next year. If you don't mind us giving us some quantification around those moving parts for modeling purposes? Thank you.

Yes, Brian, I can handle that one. So on New York, as Dirk mentioned in his comments, we've seen the 1.5% reduction across the board to Medicaid providers, which is about a third of our business, which is not really material to us. We haven't seen any other real material moves in the non-state Medicaid payers at this point. So it's kind of hard to put a quantification around that what we would expect going forward. I think everybody knows that New York has been a fairly fluid situation, and they've done a lot of work to try to look for ways to save money, but really, nothing concrete has come out of those discussions as of yet. So we'll wait and see kind of where they land. On Illinois going forward, I think rate increases is going to be similar to what we saw last year with the timing delay. So I think our impact from Chicago and our weight scale was a little above, so we didn't take necessarily a full $1 per which is why I think the impact for us this year was a little less than it was last year, but the rate increase is going to be very similar to what we saw previous. So I guess the answer kind of those two moving components.

Brian, just a follow up on that. So like for example, the Chicago increase, it's about $1, translating to roughly $4 million to $5 million of increased cost. Is that on an annual basis? Is that the right way to think about that?

Yes. What we saw in Q3 was just about $900,000, just under a $1 million. So it's about going to be that on a quarterly basis. That is correct. So right now, you are correct. We are going to see $1 increase in minimum wage one more time in Chicago next July. And that will be addressed through the state's budget for the next year.

All right. Got it. Thank you.

Thank you. Our next question comes from the line of Matthew Gillmor from Baird. Your question, please.

Hey. Thanks for the question. I guess I wanted to first ask about the -- I think, Dirk mentioned sort of a 3% to 4% impact in terms of the revenue dynamics around COVID relative to where you were pre pandemic as we're thinking about the fourth quarter. I guess I was, I was kind of curious. Where did that -- where did you end up in terms of like the exit with the third quarter in terms of the revenue impact? And are you -- does this outlook you're providing, does that anticipate some additional disruption that you haven't seen yet? Or is it reflective of sort of the current dynamics that you're seeing on the ground?

Yes, Matt. This is Brian. I'll start it and Dirk if he want to add color about. What we saw coming out of the end of Q3 into Q4, is we really kind of flattened out as far as our trajectory on volumes. I think in Dirk's comments in 3%, 4% for Q4, we are seeing a rising number of cases. So I think we're be taking a very cautious view on how that could impact us. I think from a standpoint of being prepared for that from our perspective, obviously PPE is something we've been focused on this year. We're very well prepared for that if cases do continue to rise. And we've got protocols in place to handle that. But we'll see what happens with certain of our markets if they go more into a lockdown or kind of a different type of environment that we've seen over the last three to four months.

That makes the no -- what I was saying that, that that basically means it's somewhat flat to the third quarter where we already saw that impact.

Okay. Fair enough. And then I was hoping you could update us just on sort of labor market dynamics. And I know we had a reduction to the enhanced unemployment benefits. And curious if you've seen that translate into faster hiring or better retention, anything on that front?

Yes. This is Brad. We have seen improvement in hiring, if you look at really kind of from August forward. Overall, we're up probably about 2% when we look at caregiver hires per business day. So that that trend has been favorable. And that's in spite of some challenges in New York, which is still hiring there is still very challenging, they still have some enhanced unemployment benefits that is impacting the New York market. In addition, I think this is being generally locked down. But we have seen some improvement in the hiring numbers, which is encouraging.

Okay, great. Thanks very much.

Thank you. Our next question comes from the line of Mitra Ramgopal from Sidoti. Your question, please.

Yes. Hi. Good morning. Thanks for taking the questions. First, I was just wondering, I think pre COVID you're seeing states like New York, look to shrink their provider networks, and that obviously was going to be a benefit for you. Are you seeing that starting to happen in other states now as a result of COVID, maybe accelerating that move?

Well, one of the things we saw during so far during the COVID is -- with the Care Act, funds coming out to help providers as they kind of went through the pandemic. I think states have been very cautious about doing anything that would affect the employment and the companies out in their state. So no, we have -- that's kind of a long way to say. At this point, we've not seen any additional shrinkage in the networks that the states are allowing to operate. I do know that New York was considering during their budget process some things that might have tightened up the network a bit further. That now has been put on hold. So right now we are not seeing any additional movement because of the COVID virus towards a narrowing of the networks.

Okay. That's great. And then on the acquisition front, again, obviously, there was a nice addition you announced. But just looking ahead any commentary in terms of valuations you're seeing out there or increased opportunities that might not have existed before the pandemic?

Yes. Let me take. One of the things that had surprised us a bit coming out of the pandemic is the valuations that we are seeing. We are seeing valuations being pretty strong, and whether that's the fact that quite honestly that I think the pandemic has really driven on the fact that home-based care both clinical and non clinical are very important to the elderly population of this country. I think that has been something that some private equity firms have seen and other strategic like ourselves has seen. And so the valuations that we have seen in some of the recent transactions are higher than we would have thought potentially coming out of the pandemic. That being said, personal care, we've been able to maintain our valuations much better than we have on the clinical care side. So that's something that is nice to see. We haven't seen a lot of HomeHealth providers yet come out after both PDGM and the COVID virus. We'll be interesting to see maybe early next year, if some of those come out what happens to valuations. Certainly, on the hospice side, I know you've been following that. Those valuations are still pretty high. So that kind of tells you as we come out of it, things have certainly not gotten less expensive. And at times, maybe it gotten a bit more expensive.

