Good day, and welcome to the Addus HomeCare's First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [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 first quarter 2024 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 first quarter 2024 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 2024 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 quarterly calls, I will begin with a few overall comments and then Brian will discuss the first 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 first quarter of 2024. These results highlight continued strong 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 individuals in their home. As I have said many times in the past, I'm very thankful for all the employees -- for all that the employees do for our company. As we announced yesterday, our total revenue for the first quarter of 2024 was $280.7 million, an increase of 11.6% as compared to $251.6 million for the first quarter of 2023. This revenue growth resulted in adjusted earnings per share of $1.21 as compared to adjusted earnings per share for the first quarter of 2023 of $0.97 an increase of 24.7%. Our adjusted EBITDA of $32.4 million was an increase of 24.6% over the first quarter of 2023. During the first quarter of 2024, we continued to experience strong cash flows, allowing us to reduce our debt balance to $101.4 million. At quarter end, our cash balance was approximately $77 million which together with our availability under our existing credit facility continue to give us the financial flexibility to be opportunistic as we see potential…

Thank you, Dirk, and good morning, everyone. Addus had a strong start to 2024, continuing our momentum with an impressive financial and operating performance for the first quarter. Our results included solid year-over-year organic growth of 9.3% in Personal Care Services, well above our long-term expected range of 3% to 5%, but in line with our expectations. This growth reflects steady volumes as well as continued favorable rate support for Personal Care Services in some of our larger markets. We were pleased to see consistent positive year-over-year trends of our hospice business in the first quarter, inclusive of our Tennessee Quality Care acquisition. Our hospice same-store revenue growth of 5.8% was our third consecutive quarter of sequential increase and the highest percentage increase we have seen since prior to the COVID pandemic. We continue to see favorable admission trends as we have experienced three consecutive quarters of sequential same-store admission growth. Same-store revenue for our Home Health Services, which is 6% of our business, was down 15.1% from the same period a year ago as we continue to intentionally limit admissions from payers with less favorable reimbursement rates. We remain focused on maintaining a consistent margin profile in our Home Health business as it complements our Personal Care and Hospice Services. Acquisitions remain an important part of our growth strategy with our primary focus on markets where we can leverage our strong personal care presence and add clinical services or enhance and expand our personal care services in strategic geographies. With our size and scale and the support of a strong balance sheet, we are well positioned to execute our strategy, and we are optimistic we will see attractive acquisition opportunities in 2024. As Dirk noted, total net service revenues for the first quarter were $280.7 million. The revenue breakdown…

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

I guess my first question for Dirk or Brian, as I think about your comments on acquisitions and obviously the rule is out now, how are you thinking about the kinds of assets that you'd be interested in? Would you be focused more on the personal care side or is it still an interest in the home nursing side and then maybe sizing? I hear it loud and clear you want scale and density, so just curious how you're approaching the acquisition strategy here?

Yes, Brian. I think our focus remains largely on continuing to bolster our personal care services in markets that we currently operate in. I think with the 80/20 rule, the access rule, I guess, is the more formal term for it out now. It's clear to us that size and scale is going to be important. I think we've always kind of had that approach generally anyway, but this further reinforces that in our mind. So I think acquisitions in Personal Care that continue to build scale in markets we operate in today are important. We also would look at selective additional markets if we could enter at scale would also be, we think, good opportunities for us. And then where we can continue to add clinical services, where we have strong personal care to help with some of the things we're doing on value based is also still important to us. So I think those are kind of our focus areas, but I'll let Dirk add a little color if you'd like.

I think that's great. I think the real key with the Medicaid access rule that we've seen is we do believe to emphasize what Brian said, we believe size is important. And so we'll be looking to add backfill in markets in which we currently operate. But at the same time, we're looking for new markets in states where we are today, again, with the qualification that we could enter with size.

Understand. And then maybe, Brian, just any comments or color you can share with us in terms of how we should be thinking about the sequential change in trajectory in earnings or revenues for Q2 and into Q3 as well?

