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

Mitra Ramgopal – Sidoti.

Good morning and welcome to the Addus HomeCare Corporation's Third 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 and 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 third quarter conference call. With me today is Brian Poff, our Chief Financial Officer. Let me begin with some general comments and then Brian and I will discuss the third quarter results that we issued yesterday afternoon.

After that, we would be happy to respond to any questions. Before I continue, I want to welcome Susan Weaver and Darin Gordon to our Board of Directors.

As we continue to position Addus for growth, our Board felt we needed additional expertise which can help leverage both the increasing shift to value-based care and growing managed care involvement in the home-based personal care industry.

Among their attributes, Susan and Darin bring that expertise to Addus and we appreciate their involvement on our Board. As you can see by our financial results announced yesterday, we continue to make progress towards our goal on both growth and margins. On an adjusted basis our EBITDA margin was 8.4%.

Discontinued improvement in our margin is reflective of the hard work being done by all members of the Addus team. As CEO, it is gratifying to see how our employees have responded to the challenge of improving both our service and financial performance.

Our entire team is continuing to work hard to meet the strategic goals we have developed as a company.

After the difficulty over the past year in collecting non-Medicaid cash from the State of Illinois, I am happy to tell you that during the third quarter of 2016, we received the bulk of our past-due receivables at June 30, 2016 for those services that we provided to our non-Medicaid consumers.

In addition, the state owes Addus over $1 million for prompt payment interest relating to these past-due amounts, which we expect to receive in the fourth quarter of 2016. However, the approved Illinois budget that allow for these payments has now been exhausted.

Effective July 1, our non-Medicaid receivables with the State of Illinois began to grow at approximately $5 million per month and will continue until the governor and the legislator agree to pass the new budget for fiscal 2017.

We are hopeful that today’s state election will bring more clarity to this situation and allow the leadership of the state come together and pass the budget, which would allow for the payment of this service.

As we previously discussed, our cost reduction initiative that we began in the first quarter of this year has resulted in the cost savings we shared with you. At that time we estimated that we would reduce our corporate expenses by $4.1 million. The final savings from this process were fully realized in our third quarter.

While our cost reduction target from this initiative has been realized, we are still working on final completion of a few of the projects included in this process. Let me update you on a few of these major efforts. The conversion of our field technology to CellTrak began in September.

This is an exciting project, which we believe will not only save us money, but will improve our service levels by moving us towards company wide electronic reporting for all consumer services. By the end of 2016, we should have the entire State of Illinois converted to CellTrak and then we will begin the conversion of the rest of our sites.

More important than the cost reduction from this project is the real-time serviced information that will be available to our leadership. We expect this more timely information will support our ability to drive further organic growth while ensuring that we continue to provide the quality services that our consumers expect.

During this past quarter we began the important process of designing and developing our new payroll process with ADP. This process is very detailed and time consuming. It is also extremely important to Addus as we continue to grow our company as this allows us to transition future acquisitions on to our payroll system with minimal disruptions.

As we have stated on our last quarter earnings call, we anticipate these payroll changes to be effective on July 1, 2017. During the third quarter, we completed write-off of our contact center that we had mentioned in our first quarter earnings call.

This center was closed earlier this year but we delayed taking this write-off as we were in negotiations to sublease the building. While we have not yet leased this location, we continue to negotiate with potential parties who have an interest in subleasing this building from us.

This write-off is largely non-cash and completes our closing of our centralized contact center. As part of our continuing process to focus our strategy as a home-based healthcare provider, we made the decision to close three of our Illinois based adult day sites.

These sites have been unprofitable for sometime and we’re not strategic to our home-based business. All three sites were closed effective September 30, 2016. This resulted in a write-off of $1.8 million which largely relates to one long-term lease.

While we will continue to try and sublease this location, we felt it prudent to write-off this liability due to the specific nature of the building we occupied. Following the closing of these three adult day sites, we still operate three profitable adult day sites in the Illinois. For the last nine months ADUS has been in a restructuring process.

We have made executive changes, closed sites, including our contact center, we negotiated vendor agreements and partnered with new vendors to help improve our services and lower our cost. This process meant we had record both severance and restructuring charges. I'm happy to tell you that we are now through with the restructuring efforts.

We may have non-material restructuring charges next quarter as our current efforts come to an end, but the majority of these type expenses are behind us. Now let me turn to the financial results for the third quarter of 2016.

Revenues for our third quarter were $103.5 million, compared to $84.3 million for the same period in 2015, an increase of 22.7% with same store revenue growth of 4.1%. Our adjusted EBITDA for the third quarter of 2016 increased 45.5% to $8.7 million, from $6 million in the third quarter of 2015.

Our adjusted EPS for the third quarter of 2016 was $0.39, compared to $0.29 in the same period of 2015, an increase of 34.5%. Overall, I am very pleased with our third quarter results, as well as the great progress we have made during 2016.

