Good day, and welcome to the Addus HomeCare Fourth Quarter and Year-End 2022 Earnings Conference Call. [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 Fourth Quarter and Year-End 2022 Earnings Conference Call. Today’s call is being recorded. To the extent that 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 2023 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 its fourth 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 now 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 welcome to our 2022 fourth quarter and year-end 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 earnings calls, I will begin with a few overall comments, and then Brian will discuss the fourth quarter results in more detail. Following our comments, the 3 of us would be happy to respond to your questions. I first want to say thank you to all the employees at Addus HomeCare for their efforts this past year. While it’s exciting to know that we had a great year financially, it is more important to know we provide care to approximately 66,000 clients and patients in 2022. I am very proud of our team’s hard work in making sure we are able to meet the home care needs of all these deserving people. Meeting our mission each day will continue to lead to ongoing growth for Addus. Yesterday, we announced our financial results for the fourth quarter and full year 2022, and I’m extremely proud of our operating performance. Our team grew revenue 10% to $247.1 million for the fourth quarter of 2022 as compared to $224.6 million for the fourth quarter of 2021. This resulted in adjusted earnings per share of $1.11 as compared to an adjusted earnings per share for the fourth quarter of 2021 of $0.97, an increase of 14.4%. We also exceeded $28 million in adjusted EBITDA. For the full year of 2022, our revenue was $951.1 million with an adjusted EBITDA of $101.5 million or 10.7% of revenue. Our team was able to achieve these full year results despite the first 2 months of 2022 being negatively impacted by the Omicron wave. During 2022,…

Thank you, Dirk, and good morning, everyone. Addus had a strong financial and operating performance for the fourth quarter, capping off another record year of profitable growth. Our results reflect strong demand for our services, led by organic growth in personal care services, well above our normal expected range of 3% to 5%, along with solid same-store growth in our home health segment. In addition to our organic growth, we benefited from our acquired operations in home health, Armada Home Health and Summit Home Health added in 2021 and Apple Home Healthcare, which we closed at the beginning of the fourth quarter of 2022. Our hospice business has continued to slowly recover from the pandemic with a return to our pre-COVID median length of stay range in the upper 20s. Our hospice results also include the acquisition of JourneyCare, which closed in February 2022. As Dirk noted, total net service revenues for the fourth quarter were $247.1 million. The revenue breakdown is as follows: Personal Care revenues were $183.4 million or 74.2% of revenue, Hospice care revenues were $50.6 million or 20.5% of revenue, and home health revenues were $13.1 million or 5.3% of revenue. We have continued to actively pursue acquisition opportunities that meet our criteria and complement our organic growth. In 2022, we added approximately $65 million of annualized revenue with the acquisitions of JourneyCare and Apple Home Healthcare. We continue to evaluate and pursue other acquisition opportunities and believe we will see a more favorable market environment later this year as sellers, particularly in brokered processes, have been slower than expected in coming to market. In part due to significant Medicare reimbursement uncertainty through October of last year for home health services. The final announcement of late 2022 on reimbursement changes for home health has provided more…

[Operator Instructions] The first question today comes from Scott Fidel with Stephens.

First question, just appreciate the commentary just around the 2 Illinois rate increases and then the impacts on gross margins. Might be helpful just if you want to -- if you could just give us what you would view the overall annualized revenue impact of those 2 Illinois rate increases in aggregate, obviously, that would, I guess, sort of annualize out more in the second quarter. And then just an update as well on sort of how the blended rates look across your other markets in Personal Care outside of Illinois for 2023?

Yes, Scott. I’ll talk about the January 1 increase first. So based on kind of current volumes in Illinois, that’s going to result in approximately right around $12 million in annualized revenue. So obviously, coming in January 1, you’ll see a full quarter impact of that in Q1. The March 1 rate increase, which is a little larger per hour, is going to be probably between $17 million and $18 million kind of based on current volumes in Illinois, obviously, getting 1 month of impact of that in Q1, but you’ll see the full impact of that as that rolls through Q2. Outside of that, I think we’ve seen a couple of other markets that we’re going to see rate increases for I think South Carolina, which is one of our smaller markets has come through with a rate increase early this year. Probably not going to see the same level of rate increases across the board. We’ve seen in the last couple of years. But I think overall, I’m still seeing some support in some other areas as well.

