Good day, and welcome to the Addus HomeCare Second Quarter 2023 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 second 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 and its second 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 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 earnings call, I'll begin with a few overall comments and then Brian will discuss the second quarter results in more detail. Following our comments, the three of us would be happy to respond to any questions. Before I turn the discussions to our results, I want to take a moment and update you on a bench related to the CMS proposed rule for Medicaid services. As you know, in early May of this year, the Health and Human Service Department introduced the proposed rule titled Assuring Access to Medicaid Services. While we have previously stated our agreement with the goal of broadening coverage and expanding the caregiver workforce, we questioned the specific approach, proposed and the target threshold concept for caregiver wages as there are inherent challenges in setting a one-size-fits-all minimum percentage. This is due to the wide variance among state waiver programs, which directly impacts the administration 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 continue providing care due to the significant administrative burden and related costs required to provide quality regulatory compliance, 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 reducing access to services, particularly in rural areas. We recently submitted our comment letter to this Proposed Medicaid Access Rule. We also participated in the development of comment letters from our various trade associations. Overall,…

Thank you, Dirk, and good morning everyone. Addus has had a strong financial and operating performance for the second quarter of 2023, continuing our solid performance through the first half of the year. Our personal care results reflect robust demand for our services in a favorable rate environment led by a very strong 12.6% year-over-year organic revenue growth for the quarter, well above our normal expected range of 3% to 5%. We are very pleased with the momentum in the core personal care segment with an 11.7% revenue increase for the year-to-date period over the prior year. As expected, we received our second statewide increase of the year in Illinois, our largest personal care market on April 1. This increase is in addition to our January 1, 2023 increase in the state. Additionally, we received a retroactive reimbursement increase in New York, which was largely focused on our consumer-directed business and has brought our margins in this program more in line with our other programs in the state. As a result, we have resumed taking new clients into our consumer-directed program and therefore are no longer excluding those results from our same store revenues. While our hospice business has been slower to recover to pre-pandemic levels, we experienced modest sequential improvement in several key metrics this quarter over the first quarter. Our average daily census, medium length of stay and patient days all improved in the first quarter of the year with our medium length of stay the highest we have seen since before the pandemic at 29 days. We expect to see further gradual improvement in our hospice business in the second half of this year with the expiration of the public health emergency expected to lead to an increase in our skilled nursing facility hospice length of stay.…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Brian Tanquilut with Jefferies. Please go ahead.

Good morning, guys. Dirk, I guess I’ll start. You mentioned that if the EMS rule is finalized as proposed, Addus would explore operational changes. So, I know it’s pretty early, but any details you can provide on what levers you can pull to offset any negative impacts from that rule?

Well, Brian, once we see what the rule, the final rule entails, there are things we can do such as we’ll look at states, which may be due to the rule limit your ability to properly operate in that state, and we will potentially look at moving out of those states if necessary. We would hate – we don’t really want that to be the way the operations end up, but certainly if the rule forces that we will look at it. More importantly, what we really would do from an operation standpoint is really try to grow in the markets in which the rule works, we would try to accelerate our – both our M&A growth and our organic growth in those markets, really focused on the areas, the states that give us a high enough reimbursement rate to be able to pass along whatever percentage if there is a change in final rule, whatever that is to our caregivers. Let me make sure you understand, I know you do Brian, but I want to state it publicly, and that is we want to make sure that we pay our caregivers alleged to pay. That is absolutely critical for Addus and our caregivers and both. But the way to do it in our mind is not for this stated minimum percentage, it’s more through making sure the states are paying an adequate rate and that is what the states we would focus on in the future.

Yes, I understand that. And then maybe as I think about kind of like your fill rate, right and I know you’ve done a great job ramping up hiring on a daily basis. How are you thinking about the remaining opportunity to increase the fill rate, maybe get it back to pre-COVID levels and what that would take? And maybe kind of layering that on I know your quarter-over-quarter hours are up north of 1%, so just try to put that growth algorithm on what the remaining opportunity is to drive growth over the next couple of quarters. Thanks.

Hey Brian, this is Brad. Yes, happy to discuss that. When we’re looking at the bill rate, we have certainly seen some nice improvement over the past 12 months. We’ve probably increased a couple 200 to 300 basis points on the bill rate. A lot of that is focused on the improved hiring that we’ve seen over the past 12 months. The things that we’re focused on are frankly, in order to kind of get another couple of hundred basis points out of that number to get back up to where we were pre-pandemic is: one, continue to focus on the hiring piece, but then also when you look at our new candidate tracking system and the speed to hire getting those people on board and then also focusing on getting them to their first billable days, because we still lose too many caregivers between honestly, hiring and when they actually take a billable case. So, really focused on accelerating that process which also will improve turnover as well, which actually takes a little bit of the pressure off of the hiring. We’ve been really focused this year on getting back to the basics on the scheduling, and the serving and assigning of caregivers. We’ve got some enhanced technology tools that we’ve added to help our schedulers, our service coordinators to make their job easier. So, certainly seeing good progress on that I still think that we have a couple of hundred basis points more opportunity there.

