Dirk Allison - President and Chief Executive Officer Brian Poff - Executive Vice President, Chief Financial Officer.

Mitra Ramgopal - Sidoti & Company Dana Hambly - Stephens Inc. Nate Singer - Angel Island Partners.

Good morning and welcome to the Addus HomeCare Corporation's Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded. This presentation will contain forward-looking statements within the meaning of the Federal Securities Laws.

Statements regarding future events and developments, the company’s future performance, as well as management’s expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws.

These forward-looking statements are subject to a number of risks and uncertainties, including factors outlined from time to time in the company’s most recent Form 10-K or Form 10-Q, earnings announcements or other reports filed with the Securities and Exchange Commission and available at the SEC’s Web site.

The company undertakes no obligation to update publicly any forward-looking statement 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..

Thank you, Scott. Good morning everyone and thank you for joining us for our second quarter conference call. With me today is Brian Poff, our Chief Financial Officer. I would like to begin with some general comments and then Brian and I will discuss the second quarter results that we issued yesterday afternoon.

After that, we would be happy to respond to any questions. I am excited to remind you of the changes we have made to our executive leadership team during the second quarter of 2016. Brian joined us as our Executive Vice President and Chief Financial Officer in May.

Brian has many years of experience with both healthcare businesses as well as public companies. In June, Brenda Belger joined Addus as our Executive Vice President and Chief Human Resource Officer. Like Brian, Brenda brings a great deal of experience to our company.

I have worked with both Brian and Brenda in the past and I'm excited to have the opportunity to work with them again. With these additions, we now have the executive team in place to execute on our plan to build and grow Addus.

In fact, as I will discuss in a few minutes, I think we are off to a terrific start and have implemented changes that have had an immediate impact and will have even greater impact with the passage of time. As we mentioned on our last earnings call, the state of Illinois operated without a budget for the entire 2016 fiscal year.

While we have been paid for services we provide to Medicaid consumers, without a budget the state was unable to pay for services that we provided to non-Medicaid consumers. Our accounts receivable related to these consumers totaled $68 million at June 30, 2016.

I am happy to tell you that on June 30, the state of Illinois legislature passed and the Governor signed SB2047, a partial budget appropriation that allocates over $309 million of funds to pay for past services for companies in our business.

Of this amount, we estimate that Addus will receive between $65 million and $70 million which should pay substantially all that the state owed us as of June 30. In addition, the state owes Addus over $1 million for prompt payment interest relating to these past due amounts which we have been told we will receive as the payments are made.

Our policy is to book prompt payment interest when received, so nothing has been accrued to date. The first $1.8 million of this receivable was processed last night and we believe that by the end of August, the remainder will be paid.

While we are pleased with this movement by the leaders of the state of Illinois and their support of our programs and services, we continue to encourage them to develop a more permanent solution which will fund the important services that we perform in a more timely manner.

During the second quarter of 2016, we amended our credit facility to accomplish two things. First, we added Capital One to our bank group. Second, we increased our overall revolving line of credit to $100 million from $75 million.

This gives us approximately $25 million more availability on our line of credit which can support the ongoing growth of our business in addition to the possible growth through acquisitions. We are appreciative of the partnership we have with our bank group and their willingness to make the amendments to our bank agreement.

I reported you on our last earnings call that we had identified $4.1 million of saving opportunities. During the second quarter we have implemented most of these changes and we are now starting to see the results.

These cost reductions contributed over $500,000 during the quarter and we believe that by the fourth quarter, we should be at an annual run rate of over $4.1 million for these savings. I want to reiterate that no additional actions are required in order to receive these savings other than the passage of time.

Let me update you on a few of these initiatives. Our expanded partnership with CellTrak is well underway. CellTrak is the firm we partner with to manage both our field telecom as well as our electronic entry of services. During our second quarter, we started seeing reductions in our telecom expenses.

We anticipate that we will begin the most significant aspect of this new program in the fourth quarter of this year. This is an exciting project which we believe will not only save us money but will improve our service levels by moving us towards companywide electronic reporting of our consumer services.

As we complete this project, not only will our cost be reduced but the real time service information for business intelligence will greatly increase. We expect to launch this process in September with completion several months later.

Over the past few quarters, we have shared with you issues related to our payroll process which is critical to us as it insures timely payment to our over 20,000 employees. Our current system is not effective or efficient as we would like, which has led us to begin making plans to change our payroll system.