Okay. Got it. And then a follow-up question. Just wanted to follow up on Dirk’s commentary just on I guess, sort of the updated framing around the M&A pipeline? And Brian, I know you mentioned as well sort of maybe picking up middle later this year. I’m assuming is that sort of implying wanting -- the market wanting to also get visibility into at least the proposed 2024 rates for home health in Medicare, just given some of the uncertainty around some of the proposals that CMS had talked about for next year as well. And that would be the first part. And then the second part, I guess, if you wanted to just sort of update us on your prioritization list between home health, personal care, hospice in terms of how you’re prioritizing M&A in the pipeline here?

Yes, Scott, I do think the question of what’s going to happen with the home health rates long term is still somewhat to be answered. I mean, obviously, last year, there was a period of time where we didn’t know a whole lot based on what had been announced by CMS as to what the actual rule is going to be by the time it came through. We still have a little bit of that going forward, as you know, trying to figure out exactly what the rates are going to be. And I think the real question lies in what sellers and the purchasers are thinking. I don’t know that all sellers today have come to the place where they have factored in that there might be future limitations on the rate increase. And so their expectations for price may be still a little high. I think from us as purchasers and others in the industry, we’re trying to be very careful and strategic as to what we pay for deals until we truly understand the ruling. So I think that has affected some of the -- as Brian said, some of the larger broker deals that we may see, particularly around in the home health market. Going forward, the prioritization really continues to be quite consistent from what we’ve been telling you for the last few quarters. Our prioritization as far as where we will use our acquisition dollars will be really around personal care as well as home health. At this point in time, we’re probably not as focused on hospice as we have been in the past. We think we have a nice operation around the hospice coverage around our personal care market. So we’re really trying to grow home health. And we’re really also continuing to look for those strategic opportunities to grow personal care, either strengthening the states in which we currently operate are potentially entering into new states where we would like to go. So that will be our focus that you’ll see over the next few quarters in 2023.

The next question comes from Tao Qiu with Stifel.

Could you talk about any shift in discharge rate or referral sources that may have impacted this quarter on the hospice side? And since you mentioned the positive hiring trend, which contributed to the 6.6% quarter-on-quarter growth in the admissions there. Should we expect a relatively strong sequential gain in ADC in the first quarter this year? And additionally, JourneyCare, I know it has played a major part last year. And when compared to your $50 million annual revenue expectation, should we expect any upside in terms of the continued ramping up of performance there?

Yes, happy to take those questions. First, when you look at the just kind of mix from an admission and discharge rates, we haven’t -- what we have seen is certainly some improvement in our median length of stay year-over-year. We’re kind of back to that upper 20s where we were pre-pandemic. We did see a 1-day slide sequentially. I think the one area where we’re still seeing an opportunity for improvement is when you look at nursing home, discharge length of stay and median length of stay, those still haven’t recovered. So we’re tending to get those patients later in the cycle. And I think some of that may resolve itself with the ending of the public health emergency and some of the special rules around SNFs and related to skilling patients that you did not have to have the prior 3-day hospitalization that was previous pre-pandemic. So I think there’s certainly some opportunities there. When you look at from the standpoint of what does Q1 look like. We certainly have added a lot of staff. So that’s very helpful to help with the growth aspects. But I still think you’re going to see a little bit of a bumpiness in hospice in probably the first half of the year and more of the growth is going to come through in the second half of the year. And part of it is related to what I just said, related to expiration of the -- some of the allowances under the PHE. With respect to JourneyCare, we’ve fully integrated JourneyCare into our processes, our systems, I think it’s just poised for some growth. But again, they still have some of the same issues that you see for I think they’re going to be kind of challenging in the first couple of quarters related to some of the -- can we get more nursing home business. And particularly, can we get patients that come on service a little earlier out of those facilities.

