Good day, and welcome to the Addus HomeCare's Third Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Dru Anderson. Please go ahead, ma'am.

Thank you. Good morning, and welcome to the Addus HomeCare Corporation third quarter 2023 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 in its third 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 third 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 the third quarter results in more detail. Following our comments, the three so us would be happy to respond to any questions. Before I turn to the discussion of our results, I want to take a moment and bring you up to date on the status of the CMS proposed Medicaid Access Rule. At this time, CMS continues to review the more than 2,000 comments submitted to the proposal before issuing a final rule. The comments submitted to CMS, including those from a broad array of state Medicaid agencies, overwhelmingly called for the administration to resend the part of the proposed rule requiring that 80% of the Medicaid payment providers go to direct caregiver wages. States, along with others who submitted comments to the proposed rule, generally site both the inherent challenges to a one-size-fits-all approach and the lack of data to support the likelihood of the 80% mandate increasing access to care for Medicaid beneficiaries as the reasons for the call to resend it. Similar calls to resend the 80% mandates are coming from Congress, including in the House Energy and Commerce Health subcommittee hearing held on Wednesday of last week. Based on the feedback we have received from industry sources, we believe the final rule may be published sometime late in the first quarter or early part of the second quarter of 2024. While the volume and substance of the comment letters may have an impact on the final rule, we do not…

Thank you, Dirk, and good morning, everyone. Addus had a strong financial and operating performance for the third quarter, reflecting the continued momentum in our business in 2023. Our results were driven by robust demand for our services, highlighted by 13.9% year-over-year organic growth in personal care services, well above our normal expected range of 3% to 5%. For the year-to-date period, personal care revenue is up 12.5% compared with the same period last year. In addition to the volume growth, we benefited from the statewide rate increases in Illinois, our largest personal care market that were effective January 1 and April 1 of this year. Our third quarter results included two months of operations of Tennessee Quality Care, a provider of home health, hospice and private duty nursing, which we acquired on August 1, 2023. We are pleased with the integration process to date and look forward to the additional growth opportunities this acquisition offers in an attractive market. Acquisitions remain an important area of focus for Addus, with the market somewhat tempered pending proposed rule changes for reimbursement and program structures. We continue to be selective in assessing and pursuing strategic opportunities in the interim. We were pleased to see continued improvement in our hospice business in the third quarter with positive sequential trends in same-store revenue, average daily census, length of stay and patient days with same-store revenues up 3.1% over the prior year. We have begun to see the early impact from the expiration of the public health emergency, which we expected to lead to an increase in our skilled nursing facility hospice length of stay. The overall results for our hospice business also include the addition of the Tennessee Quality Care operations. Same-store revenue for our home health services was down 8.8% from the same…

[Operator Instructions] And the first question will come from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning. First question, just wanted to just ask about thinking about with the fourth quarter and recognizing that you don't provide formal guidance, but would be curious if you could give us some of your thinking on sort of directional trajectory of volumes across the three core business lines sequentially for the fourth quarter and any seasonality that you would think about also influencing that? And then also on the cash flow side, which has been very strong throughout the year. Any working capital items that we should be thinking about when modeling 4Q cash flows.

Yes, Scott, this is Brian. I think just looking ahead to Q4 on growth rates, obviously, we've been well ahead of our 3% to 5% this year in Personal Care, Illinois, two rate increases this year have definitely been beneficial. I think looking ahead to the fourth quarter, we still expect our growth rate in Personal Care to most likely be above that 3% to 5% range, maybe not quite to the level we've seen in the last couple of quarters with some of the comps to last year, but still a healthy growth rate on a same-store basis year-over-year for the fourth quarter. I think in the clinical services, we've talked about we've seen some sequential improvement from Q2 into Q3. I think we would expect and anticipate to see continued positive momentum there. We do have a little bit of seasonality. I think just like most books when it comes around the holidays, particularly maybe in the hospice segment, but I think that's pretty typical. But I would say probably not overly material. And then just on the question on the cash flow. I think nothing significant, I think, from a working cap perspective, I think our DSOs have been pretty stable. We talked last quarter about being a little artificially low. We came back a little more, so I think a normal range in Q3. I would expect that to be pretty consistent. So really nothing towards the end of the back part of this year. I think just thinking ahead a little bit, we get into the early part of next year, you sort of think about annual merits, compensation, things like that, that play a little bit of an impact some of your insurance on a prepaid basis, but again, probably nothing overly material there.