We are close to an agreement with ADP, who will provide our future payroll and human resource system needs. Given our team's past experience with this provider, this should be an important improvement for Addus, making us more cost efficient and more effective as it relates to our entire revenue cycle management.

We anticipate these payroll changes to be effective on July 1, 2017 which allows us ample time to test all payroll processes and ensure a successful conversion. As we mentioned in our press release, we have delayed the Contact Center write-off of $2.3 million, pending the outcome of leasing discussions.

We expect to have a conclusion concerning these discussions in the third quarter. Depending on the outcome, we may take this write-off at that time. Now let me turn to our financial results for the second quarter of 2016.

Revenues for our second quarter were $100.9 million, compared to $85.8 million for the same period in 2015, an increase of 17.6% with same store revenue growth of 4%. Our adjusted EBITDA for the second quarter of 2016 increased 9% to $7.5 million, from $6.9 million in the second quarter of 2015.

Our adjusted EPS for the second quarter of 2016 was $0.31 compared to $0.32 in the same period in 2015. I would expect that our future results will benefit from the additional cost savings mentioned above in addition to the reduction of certain other expenses.

Overall, I am very pleased with our second quarter results as well as the great progress we have made in a fairly short period of time.

The past six months have been very busy as we have made a number of operational changes to improve our financial performance, we will continue to make changes to improve our operations and to do a better -- to better position us for additional acquisitions.

While we still have work to do, during the second half of 2016 we will expand our priorities to also include growth. This not only means organic growth but acquisitions that are strategic to Addus. We understand the importance of continuing to grow our existing business and we believe we have a significant opportunity to do so, well into the future.

Maxine Hochhauser, our COO, is leading this effort. Maxine is working with Zeke Zoccoli, our CIO, to develop information dashboards which are really helping our team identify areas where we have the greatest opportunity for revenue growth existing within our current consumer base.

In addition, under the direction of Darby Anderson, our Chief Development Officer, we have added resources to more actively pursue growth opportunities with managed care organizations.

Before I turn this call over to Brian for a more detailed review of our second quarter performance, let me thank the employees of Addus for their patience, support and hard work during these past six months since I became CEO.

Change is always difficult, yet our team has continued to strive everyday to improve the health and well-being of our consumers through quality, cost effective home and community-based services while achieving profitable growth and increasing shareholder value.

Additionally, the more time I spent at Addus, the more excited about the company and the opportunity ahead. I look forward to the coming months as we move from primarily an expense focus to one that also focuses on growth. With that, let me turn the call over to Brian..

Thank you, Dirk and good morning to everyone. For the second quarter of 2016, net service revenues increased 17.6% from the second quarter of 2015. This growth was driven by a 16.3% increase in billable hours per day and a 1.2% increase in revenue per billable hour in a quarter that had the same number of days as the comparable quarter last year.

The growth in average billable hours per day of just over 16% was primarily due to the impact of the acquisition of South Shore. If we adjust last year's revenues for the site closings in the third quarter of 2015, net service revenue increased 21.5% for the second quarter of 2016.

In addition, same store revenue increased 4% for the quarter as a result primarily of growth in both the Midwest and New Mexico. Our adjusted net income per diluted share for the second quarter was $0.31 compared to $0.32 per diluted share for the second quarter last year.

The adjusted per share results for the second quarter of 2016 excluded three items, including $0.04 for severance and other cost related to senior executive changes during the second quarter , $0.01 for restructure charges related to the initiatives Dirk discussed, and $0.03 for non-cash stock-based compensation.

Our adjusted per share results for the second quarter last year excluded $0.01 for acquisition related transaction expenses and $0.02 for stock-based compensation. Our gross margin for the second quarter was 25.5% or 210 basis points lower than the second quarter last year. This decline was due to the higher service cost related to South Shore.

Excluding the impact of South Shore, our gross profit margin would have been 27.7% for the second quarter of 2016 compared to 27.6% for the same period last year. Moving to G&A expense. We benefitted from both a full quarter with South Shore as well as the initial impact of our cost savings initiatives.

While GAAP G&A as a percent of revenue decreased 90 basis points from the comparable quarter, if we adjust to exclude restructure, severance, M&A and stock compensation expenses from both quarters, G&A as a percent of revenue improved 160 basis points to 18% from 19.6% for the second quarter last year.

This improvement was also inclusive of an increase in our bad debt percentage to 1.8% from 1.5% for the comparable quarter. We expect our bad debt expense to return to normal historical levels by the fourth quarter of this year.