Alright, got it. Thank you.

The next question comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning. First just appreciate the color you gave us in the advocacy efforts on the HCBS rule. My first question though was just wanted to ask on the home health contracting environment, if you can just give us a little more details on how those re-contracting efforts are going with those that lower tranche of payers, is there any way that you can sort of, you know, quantify, I guess, what percentage of the MA payers would be in that insufficient reimbursement bucket? And then also just wondering as you are bringing the Tennessee acquisition online given the revenue mix is heavily weighted towards home health how you would describe the MA contracts underneath that asset and sort of against this backdrop of trying to be disciplined on your reimbursement with MA payers here?

Yes, Scott, this is Brad. So yes, we’ve been really focused on frankly trying to get some quick wins when you look at the Medicare Advantage really focusing on, let’s introduce the concept of getting to an episodic type reimbursement, but we’re in the near term, let’s really focus on just getting those per visit rates up. And I think we’ve done a pretty good job of adjusting those rates in some key markets still have some work to do there, but it’s really kind of market-by-market as to which payers that we’re focused on. When you look at the Tennessee Quality Care they’re contracting pretty – a good mix, but I think there’s opportunities from upside there for us. And so that’s one of the things that our contracting team will be focused on is working on those races. They continue to work with the other payers to adjust not just try to get the episodic, but also let’s try to get those per visit rates up to where we can start taking more of those referrals and continue to have good operating margins or improved operating margins that we currently are showing.

Okay. Thanks for that, Brad. And then just my follow-up question would just be on sort of taking the improvement that you’ve had in personal care on the hours and sort of – maybe you’ve sort of giving us some visibility into how you are thinking about that continuing to trend out in the back half of the year in any seasonality that you would maybe want to comment on. And then separately, I guess just Brian maybe for you just on the Tennessee acquisition, maybe just sort of I know you, you talked about sort of starting to see some positive impact on margin at 3Q and then more fully realizing then in the 4Q? Any sort of, I guess quantification you could give us side of what the, the gross margin impact would be, the sort of start out there from that that acquisition in the third quarter? That's it for me. Thanks.

Sure, Scott, I'll start with the PCS question first. I think, we've talked about the last couple quarters to see nice sequential growth in hours per business day I think Q4 and Q1 was 1.9%. We saw that at 1.2% quarter-over-quarter. This year I think our expectation is going to be probably more similar to what we've seen in this last quarter. So around 1% maybe give or take over 2%, 3%, 4% there's not a lot of seasonality really in PCS. I think typically where we see impacts is, is more in the winter months where maybe you have some service delivery issues or shifts get canceled, et cetera. Obviously you're probably not going to see a lot of that. I mean, Q3 might start to see some impact a little bit into the year as things get colder holidays et cetera, but it's going to be pretty minimal. So wouldn't expect a lot of seasonality kind of in that – in that trajectory. And on the Tennessee Quality Care, just a couple of metrics to give you guys, I think. We mentioned there are about $40 million in annualized revenue. It's a skilled business, so that gross margin profile is going to be in that mid to upper 40% range. And I think we've talked about it before the bottom line expectation to EBITDA, that's going to be in more that mid-teens as a percentage. So one thing I would just advise on as well with an acquisition that's ties, obviously there's going to be some depreciation, amortization that'll come into play with the intangibles we are borrowing for this acquisition. So with the most recent hike from the Fed, all in interest rate now is just a little over 7%. So we'll also be thinking about that from an interest expense perspective. But those are probably some good metrics, I think from a modeling perspective.

Very helpful. Okay, thanks.

The next question comes from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hi, this is Mike Murray on for Ben. Can you give us a little bit more color on hospice? Same for ADC decline, 3.2% driven by lower admissions with, with higher length of stay, a partial offset. Are you still seeing pressure from referral sources? Is there an increase in competition in some of your markets? Any color would be helpful.