Got you. And also, it sounds like you’re going to get pretty strong rate growth in personal care services this year, and with the improved hiring trend when you return to a more normalized volume growth as well. So should we -- when we look at the organic growth profile, should we expect that you can sustain kind of the top end of that 3% to 5% growth? Or do you foresee yourself doing even higher than that?

Well, I think you could certainly say that we are we’re excited about the potential for growth this year in personal care, we would tend to believe that it could be to the upper end of that 3% to 5%. We’re not ready to adjust that level. At this point in time, we want to see what continues to happen over this next year. I think the exciting part for us, as I mentioned in our comments was the fact that for the first time since the pandemic has occurred, we are starting to see over the last couple of quarters growth in personal care volume in the hours provided. And I think that’s very exciting because that was a struggle that all the industry had for the last 2, 2.5 years. And now that we’re able to hire more individuals are coming back on service, we’re able to then put them to work, seeing this hourly growth and then put on top of that, just normalized rate impact, we believe that 2023 will be a nice year for us.

Yes. And Tao real quick, I’ll just piggyback a little bit on that. Just keep in mind, obviously, Q1 comps back to last year, impacted by the Omicron wave, I think, just across the board, we probably expect some pretty robust same-store numbers. But again, that impact last year compared to this year is going to be a big part of that difference. But with some of the rate increases we got, particularly with 2 rate increases this year from Illinois, which is our largest personal care market is definitely going to be helpful, I think, on the personal care side from a rate perspective.

[Operator Instructions] The next question comes from Brian Tanquilut with Jefferies.

It’s Taji on for Brian. Just a couple of questions for me this morning. So just going back to your discussion around contract negotiation for home health, right? So as you negotiate contract terms with Medicare Advantage payers, I’m curious what leverage points you’re employing to successfully get those rates. And also, what does appetite look like from the payers to secure the value-based contracts like the case rate you had mentioned previously?

Yes. We’ve actually -- when you look at kind of from a leverage standpoint, I mean, these are the payers that are our largest payers on the home health side. They also tend to be in the markets where we have significant personal care presence as well. And so I think that is kind of a primary leverage point. These are also payers in certain instances where we have existing value-based arrangements or we’re talking with them about adding value-based arrangements. So that’s really kind of our leverage point when looking at can we get an episodic or case rates in place. I think there’s still a lot of appetite from payers to explore value-based arrangements. I think we’re starting to build a good track record around what we’ve accomplished. And so there’s really no shortage of interest in those types of arrangements. I think it’s really a matter of making sure that we have the wherewithal to do good with those projects. So you definitely don’t want to stretch too far. So we’re just making sure that we’re building out some infrastructure relate it to value based, that should help us be able to take on more of those cases. And as Dirk alluded to in his comments, this is something that we think has a tremendous opportunity for us down the road, but it’s going to take a little while to get there, make it meaningful from a revenue standpoint.

Great. And then just one more follow-up. I think this is more so for Dirk. You had mentioned with the PHE, just the elimination of the enhanced federal Medicaid match. So what are the offsets that will create that stability, even though the enhanced federal Medicaid match programs ending in May, I think, Dirk, you had mentioned that in your commentary?

Yes. This is Brad, actually. I think when you look at those -- the reduction in the match, I also think about redeterminations that were put on hold, which, again, we don’t feel like we will have much, if any, impact from redeterminations on the Medicaid roles. Just when you look at the patient population that we serve, elderly fixed income chances of them being bumped out the roles is probably negligible. However, there are individuals that were added to Medicaid that may not qualify now. And I think that’s in large case, why the match is being eliminated and lives being phased out as you see those redeterminations take place.

The next question comes from John Ransom with Raymond James.

Dirk, I know it’s a small piece of your business, but I’d be interested in your perspective on hospice, some of the cross currents we’re seeing. Do you think this is a temporary thing? Or do you think something structural has differed in that marketplace?

