Good morning and welcome to Addus HomeCare’s first quarter 2023 earnings conference call. All participants will be in a listen-only mode, and should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note that 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 first quarter 2023 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 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 in its first quarter 2023 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 2023 first 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 earnings calls, I will begin with a few overall comments and then Brian will discuss first quarter results in more detail. Following our comments, the three of us would be happy to respond to your questions. Before I turn to a discussion of the results, I wanted to take a moment and talk about the recent development that I’m sure is on everyone’s mind. Late last week, the Biden administration’s Health and Human Services Department introduced a proposed rule titled Assuring Access to Medicaid Services. This proposed rule has a stated goal of improving access to services for Medicaid beneficiaries, which we strongly support. As part of this proposed rule, HHS is proposing that state Medicaid agencies provide assurances that a minimum of 80% of Medicaid payments for personal care and similar services be spent on compensation to direct care workers. While we agree with the goal of broadening coverage, we question the specific approach proposed and the target threshold as there are inherent challenges in setting a one-size-fits-all minimum percentage. This is due to the wide variance in state waiver programs which directly impacts the administrative burden required to provide home and community-based services in individual states. We also believe that many providers, especially small local providers and those operating in states with larger rural populations, may be unable to continued providing care due to the significant administrative burden required to provide quality regulatory compliant home and community-based services. These challenges, if not properly considered and addressed, may have the opposite effect intended by the proposed rule by inadvertently…

Thank you Dirk, and good morning everyone. Addus had a strong financial and operating performance for the first quarter, marking a solid start to 2023. Our results reflect ongoing demand for our services, led by 11.4% organic growth in personal care services, and as expected was well above our normal range of 3% to 5%. We saw sequential growth in both clients and hours of service per business day for the second consecutive quarter and benefited from the impact of the first of two state-wide Illinois rate increases, with the first effective on January 1, 2023. With the recent approval from CMS, our second Illinois rate increase was effective on April 1, 2023 and will benefit the second quarter. Revenues for our home health services continue to trend higher, boosted by two acquisitions completed in 2021 and the Apple Home Health acquisition completed in October 2022. For the first quarter, we achieved 13.8% same store revenue growth over the first quarter of last year. We have continued our focus on improving our mix of episodic versus non-episodic cases and have made good progress to date, with overall revenue growth outpacing volumes. Our hospice business has been slower to recover to pre-pandemic levels, but we saw modest improvement this quarter compared to a year ago. We expect to see further gradual improvement in our hospice business, particularly in the second half of this year. Results for our hospice business include the JourneyCare hospice operations acquired on February 1, 2022. As Dirk noted, total net service revenues for the first quarter were $251.6 million. The revenue breakdown is as follows: personal care revenues were $190 million or 75.5% of revenue, hospice care revenues were $49.1 million or 19.5% of revenue, and home health revenues were $12.5 million or 5% of revenue. For…

We will now begin the question and answer session. [Operator instructions] Our first question here will come from Brian Tanquilut with Jefferies. Please go ahead with your question. Your line is open, Mr. Tanquilut.

Hey, good morning guys. Sorry about that. I guess Dirk, thanks for giving us all the color and your views on the Washington stuff. But maybe as I think about it, I know you’re very good at lobbying at the state level, but how should we be thinking about the industry’s lobby efforts or ability to deal with this issue at the national level, especially since this is CMS instead of usual state plans. Thanks.

Yes Brian, appreciate the question. You know, we have been--in our history, if you think about it, the majority of our lobbying efforts have been statewide recently with our entrance into clinical services. We started doing some more with NOHC, a national organization for healthcare, so there is a Washington presence there. We as a company are talking with others and certainly discussing inside the company with management and our board, reaching out and developing our own lobbying resource in Washington DC, so we hopefully will be able to enlist that very soon and start the work. Independently of what we’re doing with all the strong associations we have, this particular proposed rule has gathered a lot of interest, as you would expect, so we believe that we will be able to utilize a lot of different associations to lobby at the federal level.

