Good day, ladies and gentlemen and welcome to the Addus Quarter 2 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Ms. Dru Anderson. Ma’am, you may begin..

Thank you. Good morning and welcome to the Addus HomeCare Corporation second quarter 2019 earnings conference call. Today’s call is being recorded.

To the extent that 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 2019 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 second 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..

Thank you, Dru. Good morning, everyone and thank you for joining us for our 2019 second quarter earnings call. With me today is Brian Poff, our Executive Vice President and Chief Financial Officer. As usual, I will begin with some overall comments and then Brian will discuss the second quarter results that we issued yesterday afternoon.

Following our comments, we would be happy to respond to any questions. Last week, we announced the retirement of Zeke Zoccoli, our former Executive Vice President and Chief Information Officer. I want to thank Zeke for all he’s done on behalf of Addus these past 3.5 years.

He has been an important part of our senior team and instrumental in our success. I want to wish him all the best as he enters into this new phase of retirement. I also want to congratulate Mike Wattenbarger on his promotion to Senior Vice President of Information Technology.

Mike has been with Addus for over 15 months following a long history of success in the health care services industry, where he has served in various IT leadership roles including Chief Information Officer.

Mike’s new position includes the responsibilities previously held by Zeke and I am excited to have him take the responsibility for this important area of our company. As we announced yesterday, our solid operating performance continued in the second quarter of 2019.

Revenue for the second quarter was $149.7 million compared to $131.3 million for the same period in 2018, an increase of 14%, which included 5.9% same-store growth. Adjusted earnings per diluted share for the second quarter of 2019 increased to $0.56 as compared to $0.50 for the same period of 2018, an increase of 12%.

Our adjusted EBITDA for the second quarter of 2019 increased 12.9% to $12.8 million from $11.3 million. We continue to have a strong cash position with minimal debt.

As we mentioned on previous earnings calls, the lack of a corresponding rate increase to offset the July 1, 2018, Chicago and Cook County minimum wage increase has continued to negatively affect our margins. This lack of an increase also affected our second quarter margins.

With the passing of the fiscal 2020 Illinois state budget, our industry will receive two rate increases to offset the statutory minimum wage increases experienced in both Chicago and Cook County. The first rate increase is expected to be effective on September 1, 2019, and will increase our rate to $20.28 per hour.

We understand that Illinois expected that this increase would be effective July 1, 2019, but was delayed due to the state’s need to file additional information needed to obtain approval from the federal government. This information has now been filed with the appropriate federal department with their approval expected soon.

This delay will mean our financial results for July and August will be negatively affected by the required July 1, 2019, minimum wage increase in Chicago and Cook County. However, the September 1 rate increase will offset these costs. We will also see an additional increase effective January 1, 2020, which will take our hourly rate to $21.84.

Once these two rate increases are effective, it will have offset the past 2 minimum wage increases we experienced in Illinois. We are appreciative that the leadership of the State of Illinois recognized the need to make rate adjustments to cover the costs associated with the higher minimum wages mandated by statute.

For the second quarter in a row, our same-store growth exceeded our stated goal of 3% to 5%. In addition to the continuing growth in our New York market as the state-led narrowing of the provider network nears completion, we also saw nice growth in New Mexico.

Our coverage in these markets has allowed us to work with our MCO partners as they add new consumers and to benefit from increased reimbursement rates. Going forward, we remain confident in our same-store growth rate goal of 3% to 5%.

However, with the upcoming rate increase in our Illinois market, we thought we should continue to see same-store growth at the high end of this range for the next few quarters.

Yesterday, we announced the completion of two acquisitions, Alliance Home Health Care, a hospice, home health and personal care provider in New Mexico; and Foremost Home Care, a personal care provider in New York City. The Alliance acquisition primarily adds broader hospice coverage in markets in New Mexico that we previously did not serve.

Along with our Ambercare hospice operation, we now have approximately 900 ADC under our hospice service in the state. Foremost Home Care is a long-time provider of personal care services in the New York City metropolitan area and will become part of our VIP operation.

This will further our ability to offer personal care services to the New York City market. Both of these companies continue to follow our strategy of targeting acquisitions in our current markets, both in clinical and non-clinical areas of home care. These two companies will increase our annual revenues by approximately $25 million.