Thanks, John. It seems there’s been a little bit of change in the industry. I think you can see that in that all the providers of hospice over the last couple of quarters have had some struggles as far as growth. There’s a question whether with the pandemic, there was a lot of increased elderly deaths that came through that period of time. And so the question is -- some of the indications are, if you look at the government data, the hospice has gone down a little bit over that time frame. So while I don’t believe and I don’t think we as a team believe that’s going to be a long-term change in the hospice environment. We do think there’s some short-term impacts as those -- probably those early deaths of elderly patients that would have been on hospice as that kind of moves through when we get back to a more level operation as we consistently have seen [early] in the hospice environment. So we’re still excited about hospice. I want to make sure you understand that just because it’s not a focus for our M&A at this point in time, that’s largely because we already have about 20% of our revenue in hospice, and we really believe that to get the balance of home health and clinical services set on top of our personal care network is really the strategic way to move forward in the next year or 2.

And so I mean, just a follow-up on that. Do you think length of stay are going to be any different in the future than they used to be? Is there more government scrutiny with [indiscernible] and somethings like that? Or again, do you think this some of the struggles maybe your peers have had with shorter length of stay and getting bottleneck referrals? Do you think that’s also temporary notwithstanding the demand issue, structural demand issue on the [COVID] mortality? Do you see anything with referral networks, length of stay, that kind of thing changing?

Well, I think we saw during the pandemic that our length of stay was challenged. That was the industry probably due to what Brad mentioned earlier, and that is we were receiving the hospice patients that were coming on board over the last couple of years seem to have been later in their stage of -- in the hospice stage. So their length of stay, once we came on service tended to be shorter than what we had seen historically. The question will be, will we start to see that longer length of stay as the nursing homes, the SNFs get back to after the emergency is declared over. Will it get back to more of the normal approach that when we receive clients straight from a nursing home, the length of stay for those clients tended to be longer. If you look at the last couple of years, we’ve still received a lot of hospital hospice referrals and their length of stay has not changed a great deal, but those tend to be the shorter length of stay patients. So our belief is we will start to see that change over the next year or 2. But as to what point it really reverts back to a more normalized level, that’s still a question for us.

[Operator Instructions] The next question comes from Matt Larew with William Blair.

I wanted to follow up on the comment about home health rates it’s been on the Medicare Advantage side, been a theme for a number of the companies in the space and for years really in terms of getting adequate reimbursement. You referenced your leverage point around Personal Care. But just curious maybe what percentage of your book of business today, you feel on the MA side, you feel like you’re getting adequate reimbursement, what’s unique about the situation and how you’re approaching payers today that might be different than 1 or 3 or 5 years ago?

Well, I think when you look at the MA business, we’ve had purposely kind of slow down some of the referral volume that we saw in Q4 and really to get the attention of some of the payers out there. We have found though, once we start having conversations with them they understand some of the challenges that we won, we haven’t really revisited these rates in a while. We’ve had certainly some inflation around wages that need to be addressed. And if they want to have adequate coverage for their beneficiaries, they need to do something about the rates. So we’ve had some success. I think the way we’re approaching is let’s try to get some near-term wins, let’s focus on if we’re on a non-episodic let’s get those non-episodic rates adjusted, right to where we’re at in a position where we can start taking on those referrals, and they become profitable for us. And at the same time, let’s look at the longer-term solution, which is honestly, we need to move towards an episodic type rate that is more comparable to Medicare fee-for-service. So we’ve had some good traction with the MA plans, both on the near-term solution, but then also on that longer-term solution in investigating and looking at episodic because I think they realized this isn’t -- I think we’re kind of reaching a point where if they want to have the coverage that they need, they’re going to have to adjust rates. Also, I think they’re looking for we’d like to partner with people that we can look at potential value-based types of arrangements. So I think that bodes well for us, particularly where we have the personal care footprint that complements the home health footprint to be able to do something creative on the rate side.

Okay. And then following up on some of the investments you made in terms of candidate tracking and both to engage the potential higher than decreased time to hire. Is there anything you can maybe quantify for us in terms of how that’s improved the metrics you track on the hiring side? And then referenced rolling it out to all your sites in ‘23. So maybe where that roll out today? And what’s kind of the course of rollout over ‘23, just so we could think about how that might continue to improve throughout the year.

