Good morning, everyone, and welcome to the Addus HomeCare's Fourth Quarter and Year End 2023 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Dru Anderson. Ma'am, please go ahead.

Thank you. Good morning, and welcome to the Addus HomeCare Corporation fourth quarter and 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 2024 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 fourth 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 fourth 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 quarterly 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 three of us would be happy to respond to any questions. Yesterday we announced our results for the fourth quarter and full year of 2023. These results highlight another strong year of financial performance by Addus. This performance is made possible by the hard work and dedication of all of our employees as they continue to provide quality care to our clients and patients by helping to fulfill our mission of taking care of people in their homes. I am both amazed and thankful for all of them that our employees do for our company. As we announced yesterday, our total revenue for the fourth quarter of 2023 was $276.4 million, an increase of 11.9% as compared to $247.1 million for the fourth quarter of 2022. This revenue growth resulted in adjusted earnings per share of $1.32 as compared to adjusted earnings per share for the fourth quarter of 2023 of $1.11, an increase of 18.9%. Our adjusted EBITDA of $34.3 million was an increase of 21.3% over the fourth quarter of 2022. Our total revenue for 2023 was approximately $1.1 billion, an increase of 11.3% as compared to $951.1 million for 2022. This revenue growth resulted in adjusted earnings per share of $4.58 as compared to adjusted earnings per share for 2022 of $3.73, an increase of 22.8%. Our adjusted EBITDA of $121 million was an increase of 19.3% over 2022. During 2023,…

Thank you. Dirk, and good morning, everyone. Addus had a very strong financial and operating performance for the fourth quarter, marking a strong finish to a record year. Our results were driven by robust demand for our services, led by 11.2% year-over-year organic growth in personal care services revenue, well above our normal expected range of 3% to 5%. For the year, Personal Care revenues were up 12.1% compared with the prior year, a record annual rate of growth for Addus. This impressive growth reflects both higher volumes as well as the benefit of ongoing rate support for our Personal Care services. Our fourth quarter results included a full three months of operations of Tennessee Quality Care, a provider of home health, hospice and private duty nursing services, which we acquired on August 1st, 2023. The integration process has gone as expected and we are excited about the opportunities to serve more patients in this strategically important market. Acquisitions remain an important part of our growth strategy, especially situations with a profile similar to Tennessee Quality Care where we have the ability to leverage our strong Personal Care presence and add clinical services. We are optimistic that we will see additional attractive acquisition opportunities in 2024, as we gain more clarity on pending reimbursement issues and other regulatory changes that could affect Addus and our industry. We were pleased to see positive year-over-year trends in our hospice business during the fourth quarter with increases in revenue, average daily census, length of stay, patient days, and revenue per patient day inclusive of our Tennessee Quality Care acquisition. While we did see sequential growth in same store admissions of 2.7% between the third quarter and fourth quarter, our ADC declined slightly between the quarters on a higher number of discharges. Same store…

[Operator Instructions] And our first question today comes from Joanna Gajuk from Bank of America. Please go ahead with your question.

Thank you. Good morning. Thanks for taking the questions. So I guess first maybe on the quarter results, and I guess as it relates to '24, which you don't give specific outlook, but just to get a sense of Q4 margins were above 12%, right, clearly outperformed here, and up 100 basis points year-over-year. So I guess you outlined a couple of different things, I guess the bad debt benefit seems like you don't assume it's going to persist, but I guess outside of that, how much of this margin improvement is sustainable? And when we think about '24 as a full year, I understand you talk about Q1 being a weaker quarter, especially sequentially, but as we think about the full year, is 11.4%, I guess, that you reported in '23 as your adjusted EBITDA margin, is that a good starting point for the full year '24? How should we think about the full year? Thank you

Yes, Joanna. I think, I obviously gave a little bit of color on expectations sequentially from Q4 to Q1. You're right on just -- typical seasonality with payroll taxes and merits, we typically see our lowest margin in Q1. We typically see that kind of ease through the year. I think we would expect to see that again in 2024, but I think, with not expecting, I guess, for the same cadence of rate increases on the Personal Care side in '24 that we've seen, we expect margins to be fairly consistent. But I think part of the wildcard there is, how successful we are at acquisitions. If that mix of the clinical business continues to creep up, that's obviously going to be beneficial overall to margins, but otherwise, we would expect this to be a fairly standard year in '24.