We are very excited about the addition of both Alliance and Foremost, and I want to personally welcome all of our new team members to Addus. As we previously announced, during the second quarter, we completed the purchase of VIP Health Care Services, a New York City-based provider of personal care.

Together with our South Shore operation on Long Island, VIP will allow us to offer full market coverage to our MCO partners, both on Long Island and in the 5 boroughs of New York City. Our VIP transition is progressing smoothly, and I would like to thank the VIP and Addus teams who continue to work on this process.

With the closing of the Foremost Health Care acquisition, we are in a strong position to continue our growth in the New York market, our third largest state. As discussed on our last few earnings calls, we are excited about the opportunities for Addus under Medicare Advantage.

We are currently contracted with National Medicare Advantage plans to provide personal care services to their members. In addition, we are working with several Medicare Advantage plans on the development of future benefit offerings with the goal of improving quality and reducing overall medical spend.

We believe that these opportunities will expand as MA Plans begin to realize the cost savings potential of personal care services through a more integrated care delivery model.

While we anticipate additional MA plan participants with personal care offerings in 2020, we feel 2021 and later is the true growth horizon for this additional opportunity for Addus. That being said, we are experiencing increased referrals from our current MA partners, and we expect this trend to continue.

Before I turn this call over to Brian for a more detailed review of our second quarter financial performance, let me thank all the employees of Addus. We, as a company, continue to provide a very important and much-needed service to our consumers at a low cost.

Our services enable these consumers to stay in their homes instead of progressing to much more expensive health care, which occur in a less intimate setting. The good work that Addus does each and every day is only possible due to the commitment and hard work of each of our employees. I am very appreciative for the ongoing efforts of the team.

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

M&A transaction expenses of $0.04; restructuring, severance and other costs of $0.02 and non-cash stock-based compensation of $0.09.

As previously reported, our adjusted per share results for the second quarter of 2018 exclude M&A transaction expenses of $0.03; restructuring charges, severance and other costs of $0.04; and non-cash stock-based compensation of $0.07. Our tax rate for the second quarter of 2019 was 22.6%, within the range of our expectation.

While for the full year 2019, we continue to expect our tax rate to be in the low 20% range, we anticipate the addition of VIP and Foremost in New York with higher tax rate profiles to increase our tax rate going forward by approximately 150 to 200 basis points.

DSOs increased to 81 days at the end of the second quarter of 2019 compared with 78 days at the end of the first quarter of 2019.

While we saw the expected improvement related to payer system delays and patient transfers we experienced during the first quarter, DSOs for the Illinois Department of Aging rose to 82 days at the end of the second quarter of 2019 compared with 67 days at the end of the first quarter.

This increase relates directly to the exhaustion of the state’s prior fiscal year budget appropriation for home and community-based services in advance of the end of the fiscal year. The state’s fiscal 2020 budget included additional appropriation to encompass the prior year shortfall as well as the current year expected spend.

With this commitment, we have already seen positive cash flows of Illinois in the third quarter and improvement in their DSOs. We will continue to work with state leadership under the new administration to try to return to normalized levels.

Our second quarter net cash used in operations totaled $0.9 million and at June 30, 2019, we had $54.8 million in cash on hand.

With our credit facility announced last year, we continue to have substantial capacity to support our acquisition strategy with only $39 million of bank debt at quarter end and $62.8 million after the Alliance and Foremost acquisitions on August 1. This concludes our prepared comments this morning.

I want to thank you for being with us and I’ll now ask the operator to please open the line for your questions..

[Operator Instructions] And our first question comes from the line of Brian Tanquilut from Jefferies. You may begin..

Hi good morning guys. Congratulations on a really good quarter.

So I guess, Dirk, my first question, as we think about what’s happening in New York and New Mexico, do you think that this is the early stages or early signs of we’re seeing the importance of size and scale in this business where you’re able to get market share or have the negotiating power with commercial or with the Medicaid MCOs as you try to get better rates in states where it’s managed?.

Yes. Thanks, Brian. Yes, we do think that, and this goes back to the strategy that we strived to start implementing about 3 years ago where we believe that it wasn’t necessarily the number of states you were in, but it was the ability within the state to offer the coverage that MCO partners would need.

And we believe, as more and more states look to value-based pricing and size and the ability to negotiate with the managed care providers or the state will be important. So, while we’ve not really seen much of this happening yet outside these two states, we do believe in the future, this will occur..