Yes. I think from Dirk's comments, I think particularly in personal care and hospice we had a little bit of probably volume softness early in the quarter, hospice coming off of the holiday season, a little bit of weather impacted our personal care services early, but we actually saw nice growth through the quarter and into April and into Q2. So I think, we would expect that trajectory to continue. So I think we feel good where we are coming out of the quarter on the volume side. And just thinking about it from a margin perspective, obviously, we have a reset in Q1 traditionally with payroll taxes and our annual merit increases. Keep in mind, most of those go into place March 1, so not a full quarter impact. A little bit will go into Q2 for the first full quarter there, but we also get a little relief on the payroll tax side Q1 into Q2. So we would expect margins to remain relatively stable Q2 into Q3 and then Q4 is annually always the best margin for us as we get our hospice rate increase with no offsetting costs for those three months.

The next question comes from Scott Fidel with Stephens.

I had a couple of follow-up questions just on the 80/20 rule I wanted to ask you. The first would be, if you've been able yet to come up with sort of what the overall adjustment would be that you think you can make on gross margin when considering the add backs and some of these other exclusions in terms of how that would compare when thinking about I guess the sort of 80/20 rule adjusted gross margin for Personal Care compared to your GAAP margin in personal care?

Yes. I think, obviously, as we stated, the changes that came out in the final rule around some of the expenses and revenue definition were very positive, will be helpful as we go forward. We still, let me make sure you understand this. We still believe that the 80/20 rule is difficult for smaller providers. But for a company our side, we feel very confident, especially when you consider the fact that this is a six-year implementation that between market share growth, which we anticipate will occur in all of our markets due to this rule, along with our ability to invest in technology and do some of the things we're looking at on the cost side, we believe we'll be able to handle any impact that the 80/20 would have on our margin over that period of time.

And then one other on the rule. As we've been doing some checks on this, we've been getting some feedback that would seem to suggest that revenues that are based on value-based care contracting may have different treatment in the rule and may could be sort of largely sort of not affected by the rule. Dirk, just and Brian, just interested in sort of how you guys are ascertaining that piece in terms of the value-based care? And then also if that's the case, whether there will be more opportunity you think to shift more of your revenues to value-based care contracts, whether it be with payers or even with sort of how the states are structuring their contracts?

Hey, Scott, this is Brad. That's our understanding as well that the value-based care revenue is excluded. I think there is certainly an opportunity and it's something that we've been doing before the rule was implemented is working on those value-based arrangements, looking at being able to scale those. From a payer appetite standpoint, there's a lot of appetite out there for these types of arrangements. So that is certainly an opportunity that we'll be looking at, not just because of the rule, but just because I think it just makes good business sense overall.

And also, Scott, to follow-up what Brad said, it's one of the reasons we're looking in markets not only where we operate today, but potentially in new markets, where there might be real opportunity to work with providers in a value-based care approach. So, that's another part of our overall acquisition strategy.

Well, certainly, it seems to validate some of the investments that you've been making on the BBC side in Personal Care. And Dirk, just on that sort of other part on thoughts on sort of the potential for states to start maybe moving over to sort of structuring these more as value-based or some level of risk sharing in them. Obviously, in other business lines across both Medicare and Medicaid, we have a tremendous amount of that going on. So just curious if that would be a sort of key area of focus for Addus in terms of, I guess, communicating some of that opportunity maybe and it just modernizes the contracting anyway around personal care too?

Yes. It's something we started three or four years ago. We really were on the front end of seeing that payers wanted to start looking at a different way of having these contracts. Some of the states were moving towards that direction. So we made the investment. We talked about that this is the first full quarter with our new technology, our software system. One of the limiting factors we had before on our ability to grow value-based care contracting was the fact that a lot of it was still done manually, while we were looking for the system. Now that, that's we believe we will have additional opportunities grow that business, and it will continue to be a focus of Addus along with the other things that we're doing. But certainly, value-based care is one of the main reasons why we're trying to get size and coverage in a state.

And then just one quick follow-up just on that sort of size and scale point you're making. So currently, Addus is in 21 states for personal care. Obviously, you've got a few states like Illinois that drive a lot of the revenue. So you definitely have some of the smaller states as well. And is there, maybe give us an update just on you’re thinking around, are there some of those 21 states where you think you may need to exit because of the rule? And if you have a sort of estimate on, I guess, what the revenue contribution would be from those states that may no longer be sustainable under the new rules? And that's it for me. Thanks.