Thank you. And I guess follow-up to that, when it comes to the rate increases in Personal Care, previously you talked about the rate increase you expect in Illinois on January 1. Any other states with rate increases and I guess what kind of average rate increase, excluding Illinois, do you expect for the year and going forward?

Yes, I think currently, right now, we don't see any other material rate increases from states that are currently scheduled. I think as we move through the year, obviously, that's always kind of subject to change. We did recently receive notice we're going to get another rate increase in our VA program, which is the federally funded program. That'll impact us in a few of our markets, but nothing else really, probably to note.

Yes, I think, one of the things that we have said for a number of years is we wanted to get back to where -- when you look at our Personal Care growth rate, you had about half to two-thirds in volume and the rest in price increases. And -- while during the pandemic, we saw that shift and mainly get price increases as far as our growth, we have seen that start to revert back to normal. So for 2024, we expect that to be the case. About a third of our growth will be through rate increases. 50% to two-thirds of our growth should be through volume increases.

And I guess to that end, since you mentioned it, is it fair to assume you're kind of 3% to 5% organic growth for Personal Care that you've been talking about in the past, is that a fair assumption for '24?

Yes, I think obviously getting another rate increase in Illinois. We talked about some of the margin profile that previously -- not expecting a lot of pass-through, but it is still a nice rate increase, one of our largest markets, but I think our expectation this year, 2023, we were obviously over double digits all year, not expecting to see that same rate in '24, but would expect to be toward the top end of that 3% to 5%, if not slightly above for '24.

And if I may just squeeze the very last one on the cash flow flowing up very strongly in Q4 and the year. So I guess if you adjust for the ARPA funds utilization, so it's almost like 100% EBITDA conversion in -- for the full year. So how should you think about this cash flow conversion going forward? Is that sustainable? Or how should we think operating and cash flow for '24 and going forward? Thank you.

It's not going to be at 100% rate. We got some very positive working capital tailwind, I think, on our cash flow in '23. We wouldn't expect that. Obviously, that's not sustainable long term. But I think we've talked about our cash flow conversion in the past of being 75% to 80% of kind of adjusted EBITDA, which I think is pretty consistent expectation for '24.

Thank you.

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

Thanks. Good morning. Appreciate, Dirk, all the comments you gave us, just on the final rule and -- I thought your tone maybe sounded a little more positive as we're getting closer to the final rule here in terms of maybe some potential flexibilities that will be included in the final rule, and then just tone around deploying -- continuing to deploy capital into the personal care market, sort of as we move past this final rule. First, I want to get a sense of whether that's accurate. And then I thought it might be helpful if you just wanted to talk about when you see the final rule, maybe what would be some of the key changes specifically that you'll be looking for that you would view as sort of milestones that would keep you confident in deploying capital for the long term in the personal care market?

Yes. Scott, thanks. We are more positive about the Medicaid Access rule. We think there has been a number of comments from various stakeholders, including a number of the states, a number of which we mentioned to you before were democratic states that are close to the Biden administration. I think the thing that we all understand about the Biden administration is they're very supportive of the personal care industry. They want to make sure that our elderly and disabled population have greater access to care, not less care. And so as we continue to work through the comments of the rule and look at our own situation of how we would operate if the rule at various aspects are put in, we become very bullish on the fact that this industry is going to continue to grow. It is going to be one that we believe will be supported by the states. We believe state programs will look at any final rule. And again, realizing that just because the final rule is published doesn't mean that'll ever get in. There'll be legal challenges and other things that will go through. But as we prepare going forward, we're doing things such as creating more efficient ways of scheduling. We're putting dollars into our ability to take some of the cost out of scheduling and to be more effective in our cost basis so that whatever structure that comes through, Addus will be one of the survivors of the industry and we would grow -- as we did -- as you kind of saw through the situation in Illinois when that percent was put in and larger providers were able to operate very effectively and gain market share through the period. So for us, we're doing things along investments into scheduling, investments into recruitment and retainage, our value-based investments. And then also, we're really focused now on the -- both the backfill acquisition opportunities we're seeing, as well as some of the larger opportunities we expect to see, which could take us into new markets for Addus, but in such a manner that would start in a material way, because we believe the large providers -- as I stated in our script, we believe the large providers are going to have a tremendous benefit in the personal care side as this rule -- if this rule is ever put into place.

