U.S. Markets closed

Edited Transcript of ADUS earnings conference call or presentation 7-Nov-17 2:00pm GMT

Q3 2017 Addus Homecare Corp Earnings Call

PALATINE Nov 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Addus Homecare Corp earnings conference call or presentation Tuesday, November 7, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian W. Poff

Addus HomeCare Corporation - CFO, EVP, Secretary and Treasurer

* R. Dirk Allison

Addus HomeCare Corporation - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Lalishwar Mitra Ramgopal

Sidoti & Company, LLC - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Addus HomeCare Corporation Third Quarter 2017 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 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 2017 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 forecast, 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' filing with the Securities and Exchange Commission and in its third quarter 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 President and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

--------------------------------------------------------------------------------

R. Dirk Allison, Addus HomeCare Corporation - CEO, President & Director [2]

--------------------------------------------------------------------------------

Thank you, Scott. Good morning, everyone, and thank you for joining us for our third quarter conference call. With me today is Brian Poff, our Chief Financial Officer. Let me begin with some overall comments and then Brian will discuss the third quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions.

I'm excited to share with you another quarter of strong operating performance and solid financial results. Revenues for the third quarter were $108.6 million compared to $103.5 million for the same period in 2016. Adjusting for closed locations, our revenue grew by 6.5%, which is up from $101.9 million in 2016.

Our adjusted earnings per share for the third quarter of 2017 was $0.42 as compared to $0.39 in the same period in 2016, an increase of 7.7%. Our adjusted EBITDA for the third quarter of 2017 increased 11.1% to $9.6 million or 8.9% of revenue. An important part of these improved results is due our ongoing process improvements, which are enabling us to increase our operating leverage. In addition, we continue to build our infrastructure to support both continued organic growth as well as acquisition growth.

Those of you who have followed Addus for some time know that we have been dealing with the financial status of the State of Illinois, which has negatively impacted our cash flow for a number of years. As we shared with you last quarter, Illinois has now passed a budget, which has enabled us -- has enabled the state to both pay providers on a past due non-Medicaid receivables as well as to keep more current with provider payments of Medicaid and non-Medicaid. The state has done a nice job of trying to catch up with past due amounts sending us over $90 million since this budget was passed. While the 2018 budget took positive steps to address the financial challenges faced by the state, there remains a lot of work to do in order to restore solid and long-term financial footing. Therefore, while we remain committed to serving residents of the State of Illinois, we will continue to pursue acquisition opportunities outside of Illinois to further diversify our revenue with the ultimate goal to reduce our Illinois business to under 35% of consolidated revenue.

Brian and I have shared with you that our goal for the same-store growth is 3% to 5% each year. This percentage growth target includes both volume growth as well as any pricing growth that we may be able to obtain from our states. The majority of our states have a fiscal year that begins on July 1. As of today, most of our states have started their new fiscal year, which includes any pricing updates for our service.

This year, we have seen a number of states give our industry a modest pricing increase, which is helpful in offsetting increased cost around minimum wage as well as new sick leave requirements in certain markets. Along with these increases, we did see a couple of our states pass-through minor pricing reductions due to budget shortfalls. Based on how these pricing changes finalize, we remain confident in our ability to continue to meet our goal of 3% to 5% same-store growth.

While we feel positive about our same-store growth target, occasionally, we face growth issues in a state due to changes in legislation. We are currently facing this issue in New York. A few months ago, the state made a change in the Wage Parity Law. For the first time, consumer-directed caregivers or those who take care of family members are now subject to the Wage Parity Law. This change was effective October 13. This change increased our labor cost on Long Island in that we had to work with our MCO partners to make sure we received an hourly rate increase to cover this cost. Our team has done a great job in obtaining hourly increases to help offset this change.

While most MCR -- MCO partners worked with our industry to resolve this issue, a couple of our MCOs decided to exit the market rather than increase the payments to providers, meaning we needed to help our consumers move to new MCO. On a number of occasions, the new MCO lowered the approved hours for our consumers, which has led to a loss of hours over the past few months in our South Shore division. This loss of hours seems to be leveling out, and we expect that we should begin to see growth again in South Shore over the next couple of quarters.

Next, let me update you on a recent acquisition in New Mexico. On August 1, we completed our purchase of Options Home Care. This is our first acquisition since we implemented our new due diligence and transition procedures. I'm happy to say that our transition of Option has gone very smoothly due to the great work of the Options and Addus team. Options Home Care has been fully integrated into all Addus systems and continues to grow as expected. We are very excited about this addition to our New Mexico market as it further strengthens our overall presence in the state.

Let me remind you of our acquisition strategy. Our goal as a company is to be in markets where we have or can create a very strong market position as we've been able to do in New Mexico. We feel this helps our sites grow as the state looks to providers who can service the needs of the entire state, which is especially important as we see more states outsource their personal care services to managed care organizations.

As MCOs assume more responsibility for these services, experience would suggest that they will in time reduce their networks choosing to work with providers that not only can cover the entire state but can also add services needed by the various patients. The focus of our acquisition strategy should position us for significant growth as we continue to work with both states and MCOs.