The company's tax rate for the latest quarter was 30.3% compared with 34% for the second quarter of 2015, primarily as a result of an increase in WOTC credits. The company records these credits based on a full year's credit projection and based on activity through the second quarter, we have revised our estimate for the remainder of 2016.

We expect our year-to-date tax rate of 30.5% to continue through the rest of the year. We had net cash used in operations for the second quarter of $12.3 million compared with cash flow provided of $35.9 million for the second quarter last year.

Our cash used for the latest quarter was a result of an increase in our accounts receivable with the state of Illinois on the non-Medicaid portion of our revenue. Our DSOs increased by 5 days during the second quarter to 109 days from 104 days for the first quarter with DSO for the Illinois Department of Aging 158 days.

With the signing of SB2047 by Governor Rauner, we are anticipating significant payments from the state for our [aid] [ph] receivables. At this time, it is our understanding that the payments are currently being processed by the comptrollers' office and should be completed by the end of August.

We have seen the bulk of our 2016 receivable balance move into an accepted payment status so far with the first $1.8 million processed last night. At June 30, 2016, we had cash of $8.2 million, $17 million of debt on our revolver, and availability under our revolving credit facility of approximately $46.4 million.

We also had $24.7 million outstanding on our term loan, primarily related to the South Shore acquisition. As a result of a provision in our amended debt agreement, we were able to transfer $3 million of our revolving debt to our term loan during the quarter. This concludes our prepared comments this morning. Thank you for being with us.

I will now ask the operator to please open the floor for your questions..

[Operator Instructions] And our first question comes from the line of Mitra Ramgopal with Sidoti & Company. Your line is now open..

First, I just wanted to get a better sense on the South Shore acquisition. I think you mentioned the decline in gross margins largely due to that. If you can give us some sense as to how that integration has come along and when we should probably start to see the margins tick up as a result of improvements there..

Yes, Mitra, this is Dirk. We are very pleased with South Shore. Actually there revenue is above where we expected it to be, based on our due diligence of the company. I do think one of the things that we see is that their gross margin is lower than ours and that’s probably something we did not understand as much when that acquisition was made.

So ongoing, we are going to continue to have them operate at a lower gross margin than our base business. Now we are working with various aspects, Maxine and her team, as we deal with the changes to the minimum wage in New York.

So we are doing some things to try to improve that gross margin but you need to expect that it's going to continue to be lower than what we normally run as a business..

Okay. No. That’s fair. And secondly as regards to, I know if we look at the revenue from adjusting for closed locations, it shows nice improvement.

As you look at your existing location base, are you pretty set in terms of what you have or do you think there are still more locations you might be closing?.

You know we are constantly, as an executive team, talking about the operations that we have. Obviously, it's our goal not to close sides but to continue to work to improve them. I do think you will see one or two additional sides over the next 12 months that we will consider closing. But by and large, we are through with the majority of those..

Thanks. And when you look in terms of just the overall environment now, in terms of your opportunities for continued growth, both organic and acquisitions. I was just wondering, if there is any developments you have seen over last few months that make things more encouraging..

Well, I will tell you this, actually I think I will answer your question, Mitra, I will try to do the best I can. I believe you are wondering if we felt more encouraged by what's going on that we could improve growth. We are, I am very excited about the team that we have put together, both from the executive level and the team right below.

The leaders in our company I think understand how to operate a healthcare service company and how to grow a healthcare service company.

So we are much more, I think as a team we are much more confident today that as we look out at the potential for acquisitions, that we are excited about that opportunity and feel comfortable and ready to start that process again. So we are currently looking at opportunities.

Now one of the things I want you to understand is we are going to be very careful as we acquire companies. We want to make sure that we do a very solid due diligence process. We have a solid transition process so that we eliminate some of the potential issues that maybe we have had with a couple of our acquisitions over the last two or three years.

Does that answer your question?.

Yes. No, that’s very good. And then finally for me. Again, there is talk of a number of states have released a minimum wage increasing etcetera.

If you can just remind us in terms of how can sort of overcome that and any potential reimbursement pressures?.

Yes. Obviously, that’s going to be something that we are going to have to address in the areas that we operate in, in which you are talking about a minimum wage increase.

One of the ways, obviously we do that, is we start negotiating and discussing with the state the fact that if they are going to raise the minimum wage then we need to have a corresponding increase to our reimbursement. We were discussing that with the state of Illinois. The governor vetoed the increase that was put forth by the legislature.

So there is at least talk of helping us in that state. We will continue in other states where we have this pressure to visit with the reimbursement source and try to make sure that we are able to obtain revenue increases to take care of this.