Yes. I think the difficulty, Scott, in determining whether or not a state is viable today is we don't know over the next six years what's going to happen with the payment rate of that state, the various rules required. We do know that most states in which we operate and I'd say in all the states we operate, the program is very valuable to the state, to the Medicaid program. So today, there are some smaller states we're in that we'll be looking at and we'll be monitoring to see how they change. But I would say as of today, there's no state that we've identified that cannot be successful in this particular with this particular rule.

The next question comes from Andrew Mok with Barclays.

Just wanted to follow-up on the 80/20 rule. First, despite some of the changes in the final rule that you're more constructive on, it still sounds like there's still a fair amount of uncertainty hanging over the industry and even the likelihood that this gets finalized in six years or so. So, one, are you able to share with us a preliminary estimate of the unmitigated impact of the rule as it impacts your P&L today? Thanks.

No, we can't because, again, with so much still out there, we're still looking for clarification of definitions. We're talking to states about what they're going to do as it relates to the rule. It would be unfair to try to give a number because, again, with a six-year time frame, there is so much that will change, not just with Addus but with the states themselves. So what we're approaching it from is truly standing back, Andrew, and saying with our size and coverage in our markets, we're going to be fine. And the way to be for us to work with this rule is to continue to do the things that we've been doing, grow our markets in those states, look at our technology and try to get more efficient with our cost basis. And one thing that I think people are truly probably missing, the fact is market share growth, as small providers are not able to work under this rule, and we believe strongly that is a problem as exists today. And as you bring margin from that market share move, you will mitigate the issue related to your margin with this rule.

And then it sounds like one of the big definitional swing factors of the role of the clinical supervision. Do you have a sense for how much clinical supervision costs are sitting in your G&A line today that would potentially be reclassed to direct care for the purposes of the pass through adjustment? Thanks.

Well, I think the difficulty there is what's the definition of clinical. I think some of the folks in there's different thoughts in the industry as about what may qualify in that particular line and so we don't know today, we don't have enough information from the rule to tell you exactly what that percentage would be. We can't tell you it will be positive. So I think that's certainly one of the nice changes in the rule as the clinical supervision salaries have got put into the definition, which will be helpful as we continue to mitigate any issues.

The next question comes from Jared Haase with William Blair.

I'll maybe ask one just sticking with value-based care opportunities and appreciate the comments around having the technology system in place to sort of help that scale. I was hoping are you able to kind of level set for us just today kind of what the penetration is within your book of business in terms of value-based contracts either on a sort of percentage of revenue basis or maybe the number of partners that you have in a value-based contract? And then having the technology system in place, do you have a sense as to maybe how quickly that could scale over the next handful of years?

Yes. On the value base, as Dirk pointed out, this is the first quarter where we've had our new IT software in place that allows us to really start scaling this program. We currently have seven value-based contracts in effect, and we certainly could add more. There's not a there certainly is not a lack of interest in doing it. And we're talking with several of those payers about actually expanding those programs. We cover currently a little over 6,000 clients that are in value-based arrangement. From a revenue standpoint, still immaterial, but there is certainly, I think, this is an opportunity to grow. As I mentioned, we have several payers that we're currently in that are very pleased with how these arrangements are working and are looking for us to actually expand those significantly.

And then, maybe I'll just ask a follow-up on the home health segment. And it sounded like from the prepared remarks, there's some process improvements you guys are implementing. I think you mentioned around staffing and referral conversion rate. So would love to just hear a little bit about maybe what some of those workflows look like from an improvement perspective. And then also sticking with kind of the referral dynamic, if you take a step back and think about all the sort of structural pressures facing Medicare Advantage plans on their rates and MLRs and some of the issues that they're working through. Have you guys noticed any changes just in terms of post-acute care referral trends with those plans? Are they getting a bit more restrictive in terms of prioritizing quality with the post-acute care providers that they're referring to? Anything really changed on that front?

Yes. First, I'll start with the home health process improvement question. If you think about our Home Health operations, it's certainly our smallest segment. It's the one where we've done a handful of acquisitions, and now that which are necessarily characterizes kind of a platform acquisition. And so when you think about kind of integrating and looking at process within that segment of our business, there's certainly a lot of opportunities to really get more consistency in how we do things. And so we're looking at, one, looking at centralizing intake, looking at centralizing scheduling. And when you say centralizing, it's really kind of focusing at these are your tasks, whether you're in the office, in a central office or in a office out in the field, this is what you do to really kind of increase that, the efficiency of that workflow. And particularly on the intake side, we think there's certainly opportunities to accept more cases and improve those conversion rates. So looking forward to that project getting completed, I think we're looking at kind of Q3, Q4 to really get that wrapped up, but very optimistic on where we stand with home health. And when you look at on the referral process, we really haven't seen significant changes or any changes related to Medicare Advantage focusing on just a handful of providers, if you will. We still get a lot of referrals from payers on the Medicare Advantage side that we're not going to accept just because rates aren't there or we're going to prioritize where we have episodic rate.