Okay. Thanks. And then finally, one thing we've been hearing is nursing home certainly being affected in terms of occupancy. And there was a people more willing to stay at home. Is that something that you can say is maybe perhaps a little benefit to you or just too hard to or too small to quantify it here?

Well, I think right now, it's a little early in the transition or the effect of the virus to be able to quantify anything material. That being said, I do think what's come out of this, our team I think sees it is that there's a real renewed focus in healthcare on taking care of people in their home. And we like that, obviously, that's been our mission for the past 41 years. We believe it's a important place and a very safe place to take care of individuals as they age. And so, that's something that we believe we have seen is a renewed emphasis from states payers and others on the importance of home care.

Okay. Thanks again for taking the questions.

Thank you. Our next question comes from the line of Matt Larew from William Blair. Your question, please.

Hey, good morning. CMS recently had out sort of a toolkit around various state models, taking care of people at home focused on LTSS. And it was mostly retrospective in nature, but just thought of maybe an opportunity t to ask you about any trends or conversation -- trends you're seeing or conversations you're having with states that kind of reflects, Dirk, as you alluded to this renewed interest in the home and whether that might result in different funding environment or different opportunities set for you?

Yes. This is Brad, I mean, we've haven't seen a lot of discussions around that, specifically, with states looking for different funding opportunities to take care of people at home. I think there certainly is an interest in expanding that keeping people out of a facilities setting, particularly I think the virus impact on facilities, I think people have taken note of that, and to the extent that we can keep them out, the better. But haven't really had any active discussions with states around different funding sources for that.

Okay. Fair enough. And then just wanted to ask about MA plans. I know, there were a couple pilots you had been working on, but those have been paused. And at this point, it's difficult to predict when post COVID will be, but are those two opportunities that you see is realistic for 2021? Or is this more in that 2022 in terms of when you might start seeing some data or progress with those?

Yes. This is Brad. Again, the MA plans and the projects we have there, I mean, I think it's really a 2022 initiative. That being said, we do have some projects that are currently we started up kind of in the September/October time period on a variety of value based projects, which we're definitely excited about, looking forward to starting to collect some data on the outcomes from those projects. But that'll probably as far as data we're six months away from getting some meaningful data on that.

Okay. Thanks, guys.

Thank you. [Operator Instructions] Our next question comes from the line of John Ransom from Raymond James. Your question, please.

Hey, good morning. I'm just wondering as you think about the future of Addus, do you have any markets you could point to where you've been able to integrate the three legs of the stool, meaning, personal care, home care and hospice? And as you formulate M&A, is that like trying to thread to find a needle to find complimentary assets in existing markets or say you have a big personal care presence?

Dirk, do you want to take that?

Yes. We do want to replicate New Mexico in other markets. Now, I don't think any of us believe that if we operate in 25 states, we're going to have 25 markets with all three legs of healthcare in it. But there are probably four or five of our markets, where we're very excited about the potential of being able to add additional market. Some may be that you add one of the clinical side of care, and then from that you grow that third leg more internally. And so we're looking at as a company. We've got two or three markets that we're excited about. We're looking for as you talked about acquisitions would be nice if we could find something in those markets, that would be our desire.

Okay. And then secondly, I know the companies that focus primarily on health. That had to do lots of heavy lifting to get ready for PDGM. Kind of where you're given us a smaller segment for you kind of where are you in the PDGM integration process? And as you look at potential acquisition targets, you feel comfortable you can model it now? Thanks.

Yes. This is Brad. We've made a lot of progress on PDGM front. I will say I think the COVID virus has had a little bit of a disproportionate impact on PDGM as far as I think it makes the numbers look a little worse than what they would be without the virus just because some of the referral sources that you would have received and then from the institutions, dropped off particularly early on in the virus, and we're still seeing some slowness, or sluggishness of the referrals coming from the sniff environment. But as far as working on our cost structure, I think we made some pretty good strides there. If you look our gross margin on the Home Health front, certainly has improved, I think we'll continue to see some incremental improvement there. So I think we're in good shape. And we're certainly looking forward to add some more assets on the Home Health side.

And then just lastly. Have there been any at least pulmonary discussions with MA plans on more models that will move beyond kind of the simple fee for service? So do you think you're going to be in kind of fee for service land for the foreseeable future?

John, I think what we're seeing, probably in the last year is a real interest in value based care and looking at ways in which companies can work with payers in a value based approach. We actually have created a committee, a team to try to work towards developing a model or models that work with us, starting from a paper service basis and moving more into eventually may potentially a risk based model where maybe there's just upside benefit, there might eventually be some full, more risk on both the up and downside. I don't see today that we will be to a global capitation. We will -- we could be a paying party to a partner of -- something that would relate around a global cap. But for us, we're more into looking at our ability to move from fee for service into some sort of bonus spaced or value based payment model. That will not be by the way across the country. That will be in limited market. So we're going to remain a fee for service business mainly in our personal care business. And then we'll move in some markets where we're larger in the ability to look at value based care.

Great. Thanks so much.

Thank you. This does include the question and answer session of today's program. I'd like to hand the program back to Dirk Allison for any further remarks.

Thank you, operator. I want to thank you all for the interest in Addus and for being part of our call today. Have a great week.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.