Good day and welcome to the Addus HomeCare's Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Thank you. Good morning and welcome to the Addus HomeCare Corporation's second quarter 2022 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 2022 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 2022 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 like to now 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 welcome to our 2022 second quarter earnings call. With me today are Brian Poff, our Chief Financial Officer; and Brad Bickham, our President and Chief Operating Officer. As we do on each of our earning call, I will begin with a few overall comments and then Brian will discuss the first quarter results in more detail. Following our comments, the three of us would be happy to respond to your questions. While Brian will give you a more detailed review of our financial results, I wanted to highlight a couple of items from our second quarter performance. First, even with the labor challenges we are seeing in parts of our industry, our team grew revenue 8.7% to $236.9 million for the second quarter of 2022, as compared to the second quarter of 2021. This resulted in sequential adjusted earnings per share growth to $0.91 as compared to $0.77 for the Omicron impacted first quarter of this year. Second, we had a strong cash flow from operations of $56.5 million this quarter, which reduced our net leverage position to less than 1x EBITDA. While we expect our results to return to a more normal level following the decrease driven by the first quarter Omicron surge, it is nice to see our team actively manage the challenge and make it a reality. I'm very pleased overall with our second quarter performance with favorable trends beginning around mid-February continuing each month through the end of the quarter and further through July. Even with the growing prevalence of the most recent Omicron subvariant, our team has continued to perform. Let me discuss this latest COVID subvariant that we had started to see. Throughout most of the second quarter, we saw little effect from the COVID virus. During April…

Thank you, Dirk and good morning everyone. Addus had a solid financial performance for the second quarter. Our results reflect positive same-store growth trends in all three segments compared to the second quarter last year. We also benefited from our hiring and retention efforts and an improving labor market for our personal care business segment, compared to prior quarters. Our home health business continues to expand and reflects the addition of the two acquisitions we completed in 2021, Armada Home Health and Hospice and Summit Home Health. We are also pleased to see more historically normalized trends for our Hospice business. We experienced strong cash flows during the quarter and remain well-positioned in the current inflationary environment. As Dirk noted, total net service revenues for the second quarter were $236.9 million. The revenue breakdown is as follows: Personal care revenues were $174.3 million or 73.6% of revenue. Hospice revenues were $52.1 million or 22% of revenue. When compared to the second quarter last year, hospice care revenues include the addition of the hospice division of Armada, which closed on August 1, 2021 and the first full quarter of the acquired hospice operations at JourneyCare, which closed on February 1, 2022. Home Health revenues were $10.5 million or 4.4% of revenue. As noted, these results include the operations of two acquisitions, the Home Health Division of Armada, which closed on August 1, 2021 and Summit Home Health, which closed on October 1, 2021. We have a strong business model in place across our Home Care Continuum and believe we are well-positioned in all our operating segments. In addition to our strong organic growth, we have added $55 million in revenue to date in 2022 with the acquisition of JourneyCare. We continue to evaluate and pursue other acquisition opportunities and have a…

[Operator Instructions] The first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys. Dirk, thanks for all the discussion on the value based progress that you're making, but maybe if you can help us understand what you're seeing there in terms of the economics or maybe the margin profile that you're getting out of that business? And then your thoughts on how that could be scaled and what it would take for greater adoption with some of the managed care or managed Medicaid plans and new Medicare Advantage plans that are looking to employ more personal care going forward?

Yes. Interesting, Brian, with the value based care, it's something that we have seen continually become more important over the last few quarters and as we see today, we've got four contracts that they've now expanded in three of our states. The important part we see is that having personal care with clinical services is very important to these contracts. And so, our ability to depending on the contract and they're somewhat structured differently depending on who [that's with] [ph]. Our margin profile is basically consistent with what we've seen in the past. In some contracts, we get paid for our personal care service, plus a savings. And others, it's more of a payment for our personal care services and then certain bonus payments based on what we're able to help accomplish that the particular payer wants to accomplish. So, again today, we've been in a couple of our contracts over a year. We're starting to develop outcome data, which I think is extremely important as we try to scale this up in the future. So, I believe over the next two or three years, you will continue to see this grow to be a more material part of our business and one in which honestly we spend some money and we're going to continue to invest some dollars as we look to – we're going to help develop some software to help us with analytics and looking at what we have from outcomes coming from our patients. So, generally we're very excited about again not material today, but we think in the next two or three years will become more so.