The next question comes from Ryan Langston with Cowen.

Just following up maybe on Brian's earlier question, in terms of kind of the scale you would need to get into a new market. I guess, if you did move into a new geography, especially in the PCS side. How do we think about that in terms of necessary size, whether it be revenues or maybe comparable to maybe recent deals like [PQC] or other size parameters? Just so we can get a sense on maybe the minimum scale that you believe you need to move into a new [indiscernible]?

Well, to go into a new market, we would really like to see either immediately or a clearly defined time line to get to the top one or two market share providers in that particular state. We believe you need to be very large. We believe you need to have the ability to have a voice with the state. So if you see us entering into any new state, I think you can assume. And again, remember, states are different. So it's hard for you to give you us, to give you a revenue because what might be a number one market share in one state certainly might not be in another. But in those various states that we're looking at, we would like to be number one or number two going into the market.

And then just one more for me, maybe more of a philosophical question. Obviously, in the New York State budget, there were some changes to the CDPAP program that's coming in the '25 budget. I know that it's kind of low single digit operating income exposure, but still a pretty decent sized state, I think the third largest in terms of revenues. I guess, do those changes and kind of maybe just some of the tone that the Governor took maybe, does that change your longer term strategy in the state going forward? Or is it kind of just steady state from here?

Well, realize that CDPAP is about 4% of our overall revenue. It's a very small part. I know you say that's material, but it's for us, it's very small. It's a very, very low single digit margin at that from an EBITDA standpoint, and that's not even from a bottom line standpoint. So for us, as we look at New York, it's they've tried changes before. I think three or four years ago, they were going to minimize the number of folks in CDPAP. That never got implemented. I think for them to go to one EFI by the end of, by the beginning of April of next year is going to be a really a tough task. So for us, we're going to continue to operate and do the best we can in that market. But just understand that it is one of our, one of the markets where it's very difficult for us and it's not, from a strategy standpoint, it's not a market that we can do the things we're trying to do, which is three levels of care and value-based care. So from that standpoint, it takes a backseat as far as acquisitions and other items and investments.

And squeeze one quick one in. Hospice revenue per day up I think 3.7%, that's pretty strong, certainly above the latest fee for service Medicare rate. Anything to call out there maybe in terms of acuity changes or geographic distribution, anything else there?

No, Ryan. I think we obviously have a little bit of mix shift pretty consistently, so there's a little bit of contribution there. But I think overall in hospice, we saw a little better implicit price concession to some of our revenue adjustment in the quarter. And the quarter than what we maybe saw the same quarter last year. I think that was beneficial this quarter to a certain extent.

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

I guess first a follow-up here on the margins and I guess some of the cost items. So gross margin in the quarter was especially in line with your prior quarters with your prior comments on the Q4 call and but EBITDA was better. So good G&A was really there at the source of assets here. So excluding stock comp and acquisition expense, right, you mentioned G&A was very close to 20%. It sounds like there's some timing, but how should we think about the next couple of quarters? It sounds like maybe that's a, it's a low point from here, we should expect some increase in that ratio?

Yes, Joanna, I think we've been at just under 20% on adjusted G&A for the quarter. I think as I mentioned earlier, our merit increases and some of those costs typically come in on March 1. So you haven't seen a full quarter impact and majority of those are through our corporate staff, our branch staff, our G&A line, not a direct cost. So you'll see a little bit of that go into the first full quarter in Q2. I think overall as a percentage of revenue, we would expect adjusted G&A to kind of still be in that 20%-ish. It might be a little tick up from what we saw in Q1, but fairly close and consistent.

And the other one in terms of volume, so you said maybe some weather impact in question occurred, by about Southwest you kind of exit the quarter, kind of back to where you thought it would be. Is that the way to think about it that kind of this was a temporary and maybe you've accrued some of those last visits and kind of what your thoughts, updated thoughts for the whole year when it comes to personal care volumes?

