Good morning, and welcome to the Addus HomeCare Corporation Third 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 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..

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

Following our comments, we would be happy to respond to any questions. As you saw with our earnings release yesterday, we had a very busy third quarter. In early September, we completed the offering of 2.3 million shares of equity resulting in Addus raising over $172 million.

This offering allowed us to acquire hospice partners of America, our previously announced $130 million hospice acquisition while maintaining a clean balance sheet allowing us to continue to focus on our acquisition strategy.

With the completion of this offering, and after the funding of the HPA transaction, we continue to have a strong cash position with minimal debt. In addition to our equity offering, during the third quarter we settled the previously disclosed Illinois qui tam suit brought against Addus in 2015.

This suit related to our previously discontinued Home Health segment, which was sold in 2013. A portion of the lawsuit had been previously dismissed, and the U.S. government had declined to intervene in the lawsuit.

While we viewed and continue to view the claim against Addus as meritless, our leadership believes that settling this suit at the amount we announced was a prudent business decision. This settlement allowed us to move forward without the ongoing legal expenses that would be required to resolve the matter up to and including an actual trial.

As for the financial results we announced yesterday, our solid operating performance continued in the third quarter of 2019. Revenue for the third quarter was $169.8 million, compared to $137.7 million for the same period in 2018, an increase of 23.3%.

Adjusted earnings per diluted share for the third quarter of 2019 increased to $0.62 as compared to $0.48 for the same period in 2018, an increase of 29.2%. Our adjusted EBITDA for the third quarter of 2019 was $14.9 million as compared to $11.6 million for the same period in 2018, an increase of 27.8%.

As we discussed on our last earnings call, in the fiscal 2020 Illinois state budget, our industry received two reimbursement rate increases to offset the statutory minimum wage increases experienced in both Chicago and Cook County.

The first rate increase, which was expected to be effective on September 1, 2019, would increase our rate to $20.28 per hour. This increase has been delayed due to the state's need to file additional information required to obtain approval from the federal government.

This information has now been filed with the appropriate federal department with their approval expected shortly. While we do not have a data set today for when this increase will be approved and become effective, we do believe this could occur within the next few weeks.

This delay means our third quarter financial results were negatively affected by the lack of reimbursement offset for the required July 1, 2019 minimum wage increase in Chicago and Cook County. The federal approval when granted will cover both the increased $20.28, as well as the January 1, 2020 increase which will take our hourly rate to $21.84.

We are appreciative that the leadership of the State of Illinois recognize the need to make adjustments to cover the cost associated with a higher minimum wages mandated by statute and look forward to the final federal approval needed to complete this process.

With our increasing presence in clinical service primarily hospice, we felt it was time to begin to break out our same store growth between personal care services and clinical services. For the last few quarters, our same store growth for personal care services has exceeded our stated target range of 3% to 5%.

For the third quarter of 2019, our personal care same store growth was 7.7% driven by our growth in the New York market, as the final stages of the state land narrowing of the provider network were completed, as well as the MCO rate increase in Illinois, which was effective July 31.

As a reminder, this MCO business represents approximately 30% of our overall Illinois business. Going forward our higher than normal same-store growth in the New York market should moderate as the process to narrow the provider network comes to its conclusion.

However, we should continue to see solid same-store growth as the expected Illinois rate increase takes effect. For our clinical services, our same-store growth was 32.3%, largely driven by the solid growth we have seen in our Ambercare hospice program.

While we have not published a stated same-store growth goal for our clinical service segment, as of today, we will be looking to provide that goal once we have a quarter or two of history with the HPA operation.

On August 1, 2019, we completed the acquisitions on both 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. To remind you the Alliance acquisition broadened our hospice coverage in markets in New Mexico, that we previously did not serve.

Foremost Home Care strengthened our personal care services in the New York City metropolitan area, and is now an important part of our VIP operation, which we acquired on June 1, 2019. Both of these most recent acquisitions aligned with our strategy of strengthening our coverage in states where we currently operate.

On October 1 2019, we closed on our previously announced acquisition on hospice partners in America, a $55 million multi state provider of hospice services. This acquisition allows us to provide hospice services to six additional states, including four states where we already have a strong personal care presence.

It also gave us an entry into the Texas market which has been a strategic goal of our company. With the completion of the HPA transaction, Addus now provides hospice services to approximately 1800 patients in seven states. With the completion of this acquisition, clinical services now represent approximately 15% of our total revenues.

During 2019, we have acquired four companies with approximately $130 million of annualized revenue. With all four acquisitions closing in the last five months, our team has been focused on ensuring that our integration plans are being followed and are on schedule.