Hey, Mike, it's Brad. Yes, we did see a kind of a drop on the admission front. What was encouraging is to start seeing that median length of stay increase as Dirk pointed out in his comments, primarily in the nursing facility, which we had anticipated with the expiration of certain provisions in the public health emergency. Frankly, we had kind of a slow May, the second half of June and its continued July we've seen a kind of a pickup in admission volume with taskforce bonded into increased ADC. So we did have sequential growth, so we saw some recovery from Q1. I anticipate that we'll continue to see recovery into Q3 and into Q4, both from an admission standpoint but more importantly on the ADC front.

Awesome, that's helpful. Just switching gears a little bit: you've seen some nice operating leverage on G&A past two quarters, but it still remains around 21%, 22% of revenue. How do you think about this line item longer term? Do you think you could get it back to pre-pandemic levels, which were call it, 19%, 20%?

Yes. Mike, this is Brian. I think we're continuing to see leverage. So as our top line continues to grow. We definitely saw that from Q1 into Q2 with kind of a decline in that percentage. So that would be our expectation. So a lot of those costs particularly on the corporate side are fixed. We'll flex a little bit in the field on SG&A, but that's probably going to move more slowly than our revenue growth. So yes, we would anticipate over time as we continue to see our top line growth that we're going to continue to get more leverage on G&A.

Alright, thank you.

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

Hey, good morning. You gave us some metrics on, on hiring productivity. I'd be curious to share a little bit on the other side of that on the retention side. What sort of improvement you've seen and if there are technology tools that you can implement or evaluating to help drive that further? Thanks.

Yes. That's Brad. So when you look at our personal care hiring and we carve out that family caregivers, so you look at kind your traditional caregivers. We have seen nice improvements on the turnover rate probably about to, to the tune of you. We gone from 64%, roughly Q1 of last year we're down to 56% which is again still ahead of industry standard. I think some of the things that we're looking at that I think have helped us on the turnover is one, really working on caregiver engagement; second, making sure that they have the hours that they want to work because we're still probably one of the biggest reasons that a caregiver leaves us is because they're not getting sufficient hours. So there's been a lot of focus on our part of trying to ascertain who wants more hours, what the schedules are they looking at and putting some technology tools that help match that those additional hours they're looking for with clients that are available. So I think our IT team has done a great job of putting together some very helpful tools. We're continuing to modify and work with those. Again, I think speed to hire is important from a – to really kind of maximize our fill rates. But honestly, it's really about making sure people are getting the hours. In addition, we actually do conduct surveys with our caregivers. We just recently completed a round of surveys, got great response. Almost half of our caregivers responded, so you think about get input from 14,000 caregivers. You learn a lot, but again it's kind of interesting is hours working in that, getting enough hours is probably one of their key things and that's what we're focused on.

Okay, understood. And then on M&A. Dirk, you spoke to sort of the Addus side of it where you are focused from a PCS versus Home Health versus Hospice perspective. But curious more on, on supply side what you all are seeing given some of the reimbursement dynamics that might be affecting potential sellers willingness to come to market as well as maybe just the general sense of your activity levels, obviously just completed the Tennessee deal, but relative to historical what you're seeing from an activity and pipeline perspective?

Hey Matt, this is Brian. I think on the supply side, I think we kind of mentioned in our comments, it's been slow. I think there are some opportunities out there. We're being pretty selective on the ones that that we're looking at with some of the rule and reimbursement overhang. So we're being, I think cautious in that front, but I would also say the environment has not – has not kind of turned, it's not what I would call robust at this point. So – but there are still opportunities for us to look at. I think still from a priority standpoint, we still believe heavily in carrying skilled home health with our personal care, having hospice as an available alternative as well. But it really comes down to more strategic markets and pricing opportunities, I think probably are, are driving us more today on what our opportunities are that we're going to pay more attention to.

And let me – let me add to what Brian has said, and that is we're facing challenges right now, as you know in both personal care and home health as it relates to either rural change – proposed rural changes or proposed rate reductions. Long-term, we don't believe those should affect our strategy. We remain completely focused on our growth of all three levels of care in markets that allow us to appropriately deal with value-based care. One of the things we think these changes indicate is that you need to be larger as a company so that when you sit across the table, certainly from Medicare Advantage payers, but others as needed that you have something that they need and that is size and quality of operation. And so while we are currently being more focused and on our strategic model as to what we will look at, if something came up in either one of these segments of care that was extremely strategic, we're not going to let the proposed rules out there affect us long-term. Now whether or not it affects the price that's remains to be seen, I mean, certainly from our standpoint we're going to negotiate if we can with the fact that there are these challenges out there. But we're – we're still focused on the long-term growth and profitability of Addus.