Got it. Appreciate that. And then as I think just about organic growth rate, I mean, in the quarter, you did 2.5% same-store rent growth, your long-term guidance has been 3% to 5% for a long time now. So, just wanting to hear your thoughts on the opportunity to accelerate growth? I know you're still winding down the CDPAP business in New York, but maybe without going to guidance, just your thoughts on organic growth for the back half of the year and into next year?

Well, 3% to 5% as you say has been our part for a long time. And it's – we've come through a very interesting time frame. As you know, with the COVID environment over the last two plus years, we've been able in most quarters to hit that 3% to 5% range, largely due to rate increases over the last couple of years. It's not been as much focused on volume as it has been an historical part of our business, if you look back historically over our business operation. We were excited to see this quarter. Our personal care hours start to grow from the first quarter. That's exciting. Again, part of what we've been facing is not just us hiring caregivers that help us with this growth, but also some of our states and others being able to hire personnel to actually get through the authorization process to allow us and to have those hours to serve our clients. So, as this continues to move forward and if we continue to see the trended growth that we've seen over the last few months, we expect that 3% to 5% to be a solid number and hopefully we would believe we could get towards the higher-end of that towards in the next couple of three quarters, especially as you see, again, the rate increase we're going to get from Illinois in the first part of the year, which will be very helpful.

Got you. Thanks Dirk.

The next question comes from Joanna Gajuk with Bank of America. Please go ahead.

Yes. Thank you. So, I guess two follow-ups. So, one is, you mentioned the improved hiring in personal care, so can you give us a little more color there in terms of what's driving that improvement? And I guess, and how would you contrast this with what you see in hospice and home health?

Hey, Joanna, this is Brad Bickham. On the personal care side, we have seen a nice trend and increase in hiring for Business Day, which is a metric that we follow. I think from a kind of the reasons behind that, I think one, you've seen the federal stimulus money, kind of play out, you know it really ended, kind of at the end of last year. The unemployment benefits went down. You have also seen kind of the higher inflationary environment. I think people need to work more hours, and also potentially another looking for maybe a second job. And that's something that personal care is set up for very well that we have quite a bit of a part time employees. I mean, that's primarily what our workforce is based on, and it allows people that if they just need to pick up some extra hours, they can do that readily. When you contrast that on the home health and hospice side, we’ve seeing certainly a more challenging environment than we have on the personal care. That being said, we've seen some kind of improvement. There's still certain markets that are a little tighter than others where we have more challenges to retain staff and to recruit new staff, but it does seem to be improving a little bit just not as readily available or obvious as the personal care side where we've seen a nice pickup in hiring.

No, definitely good to hear about that on the personal care side. And just follow-up, talking about value based care, I just want to ask your opinion and I guess how meaningful this could be because I want to say a couple of weeks ago, really, why [CMS] [ph] published the first quality measure set for home and community based services? Why they try to encourage the use of some, sort of consistent quality measures within – and you know across different states that participate in the program. So, what are the implications for you and, kind of would this be helping with the value based care, kind of shift towards value based care?

Yes, this is kind of something that we've been pushing forward. And I think the industry has as well to have some standards out there on the personal care side. And if we look at, I know one, value based contract in particular actually tracks some of those same metrics that CMS is looking to implement. So, I think in our value based contracting that we have today is going to position us well, but when those metrics – if and when those get formally adopted, but it's certainly something that I think the industry as a whole and add us in particular we've been kind of pushing on. I think it should be helpful for us going forward.

Thank you.

Next question comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning. First question, just wanted to follow-up on the cash flows and really maybe get some feedback or guidance from you on, I’m thinking about modeling operating cash flow for the back half of the year. Obviously, a really strong print on cash flow in the second quarter. Brian, you called out some of those ARPA funds that did contribute to that. So, maybe it would be helpful if, you know how you're thinking about I guess the ARPA fund flow through continuing in the back half of the year and then any other, sort of notable working capital items that you would call out for the back half of the year?

Yes, Scott. I think it was definitely a great quarter for us. I think as we noted in our first quarter call, we had some timing differences with payroll and some of those items that we normally would see. I think we got some benefit from a working cap perspective in the second quarter, just on that timing, but the ARPA funding has net of about 14.2 million. I think we're still expecting to get additional funds later this year, we’ve not received all the funding that we've been scheduled to receive yet. So, you'll still see some of that come through, but at 56.5 million for the quarter, you back up the 14.2 million in net ARPA, you know we're right at 42 million for the quarter. I think it's 48 million net of ARPA year to date. I think our expectations is thinking about, kind of our full-year projection. Our conversion rate from an adjusted EBITDA perspective in the upper 60s, close to 70%. So that would put us in that, kind of mid to upper 60s range for a full-year target and we're tracking at 48 million, kind of year to date through the second quarter. So, nicely ahead. I think we've definitely seen DSOs come down with a big contributor during the quarter. Obviously, we wouldn't expect to see continued movement in that regard, get it down into the 30s, but I think definitely we've seen strong collections year to date and we expect to see consistent payments going forward.