I am proud of the efforts of our Addus team as we have jointly focused on ensuring smooth integration of these acquisitions while continuing to effectively operate our growing company. As discussed on our last few calls, we continue to be 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 began 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 still 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 third quarter financial performance, let me think thank all the employees of Addus. Our mission, providing cost effective care and assistance that gives people the freedom to remain in their homes is one that each of our team endeavors to live each day.

I'm extremely proud of all these efforts and know each employee works hard to live our values while serving our patients. We have a very important responsibility to the thousands of patients and their families who trust us with their care, and I am very appreciative of the ongoing efforts of our team. With that, let me turn the call over to Brian..

interest income from Illinois of $0.02, M&A transaction expenses of $0.10, severance and other non-recurring cost of $0.08 and noncash stock-based compensation of $0.08.

As previously reported our adjusted per share results for the third quarter of 2018 exclude M&A transaction expenses of $0.11, severance and other nonrecurring costs of $0.02 and noncash stock-based compensation of $0.07. Our tax rate for the third quarter of 2019 was 24.4% within the range of our expectation for the full year of 2019.

We continue to expect our tax rates to be in the low to mid 20% range.

As Dirk mentioned, during the quarter we entered into a settlement agreement that resolved our historical key tam litigation and have reflected the amount of the settlement and related legal cost as discontinued operations net of tax as this related to our previously divested home health business.

DSOs were 75 days at the end of the third quarter of 2019, compared with 81 days at the end of the second quarter of 2019.

During the quarter, we saw increased payments from the Illinois Department of Aging as anticipated, with their DSO declining to 65 days at the end of the third quarter of 2019 compared with 82 days at the end of the second quarter of 2019.

While we were pleased with this improvement, the state has also began to further shift of clients to manage Medicaid plans, which hindered a further reduction or overall DSO number as those plans complete the transfer process.

We anticipate this activity to continue in the fourth quarter and its end towards deluging with both the state and managed Medicaid plans to ensure a smoother transition as possible.

Our third quarter net cash provided by operations totaled 12.2 million and at September 30, 2019, we had 239.6 million in cash on hand prior to the completion of a Hospice Partners acquisition on October 1.

We continue to have substantial capacity to support our acquisition strategy with only 60.2 million of bank debt at quarter end and 134.1 million in availability under our revolver. This concludes our prepared comments this morning. Want to thank you for being with us. I’ll now ask the operator to please open the line for your questions..

[Operator Instructions] Our first question comes from the line of Scott Fidel with Stephens. Your line is open..

First question just - as you get those two incremental rate increases that you're expecting in Illinois and in the 4Q and then the 1Q.

Any update on what's the incremental revenue impact is that you're expecting from those two rate increase updates fully move into the run rate?.

Yes, that's going to be just under the total of what we have not received today will be right at 40 million Scott in revenue..

Then second question just on the improvement in the DSOs, Brian it sounds like, at least with the shift to more managed Medicaid patients in Illinois, but that could continue to be a bit of a tail wind in the 4Q. So any expectations on sort of where you're expecting DSOs to trend to in the fourth quarter.

Then maybe also, just related to that just in general, what you're thinking about operating cash flow expectations for the 4Q as well?.

Yes, keep in mind we've experienced this before with Illinois, whenever they go through this transition phase. It typically has a negative impact on cash flow during that transition as they move those patients and authorizations over to the plan. So we typically see a lag during that transition.

And then there's a catch up once those patients are fully incorporated into the management Medicaid plans. So that's what we would kind of expect to see in Q4, as the state continues that push.

Ultimately though, we do see it as a positive as they continue to, to increase the MCO presence, but there will be a cash flow impact in that transition period..

And then just one last question from me, just as we're thinking about 2020 at this point, interested in, maybe just your update on sort of high level headwinds and tailwinds. I know obviously, the Illinois rate increase would seem to be a tailwind as you sort of fully capture that.

I know you mentioned some expected normalization and the growth rate in New York. Just interested in terms of what else you obviously at the annualization of the HPA deal as well, but interested, some just general other sort of headwinds or tailwinds that you want to call out for us as we think about modeling 2020 and then that's it for me? Thanks..

Yes Scott, I think clearly the tailwinds for the company, as you know the Illinois rate increase is going to be a big deal for us, it's going to take care of the two minimum wage increases that we've given to our Illinois employees over the last couple of years so that's very exciting.

We've seen as far as the tailwind the consolidation in the New York marketplace now we're starting to see that come to an end. So that process is going to be complete. There are challenges in New York. It's a state that has budget challenges going forward. We will continue to work hard in that state.