Okay, got it. And just as my follow-up just on the business. Just, we'd be curious if you wanted to maybe drill a little bit into how you're thinking about hospice segment margins for 2024, obviously, had the rate increase effective in 401. So maybe how you're thinking about sort of that rate against maybe how you're thinking about cost per visit for hospice. And then with some of the volume trends, how you're thinking that could translate into margins for hospice? Do you think this could be a year for margin expansion in hospice, or you're targeting -- trying to hold margins relatively constant?

Yes, Scott, I can take the first part on the margins, and I'll let Brad talk a little bit about just some of the volume expectations. But I think obviously with a 3.1% increase, our typical merit is probably around that 3% range. Obviously, wages aren't 100% of our cost basis, so there's probably a little bit of pull-through there. But I think our expectation overall is not to really see material margin expansion in hospice, but to maintain maybe a little bit, like I said, of pull-through. But I'll let Brad talk a little bit about kind of volume expectations for this year.

Yes, Scott, on the volume side, if you look at our year-over-year results, we were essentially kind of flattish on the volume side. Having said a lot of that was due to some -- has pretty heavy discharges in Q4. We expect with the strong admission volumes that we've seen over the past couple of quarters, that'll start translating into some ADC growth. So I think we're kind of looking in that 5% to 7% revenue growth for the hospice segment.

Okay, got it. So it sounds at the top end of that, Brad, pretty evenly split between rate and volumes for - with a 3% rate increase.

Yes, roughly.

Okay. Thank you.

Our next question comes from Brian Tanquilut from Jefferies. Please go ahead with your question.

Hi, good morning, guys, and congrats on the quarter. Dirk, maybe as I think about your M&A philosophy, I understand obviously staying on the sidelines right now, given the regulatory uncertainty. But how are you thinking about if the rule comes out and the 80% rule goes through, is that the opportunity point given maybe distress or concerns among other players in the space? Or does that preclude you from getting more aggressive and -- as you wait for finality on the rule? How are you thinking about that?

I think once we have a final rule, we're of a size and have financial flexibility enough, that we're going to operate, I think, very effectively in whatever rule comes through. So what we'll do, we'll wait and see what the final rule is. We'll also have to understand the particular challenges that may occur with those rule. But once it comes out, we've started thinking through how do we grow our business in what particular markets. There will be certain states that will be more advantageous for us to look to grow in. There may be some states that we'll have to wait and see what the various Medicaid programs in those states try to do us -- think to do in response to any particular rule. So I think for us, just the hack that we have a final rule, even though we know it will be challenged by various states, will allow us to then refine our strategy and continue with what we're doing. And as I mentioned, we're already starting to do some of the things that we think will make us successful in whatever the rule is, and that is investment in technology, as it relates to scheduling, trying to take cost out of the back office in our scheduling, looking at how we can more appropriately use the caregivers we have and give them more hours, which will help both with retaining them as well as recruitment costs for new folks. So we're pretty excited. Obviously, we would rather us -- be able to have a little more flexibility depending on the state in which you operate. And we hope that's where the final rule goes. But we're prepared to operate in any manner in which it is finalized.

No. I appreciate that. And my one follow-up, as I think about your comments on value-based care and trying to get -- make inroads there, what does Addus need to do? Whether it's investment in capacity or investments in capabilities or expansion of service lines? I mean, what will you as a company need to do to gain traction and really get the ball rolling there?

Well, I think, if you look at our value-based programs that we've been in several for two years now, and we've collected a lot of favorable information that we believe will be useful in demonstrating value to manage Medicaid that has full risk, but then also potentially Medicare Advantage as well. I think Dirk alluded to in his comments that we have recently implemented a new case management software that's going to allow us to scale that program, I think significantly it'll also allow us to do some analytics that we haven't had access to before that I think will help further improve the outcomes that we've already demonstrated. So I think there's a real opportunity there. What we have found is kind of interesting is it really starts with personal care in the home, and the information that we can collect from our caregivers regarding the clients that we're serving, can really influence the outcome. So we're very positive on where the value-based program is going and we'll continue to invest in it.

Awesome. Thank you, guys.

Our next question comes from Ryan Langston from TD Cowen. Please go ahead with your question.

Hi. Good morning. Just a couple of quick ones for me, I guess maybe, Brian, how do we think about the progression just quarter to quarter seasonality from these union negotiations maybe outside of the first quarter detail there? And then it looks like billable hours per employee in PCS just continues to kind of steadily move up a little bit sequentially. I understand certain markets have caps on allowable hours and things, but how do we think that may be progressing over the next one to two years?