Got it. And then just my follow-up question, just wanted to revisit on the M&A dynamics and that was helpful, sort of framing that, Dirk had given just around some of the dynamics with the proposed home health rule. I guess, sort of two just, sort of follow-up questions on that. The first one would be just you had mentioned some of the larger deals getting deferred maybe to later this year and to next year, I just want to confirm that specifically in home health because of the uncertainty around the proposed home health rate or was that in some of the other markets as well like personal care and hospice? So that would be the first part. And then Dirk, just when you had mentioned some of the differentials between buyers and sellers on valuation, is that just that the sellers are actually still wanting the same values, despite the proposed home health rule or is it just simply too hard to determine intrinsic value right now until we get those final 2023 home health rates?

Yes, Scott. As part of the first part, what we've mainly seen in the larger transactions that we've been a part of had been home health. Realistically as we've talked about in the last couple of quarters, we're focused more on home health and personal care acquisition today than hospice. It doesn't mean we wouldn't look at the hospice if it was appropriate in markets where we had strong personal care coverage, but so far this year, we've really focused more of our efforts in the other two segments. And some of the processes, couple of processes we were in were well underway and when the proposed rule came out, and at that point in time, they went into a holding pattern waiting for the publishing of the final rule later on this year. As we would talk about somewhere in the overhang because of the differences in valuation thoughts between buyers and sellers, I think it really goes most of what we're talking about there is in the home health. I think the sellers believe that the rule is not really going to be a big deal and that we should be willing to pay out value regardless. I think fires are looking and saying, great. If that's the way it works out in October, November, and when the publish rule comes out, [we’ll find] [ph]. I think if that understanding comes out the same way, then the value between buyers and seller in home health, I don't think is really that much of a disconnect. I do think there's still somewhat of a disconnect between sellers of hospice programs and buyers. The markets seem to have come down. The public multiples have come down. I don't think all of the sellers thought process had quite come down to that level. And then to personal care, great thing about personal care, it stays pretty consistent. Smaller deals, as Brian has said in the past, in the 6x, 7x range, larger deals may be 8, 9, a really large deal that's very strategic, might be 10, but those are all very reasonable multiples that we, I think, could agree with. So, realistically, the rule is probably the biggest impediment right now to signing deals in the home health market.

Helpful color. Okay. Thanks.

The next question comes from [Kyle Chu] with Stifel. Please go ahead.

Hey, good morning. This is Seth Canetto for [Chu] [ph]. I just had a question on the personal care. Earlier the improvement, in the hiring and the labor improvement there, but the volumes were a little bit lighter than we had expected. How much of an impact is labor still having on personal care volume? And as the labor force continues to improve, how much acceleration could we see into the second half of 2022?

Yes, Seth, it's Brad. I think really what you saw, we experienced a pickup in the COVID quarantines. Clearly, that last week in May carrying over into June, that dampened our June results. And I think that's what, you know had kind of a more of an impact on the numbers rather than the hiring numbers. The hiring numbers like to say have been very robust. And so, we expect as we're still seeing some case counts that are still a little elevated, but again, nothing like we experienced in Q1 or in back in the fall with the delta variant. So, optimistic that those numbers should start coming back up or we should see some better volume numbers towards the back half of the year.

Great. Thanks for that color. And then my last question was just on the American [Rescue Plan] [ph] funding. I think you guys received 14 million in the second quarter, do you still expect to receive the full 20 million or so in benefits funding that you alluded to last quarter? And if so, when should you expect to receive those remaining funds?

Yes. We still expect to receive the additional amount of scheduling, it's just timing on when we're receiving those funding from the state, but I think we expect to see most of that money, to be honest, through the third quarter.

Great. Thanks for taking my questions.

The next question comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Thank you. Could you just touch on the – as you talk about potential acquisitions, what you think is motivating sellers here, is it retirement of the key owner or some perhaps sense that there to scale this advantage on, I don't know if you know that motivation, but also if you just combine with that question on how high you'd be willing to go on your debt leverage to do a larger acquisition?