But on the other hand, also understand, one of the things we are trying to do as a company through use of technology in our operations, is to become more efficient as it relates to serving our consumers. Whether that’s making sure that our aides have more hours in which they can operate if there is less travel time.

We are looking at all those opportunities to try to make sure that this company operates at the best possible manner in which we can..

Okay. Thanks, again. And finally, Brian, I just wanted to make sure I understand this correctly. The annualized cost savings of the $4.1 million, that is separate from the improvements you are seeing in terms of bad debt.

Right?.

Yes. That has nothing to do with bad debt. It is strictly on our cost improvement initiatives and Dirk mentioned the impact to Q2 and we expect to see that fully bake into the back half of this year..

[Operator Instructions] And our next question comes from the line of Dana Hambly with Stephens Inc. Your line is now open..

Just on that bad debt, what was the reason for the uptick?.

The higher bad debt provision, primarily driven by reserves related to some aging receivables from a handful of payers that we noticed had issues during their system conversions to MCOs and EVV platforms. So we took some additional reserves against some of the age receivables..

Okay. Did that come down in the third quarter or is that more of a fourth quarter.

We are anticipating to see it come back down in the fourth quarter..

Okay. And then following up on minimum wage having [indiscernible] up on your healthcare costs.

Has that impacted you at all or do you expect that to impact your at all going forward?.

We have not see a tremendous impact from our healthcare expense..

Okay. And then, Dirk, the comments on managed care. I know it's probably very early in the process, so I was just wondering if you could shed a little more light on what you are looking to do with your managed care payers..

Yes. You know one of the things we want to do is make sure we are spending time with our managed care providers and other companies that might have opportunities to partner with Addus and us partner with them for growth. And so we have brought on an individual that I have worked with in the past, Darby.

And that individual is now on board with us with the sole goal or focus on meeting and working with our MCO partners to try to increase the business that we have with them. We have not had that dedicated resource before, Dana. That’s fallen under Darby, and Darby has a lot of hats that he wears.

So we wanted to get somebody on board that had nothing to do except with the focus of the MCO growth..

Okay. That’s helpful. And then last from me, Dirk. I want to try to better understand the relationship with CellTrak and what that’s going to bring to you that you didn’t have previously. Thanks..

Yes. Let me try to explain that in as simple terms as I can, understanding I am not a technology expert. But when we got here as a team, and this review was led by Zeke Zoccoli, our CIO. And Zeke looked at what we were doing.

We saw that we were spending a lot of money doing a lot of things, whether it was providing mobile phones to our folks in the field, creating software like AMP. We were doing a lot of things that, quite frankly, we were not experts at doing and it cost us a lot of money.

And so what Zeke and his team did is looked at all of this in combination and said, here's what we are spending today. Here is what we think we should spend in the future. Can we find a partner that can provide all this service for us as opposed to us trying to provide it our self. And that is where we found CellTrak.

Now we had already been working with CellTrak but on a much more limited basis. So we expanded our partnership with CellTrak.

They are taking over these functions for us under a contract and a rate which we have negotiated and our team and their team are currently working to make sure that we have what we need in the field from an electronic standpoint to take care of our growth, as it relates to whether it would be IBR or whether it relates to electronic entry of time..

Okay.

And that will be across all of your states in September or is that kind of a slow rollout?.

It would be rollout, I would say, over maybe a six month period. We will start in September to make sure that as we roll it out, we do not lose the service level to our consumers or to our referral sources. That’s the biggest issue that we want to make sure we avoid.

We do not want to cost us lost revenue or lost service levels while we are trying to improve the operations. So that’s why we are going to have this very planned rollout over a few months..

Do you know if CellTrak has done one of these large implementations before?.

Yes, I believe they have..

And our next question comes from the line of Nate Singer with Angel Island Partners. Your line is now open..

I have a few questions. Maybe we can be a little bit more specific about what's going on, if you can without putting yourselves in a difficult position, with regards to getting the pay rate up in Chicago, in particular.

Really we would just love to hear what's going on there and really what is going to take to be able to keep up with minimum wage increases there..

Well, Nate, I think, specifically Chicago, Chicago did phase in on July 1. It obviously is going to cost us over the next six months of this year without right now an increase from Illinois. The problem we have with Illinois is because it's a citywide minimum wage increase, not a statewide.

While the state wants to help us out, there is not as much pressure from them as if they were the one forcing the minimum wage to go up all across the state. So we have a little bit of a mismatch between the entity, the City of Chicago that demanded the minimum wage increase versus the payer of the services in that entity, the state.

