Welcome to the Addus HomeCare Corp Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions]. I'd now like to hand the conference over to Dru Anderson. Please go ahead.

Good morning, and welcome to the Addus HomeCare Corporation second quarter 2021 earnings conference call. Today's call is being recorded. To the extent any non-GAAP financial measure is discussed in today's call, you'll 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 2021 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 2021 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 like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

Thank you, Dru. Good morning, and thank you for joining us for our 2021 second quarter earnings call. With me today are Brian Poff, our Chief Financial Officer; and Brad Bickham, our President and Chief Operating Officer. As usual, I will begin with some overall comments, and then Brian will discuss the second quarter results in more detail. Following our comments, we would be happy to respond to any questions. Yesterday, we announced our financial results for the second quarter of 2021. We continue to be proud of our solid operating performance as we have started to see our markets return to a more normal environment. Our revenue for the second quarter of 2021 was $217.9 million as compared to $184.6 million for the second quarter of 2020, an increase of 18.1%. Adjusted earnings per diluted share for the second quarter of 2021 was $0.90 as compared to $0.73 for the second quarter of 2020 an increase of 23.3%. Our adjusted EBITDA for the second quarter of 2021 was $24.3 million as compared to $18.7 million for the second quarter of 2020, an increase of 30.1%. During the second quarter, we started to see the positive effect of the $350 billion in state aid, which came from the federal stimulus plan. Our states have done a nice job in maintaining or in some cases increasing receivable payments to Addus leading to a very nice cash flow for the quarter and a cash balance at June 30 of approximately $139 million. Our largest state Illinois as scheduled increased their statewide reimbursement rate on April 1, to cover the minimum wage increase, which was effective in Chicago on July 1 of last year. In addition, the State made this rate increase retroactive to January 1, 2021 for the approximate 60% of our…

Thank you, Dirk and good morning, everyone. Addus had another strong financial performance in the second quarter of 2021 with consistent profitable growth and continued improvement in volume trends across all of our operating segments, with personal care and home health exceeding our organic growth targets and our Hospice segment experiencing solid emissions and sequential growth and census. As Dirk noted total net service revenues for the second quarter were $217.9 million. The revenue breakdown is as follows; personal care revenues were $176.3 million or 80.9% of revenue. Hospice care revenues were $36.9 million or 16.9% of revenue. These results include the addition of Queen City Hospice in Ohio, which closed at the end of 2020. Home Health revenues were $4.7 million or 2.2% of revenue. Included in our results are the incremental benefits of the four acquisitions we completed in the second half of 2020, three in personal care and one in hospice, which totaled approximately $84 million in annualized revenue. We also closed our Armada Home Health and Hospice acquisition in New Mexico on August 1 with $23 million annualized revenues and look forward to completing additional acquisitions that meet our strategic criteria. Our gross margin percentage was 31.6%. It increased from 29.8% for the second quarter last year, largely attributable to the higher mix of clinical services and up from 29.8% sequentially from the first quarter, as we saw the positive impact of the most recent reimbursement increase in Illinois. Similar to our recent past experience, we anticipate our gross margin to be negatively impacted by approximately 40 basis points in the third quarter, by the last scheduled increase in Chicago minimum wage that was effective on July 1, with the offsetting state reimbursement increase currently scheduled for January 1t, 2022. We are hopeful however that the…

[Operator instructions] Your first question comes from the line of Matt Borsch with BMO Capital Markets.

Yes. Good morning. I was hoping maybe you could talk a little bit more about the competition for acquisitions. I think it was most intense in the hospice area previously and so now, perhaps its most intense on the home health side. Can you characterize who you're -- what types of organizations you're competing against the most? And if I could ask this question also, can you reveal if there been inquiries about Addus being acquired by some other organizations,

Well, Matt, you want to start it off with the hard one today, didn't you? As we look at acquisitions certainly this year, as we said earlier, we've been focused most on Personal Care and Home Health. Although we will look at Hospice if it's strategic and one of the things we've found, there are a number of companies out there that are looking for deals. If you go back over the last few months, you've seen a lot of our larger competitors have acquired companies. There's also been private equity firms out there that are private companies. And so as we look at it, this is a market that's going -- is attractive. The pandemic has proven that home care makes a lot of sense and I think a lot of people are wanting to get into this business or get bigger. I think the one thing that I want to emphasize is that we are going to maintain our discipline to be strategic and to look at deals that are accreative to our company. We will constantly look at opportunities in those major markets that we have talked about in the past the five or six markets where we want to continue to build like New Mexico or we want to continue to build three levels of care. And we will be obviously aggressive in those markets if it's a very strategic acquisition. But we also realized that some people are willing to pay more than we are and at that point we want to maintain our discipline. As it relates to your last part of the question, Addus is not for sale, hasn't been for sale and we are not in any way talking with anybody about that.