Let me talk about what we're seeing with some of the sellers, I believe and then Brian will talk about our leverage. But I think if you look at the two particular deals we've been looking at this year, that have now been kind of placed on hold. I think the motivation of the seller might be twofold. One, I think in a lot of cases, the last couple of years of operating through the COVID environment has been very tough. It's been a difficult environment, and I think some of the owners of these companies as they've gotten towards really towards the end of hopefully the major effect as the COVID surges on business, see an opportunity and say, look, it may be time that we ought to see if we can get some value out of the business. I think, the other motivation is some of these sellers are at a point in their life where they're looking to do other things, whether that be retirement or other businesses and it's time for them to see about monetizing what they put in to the companies for a number of years. So, that's really I think the motivation we've seen so far.

Yes. I'll just add to that quickly Matt. I think on the skilled side particularly, I think obviously private equity has been very active in putting assets together with a return in mind and with the markets where they have been in the last couple of years have done very well. And so we've seen quite a bit of those instances where private equity would buy a platform, put together several acquisitions then get those things integrated and look to sell those. So, we see more of that on the home health and hospice side and personal care side is where we see more of what Dirk was alluding to with more individual proprietors that have, kind of run those businesses and looking forward to exit strategy. So, I think on leverage, I think obviously we're very well capitalized today. I think we've said historically in the past, we'd be very comfortable at the 2.5x to 3x range, we'd be willing to go higher than that for the right deals that made a lot of strategic sense for us that we saw a path to kind of bring that leverage down through cash flow on the other side. And I think pretty consistent with our thinking today, we can find the deals that could put us into that range.

Thank you. Thank you. That was very helpful.

The next question comes from John Ransom with Raymond James. Please go ahead.

Hey, good morning. So Dirk, the home health companies have been struggling with this transition to Medicare Advantage and one of the big companies has been publicly talking about changing the economics to something more of a case rate versus a per visit. And so, my question, I know this is like a hypothetical on top of a hypothetical, but as you look at a home health asset, do you think you're big enough, you'd be big enough to go into see UnitedHealthcare, [indiscernible] had done say, I'd like to be paid differently on this book of business or is that something that you would just have to fight through that transition a per visit at a lower margin and put that in the valuation?

John, this is Brad. I think we were thinking about Medicare Advantage and trying to migrate from a per visit to more of a case rate our episodic type payment. I think a couple of factors. One, when you think about size, we're not that large in home health yet. We're certainly going to continue to grow that platform and get more scale, but we do have a very large personal care component and most of those payers have Medicaid plans. And so, I think we have the ability to leverage the personal care size and scale to have those conversations with a United or an Aetna. And then secondly, I think you also have to look at one thing that has scale nationally, but probably even more relevant is having scale in a regional or localized market I think is important. And that's where, kind of our philosophy is, we're not looking to put pins in all the states for having locations. We're really more focused about getting density in specific geographic areas, which I think would help us with those negotiations.

Okay. And then just as a follow-up, this might be unfair, but once your Chicago rate goes into effect and we look at kind of 1Q 2023, how does your rate per day compare to say 2019 versus your cost per day, once everything's kind of normalized out, just thinking about the business over the COVID valley? Thank you.

Hey, John. This is Brian. I think if you look at where we are this quarter compared to last year, maybe as a good proxy, on average across our personal care business, our bill rates are up a little over 5% year-over-year. Most of our states are increases over the prior year. Wage rates, I think, have slightly outpaced that growth with some of the inflationary pressures and things that we've seen this year. I think going into 2023 [indiscernible] further activity and things that we don't expect from a COVID perspective, etcetera. I think with the next Illinois rate increase, obviously, still being our largest market that's going to bring us probably between $9 million $10 million in additional kind of new annualized revenue starting Jan 1, out of kind of our normal margin, which is going to be in that probably upper 20% range. It is going to be very helpful. I think we've seen that dynamic the last couple of years. I think we're going to see the benefit in early 2023 from that that will be impactful, but I think our expectation going forward is, we should see those level off where you're not going to see wage rates outpace reimbursement. I think that was more the fact of what we've seen over the last year, but we would not expect to see that going into 2023.

Thanks so much. The next question comes from Matt Larew with William Blair. Please go ahead.