Got it. I guess Brian, or maybe Dirk as well, Dirk, in your prepared remarks, you talked about kind of pulling back for now on PC acquisitions here, which is fully understandable. But as I think about home health or home nursing, I know obviously [indiscernible] is in the background there as well and the clawback, so just wondering how you view that and maybe should we just assume that between now and when we get clarity into some of these issues, that M&A pace will be slower? Thank you.

Well, I think it’d certainly be slower in the PCS market, Brian. Again, we think there’s great opportunity even with this proposed rule. Once we have final clarity, we believe that the PCS market is one that’s going to be ripe for consolidation, honestly. That being said, don’t expect we’re not going to do deals in the home health market just because of the pending issue related to the payment rates and potential clawback. We believe we understand some of that, although anything we did, that would be priced in. We would be talking about that with acquisitions opportunities in home health. Remember, we still have a very strong personal care base. We’re in a number of states with a very large presence, and dropping additional home health revenue on top of that is something that our value-based partners would like to see and it’s something that management is still committed to doing, so we will be active, maybe not quite as much as if PCS was still on the table, but we will be working hard.

All right, thanks Dirk.

Our next question will come from Scott Fidel with Stephens. Please go ahead with your question.

Hi, thanks. Good morning. First question, just on the proposed rule. Can you talk about any of your states that may have implemented any of these similar types of gross margin caps and some of the flexibility that they may have allowed for in terms of cost allocations when thinking about expenses that may be included in operating expenses or SG&A, but are allowed to be allocated towards caregiver or gross margin expenses, just when thinking about some of the state policies that theoretically could be adopted by CMS if they do decide to pursue this proposal?

Yes Scott, I believe probably the biggest one that we see, and I think it’s referenced in the proposed rule in the footnotes, is the State of Illinois. Illinois is a pretty good model with its requirement that at this point in time has a definition of direct wage expenses that works very well in the state. We’re very comfortable with that, and we think it can be at least a starting point for negotiations as we continue to talk to CMS about what the final rule--if there is a final rule, what that final rule might be. We’ve operated, as you know, for over 40 years in Illinois and have done a nice job, and so we believe we know how to operate with the percentage. The question becomes two things, as you would expect: what is that percentage threshold, and how detailed is the description of direct wages, so things such as training. The cost of training is very important. Some of the regulatory compliance, EVV, things like that, that directly affect the caregiver and the operation in the field are things that we need to be able to speak to having included in this rule, and that’s something that we will be talking to with CMS about.

Understood. A follow-up to this, just one, I guess your thoughts on or expectations around timing in terms of when we could see this final rule eventually come out. Are you thinking later in the year? Then also, I know no company or industry ever wants to suggest having a target gross margin cap, but Dirk, in your opinion, just understanding the economics of the personal care business, what do you think--I mean, is a--if there was a more reasonable cap that CMS were to propose to allow the industry to function in terms of its economic model, is there anything you think that would seem to be a little more appropriate than this 20%? Thanks.

Okay, let me start with the timing. Of course, reading the crystal ball, it’s obviously difficult when you’re dealing with the federal government. That being said, right now they have said 60-day comment period. We believe based on just the couple days we’ve been involved with this, there are going to be significant comments from all sectors of healthcare and others, so we believe that depending on how many comments, how extensive those come in, it could take a little time. But we’re expecting--and again, this is just our opinion, probably between October and December of the year, we’ll have a better feel of the final rule. As it relates to an appropriate percentage, let me tell you the difficulty in telling you that. Every state in which we operate is different as far as requirements, regulatory and other issues, and even in some states waiver plans can differ into what is expected, so the problem is if you try to set a national rate, you’re going to have a very difficult time of going to that level that allows the lowest waiver program to continue to operate in an effective manner. For us, there’s other ways that we believe the goal of increased coverage in Medicaid while paying our caregivers a living wage, we believe there are other ways to reach that goal, so we will continue to work with our lobbyists, with our associations to have discussions along those lines.

Okay, great. Thank you.

Our next question will come from Matt Larew with William Blair. Please go ahead with your question.

Hi, this is Madeline Mollman on for Matt Larew. One question we were wondering is do you see the potential for a similar rule to be implemented in the home health or hospice space, or because they’re more skilled labor with nursing degrees and things like that, are the dynamics just very different?