So I would say, as far as somewhat of a headwind that may be a little bit of one there, but understand to all states have ups and downs with their budgets. And we've been able to effectively operate through that over the last three years. I think the continuing headwind as it relates to just an overall part of the company relates to recruiting.

It's still difficult to recruit, it's difficult to recruit, it's difficult to retain. It's a tough market with the unemployment as low as it is. So I think that's going to continue to be a challenge..

Our next question comes from the line of Matt Larew with William Blair. Your line is open..

I first wanted to ask about some of the acquisitions. Obviously, some closed inter quarter and the opposite is your first full quarter with VIP.

So can maybe just update on how those have arrived relative to expectations, what they contributed in the quarter, to the extent you can break them out, and then where you stand in terms of integration process, be it persistent conversion and anything like that with each of those?.

I think all the integration activities for the acquisitions we've completed so far, are on track. And, I mean, expectations, financial performance as well. I think, VIP coming on board in June, obviously most of that transition is complete.

Alliance and foremost that came on during the quarter is going very well and is on track, still working through the conversion of Home Care, home base for Alliance, but that is as scheduled. And then I think, initially, one month into the HPA acquisition through October, that leadership team is working very well with ours.

I think that also is on track for us. So no surprises to-date. I know there's been a lot of activities this year. But our teams are working very diligently with all of those that we've acquired and have achieved, what we've expected..

I agree with Brian on that. The integration activities are going well. We're actually in New York, working on consolidating our South Shore and VIP operations in certain markets. So that'll go kind of Q1, a couple of small office mergers there.

And then also moving a South Shore IT platform to the VIP platform, so they'll be on a common platform for management purposes..

And then, Dirk, wanted to ask you about some of the comments around Medicare Advantage opportunity. Obviously, you're seeing some additional referrals now.

But the newer opportunities that you're seeing, are those potentially changes in contracts, changes in the way they're structured with respect to risk sharing, with respect to additional responsibilities, potentially, mixes of skilled and non-skilled services where you add capabilities? How do you evolve - how do you expect the next couple of years of growth in MA to maybe differ or be similar to the growth you've experienced in the past, kind of, 24-months?.

Can we save them dollars through things we discussed before, emergency room visits, hospitalization, readmissions. The two we're working with have a little different structure, but they're both basically an opportunity for us to get our per diem right. While at the same time, then sharing in potential cost savings going forward.

So we're very excited about that. Those should start probably in the first quarter of 2020. So by the end of 2020, we'll have those results. And for a long-term aspect for us, we do believe we're going to be moving towards cost sharing, eventually a risk-based approach, which we're excited about. And we're probably looking at that being 2021, 2022..

And then just the last one would be, whether you've had any discussions with other states beyond New York about more aggressive network narrowing at any time kind of here in the next year or two?.

At this point, we haven't had any conversations or know of any states that does not go through a similar process. I think, obviously, our strategy of trying to become strong and have a solid presence in states and preparation for that, I think it plays well and it's played well in New York.

But at this time, no other states that we're aware of, that have indicated that similar process..

Our next question comes from the line of Matthew Borsch with BMO Capital Markets. Your line is open..

Maybe I could just ask on the question that you just addressed regarding the narrow networks.

Are you finding that that is something that comes with a demand for lower reimbursement? Is there a trade-off that's involved there? I mean, if you look ahead, do you think this is something that's going to play significantly to your advantage, given your ability to meet the, whatever complex requirements might be demanded of these plans?.

I think the narrowing of the networks to-date have not come with a reduction in fee as of yet. We've been able to negotiate strong rates in the New York marketplace, even while the networks were narrowing. And I think that's partially due to our size, our coverage and our really strong relationships with MCOs.

However, in the future, there are always going to be situations where the states get into budget issues, where they're going to be looking at how do they control costs. And we believe our size and ability, at times, maybe to take a little lower increase in rate. While at the same time, taking on more new patients makes a lot of sense.

So that's our part of our strategic focus on getting size in a market so that we can partner across the table with these MCOs..

And you had touched on one of the headwinds next year, possibly being the budget constraints in New York.

Is there anything specific that you would point to there?.

The budget itself has gotten tight. Now, the state was looking at a way to reduce one of the programs called CDPAP. And they were looking at whether it was narrowing the network or redoing the way they priced it. We're working with the state now, as an industry, to try to make sure that whatever comes through, it's good for both sides.

So I think, like all states, New York is one of those, we'll continue to work with and hopefully have strong relationships so that we can help them and help us determine what's the best way moving forward, so that we can control the cost of this service that we provide..

Our next question comes from the line of Matthew Gillmor with Baird. Your line is open..