Okay. Thanks Brian. And then just as a follow-up question, and I appreciate some of the visibility into thinking about gross margins in both the fourth quarter in the first quarter. I thought it may be helpful just to the extent that you can, just relative to the specific dynamic that you called out around the renegotiation on the collective bargaining with the PCS workers and some effect that may have on gross margin. As we try to think about modeling that and I guess in particular sort of as we sort of step into next year and into the first quarter. I know you talked about like the 80 basis points of other factors, is there any type of, I guess, sort of range or framing that you can give us on how we should think about tackling the gross margin impact, I guess, for the PCS segment or on the consolidated basis from the, I guess, some of these revised wage agreements that you're working on? Thanks.

Yes, Scott. I think primarily, it's in Illinois. I think the rate increase we're getting on January 1. It isn't tied to any kind of step-up in minimum wage. There's no kind of offset wage scale per se that happens exactly at that time. So in our negotiations with them, and we'll be a little cautious in exactly how detailed we get I think we expect to see some onetime, as Dirk mentioned, kind of benefit enhancements, so not necessarily hourly rates or wages. But some things that haven't been addressed through our negotiations in the past several years that we're taking an opportunity to address now. So the way to think about, I think, going into next year, normally, we kind of see an rate increase. This is going to be the amount we're getting to be about a 4.2% increase on our current rate we would see kind of a normal margin pull-through. I think our expectation is we're not going to see that with this particular rate increase when we make some of these adjustments. Illinois is a decent part of our business. So we'll probably have a very slight impact on the margin rate, but not, I would say, overly material from a percentage basis, but probably a slight impact.

Okay. Great. Thank you.

The next question we have is from Ben Hendricks with RBC Capital Markets. Please go ahead.

Great. Thank you very much. I appreciate the commentary about the PC hiring momentum. I was wondering if you could give us some your take on how retention has been trending, especially after the special Illinois rate increase that you saw or the extra Illinois rate increase you saw last year if that's having an impact on retention. Then on the hospice side, the ADC sequentially on a same-store basis. I'm wondering how that trended through the quarter and kind of what's giving you confidence in seeing some pickup in 4Q? Thanks.

Ben, this is Brad. With respect to the PCS, just kind of looking at the turnover and retention rates there. We have seen continued improvement in our retention and our turnover rates on the PCS side. I think a lot of us, as we pointed out earlier, is a lot of the enhanced unemployment benefits ended last year, which certainly helped on the retention side and getting people to work. But then more importantly, I think as you point out, some of these rate enhancements have certainly helped keep people engaged to help with hiring numbers helped keep them - I think we're doing a better job, honestly, of giving them more hours, that's one of our focuses is we're doing a good job on the hiring front. But what we really need to, I think, focus on this year and next is really maximizing our existing workforce because it's there's a lot of employees there that want more hours, and it's really a matter of matching those caregivers with open shifts, and that's where we're spending a lot of our efforts now and into next year is really focused on technology enhancements that would allow us to do a better job, which I think one helps us get cases started faster, as Dirk alluded to, but then more importantly, allows us to get more hours out of our existing workforce, which helps with the retention. When you look at the hospice trends, we saw pretty good hospice numbers when you looked at July and particularly August, tailed off a little bit in September, but then picked up again in October. So I think we've got some good momentum on the hospice front. There's still some pockets where we had some challenges on the staffing side, primarily in some urban markets like Chicago and Portland, Oregon. Those have improved. So I think that gives us some optimism heading into Q4, but as Brian pointed out, you typically have a little bit of seasonality around the holiday season, particularly with respect to hospice.