I think the dynamics of home healthcare are somewhat different. You’re dealing with a different level of pay to your clinical employees, but to me, we’re not aware of any time the federal government has attempted to do this. This is why this is so surprising to all of us in the industry. It’s one thing for a state to look at it and negotiate with the providers in the state based on all the rules and regulations and costs related to providing that care, but for Washington DC to decide to do this for all the states certainly is something we see as very, very difficult. I think at this point in time, this is new to us. We haven’t seen it anywhere else in healthcare services.

Great, thank you. Then one more from me, just thinking about you mentioned that you’re sort of limiting admissions of non-strategic MIA patients in home health. Can you talk a little bit how payors have responded to that and how your conversations with payors are going related to [indiscernible] different reimbursement?

Yes, this is Brad Bickham. It’s actually going pretty well. I think it’s garnered attention from the payors, and those that are some of our larger, more strategic payors and markets have been willing to talk about, at least in the interim, let’s talk about increasing just the per-visit rates, but then let’s talk about and engage in what would an episodic rate look like. We certainly are seeing some progress there, and it has gotten the attention of the payors.

Great, thank you.

Our next question will come from Ben Hendrix with RBC. Please go ahead with your question.

Hi, thank you. Just a quick question related to the $1.26 update in Illinois that went into effect in April. You mentioned that it wasn’t going to have any impact on gross margin. I’m wondering what costs come along with that $1.26 update that might be unique to that particular raise, and are there any inflation risks going forward related to those costs that may not be captured in future updates? Thanks.

Ben, this is Brian. I think our comments there around the $1.26, and we kind of mentioned this, I think, on our last quarterly call as well, typically we kind of see a standard normal statewide margin kind of pass through when we give our increases to our caregivers in the state. I think our anticipation with this one, since it was a little bit in advance of required wage increases, which hasn’t really happened in the state over the past few years, I think there’s going to be an opportunity for SEIU to want to have conversations around a few other items in the agreement, so around PTO, mileage, things like that, that haven’t been addressed in some time, and so our expectation is we will see obviously gross margin dollars, but we’re talking about as a percentage, we think this is going to be a little lower percentage profile than we typically get in Illinois, so that’s why we were trying to caution people into thinking there was going to be some margin expansion out of that. We do not anticipate assuming margin expansion from that increase. It is a nice increase - again, second one this year, pretty sizeable. It will give us a nice bump in annual revenue and allows us to give all of our Illinois workers another raise that further differentiates them from minimum wage in the state, which hopefully--again, this proves our point again, it improves access to care. We’ll get more caregivers, we can provide more care in the state with the support from the rate that we’ve gotten from them.

Great, thank you.

As a reminder, if you have a question, please press star then one to join the queue. Our next question will come from Joanna Gajuk with Bank of America. Please go ahead with your question.

Hi, this is [indiscernible] for Joanna. I just had a quick question about personal care census and seeing how it’s continued to build sequentially. Is it fair to assume that there will be quarter-over-quarter growth or is there some seasonality?

This is Brian. No, there’s typically not a lot of seasonality - I mean, you might see if it you have a weather event, that’s more talking about a snowstorm or something up in the midwest, so very minimal impact on that kind of seasonal adjusted. But based on our hiring and the trends we’re seeing, we feel pretty good that we should see some nice sequential growth in terms of census and hours.

All right, thank you. Just as a follow-up on census, but for hospice, I see that it was down 4% year-over-year and down 0.6% quarter-over-quarter in Q1. What’s causing the rebound delay, and what’s a reasonable assumption for census year-over-year change in 2023, as well as long term?

Yes, I think if you’re looking at kind of long term, getting back to kind of a 3% to 4% census growth, if you put rate increases on top of that, you’re looking at kind of a 5% to 7% kind of long term goal on the hospice front. I think there are certain things that will go away with the public health emergency that should help with our ADC, our average daily census via nursing homes. There were some special rules that we have seen an impact with those rules, where our median length of stay is much lower during the pandemic. We expect that to start to rebound after the end of the PHE, which should help our census growth.

All right, perfect. Thank you.

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. Thank you all for your interest in Addus and for being part of our call today, and we hope you have a great week.

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