Got it.

And then, Dirk, you touched on the MA opportunity a little bit with that color on the contracts that you have, what are the discussions like now in terms of other plans or some of these national plans that you’re already contracted with in terms of how do you get the hours, how do you get into the value-based portion of this? And I know we’ve talked about that in the past.

Can you give us some thoughts on how we should be thinking about the expansion of this opportunity?.

Yes. I think there’s a real education process going on now between providers like Addus, where we with the personal care services, the non-clinical component of home care dealing with the Medicare Advantage companies because they’ve not really experienced our service in the past.

And so, what we’re working with them on is trying to show them how we can affect positively their bottom line through reduction of cost, especially related around items such as emergency room visits, hospitalization days, readmission.

So, it’s a process, Brian, that takes a little time, and that’s why we feel like for us, as we continue to move in that direction and move towards a value-based care system with these payers, it’s going to take a little longer than starting in 2020..

I appreciate it. And then last question for me, Dirk, as I think about M&A, obviously, 3 deals closed within the last 2 months.

Does this mean that we’re done for the year? Or how does the pipeline look between now and year-end?.

Well, Brian, our team wishes we were. They would probably tell you they’d like a little break, but I will assure you, we’re not. Addus is a part of our strategy and part of our plan is to be a growth company through, not only organic growth, but also through strategic acquisitions.

So, we continue to be looking at both clinical and nonclinical acquisitions. So, our belief is we have enough in the pipeline right now that we’re working on that there is, we anticipate before the end of the year, we’ll be able to talk to you about additional opportunities that come on with Addus..

Alright. Sounds good. Thanks Dirk..

Thanks Brian..

Thank you. And our next question comes from the line of Frank Morgan from RBC Capital Markets. You may begin..

Good morning. Hi, I was hoping I could get just a little more color on this on your existing Medicare Advantage relationships.

Could you talk a little bit about kind of how those referral relationships you’re working today? Is it any different from what you’re doing in your in the government side of your business? So, any color on differences in services offered? And maybe a little color about how those rates compare to your other rates?.

Yes thanks Frank. Medicare Advantage, we believe, is a very important part of our future, and we’re trying to do it in such a way with our partners that it makes sense for both of us. The way we’ve really started out this last year is where the benefit is more of a respite benefit.

It’s probably 1/5 of the hours that we normally see personal care patients receive from state Medicaid programs, but I think that’s partially by design. That’s for the MA Plans to be able to offer this as a service, bring in new members and then to see how it will work going forward. So, we continue to work with them.

Today, we work with them on a per hour basis. I think in the future, our goal would be to continue to develop data with these plans so that we can go to some sort of model that would be more value based. But today, again, it’s very early, and it’s more of a respite benefit with the plans we have today..

Got it.

And I guess back on that narrowing of networks in New York, do you feel like you are kind of there or do you expect that the full impact of this narrowing has been is it now in the run rate of the business or do you think there is still more upside there?.

I think it’s largely completed, and that’s not to say we won’t see some experience in some advantage of that in the third quarter. But I think due to the timing that was required by the state, most of the plans are near completion at narrowing now.

That being said, I will say, as we continue to grow such as the VIP acquisition, the foremost acquisition in the city, we continue to believe that we will be an important player with managed care providers in the city and continue to see benefits. But the main increase that we’ve experienced these last 15 months is nearing in..

Got it. And then my last one, I know it’s a smaller part of your business today, but with hospice and home health care, but you’re clearly still making acquisitions there.

Any color on sort of how the, your view on the how the final looks shook out for hospice and then also on what you’re seeing on PDGM for the home health care side?.

Really, the PDGM for the home health care side for us is very, very immaterial. We’re more of a rural provider, a very small provider of care. So, it’s not an issue for us as a company today. Obviously, as we grow, it could be, but the fact that we’re not in it today, hopefully, we’ll take advantage of any changes that do occur.

As far as hospice, we’re still very excited about hospice and the opportunity there. We see continue to see synergies between personal care, hospice. We see synergy between personal care and Home Health. So, we’re excited about all 3 areas that we offer, and we will continue, Frank, to look to grow.