Yes, I'll take the first part. I'll let Brad talk about the hours per caregiver. But on the union side, I think really we've talked about the impact that's going to kind of come through with the Illinois rate increase Jan 1. We made some concessions there, enhanced benefit packages for those employees. So we're not expecting to see much of any real margin kind of pull-through in Q1. But there's really no other seasonality. Once that's kind of in, it's in. There's no kind of adjustment Q2, Q3. So wouldn't expect to see any other adjustments up or down kind of through the year. It should be whatever we kind of see in Q1, which we've kind of indicated what we think that will look like, should be pretty static for the year.

Yes. And then when you're looking at the hours piece, we have seen improvement in what we call our service percentage or fill rate. A lot of that is due, I think, to some of the initiatives that we've put in place this year to really refocus on scheduling clients and caregivers. We still have room to go, as far as you alluded to, kind of the cap, which is the authorized hour. We still have -- continue to have some opportunity there to improve those numbers.

Got it. Thank you.

[Operator Instructions] Our next question comes from John Ransom from Raymond James. Please go ahead with your question.

Hi, good morning. This small part of your business, but this relentless mix shift, and payer mix in the home health business, Dirk, do you think, I mean -- the two of the big M&A payers of -- or to just think acquisitions of home health, and so they're going to push some stuff. But do you think once they've adjusted these mergers and have figured out how much they can allocate to their internal home health, does -- is there any sort of daylight in your opinion on the rate -- on rate relief? And then secondly, does it help to have personal care and hospice to trade when you have these discussions, or should we just expect kind of this just continued relentless shift to keep going and the payers to kind of stick with a relatively low kind of per visit rate, calculation?

You Know, I think they'll continue just for home health companies, I think they'll continue to be pressures as the percent of Medicare beneficiaries move more toward Medicare Advantage and away from pay-for-service. I think we've seen that in the last couple of years. I think the great thing for us, remember, home health is 6% of our business. It's not a business that it -- when we look to what home health is for us, it's an important part of our business, but it really works with value-based care for us. It works to supplement what we do on our personal care side. So for us, we're able to sit across in those markets where we have all three levels of care, specifically as it relates even just to personal care and home health. We're able to use our personal care coverage across the state as leverage with our payers to help us drive rates to a more appropriate level, much more so than in those markets where if we just would have home health by itself. So while the big acquisitions, while the big payer certainly going to continue to affect the market for a long period of time, it really doesn't affect Addus much at all, just because of our locations and the size of our home health and what we really are focused on, which is building our personal care business, our value-based business, and using clinical services on top of that to help supplement that particular growth.

Great. And then my follow-up, and again, these are recognized, this is not personal care. But do you all think that the pandemic induced changes in hospice and also kind of the mortality, we lost too many seniors in 2021, 2022, but do you think hospice will normalize and go back to its old growth rates? Or is there something also structural there that just means that it's maybe a less growth business than it used to be?

Well, I do think there was a lot of structural changes that happened to hospice during the pandemic. You had the accelerated death rates of the elderly population that normally would be your clients in hospice down the road. We have expected this to return to a more normalized level the last couple of years. And we're still at times, struggling with some of the things that have occurred, as far as trying to get back to that normal rate. But I will say this. I do believe it will get back. I believe hospice is a much-needed service. And I think as we continue down the road, you'll see the admissions rate level out and become back more to what we were expecting. I think you'll see the ADC growth start to be more consistent than what we've seen maybe in the last couple of years. I mean, even in our business, as we've seen it, while we've struggled with things such as making sure we could hire enough caregivers, that's been a challenge the last couple of years. But we're starting to see, on the hospice side of our business, it really start to level out a bit. I mean, we had 3.1 -- 3.5% growth while our ADC was down. As Brad mentioned on one of his questions, we had a extraordinary number of discharges in the fourth quarter, above what we have seen historically in our company. And we don't expect that to continue. So once that comes back, we believe that hospice will get back to where it was prior to pandemic levels.

All right, thanks so much.

Thank you, John.

And, ladies and gentlemen, I'm showing no additional questions, we'll be ending today's question-and-answer session. And I'd like to turn the floor back over to Dirk Allison for any closing remarks.

Thank you, operator. We want to thank everybody today for your interest in Addus and for being part of this call. And we hope that you have a great week.

And, ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.