Your next question from the line of Scott Fidel with Stephens.

Hi. thanks. Good morning, everyone. First question, just appreciate the update around some of the enhanced FNAV funds. It looks like visibility starting to come in and in terms of what you called out with potentially a faster update in November on the Illinois rate increase that was scheduled for January, just interested as you're looking across the other states as well in terms of your other key personal care markets, just any type of visibility or indications that you're getting at this point in terms of how some of those enhanced FNAV funds from our may start to float through into the personal care business.

Yeah, I think what we've seen and again, a lot of states are still in the planning stage, I think there's kind of an underlying thing that most states are not trying to add long-term, new long-term plans that would require funding once the FNAV dollars go away. As you know, pack [ph] dollars are a match for a year. The states have three years of which to use those funds. States I think are doing what looking like what Illinois did. Illinois already had a rate increase plan and what they decided to do was use partial funds to move that forward 60 days. I think you will see things along those lines being considered in other states, but at this point in time, there's no concrete plans that we're aware of another states that we could talk to you about today.

Okay. Then next question, just Brian I know, you pulled out the expected impact sequentially in 3Q, just from the Chicago minimum wage going into effect. Would be helpful if you maybe wanted to just bring it up to the higher level in terms of thinking on EBITDA market progression for 3Q and then into 4Q and then how that may shake out when looking at the full year now after having reported second quarter results, how you're thinking about full year EBITDA margin against that long-term 10% plus target?

Yes Scott. I think just looking back real quickly 2020 was the first year that we had a full year over 10%, which we had talked about a few years ago was kind of being in our targets. I think we're pretty happy getting into the second quarter of this year and being ahead of 11%, we usually have a lower per quarter as we saw as a result of payroll taxes and the like that we said. So we're seeing some release there additional incremental leverage off of our clinical business. So adding Armada is definitely going to help from a margin perspective in Q3 to help offset a little bit of what we'll see from the headwind and the Illinois minimum wage increase in Chicago, if they're able to pull forward the statewide increase in November 1, I think we'll see a nice impact in Q4. I think as you guys are aware, typically with that increase, we see $20 plus million in new revenue statewide with corresponding costs, but a nice margin attached to it. So, I think our thought process looking at the full year of 2021 compared to 2020, we definitely see ourselves coming in with a higher bottom line margin percentage than we saw last year continue to grow and continue to expansion. So with our strategy that we have with adding clinical services where it makes sense strategically continue to grow and get leverage off of G&A, I think we would expect to see continued expansion on that bottom line as well into the future.

Got it. And if I could just flip out, follow up on that, on the EBITDA margin side just as we now roll in the Armada deal, which closed into the model, any color you can give us on, I know you talked about that being immediately accretive financially. But I was thinking about the EBITDA margin profile on that or, incremental EPS, just try to model the margin side on Armada correctly and that's it for me, thanks.

It's 23 million annualized revenues. So with it coming in for two months in Q3, and then you'll see it for full Q4, the margin profile is primarily home health a little bit of hospice, but primarily home health. So those gross margins are nice for us at 40% plus. Bottom line margin is going to be somewhere in that kind of mid-teen range, as well.

[Operator instructions] Next question comes from the line of Brian Tanquilut with Jefferies

Jack Lebanon for Brian congrats on a strong quarter. I think we wanted to appreciate all the commentary. Wanted to take a look at the labor side of things in Personal Care, I guess just any updates you have on perhaps what the pull through from your recruitment efforts in May, June, July have been and kind of expectations for top line growth as some of those unemployment to elevate unemployment benefits, roll off as we get into the back half of the year.

This is Brad. I'll start with talking about the kind of tentative flow we've seen. April, May, a little slower, June was a really good month for us from both a candidate flow and a hiring standpoint. July numbers actually look good as well. I think what we're seeing on Personal Care is as these unemployment benefits are starting to -- enhanced benefits are starting to phase out in various states and then early September entirely I think you're starting to see people try to get ahead of that and start applying for jobs. So we're encouraged by the increase in the candidate flow. I think at the third, we need a consistent hiring that as far as on the growth trajectory, I think we've said that the 3% to 5% is the long term goal. We'll be at the higher end of that range we expect though in Q3.

Got it. That's helpful. And then on the hospice business, obviously I think the challenges are well-digested and understood in the market, but could you just give a sense of where you're at, like maybe July trends on meeting length of stay and average length of stay and how you guys are thinking about ADC tracking through the back half of the year?