We’ve been very careful as we’ve looked into the clinical side of the business, but we are we are looking. And if we find a strategic acquisition in hospice that can help drive us towards our goal of 20% of our revenue, then we will, obviously, look at that and be willing to probably pay a little more than we’ve been willing to pay in the past..

Thank you. And our next question comes from the line of Matthew Gillmor from Baird. You may begin..

Hi thanks for the question. I wanted to follow up on the acquisitions that you announced.

Can you just confirm that the deal multiples were roughly in line with the ranges that you’ve talked about in the past? And then for the New York deal, it sounds like you maybe bought an organization that was going to be excluded from some of the networks going forward, but I was curious if there’s other targets like that as the networks get narrow that there’s an ability to pick up share through a similar acquisition?.

Yes, Matt, this is Brian. First, on the multiple question, I think looking at Alliance, being a pretty good mix of skilled. I think we were still very happy that the multiple that we paid for that deal was in our normal range, not our maybe the higher profile that we would typically expect from skilled.

So that was a good mixed asset, kind of similar to the Ambercare that we did last year had a really reasonable multiple with a decent amount of skilled business that came with some personal care. So, we were very happy, but that was definitely in the range that we’ve seen historically.

Foremost with kind of what’s going on in New York, that was a lower multiple than is our range. It’s a smaller asset. I think we’ve talked previously that for those smaller tuck-ins, as multiples tend to be lower anyway, but with what’s happening in New York, obviously, we had a decent amount of leverage in that situation.

So, a great multiple that we paid there. But it provided a little bit of a strategic advantage for us as well. It looks like they were going to get shook out and gave us an office in Manhattan that we didn’t have with VIP system coverage there, so we were happy to do that.

And I think there’s definitely other opportunities in the M&A pipeline in the New York City area. This transition has occurred. So other things that we’re continuing to look at..

Okay. Fair enough. And then maybe following up on the Illinois rate update and I was kind of curious if you could give us some sense for the impact on margins. And in the past, you’ve talked about the timing issue, having a 70 basis point drag. I guess it could be a little bit larger in the third quarter just on a temporary basis.

Once the rate updates come through, do you will you get all the 70 basis points back as we’re looking at 2020? And how does if you could kind of update us as well with respect to the 10% long-term margin targets? Or how close do you think you’ll be once these rates come through?.

Yes, Matt, this is Brian again. I definitely think with the September 1 increase, that will help offset the dollar increase in Chicago that became effective this July 2019 and help offset a little bit of what we took last year.

By the time we get the January increase, our expectations that will cover that as well and should be consistent with our kind of our typical profile. As you know, when it’s a state increase, not Chicago-specific increase, we have to go through our process for our downstate workers as well.

That is an ongoing process that we haven’t finalized, but we have anticipated rate that we think we’ll get out of that. So, we keep a pretty consistent margin profile to our existing business after those go through. But definitely, it’s helpful to get us back towards the 10% target that we’ve talked about.

The acquisitions that we’ve announced are helping with that as well. So, when we get that rolled through in January with that leverage, we would anticipate getting to that range for sure..

Okay, great. Thanks very much..

Thank you. And our next question will come from the line John Ransom from Raymond James. You may begin..

Hi good morning. You know me I like to make things simple. So, when we thought about Illinois and we think about 2020, when everything is fully baked in, we modeled about a $40 million gross revenue and a low 20s gross margin. And I think at the time we talked you guys have not yet completed your negotiations downstream with the SEIU.

So now that we’re a few weeks past that, are those still pretty decent walking around assumptions to think about the impact for 2020?.

Yes. I think those are still decent. Nothing’s really changed. I think the only thing that’s really impacted is just the expected timing. We expect that July 1, that’s moved back a little bit as the state works with the government, but nothing else has really changed as far as the components..

Okay. And the other thing I wanted to follow up on is I know there was some discussion at a Board level about M&A and trying to accelerate and do some different things with M&A, just given the difficulty in finding assets. I know Amedisys has come through on all there and they’re doing something different with the development strategy.

But again, it’s been a few weeks since we’ve talked about that.

But what’s the latest and greatest on that? And do you think that that’s something that will be notable months or years out in terms of your pace of spend?.

Yes. I think, John, I can start, and Dirk can add some color as well. But just on M&A, I think our pipeline is still pretty robust. We have a pretty strong focus as a team continuing to do strategic acquisitions in our areas. And so, we definitely had these conversations internally.