I wanted to ask about the same store growth metric, and sort of how that shook out by geography. So can you - and I'm, if you don't want to be overly specific, I'd certainly appreciate that.

But could you may be at least rank, sort of, your major markets in terms of the growth rate? And if you had any indications or views in terms of how that would trend as you look into 2020, that would be helpful as well?.

I think, probably, the top four markets that we had that really contributed to the stronger at this quarter, and a couple that we've talked about; New York, obviously, is an area that we're - at Illinois, partial rate increase, also was helpful. But we talked about previously, we've done well in New Mexico with our rate negotiations there.

And on a comp basis, that continues to provide meaningful impact to our same store numbers. So those three, I think, alternatively in one of our other larger states, Washington State, has some really good volume growth and also some positive rate impact that contributed.

So between those, I think that was what really drove to the high end of where we ended for the quarter..

And then on the acquisition pipeline, I know you've had a busy year with $130 million of acquired revenue. And you also mentioned to focus on integrating some of the recent deals.

Should we still think about the annual target being $75 million $100 million, as we're moving into 2020? And could you also then just give us an update in terms of the mix of what's in the pipeline, if that's related to personal care or to hospice right now?.

Yes, I would say that you can continue to expect $75 to $100 million for the next couple of years, as our target. Obviously, we've been able to overachieve that for the last couple years and we would expect with our pipeline to continuing to do well.

As we look at what's in the pipeline today, I would say probably the vast majority of what we're looking at. Our personal care services are low. There are, today, some hospice assets we're looking at. Mainly, the smaller assets now that we have, Ambercare and the Alliance, as well as the HPA, nice business to grow from.

Going into next year, one of the things I want to make sure is we point out too is, we'll be looking at what the - even though PDGM effect was reduced, properly so. It still will affect the industry a bit, as well the reduction of the RAP payments. So as a Company, we have become very interested in home health.

It has done very well for us in our New Mexico market working with the - having all three levels of care. Brad and his team has done a very good job of adding and seeing somewhat of the synergies back and forth among the service line. So I would say in 2020 in addition to most of our look will be at personal care.

We'll also start looking at home health assets and seeing if we can bring them on..

Our next question comes from the line of Brian Tanquilut with Jefferies. Your line is open..

Congrats on the very good quarter. I guess Brian my first question for you is, as I think about the rate increase in Illinois or they increases, so mind just walking us through the mechanics, I know that's still pending with CMS.

When does that get effective? Is it retroactive to September 1? Can you just walk us through how we could think about - how the rate increases will progress if they're approved?.

Yes. Let me start with that and then we will - I’ll let Brian talk about the mechanics. But from our standpoint, we don't expect it to be retroactive. Doesn't mean that it won't be, but at this point in time, we are not planning on that. The process is going through the normal rate increase process.

When you have a 10% increase or greater takes a little more paperwork, takes a little more time. We are getting close to the estimated time that we should have an answer. Let me emphasize it's estimated, we have no firm knowledge that it'll be by the mid-November, late November timeframe. But we do believe it is getting close.

We feel comfortable it will be approved, but that's yet to be seen. So whether it will be approved in November and effective November 1, it will be approved and effective December 1st is still to be seen. You want to talk about the process..

Yes, just for some clarity. So in the quarter, keep in mind in Q3 we absorbed the impact of the Chicago minimum wage step up. We did get the benefit of the MCO rate increase. And there's also the related wage costs in that in the quarter as well.

So, once CMS approves the remainder of the rate increase schedule for this year, it was the conversations that we'll have with CIU and then we'll see a similar effect Jan 1, with the reimbursement rate increase in a step up in wages corresponding..

Because one of the things that - I think, you know, but I want to clarify is the minimum wages increased in Chicago and Cook County, but it has not increased anywhere else in the Illinois marketplace. And so as we receive rate increases from the state, part of our process is negotiate with our partners at the union.

What the appropriate rate increases for those employees that did not fall under the Chicago of minimum wage increase.

So part of this, when we get the first increase will be determining the proper flow through to those employees at other parts of the state and then obviously when the January increase comes through the same process at that point with those outside the Chicago and South Cook market..

And then I guess my follow up as I think about 2020 without going, I know you don't give guidance, but as I think about the moving parts, just like you mentioned Dirk, potential rate increases or wage increases for your employees in Illinois, the New York benefits tailwind should carry over probably till September is my guess.

How should - and then the HPA comes in.

How should we be thinking about the moving parts in terms of your expectation for same store and margins next year as a mix shift to a greater proportion of hospice?.

Yes, I think I can start in and Dirk can add some comments as well. This is Brian.