Okay. Understood. And just quickly one more on the time line for the Medicaid rule. I think in the past, you had mentioned you expected some uptake in the fall. I don't know, if based on the quantity of comments and the listings that you had, if you have a different perspective, when that might come acknowledging some uncertainty?

Yes. Well, I think when it first was proposed, there was a discussion around the fact that if you look historically, some of these things could be actually finalized within a few months of getting the final comments in. I think at the last conference call, and certainly we've made visits through the last quarter since then, our feeling is that that's probably shifted and won't be finalized until sometime in 2024, especially if you think about it. When you receive so many comments and most of them are against the proposed change I think there's a lot of thought process going from a CMS perspective. So we're expecting something probably more in line with the first part to mid-part 2024.

Okay. Thank you.

[Operator Instructions] The next question comes from Joanna Gajuk with Bank of America. Please go ahead.

Good morning. Thanks for taking the question, Dirk. So I guess, first on the Tennessee acquisition, you mentioned the fact that the situation in terms of the payers, would you make this state as a target for value-based contracting? So when should we expect, I guess, for you guys to have a contract like that in the state, was it maybe the payer there was actually asking for you to add more services to kind of how you expect the situation in the state on that front evolved with this acquisition now closed.

Yes. I think on the value base, I mean, some of the payers that we work with outside of Tennessee are similar to the payers that are in Tennessee. Now it tends to be a different group of individuals that are overseeing those markets. But I think we'll at least be able to have an introduction pretty easily to start having those discussions around value-based I think that's something – it's still not something we'd probably be jumping into in three months, but maybe towards the back half of integration within the first 12 months, we'll probably looking to get into value-based arrangement. But we'll start exploring those, frankly, now are engaging with payers to have some of those discussions as we work on some of the other rates that are with some of those managed care payers.

Great. And if I may also follow-up on the fact at that this asset comes with a majority revenues being Home Health. So moving forward with the acquisition despite the rate cuts that are coming next year likely, while and there could be more cuts going forward with the recruitment. So I guess, as we think about this business, Home Health segment that is. With this, let's say that the 2% rate that is finalized, maybe a little bit better than proposed. Would you expect to be able to grow EBITDA on a same-store basis, I guess, with these types of rate cuts?

Yes. I mean, I think, Joanne, I can talk about the rate cuts, so I'll let Brad kind of talk about our growth opportunities with this acquisition. But I think already [indiscernible] small segment for us today. The deals that we're looking at this one being a prime example. We've taken those potential rate cuts over the next couple of years into consideration with our kind of long-term view on what we think our top line growth opportunity is there. We've modeled that in and that flows through obviously to profitability for us and our expectation, and that's what we utilized in our pricing conversations with these targets. So all part of our process, and we're aware of kind of the environment and take that into account. I think from this one, particularly and Dirk kind of mentioned, there are opportunities to get into other counties. So I think we see some volume growth opportunities in the market, but I'll let Brad talk a little bit about that.

Yes. So I think there certainly are some volume opportunities with potential de novos based on kind of where they are. I mean, they cover a large geography in Tennessee. I think there's some opportunities to move into some of the more urban markets. They're primarily kind of more rural focused. But also, I think to Brian's point, I mean, Home Health is a relatively small segment for us, so there's operational efficiencies that we gain by scaling up. And so I think that really went into our calculus about doing this deal and about the opportunities to get some same-store growth from a bottom line perspective as well as top line.

Appreciate it. Thank you. And if I may, just a last question, I guess, more strategic and I know this just came out yesterday about CMMI announced a new voluntary demonstration, I guess, across all the states would have focused on dementia patients. So I don't know if something like this would be of interest to Addus, the material from CMS talks about targeting dual allergic population, but at the same time to talk about us being open to Medicare certified providers. So I don't know if this is something that I guess makes Addus here well positioned given the kind of presence in both Medicaid, also Medicare Home Health?

Yes, Joanne, this is Brad. Yes, very pleased with that announcement. It's certainly something that we're willing to explore. I think it really fits well into our strategy of having all three levels of care because it has a skilled component with the Home Health, but also has a personal care type component as well. And frankly, it's good to see CMS recognize that that's probably the population that honestly has the lack of services or a potential lack of services. Those are individuals that they can need Home Health, they can need Personal Care, they need Hospice but by the same token, it helps – when you look at Hospice, you get a lot of criticism with somebody's on length of stay for a long period of time. And it's primarily those neurological disorders such as dementia. And I think this is really trying to kind of fill some of that gap and some of the pressure you have in trying to take care of those individuals in the right place. So very pleased with it and I'm certainly looking forward to exploring it.

Thanks for the call. Thank you.

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

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

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