With this strategy in mind, we continue to be very active and disciplined as we look for potential acquisitions. We are well positioned, given we ended the third quarter of 2017 with over $45 million of cash in the bank and no outstanding balance on our $125 million revolver. We also have $80 million left in delayed draws on our $125 million term facility.

In addition to our Medicaid personal care business, we have stated that we are interested in growing the private pay side of our business. Today, we generate approximately $8 million in private pay revenue annually. Recently, we have completed a small private pay acquisition in Arizona and are close to completing another small acquisition for private pay in one of our other states. These 2 deals nearly double our overall private pay business and we believe position us for continued growth in private pay.

In addition to these 2 deals, we are currently in discussions with other acquisition candidates, whose service lines are more in line with our Medicaid business. While there is no guarantee that we will be able to close any of these transactions, our team remains very active in sourcing deals as well as completing due diligence.

Before I turn the call over to Brian for more detailed review of our third quarter performance, let me once again thank all the employees of Addus. We provide important and much-needed services to consumers at a very low cost, which enables them to stay in their homes where they prefer to be instead of progressing to much more expensive health care in a less intimate setting. The service is made possible by all the hard work of our 26,000 employees.

With that, let me turn the call over to Brian.

--------------------------------------------------------------------------------

Brian W. Poff, Addus HomeCare Corporation - CFO, EVP, Secretary and Treasurer [3]

--------------------------------------------------------------------------------

Thank you, Dirk, and good morning, everyone. I'm pleased to report that Addus had another solid financial performance for the third quarter of 2017. We continue to meet expectations with regard to our same-store revenue growth, and our margins continue to expand. As Dirk discussed, we completed and integrated the acquisition of Options on August 1, as scheduled, and Options results for the quarter were consistent with our expectations. We also remain engaged in evaluating additional acquisition opportunities in an active pipeline and believe we are well positioned to fund any transactions we might pursue. As a result, we are confident of our potential for further growth.

Net service revenues increased 4.9% to $108.6 million for the third quarter of 2017. This growth was driven by a 4.9% increase in same-store revenues adjusted for the sale or closing of the adult day services locations since the end of the third quarter last year, which is on the high end of our expected range of annual growth of between 3% and 5%.

The strength in same-store revenues is primarily due to solid growth in our northwest region and in Tennessee as well as continued expansion in Arizona and Michigan, 2 markets that continue to perform extremely well. Same-store and total net service revenues were also aided by the rate increase from Illinois and the contribution from Options Home Care. The combination of our organic growth and acquisition resulted in a 2.8% increase in billable hours per business day and a 3.6% increase in revenue per billable hour.

Our gross margin for the third quarter improved 30 basis points (inaudible) from 26.5% for the third quarter of 2016. We have continued to benefit from improved efficiencies in mileage and travel expenses, and we continue to focus on improving our cost controls related to direct labor and overtime.

G&A expense for the third quarter of 2017 declined 280 basis points from the third quarter last year to 17.8%. This decline was primarily due to the much higher level of restructuring expenses incurred in the third quarter last year as well as some initial revenue-driven operating leverage produced by the Options acquisition. Our bad debt was 1.9% of revenue as compared to 1.8% for the third quarter last year. This is an improvement of 10 basis points over our second quarter of 2017 bad debt expense. We believe we are continuing to make progress in our initiatives to improve our bad debt expense and anticipate further declines over the next few quarters.

The company's adjusted EBITDA grew 11.1% to $9.6 million for the third quarter compared with $8.7 million for the third quarter of 2016. Adjusted net income per diluted share was $0.42 for the quarter, a 7.7% increase from $0.39 for the third quarter last year. The adjusted per share results for the third quarter of 2017 excluded the following: M&A transactions expense of $0.04, restructure charges of $0.04, severance and other costs of $0.01, and noncash stock-based compensation of $0.04. Our adjusted per share results for the third quarter of 2016 excluded restructuring charges of $0.23, severance and other costs of $0.02, noncash stock-based compensation of $0.03 and a positive impact from normalization of the effective tax rate of $0.04.

We have now been working on restructuring Addus for the past 7 quarters. We feel we have made great progress with these efforts and are now near the end of this process. Based on our progress to date, we feel that our restructuring and severance cost should be largely completed by the end of 2017.

The company's tax rate for the latest quarter was 32.3% compared with 14.6% for the third quarter of 2016, largely due to the impact of the additional restructuring and severance charges on pretax income last year. We continue to expect our normalized tax rate to be in the low 30s.

We generated net cash from operations totaling $54 million for the third quarter and had $45.7 million in cash on hand at quarter's end. We had no debt outstanding on our $125 million revolver at the end of the quarter and $45 million in term debt. The payment of over $90 million by the State of Illinois drove a 39-day reduction in DSOs to 82 days from 121 days for the second quarter. DSOs for Illinois Department of Aging (sic) [Illinois Department on Aging] fell to 90 days at the end of the third quarter from 197 days at the end of the second quarter. We have yet to receive our prompt payment interest from the state of approximately $3 million, and we are still being affected by slower state payments to the Illinois managed care plans, although we are experiencing a normalization of cash flows from the state as a result of the new budget.