Hi. This is Q - Madeline Mollman on for Matt Larew. Circling back to M&A, I know that you said right now you're having some trouble finding common ground with sellers, but wondering, in general, after a couple of years of higher funding levels, higher reimbursement, the sequestration suspension, would you expect home health valuations to come down as separate from the CMS rule as sequestration phases back in, like what do you expect long-term for home health multiples?

Yes. I think this year, your expectation that we want to talk about it on the last couple of calls is valuations in home health. With some of those pressure, we expected to see be a more rational market, [I’m coming] [ph] to this year. I think a lot of us have been kind of waiting for more of the influx of smaller organizations coming to market. I think the things you mentioned have, kind of kept some of those guys afloat, but to your point, those things have come to [indiscernible] sequestration coming in, in Q2 now in Q3 is going to put more pressure. I think when there's some more clarity on the rule and how that's going to impact, I think that definitely is going to probably help rationalize margins a little bit as well depending on how that turns out. I think our view is like some of the larger process fees, they've kind of put themselves in a holding pattern. Some of the smaller processes where maybe the proposed rule wouldn't be as impactful, I think are still willing to have conversations and trade. So, I think we still got some opportunities there, but I think overall, our expectation is that home health multiples are probably a little bit lower on the other side of this than what we saw maybe a couple of years ago.

Great. Thank you. And then one other question. You mentioned that you were building a personal care version of home care, home base, just wondering how that was coming along and how it would integrate with the traditional home care home base?

I think when we got into this project with home care home base, I don't know if they fully realize the complexity of Personal Care, and when I say the complexity, as compared to the skilled side, where Medicaid is your predominant payer, Personal Care is a totally different animal from a standpoint that you're dealing with multiple states, different types of programs within those states. So, the reimbursement codes, all that sort of things are a lot more complicated. All that being said, we've been pleased with the progress. We anticipate possibly being able to roll out some pilot sites, kind of Q1 of next year, but it's going to be a – the main thing is, we want to make sure that we have a product that we're satisfied with before we go forward with it. And I think they've certainly indicated their willingness to put those resources to develop that product. And as far as integration – and just the second part of the question regarding integration with the home care, home base, the clinical side, just think about it from a standpoint that all of those patient records will be in one system that we'll be able to access through. And so, we think that that's really kind of one of an important component of really recognizing the benefits of the value-based contracting potential in the personal care side. And then also just when you think about referrals coming from personal care to home health and to hospice really helping facilitate that on a larger scale.

Great. Thank you so much for the color.

[Operator Instructions] The next question comes from Mitra Ramgopal with Sidoti. Please go ahead.

Yes. Hi. Thanks for taking the questions. I was just wondering if you could provide some additional color in terms of the new hiring and retention strategies that combat the tight labor market you're seeing, especially on the clinical side?

Yes. So, if you think about on the clinical side, we've – it's really putting more recruiting resources to the clinical side. Again, that's a little more challenging. If you think about personal care versus the skill components, kind of a different recruiting environment. We have kind of corporate recruiters that focus on filling positions on the clinical side plus kind of your general administrative positions whereas our recruitment efforts are predominantly on the [PCS] [ph] side are at the branch level. But it's certainly on the clinical side, a challenging environment. When you look at personal care, we've got the ARPA funds that really we haven't tapped into in a meaningful way yet. I mean those programs and retention programs that we're putting in place to both help keep caregivers and encourage caregivers to work more hours and also help with our recruitment efforts. That's really just getting started on the [PCS side] [ph].

Okay. Thanks. That's great. And then, Brian, there was a significant debt reduction in the quarter, just curious in terms of the capital allocation priority, if it's more a question of trying to overcome the higher interest rate environment versus maybe a shift in priorities?

Yes, Mitra, I don't think it was a shift of priorities, I think we'd still prefer to use that capital toward M&A when for available. I think in absence of that and some of the overhang currently, particularly in the home health segment, I think you guys probably heard us talk in our last call, more of our pipeline [indiscernible] that direction. So, during that period of, kind of call it a delay, we try to be opportunistic and at least limit our exposure to the rising interest rates. So, I think it's going to be meaningful savings and interest expense for us. So, I think we'll continue to do that until we see M&A pick up and then with the access to being full revolver now, not a term loan, we have that ability to draw that and use that at the time that we needed. So that will be, kind of our focus over the next couple of quarters.

Okay. That's great. Thanks for taking the questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Allison, Chairman CEO for any closing remarks.

Thank you, operator. I want to thank you for your interest in Addus and for you being a part of our earnings call today and hope you have a great week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.