Thank you.

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

Good morning. Thank you so much for taking my question here. So I guess maybe first I'll start with a follow-up question, and then I have my question. But on the follow-up, so just talking about the Illinois rate increase and how you expect a onetime, I guess, impact to gross margin because of the lower, I guess, flow through. But you also said in the prepared remarks, you expect to see some offsets from volume increases in the market. So could you talk about that a little bit more? Like when would you see those volume, I guess, increases materializing? Is it immediately? Or is it more of a comment over time?

Yes. Joanne, this is Brad. With respect to the volume, if you look at Illinois, and this kind of goes back to the previous question, we paid a pretty good rate in Illinois because of some of the rate increases that we've received from the state, which has been beneficial on caregiver recruitment and retention. So we've seen some really solid hours growth in Illinois. I think year-over-year, they're up by almost 6% on an hours basis. Even though we're not getting necessarily as much margin out of this - the upcoming rate increase, I do anticipate that those volume increases should continue, which will give us more leverage off of our SG&A which I think when you talk about margin, really focused on the bottom line, it should have a negligible effect that we're seeing a little bit of not as much pull-through on this rate increase.

Okay. Thank you. And my question around the margin comment there, so appreciate typically, this Q4 margins are higher. But then to your point, Q1 tends to be a lower margin quarter in a year. So I guess this year, I guess, tracking for the full year EBITDA margins, I'm talking about 11% and in change maybe 11.1% for the full year. So is that a good starting point when you think about the full year 2024, I understand you don't give specific guidance, but I guess in light of the commentary is around Q1, I think it will be helpful talking about also kind of fourth quarter period, how the margins could play out? And as you talk about that, I guess, any puts and takes in terms of the volumes and rates, obviously, volumes have been improving nicely in PCS, but it's very strong right and how you see this normalizing into next year? Thank you.

Yes, Joanna, I think for 2023, I think we are trending toward finishing the full year above - back above 11%, which is where we were a couple of years ago. I think we had talked about coming into this year, we expected our margins to remain somewhat stable compared to last year where we saw a lot of wage pressure. I think we've actually overperformed that a little bit this year, I think adding an acquisition like Tennessee Quality Care and Clinical is helpful with that as well. But I think our expectation looking forward to 2024 on a margin perspective is we would expect to again be back above 11% and stay in that range. I think talking a little bit of piggybacking on Scott's earlier question about growth rates, I think our long-term growth rate in personal care 3% to 5%, I think we're still comfortable with and then getting to a four plus percent increase in Illinois just thinking about the top line, not necessarily the pull-through is very helpful in that regard going into next year. So I think we expect to be nicely into that range and maybe towards the top end of next year. And I think our clinical services, we anticipate we'd like to see those get back to our normal growth rates of kind of mid-single digits. So with that, again, that 11-plus percent bottom line margin expectation for next year.

Thank you. If I can just follow up on that. So I guess, sounds like you're talking about maybe higher end of the 3% to 5% for PCS. So how would you break it down the volumes versus rates? Or I guess Illinois, you just mentioned 4% increase. And how are, I guess, the rest of the PCS markets trending when it comes to rate increases into next year? Thank you.

Yes, I think Illinois obviously is going to be the most impactful one for us next year. So they're about 40% of our business in personal care. So at four plus percent, that's a good start on the 3% to 5% consolidated for the year. I think we've seen good rate support over the last couple of years from a lot of our markets. We've seen a lot of corresponding increases to offset some minimum wage step-up. We don't have many of those, I think, scheduled for next year. So I think our expectation is outside of Illinois, not probably a lot on the rate side next year. I think we are getting, as Brad mentioned, really good momentum and volume - on the volume side. And we have an expectation that our markets will continue to grow both in number of clients, but also where we can maximize the fill rates from our authorizations. We're making some headway there. We have some opportunity there on the volume side, we believe.

Great. Thank you so much.

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

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

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