As I mentioned, we will continue to make changes to improve our operations and to better position us for additional acquisitions. As far as our potential acquisitions we are currently in discussions which if successful, will continue our strategy of diversifying our base of business into additional sites.

Before I turn this call over to Brian for a more detailed review of our third quarter performance, let me thank the employees of Addus for their patience, support and hard work. We continue to build an exciting company that provides service to home consumers at a low cost. With that, let me turn the call over to Brian..

Thank you, Dirk and good morning to everyone. For the third quarter of 2016, net service revenues increased 22.7% from the third quarter of 2015. This growth was driven by a 22.9% increase in billable hours per day, on essentially flat revenue per billable hour in a quarter that had the same number of business days as the comparable quarter last year.

The growth in average billable hours per day, of just under 23%, was primarily due to the impact of the acquisition of South Shore. In addition, same store revenue increased 4.1% for the quarter as a result primarily of continued growth in both the Midwest and New Mexico.

Our adjusted net income per diluted share for the third quarter was $0.39, compared to $0.29 per diluted share for the third quarter last year.

The adjusted per share results for the third quarter of 2016 excluded three items, including $0.23 for the restructure charges Dirk discussed, $0.02 for severance and other cost related to management changes during the third quarter and $0.03 for non-cash stock-based compensation.

I addition, the adjusted per share results included $0.04 for the normalization of our effective tax rate expense as a result of the impact on pre tax income from the restructure and severance charges. Our adjusted per share results for the third quarter last year excluded $0.03 for stock-based compensation.

Our gross margin for the third quarter was 26.5% or 140 basis points lower than the third quarter last year. This decline is due to the higher service costs related to South Shore. Excluding the impact of South Shore, our gross profit margin would have been 28% for the third quarter of 2016, compared to 27.9% for the same period last year.

South Shore gross margin for the third quarter of 2016 stabilized at 17.7%. Moving to G&A expense, as Dirk mentioned, the third quarter included the full realization of the impact of our cost savings initiatives, while GAAP G&A as a percent of revenue increased to 100 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 270 basis points to 18.1% from 20.8.% for the third quarter last year. This improvement was also inclusive of an increase in our bad debt percentage to 1.8% from 1.1% for the comparable quarter.

We expect our bad debt expense to return to normal historical levels in the fourth quarter of this year. The Company’s tax rate for the latest quarter was 14.6%, compared with 30% for the third quarter of 2015, primarily as a result of the impact of the additional restructuring and severance charges on pre-tax income.

We expect our year-to-date tax rate of 25.2% to continue through the rest of this year and with the restructuring charges behind us to normalize to approximately 30% to 32% in 2017.

Primarily as a result of the Illinois payments received during the quarter, we had net cash provided by operations for the third quarter of $49.3 million, compared with cash flow used of $26.3 million for the third quarter last year.

Our cash provided for the latest quarter was partially offset by an increase in our account receivable with the State of Illinois on the non-Medicaid portion of our revenue, related to the state’s 2017 fiscal year.

Our DSOs decreased by 37 days during the third quarter to 72 days from 109 days for the second quarter, with DSO for the Illinois Department of Aging at 71 days. At September 30, 2016, we had cash of $39.4 million, no outstanding debt on our revolver and availability under our revolving credit facility of approximately $69.5 million.

We also had $24.4 million outstanding on our term loan primarily related to the South Shore acquisition. This concludes our prepared comments this morning and thank you for being with us. I will now ask the operator to please open the line for your questions..

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

Yes. Hi, good morning. First, regarding the CellTrak conversion, I believe you mentioned it should be completed in State of Illinois by the end of this year.

When do you think, you’ll be getting it fully implemented or converted throughout the network?.

Yes, we believe that should occur in the first quarter of 2017..

Okay thanks.

And given the continuing issues in terms of Illinois and the budget issues there, are you more inclined to be aggressive in terms of acquisitions looking to reduce your exposure there?.

You know Mitra one of the things we learned this last year going through what we did was that the state did show that they understand that they owe this money and they did in fact pay it and with prompt payment interest to follow, in fact they’ve already started paying prompt payment interests to other companies.

We just happen to be down the line to get our payment, so that gives us confidence that there is an understanding that this money is owed. Now the question becomes will they hold us another year like they did last year while the governor and the legislature decide if they are going to put a budget together.

So obviously going forward we will always have to reserve some of our working capital or some of our availability to cover this growth, this extraordinary growth and working capital due to this situation currently just with Illinois.

But what it – we do still have enough room that we are going to be aggressive in looking at appropriate acquisitions that lead towards our strategy and that is, takes us away from dependence on one state, moves us into sates that don’t have some of the issues we’ve been facing with our current base of business.

So we will continue to look at the acquisitions while reserving some of our working capital for Illinois issue..

Thanks.