Yes. So on the candidate tracking system, we initiated it first with our clinical side, lower volume just to make sure we get kind of address any issues or bugs in the system. That was successful earlier this past year by about midyear. We then piloted at several of our personal care sites actually kind of split it out a couple of locations in each region. And I wanted to spend some time there because if you look at just volume of hiring that we do on the personal care side is significant. So we wanted to make sure that the system was working as planned. And so we’ve had those rollouts have been successful. We’re now ready to take it to the rest of the personal care locations, which we’ll do over the next probably 2 quarters to get all of the regions on the new candidate tracking system. It’s pretty intuitive. It takes a little bit of training but pretty straightforward. But what we’ve seen is, one, increase in candidate flow to start with, but we’ve also seen that reduction from the time that someone submits an application to their actual hiring. And it’s been -- depending on whether it’s a clinical services or PCS, we’ve seen anywhere from 1 or 2 days savings to versus really on the PCS side, where we’ve seen probably 4 to 5 days acceleration of that process.

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

I’m sorry if you mentioned this earlier, but actually, I just want to follow-up on the last commentary did you give some stats in terms of your net hires in your personal care, how things are trending in Q4 and into Q1?

Yes. So if you look on the clinical side, we actually had a nice net hire. We added probably about 80 net hires on the clinical side, primarily on the hospice front, our hiring on PCS. Certainly, if you look year-over-year, it was, I think, about 10% greater than it was prior year, sequentially down a little bit. That’s mainly because of the holiday season. You see some less slowness in Q4. Good to see our January and February numbers look solid. So more in line kind of with the Q3 type number. So good hiring momentum on the personal care front. And again, as we said, the clinical hiring has certainly improved really since kind of midyear last year.

Okay. That’s helpful. And I guess I’ll say on the personal care, so you mentioned some positive trends there on rates, but also on the volumes, the hours per business to improve sequentially. As we think going forward about the following quarters. Is it fair to assume volumes in the normal situation should be growing sequentially over the quarter? Or is there some seasonality in the business?

No. I mean I think there tends to be a little less seasonality related to personal care. I mean where you have seasonality primarily is if you have a depending kind of winter storms can affect it. A little slowness and it tends to be, frankly, in Q4 around December and the holidays. But we saw, in spite of that, some nice growth. So Q1, I think when we look at Q1, Q2, Q3 should be nice, steady growth with the hiring numbers that we’re seeing.

Yes. Keep in mind, Joanna, just to piggyback on that a little bit. So in Personal Care, a lot of our markets, if we have missed visit things, we have the ability to make those up and reschedule those on different days. Again, that’s market to market. So it’s not always a guarantee, but we do have a little bit of flexibility if we run into some of those things. There’s a little bit of ability to work around those in certain spots.

And I had a follow-up on the cash flow, which you mentioned it was very strong. You’ve included some of the maybe, call it, onetime type funding your receivable, it’s not repeatable. But how should we think about operating cash flow for this year versus this $105 million? How much should we exclude kind of as a onetime not repeatable? And where would you think you could land for this year for cash flow?

Yes. If you look at 2022, so it was $105 million, but if you kind of back out the net positive impact from the ARPA funds and then you back out kind of those working cap changes that I mentioned in my comments was around $19 million. So you back those out, that’s $27 million, you probably would have been more in the $75 million-ish, $80 million range off of our EBITDA of over $100 million. So that’s a pretty strong conversion rate still. So I think to expect something more in that range would be more probably opportunity for 2023. I think ‘22, we’re not going to continue to see $20 million in net working cap improvement even as we grow. That’s probably more of a onetime thing. But that 75% conversion rate is probably something you should expect on a consistent basis.

This is great. That’s helpful. And the last one, a follow-up. So you were talking about working with the other home health -- sorry, on the rates, working with the Medicare Advantage plans. I don’t remember, did you disclose, can you tell us what is your mix of Medicare fee-for-service versus the Medical Advantage previsit versus Medicare Advantage episodic type of contracts [indiscernible] volumes like percent of visits.

Yes. We haven’t disclosed that in the past, but I mean we’re probably a little over half of our businesses in Medicare are episodic and a little less than half is non-episodic. And again, we’re working on that mix and certainly made some good progress in Q4 related to that.

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

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

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