We mentioned we made sure we had the right resources dedicated to that area from a sourcing perspective and then as well as integration. So, I think that’s ongoing. That really isn’t a large change, but it’s always a primary focus of ours to grow through acquisitions..

One, Medicaid personal care is eventually going to benefit those of size that can negotiate rates and give coverage to the managed care providers that outsource that service; and then two, we believe it’s very important as Medicare Advantage continues to push in area that not only do we offer personal care but we have the ability to offer some clinical services along with that to help our MA potential MA partners.

So, you’ll continue to see us look in those directions as it relates to potential M&A targets..

And then last one for me is I think some of your peers have are thinking that and this is hard to pull off, I know. But ideally, sort of this blended hospice, personal care, home care model creating a continuum.

Is there I mean just given how expensive those assets are, is there a maybe market-by-market plan B where you partner with other providers and try to go with one sort of package to Medicare/Medicaid type plans? Or do you think that it’s going to be a buy-and-build versus a JV model..

Well, I think each company has their own thought processes. Others believe in the JV model. We have not yet as of yet entered into that type of relationship. We like the process of building our own ability to control.

We believe we’ve been controlling the quality of cost through ownership, if possible and so, the fact that we already have a large personal care presence, and that’s probably one of the most difficult presence to build across the nation. We believe strongly we can come back behind it and try to add clinical resources to it.

Now one of the points you brought out is this is still there, and that is the valuation it takes to acquire these clinical services are a little higher, unless especially on the hospice side. And so that’s always going to be a challenge..

Right. Do you think other people have said now that we’ve got this PDGM rollout, maybe the dam breaks a little bit on home health acquisitions but it takes a heck of a lot of infrastructure and modeling to move from where we are now to PDGM.

Is that something you think is the case? And if so, do you have to build them some more infrastructure for modeling? I know, again, some of the peer companies have been spending 1 year-plus to get ready for this? Is that something if you went big into Home Health, do you have to build out that sort of modeling and process capability or do you think you can buy it?.

Well, the fact that we’re not in home care in any material way prior to PDGM coming in, we believe that if we continue to grow in that area, it will be after the rule is in effect, and we’ll be able to see how it affects these companies and we believe, at that time, be able to buy it. So, that’s more our thinking today..

Okay, thanks so much..

Thanks John..

[Operator Instructions] Our next question comes from the line of Mitra Ramgopal from Sidoti. You may begin..

Yes, hi good morning. Just a couple of questions. We saw the last couple of quarters, same-store trending above what you’ve guided to in the past, that 3% to 5%. I was just wondering how we should think about that over the remainder of this year and going into 2020. Obviously, you’ve benefited from New York.

And I was wondering if that 5% plus number you feel is pretty sustainable..

Mitra, we are still confident long-term in a 3% to 5% organic growth rate, still our goal that we want to give to our shareholders, potential shareholders and guys such as yourself that work with us. That being said, we’re getting a nice increase from Illinois, hopefully, effective September 1, and then followed up by the January 1.

So, we are going to be pushing at the high end, slightly above that growth rate probably for the next four quarters or so as those price increases flow through.

So, we don’t really want to change our stated goal to encompass that because we feel that is a kind of an extraordinary change for that is being done to take care of statutory increases in minimum wage and that will fall off.

So long-term, we are still 3% to 5%, but we do believe we will be at the high end or a little above for the next four quarters..

Okay. No, that’s great.

And then just on the labor front side, as you look in terms of your growth over the next few years, do you see labor constraints as a potential headwind in terms of being able to find sufficient caregivers given the tight market out there?.

Yes. It’s probably our single biggest impediment to growth today. We talk about it as a team, as a leadership team constantly.

I know that our operations team, along with our HR and other folks in our company, are doing everything we can to use technology in other areas to increase our ability to recruit, but I do believe right now with the economy like it is and some of the minimum wage law increases that more leveled the playing field for a number of companies, I think it’s going to continue to be a difficult aspect of our operation for the next few years..

Okay. Thanks again for taking the question..

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Dirk Allison for closing remarks..

Thank you very much, operator. Listen, I would like to thank everybody today for your continuing interest in Addus and for your participation on our earnings call today. Hope you have a great week. Thank you..

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