Yes, I mean, if you look on the PCS side, a weather event, if you have a snow or an ice storm, particularly in kind of some of the downstate Illinois markets or on some of the more rural markets, a lot of times caregivers can't make those visits. We attempt to try to reschedule those, but that's challenging and you can only reschedule that within depending if it's a weekly auth or monthly auth determines when you can reschedule or have an opportunity to. So it's unfortunate. I'm always rooting for bad weather on the weekends in those markets because I'm an operator. Unfortunately, we had some that is kind of early in the week. Mondays are worse than it would be if it's on Friday. So again, kind of a temporary blip. But if you look at just where we progressed throughout the quarter on PCS, January was impacted by the weather events, but we saw a nice pickup in February and actually exited pretty strong in March and expect those trends to continue. And if you look at our hiring numbers as well, kind of mirror that. January was a little soft because of, frankly, the weather impact there. We actually had nice hiring in February and frankly followed that up with what really was record hiring in March, and our April hiring numbers were solid as well.

And if I may, just follow-up on the discussion around the 80/20 provision in the access reg. So indirect specifically CMS actually did say something along the lines of they expect the states to look at the rates, right, to see if they are actually positioned. I mean, there's a lot of requirements now, different requirements for states to disclose that information and keep updating those. So do you expect states to actually, if forced to waive rates to ensure they're essentially not provided to deliver the care account because obviously if they don't insured access, you know, they will end up, paying, higher or sending more money for some of these, seniors of people with disability that end up in nursing homes, right? So how do you think about this, forcing some states to improve rate?

Yes. Joanna, I'll start and Dirk may add some color to it. From a, that's one of the aspects of the rule that I think we like others in the industry are in favor of. I think having more transparency around how rates are calculated and formulated by states is very important. I do think there will be some pressure on states to raise rates. Because as you point out, the alternative is actually putting individuals in a much more costly institutional setting. So I certainly think there's opportunities over the next six years to really work with states in where those rates need to be in order to be able to maintain the programs at their current status and frankly, and to try to grow the personal care programs in those states.

And then, the last one is, so you mentioned there's obviously some clarifications in the rec around some definitions and denominators and things like that, but there sounds like there's still some additional clarity that you might be expecting. So is this something you expect to come out from the states? Because that was another element of this regulation, right? CMS gave a lot of authority or flexibility to the state to, when it comes to that 80/20 provision. Is that how you read it? Like there's going to be more information coming up from the states and that's when you could kind of be more clear when it comes to like what exactly is happening. But obviously, since this has been six years, you might not hear about it for a while. But I guess, I want to say indirect it also talks about that the states have to say or, I guess, prove that they are ready for it in four years or something like that. So would that mean that we kind of like, four years from now, we hear more details or are you thinking it's going to be sooner than that? Thank you.

Yes. I think, unfortunately, the way states tend to work is they wait more to the back end. So I don't expect to have any near-term clarification on some of those elements in the rules. And as you point out, there were a lot of provisions that were left open for the states to determine and have some flexibility with. And CMS said that they would provide, I think, technical assistance to help the states go through that process. But this is something that I think states will it's just reality is they'll probably take a little bit of a wait and see approach, even though some of the significant provisions for them actually kicked in four years. But I don't anticipate getting anything in the near-term. I think we'll be kind closer to the back end of that four-year period.

Yes. Usually, these governments work when it comes to deadlines, they were just very last minute. And if I may just squeeze the very last one, sorry, because there was also discussion around some of these specific elements called out in this regulation and I would check to buy some larger companies estimated adjusting for the supervisory cost. This is okay. Could be, you know, like, 500 basis points for them? So I know you're not willing to give specifics, but would it be in this range or much smaller than that?

I think it depends on how companies are defining clinical supervision. To get to the number you specified takes a great deal of breadth in the definition for those of us that operate in the industry. So I'm not sure that we would, we're agreeable with that number at this point in time till we get more clarification. However, I think what we said earlier applies. The fact that they included CMS included clinical supervisory salaries in the definition was very helpful, and it will give us some relief towards the 80/20.

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 everybody for their interest today in Addus, and for being part of our call. Hope you have a great week. Thank you.

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