And so we will continue to work with our contacts in the legislature. We did, as I mentioned earlier, there was a bill at one time that was passed by the legislature that was vetoed by the governor.

We are hoping that after the elections of November, that the legislature and the governor have an opportunity to work in more partnership, in a way that is more in partnership that can address things such as this. So as it relates specific to Illinois, we will continue to work with our contacts and try to get that reintroduced and passed.

In other where this is a problem, we will continue to work with our local contacts, as it relates to the states, and we will try to offset any potential minimum wage increases with revenue growth. Now one of the strategies of the company also is though, we are also moving into areas in the country that don’t have minimum wage pressure.

Some of the areas we have operated in in the past have much more focus on trying to raise minimum wage. In some of the areas we are looking for growth in acquisitions, there is not quite that pressure so that should also help us as we move forward..

Okay. Great. Maybe there is a little bit of a trend on billable hours going up pretty meaningfully. What was it, 56%, 57%. What's driving that? It can't just be South Shore.

And I guess how do I just handicap the rest might start growing backwards?.

I am not really, Nate, following your numbers but let me talk about -- maybe I can talk about billable hours and our focus and why we think it makes a difference and see if that addresses your question, if not we can add to it..

Yes. Let me just clarify. Average billable hours per census per month, 57 this year, 50 last year..

Yes. All right. Let me tell you a little bit about a strategy shift or a focus of the leadership team the last six months. You know I think the focus of Addus in the past has been on census.

And as we understand and used to understand census, you maybe have one consumer that we have ten hours a month and you may have another consumer that you have 50 hours a month. And so as you can see, those two census individuals are not the same as it relates to what we do, which is provide services by the hour.

And so our focus has shifted to our trying to grow billable hours. Now this also, one of the reasons you see the growth in billable hours, it also allows us to use our information we have as a company. The data warehouse, the business intelligence programs that the IT team under Zeke's leadership are developing so that we can look and see.

Sometimes we might have a consumer that has ten hours but were authorized for 20 hours and we have only been providing services for ten.

It allows us to go back and ask the question, why are we not providing services for the entire authorized hours and if we then can increase those hours to 20, all of a sudden your billable hours are growing and your census didn’t.

So, understand we now have a focus on serving our consumers but also monitoring the billable hours that each consumer has..

Great. Okay. That’s helpful. And then maybe just on the organic growth that you guys saw in Illinois.

Can you split Illinois versus the rest of the business?.

Yes, Nate. This is Brian. Looking at, you know what really we look at is the Midwest region. The same store for Q2 versus Q2 last year was all over 8%..

Got it. So Illinois is, in spite of the budgetary challenges, Illinois is growing at a nice clip..

Yes. That’s correct..

Do you anticipate that that can continue next year or do you think that there is just some one time reasons for that?.

Well, I think we can continue to grow in Illinois. I think one of the things you have to understand is that with this budget issue, it not only affected service providers like Addus but it affected the folks that are even qualifying consumers for this service.

So we are very happy that we were able to grow during last year as people had issues of their own in trying to get enough people that could work to make sure that the consumers that are qualified, could be qualified and sent out for service to companies like ourselves.

So we believe that if Illinois can get its budget issue rectified, that there is still growth for this program in the state..

Okay. Great. And the last question. Sorry to occupy so much airtime. You guys have made a fairly large scale shift out of the contact center and pushing the servicing back down to individual sites. I assume that there have been some hiccups.

Can you just discuss how you guys have been able to manage that process so effectively, it seems like an operational nightmare..

I guess if I told you good management, that might not be your answer, Nate. I am just kidding. You know the contact center was a great idea but in our minds it's a very difficult concept to actually put in place and operate effectively in a healthcare service company especially one with as many distributed sites as we have.

And so if you realize that the contact center only had about 30% of our sites actually under service or 70% of our operation out in the field was not even being affected by the contact center. And so what you are really talking about is how did you move that 30% back to the field with limited issues.

And I will tell you, I kidded about the management but our management team had a well thought through process. We did planning. We had folks that we put on it. That that was their job we could have done and so we are very pleased that it was able to transpire and get to where we needed it to be today without the issues that you are alluding to..

[Operator Instructions] And I am showing no further questions at this time. I would now like to turn the call back over to Mr. Dirk Allison for closing remarks..

Thank you, Vicky. We certainly appreciate everybody's interest in Addus and your support of our company and we look forward to visiting with you again at our next earnings call. Have a great day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day..