Yeah, it's Brian. On the hospice side, we've been pleased at when we look at where we were at our kind of low point in January, we have had seen a steady increase in median length of stay and a steady increase in ATC each month that has continued through July as well. And I think, our July medium length of stay is 21 days. If you remember recall our that kind of low point was in January at 15 days. So we're adding about a day a month and I think heading back up towards our normalized at a mid to upper twenties on the median length of stay, which we anticipate that we'll get there kind of the -- we certainly have said the back half of the year and it looks like that trend is continuing.

And then last one for me on some of the Medicare advantage pilots appreciate that probably, you don't have too much data left or collected this point, excuse me. But have you seen any uptake in payers that are interested in running more Medicare advantage pilots in the core personal care business or anything that I think we're hearing a lot of chatter on the payer side about non-medical determinants of health and social determinants of health, those kind of buzz words are picking up in use. So I just wanted to kind of hear your thoughts on what the landscape looks like there and how we could think about the opportunity set rolling forward a couple of years.

Yeah, we have seen increased interest from a number of our payers in putting together pilot programs to try to determine the effectiveness of personal care inside say a Medicare advantage program or a managed Medicaid program. In fact, we're working on a number of other pilots that we hope to announce over the next few months and to the point that we're pretty busy. So I would say long-term it bodes very well. I think that in the interim, what we have to do a number of our programs are designed to give us the information and to work with our payers on whether it be gap closures or whether it be on clinical measures, such as ER visits and readmissions and as we get that data, and then we're hopeful that we're starting to see some of that data now as we get that data and if it continues to be what we expect it to be, then we would think long term, we would be able to show Medicare advantage plans that are incorporating nonclinical care into their offering. We can overall affect their cost of care. So we're excited about the future, but it's going to take some time. It's not going to happen overnight as a lot of these pilots are just starting, but we're excited about the interests we're seeing.

Awesome. That's it for me? Thanks again. And congrats.

Your next question comes from the line of Mitra Ramgopal with Sidoti.

Hi, good morning. Thanks for taking the questions. Just had a two part question on the labor front. First, if maybe you can give us an update in terms of the progress you've made regarding vaccines among your caregivers. And secondly, if that with the surge into Delta variants etcetera, if that's having an impact in both recruiting and the ability to also bring on new business,

On the vaccination front honestly, we're not where we would like to be overall. We're at about I think 35% overall. However, on the skill side its considerably higher. We're actually 60% plus on the home health side and almost 60% on the hospice side. We're continuing our efforts to educate our caregivers on the benefits of being vaccinated. But this is an ongoing process and certainly more challenging with a personal care workforce that is largely, part-time workers. So just trying to get those individuals vaccinated and also getting honestly good data on that. I think if that 35% is fully vaccinated employees and it is a little more challenging to pull those numbers through and I suspect the number's actually higher than that and then what we're saying. With respect to the Delta variants really haven't seen it impact yet from the Delta variant either from a standpoint of referral volumes or from employee quarantines or from effecting the hiring trends yet. So it's something we're certainly mindful of and certainly keeping an eye on. But right now haven't seen anything material impact on our numbers.

Okay. No, thanks for that. And just a quick question on the M&A front, just curious in terms of the valuations you are seeing today maybe relative to a year ago, if there's been a significant change and also just the competitive environment for acquisitions if that's also gotten a little more difficult.

Yeah Mitra, I think, from an evaluation front, I think in personal care, we really haven't seen much of a change there. I think on the skilled side with a lot of the folks that are trying to kind of enter into the market that we've seen that Dirk was represented earlier, whether it be through private equity or otherwise, definitely has driven some competition up there. So if we're anything of size and scale and quality, I think you've seen a little bit of a higher multiple been paid on, particularly it seems in hospice, I think, home health, we haven't seen that impact as much. So I think from our perspective, yeah, it's an attractive space for a lot of individuals. It's very competitive. You get into broker processes is going to be competitive. As we've said, I think a couple of times, we're doing our best to try to do our own sourcing as well to try to maybe avoid some of the situations and not be forced into situations where it's a higher price auction to kind of being along with our strategy of making sure we're getting good assets that are creative for Addus, for our shareholders and I think we've got good opportunities to continue to close those types of deals.

Okay. Thanks for taking the questions.

At this time, there are no further questions. I'd now like to turn the call back over to Mr. Dirk Alison,

Thank you operator. Thank you everyone for your interest in Addus and for being part of our call today. Hope you have a great week.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.