I think, you know, we obviously had a couple of things that have impacted us positively in same-store particularly in personal care over the last couple of quarters, as we kind of move through this comps and next couple we would expect to kind of still be in that higher range.

But I think from our perspective, just in an aggregate sense, we still believe that 3% to 5% dive that we've given overall for organic growth still is what we would expect to see you long term.

We tried to start providing more information on hospice, home health obviously the operational changes that we've made from Ambercare in the last year really paid a lot of dividends.

We would expect them to potentially have a little higher growth profile than personal care on a long-term basis, but with HPA coming onboard, we think that that mix and being able to kind of put those platforms together as it, it's definitely helpful for us..

Yes. Let me add to Brian's comments as it relates to personal care and our goal is 3% to 5%. We set this goal early in 2016 where we were still learning the industry and it's proven to be, I think, a fairly accurate reflection of what the industry has grown and what we've been able to do.

We do know now that we're becoming a bigger part of personal care markets in a number of States. And with that comes the ability hopefully to grow maybe above market. So we'll look at the 3% to 5% growth rate over the next year or so to see if there needs to be adjusted.

Right now we're comfortable with it knowing that for the next four or five quarters, we are going to probably be at the high end or above that range because of things such as the Illinois rate increase coming through but with the unit growth that Brad and his team has been seeing.

Right now we want to wait before we just had just been good unit growth, we want to make sure we can continue that..

Yes. And this is Brad, just a real quick on the home health and the hospice side. With any acquisition that you tend to have a little distraction before maybe before closing and then shortly after closing. So I'll say that the comps were a little easier on the home health and hospice side this quarter.

They're going to get a little tougher, as we go into 2020..

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

First I was just wondering, obviously you expect a nice tailwind from Illinois as it relates to more favorable reimbursement. I'm just wondering if they're out of States.

You think you could be benefiting from also if you look out to 2020 and beyond in terms of reimbursement?.

Yes Mitra. I think we've done very well. Obviously we've had a good year with the little way coming through one of our largest markets very positively sets us up for the next couple of years. I think our teams, where we have the opportunities to have rate negotiations had been very successful in markets like New Mexico and New York.

Keep in mind, most of our other States typically are that rate is set by the state and is tied into their budgets. So, you know, we've gotten incremental increases where we've had, minimum wage stuff ups and others.

But, I don't have any on the horizon in 2020 that we would expect to see a similar size increase that we're seeing from Illinois at this point..

Yes let me also make a comment around that line that, you know, in certain of our markets, the industry has become unionized, and most of these are in the Midwest stage, New York and in the Northwest and we have - I would classify as a strong relationship with our unions in those particular markets.

And they have been great partners with us as we as a company and an industry have worked with the stage to make sure that the state rates narrow the increase in minimum wage.

Our employees deserve these minimum wage increases, but we have to make sure we fund them so those jobs can continue and we appreciate the partnership with the unions and the states, and looking at those.

And so we've had very effective history in the last three years of making sure that as rates and wage rates increase, we've got these larger rate increases going forward.

Now long-term, once minimum wage moderates towards the $13 to $15 hour that most of these States talking about, we probably will return to more of the historical rate increase year-over-year, which will be in that 3% to 5% or some targets we look at. So far we've done well with our partners the last two or three years..

And just coming back on the acquisition front. Obviously Dirk you mentioned you'd like to continue on the pace that you've seen in the last couple of years. I assume you still have a really nice pipeline.

I was just wondering, if you're seeing any competition as it relates to the other players coming into the space now, potentially changing valuations as you look at the deals?.

You know, as it relates to our clinical services, well home health, there's not been much activity as you know, as people avoided for the industry to settle out with the change in reimbursement.

Hospice, yes, certainly, there is competition in the hospice market, as we are looking for to hospice acquisitions in the future, they're going to be the more targeted probably on the smaller side and probably won't have as much competition as maybe we faced on some of the larger assets.

When you go to personal care, that's a really interesting industry because you've seen competitors of ours that have tried to grow that side of their business, it is hard to do.

We're fortunate in that we have such a strong network across the 26 States in which we operate, that we're able to acquire some of the smaller operators and fold them into our operations in giving us a good base in that particular area.

So I think because of the difficulty of building a large sized presence in personal care in various States, we at times don't have as much competition on the personal care side as maybe we've seen on the hospice side. So we anticipate going forward that will continue..

Thank you. I am not showing any further questions. I would now like to turn the call over to Dirk Allison for closing remarks..

Thank you, Operator. I want to thank you all for your interest in Addus and for you being part of our earnings call today. Have a great week. Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone have a great day..