This concludes our prepared comments this morning. I want to thank you guys for being with us. I'll now ask the operator to please open up the line for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Mitra Ramgopal of Sidoti.

--------------------------------------------------------------------------------

Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [2]

--------------------------------------------------------------------------------

First, just a few questions. Starting with acquisitions, if you can give us a sense in terms of the Options Home Care, anything you've learned there over the past few months that might help you in terms of future acquisitions going forward? And, Dirk, I know you mentioned -- I think believe you completed a small private pay deal in Arizona with the second one likely to be closed, I guess, by year-end. Is that true?

--------------------------------------------------------------------------------

R. Dirk Allison, Addus HomeCare Corporation - CEO, President & Director [3]

--------------------------------------------------------------------------------

Mitra, we expect it will probably be closed -- we were hoping early January of next year as our target.

--------------------------------------------------------------------------------

Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [4]

--------------------------------------------------------------------------------

Okay. And regarding Long Island or New York, you mentioned about the wage parity. Is that an issue in some of the other states you are potentially looking to do or expand into?

--------------------------------------------------------------------------------

R. Dirk Allison, Addus HomeCare Corporation - CEO, President & Director [5]

--------------------------------------------------------------------------------

Wage parity is not an issue in other states. What we face in other states is just a straight minimum wage issue. And as we have said, over the last 7 quarters is one of the things we're looking to do with our growth is to grow in areas where there is either little or no minimum wage pressure, such as Arizona, there's a little bit in New Mexico, but not a lot. And so looking in more of those states where minimum wage has not been on the minds or -- raising state minimum wage above federal minimum wage has not been on the minds of the state legislators. Now that doesn't mean in the states such as Illinois and New York and Washington or Oregon that we still don't want to grow in those areas. The good thing about those markets is the state leadership have been very open and accommodating to realizing that when they raise things such as minimum wage, or in New York, minimum wage plus wage parity that they have to raise the reimbursement rates for a company like ourselves to make sure that we maintain our ability to perform those services. And we've seen great results of that. So strategy going forward is to try to grow more in states without that pressure, but certainly have the ability to operate in markets where there is minimum wage.

--------------------------------------------------------------------------------

Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And if you can give us an update on the infrastructure IT side, if the ADP installation is completely behind you now? And do you have to do any more spending on the infrastructure side to drive efficiencies or as you expand?

--------------------------------------------------------------------------------

R. Dirk Allison, Addus HomeCare Corporation - CEO, President & Director [7]

--------------------------------------------------------------------------------

Okay. ADP was a huge project for this company, as you're aware, Mitra. We've been working on that for now about 15 months. And as of this past quarter, we were able to finalize that project. Most of the project was done on July 1. We had a couple of acquisitions that came inboard on August 1, and then, obviously, Options on October 1 bringing them on board. So as we say now, we're converted over -- completely over to ADP. It has gone extremely well. Now that is not to say it has gone without any issues. When you're moving such a major system over to a new system and you're dealing with over 24 -- at the time 24,000 paychecks on a weekly or biweekly basis, there are going to be some things you discover during the process. But I will tell you, we are largely through with that project. The team has done a fantastic job on it. And I think it's going to position us for growth going forward. Now in addition to ADP, it's not as material a project, but Brian and his team are going to be moving our financial system early next year to a more material management -- financial management system that will allow us to not only have greater access into our current operations but as importantly allow us to continue the pace of acquisition growth that we would like to achieve. And so his team has already started that with the budget process that we're using now, and that went very well. And then the second part of that project is to bring it on -- bring on the financial reporting in the first or second quarter of next year.

--------------------------------------------------------------------------------

Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Research Analyst [8]

--------------------------------------------------------------------------------

And finally, how much are you prepared or you feel comfortable with in terms of leverage on the balance sheet as you look at acquisitions?

--------------------------------------------------------------------------------

R. Dirk Allison, Addus HomeCare Corporation - CEO, President & Director [9]

--------------------------------------------------------------------------------

Mitra, as you know, as a management team, we like to think that we're fairly conservative. I think this industry, in general, with solid cash flow could run 2%, 2.5% leverage and not be overlevered on a long-term basis. If you had a very strategic acquisition that was appropriate for the company and the risks were appropriate, you could probably lever up a bit higher than that, knowing you could delever very quickly. But I would say, with our exposure to Illinois today and where we are, we like the 2x leverage to kind of be our upward target.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) I see no other questions in queue. I'll turn to Mr. Allison for closing remarks.

--------------------------------------------------------------------------------

R. Dirk Allison, Addus HomeCare Corporation - CEO, President & Director [11]

--------------------------------------------------------------------------------

Thank you, operator. I just want to thank everybody for your interest in Addus and for your participation on our earnings call today. And I hope you have a great week.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your call. You may now disconnect.