And I think you had mentioned the three ADC [ph] sites that you closed, as you look at the remaining sites there, is it pretty much all in Illinois and as you go forward is this is a business you would consider may be exiting or you still feel comfortable in terms of staying in it?.

Well we haven’t decided anything specifically around those three sites. I will tell you this, basically as we have shared with you in the past, we are a home-based healthcare company, personal care and other services that we do provide today and will provide in the future. So we will continue to focus exclusively on the home..

And Mitra this is Brian. Yes and the answer to the first part of your question is the three remaining are all in the State of Illinois..

Okay, thanks.

And then, before I get back into queue, do you look at acquisitions, and if you can give us a comment in terms of the pipeline, valuations, et cetera, that you are seeing?.

Yes, our pipeline is pretty active with acquisitions and we’re seeing them basically around the areas that we have said we were going to focus, more into the states that don’t have some of the issues related to minimum wage. May be some of the budgetary issues that we faced at some of the states we’re in today.

So we continue to look at those and we have a fairly active pipeline. As far as the price, I would say depending on the size you are going to be anywhere from four times to six times on the deals we’re looking at.

Now obviously, if we decided go upstream a bit, as far as size, the larger the acquisition we’re looking at, generally you’re going to have to pay a little more as a multiple of EBITDA to get that. But there’s also greater opportunities for synergies with those acquisitions.

So I would say right now what we’re looking at is probably in the four to six range. .

Okay, thanks for taking the question..

Thanks Mitra..

Thank you. [Operator Instructions] And I am showing no further – one moment. I’m showing a follow-up from the line of Mitra Ramgopal with Sidoti your line is open. .

Yes, just a quick question on the revenue per billable hour, how do you see that as you look at the environment and you negotiations, for example, with payors? And also if you just comment, regarding the managed care mix that we are seeing, continue to trend up?.

Brian so why don’t you talk about that?.

Yes, Mitra I don’t think on revenue per billable hour you’ve been seeing that increasing as part of our efforts internally. But on the managed care front, if you look at this quarter, compared to last quarter, we did have a higher concentration of South Shore revenue as this continues to perform well.

So that’s what is driving the tick up that you are seeing from Q2 to Q3..

Okay, thanks. .

Thank you and our next question comes from the line of [indiscernible]. Your line is open..

Yes hi guys, congratulations on the strong quarter.

Just wanted to ask with the closure of those three adult day care centers, included in your $4.1 million cost reduction program?.

Ben, again thank you for your comment on the quarter. No they were not, the closure of those were separate in a way from the $4.1 million..

Okay and did you – I assume you did not realize the full sort of run rate contribution on those savings in the third quarter, or did you?.

No, we did not – those sites were not closed until September 30 of the third quarter. So we actually operated them for the entire quarter..

Okay, great.

And then just, I mean noticed the billable hour per census sort of increasing sequentially, any sort of color on how that cost is may be unfolding there?.

Yes, Ben I think we have mentioned previously, one of the focuses the organization has and this is Brian by the way was the focus on the authorized hours versus what we have scheduled. And I think we’re actually starting to see the benefits of that internal initiative and that’s why you’ve seen the sequential increase quarter-over-quarter.

I think we would continue to look to see that gap continue to close..

Yes Ben I mean, this is Dirk. Let me add to what Brian said. One of the things that we’ve been saying to our investors and others is that we have spent a lot of time and effort in the last nine months building a usable business intelligence system that we can use to help our operations team drive towards areas where there are appropriate growth.

And we started that really more maybe late second quarter, early third quarter, looking at authorized hours versus scheduled hours. And I think I have mentioned in the past that we had some issues to clean up some of the operating procedures we needed to tighten up as far as when people went off service, maybe they went into the hospital.

And as we’ve been able to clean that up and put that in place, what we’re seeing is this information flow out to our RDs in the field and our ADs – agency directors is starting to have an impact.

And so, now all of a sudden, rather than trying to do deal with 34,000 unique consumers we deal with, they are dealing with a very limited number that have opportunity to see should we schedule more hours that are authorized, is it appropriate. And so they’re able to go through these more limited numbers and make decisions.

And we’re seeing in some cases, there are opportunities to increase the schedule, largely because we just didn’t know that we needed to do that. So we’re very pleased with that process. Now that process alone, let me make sure you understand, we’ve said in the past our goal is 3% to 5% same store or organic growth.

And we think this process helps us drive towards the top end of that. So I think with this 4.1% growth you’re seeing this quarter, that’s starting to see some of the results of this process being in place..

Okay, great. Really appreciate the work you guys are doing. And good luck, thank you..

Thanks Ben..

Thanks Ben..

Thank you and I am showing no further questions at this time. I’d like to turn the call back to Mr. Allison for closing remarks..

Well, again thank you everyone for your interest in Addus and we look forward to the fourth quarter and visiting with you in few months. Thank you very much and have a great day..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. Then you may all disconnect, everyone have a wonderful day..