Addus Homecare Corp

NASDAQ:ADUS

Earnings Call Transcript 2018-Q2

[Scott Brittain, executive]

Good morning, and welcome to the Addus HomeCare Corporation Second Quarter 2018 Earnings Conference Call. Today's call is being recorded.

To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2018 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.

[R. Allison, executive]

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 will begin with some overall comments, and then Brian will discuss the second quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions.

As we announced yesterday, our strong operating performance continued in the second quarter of 2018, which led to our solid financial results. Revenue for the second quarter was $131.2 million compared to $103.6 million for the same period in 2017, an increase of 26.7%, driven by a combination of organic growth and acquisitions. Our adjusted earnings per diluted share for the second quarter of 2018 increased to $0.50 as compared to $0.38 for the same period in 2017, an increase of 31.6%.

Our adjusted EBITDA for the second quarter of 2018 increased 32.3% to $11.3 million from $8.6 million, with an increase in our adjusted EBITDA margin to 8.6%. We ended the second quarter with approximately $69.2 million of cash in the bank and $103.7 million of debt.

As reflected in our cash position, our cash collections continue to be strong from all of our payers, including the state of Illinois. During June, the state of Illinois passed a budget for the 2019 fiscal year. This is the second consecutive year of a state budget, and this ensures that the more timely cash reimbursement from Illinois will continue for the next 12 months.

While the passing of a budget was good news, we were disappointed that the minimum wage offset that we were expecting in this budget was not in the final version that was passed. This means that for the next few quarters, we will see a decrease to our overall margins of approximately 70 basis points until we can get this increase from the state. We are working with the leaders of the state to try and have this minimum wage offset passed as part of a potential veto session, which will be held in November. While we cannot be certain of the timing of these rates to be increased to handle the minimum wage increase, which occurred in July, we do believe there is a good chance [audio gap] November elections, we may see this adjustment made in an upcoming session.

With the addition of home health and hospice to our company, we have begun the process of converting those operations to Homecare Homebase, the leading software system for these services. We are excited about moving to this new operating platform. We continue to believe that this conversion will be completed by the end of 2018.

The Ambercare acquisition is an example of our strategy to add services to our home-based care business model, a model that enables individuals to stay in their homes, while also offering services needed by our managed care partners. We will continue to look for opportunities to add services that benefit our consumers, patients and payers.

Our integration of both Arcadia and Ambercare continue as expected. As we have previously mentioned, the integration of these 2 acquisitions is being completed over a number of months. We should start seeing synergies from these companies starting in the fourth quarter of this year, with the complete realization of savings in the first quarter of 2019.

As far as financial performance, both companies continue to perform as we expected. Even as our integration efforts on these acquisitions are ongoing, our team continues to evaluate other opportunities to grow Addus through acquisition and believes that we will have the opportunity to close at least one additional transaction during 2018. We will continue to focus on expanding our market share in states in which we operate, looking at both personal care and hospice opportunities.

On our last earnings call, I mentioned that CMS had announced that personal care services may be added by Medicare Advantage Plans to their care offerings beginning in 2019. This is an exciting possibility for Addus and one which we have been discussing with our MCO partners. As you know, we have worked to develop strong relationships with managed care providers as more states have made the decision to outsource their Medicaid programs to MCOs. While it is too early to tell what the potential impact could be for Addus, this is another positive step towards expanding the availability of our home care services under a value-based payment system and an indication of the increasing awareness of the value of personal care services in improving the quality and lowering the cost of health care.

Before Brian walks you through a more detailed review of second quarter performance, let me thank the employees of Addus, who work hard every day taking care of patients. I want each of you to understand the importance of your job. You help to enable our patients to stay in their homes instead of progressing to much more expensive health care in less intimate settings. The good work that Addus does each and every day is made possible by all the hard work of our 31,000 employees.

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

[Brian Poff, executive]

Thank you, Dirk, and good morning to everyone. Our financial results for the second quarter of 2018 demonstrated the ongoing potential of our business model, which has leveraged the positive dynamics in the home care industry and our scaled leadership position in personal care to drive steady organic growth over the past 2 years and an increasing level of profitable growth from acquisitions.

With the second quarter acquisitions of Arcadia and Ambercare, which have combined historical annualized revenue of over $100 million, we believe we are well positioned to produce further profitable growth through the remainder of 2018 and into 2019. We expect this growth will also be supported by continued organic revenue expansion, with same-store revenues increasing in a range of 3% to 5%, and through additional accretive acquisitions from an increasingly robust pipeline of potential transactions.

As Dirk mentioned, total net service revenues for the second quarter increased 26.7% to $131.2 million, which included the impact of a 3.7% increase in same-store revenue. Approximately 78% of our total revenue growth was due to a 20.8% increase in personal care revenues for the quarter, which in turn reflected a 17% increase in billable hours per business day and a 3.3% increase in revenue per billable hour. The remaining approximately 22% of total revenue growth came from our initial revenues for hospice and home health services.

As noted in our press release, the adoption of ASU 2014-09 on January 1 affected the comparability of revenue growth and P&L items as a percentage of revenue as approximately $2.3 million of our provision for bad debt for the quarter was netted directly against revenue instead of as an operating expense as in prior periods.

This change reduced the revenue growth rate for the quarter by more than 200 basis points, although this reporting change has no effect on net income, adjusted EBITDA or adjusted earnings per diluted share.

Gross margin was 27.2% for the second quarter compared with 27.5% for the second quarter last year. However, with the adoption of ASU 2014-09 lowering our gross margin for the most recent quarter by 130 basis points, our comparable gross margin percentage to the prior year quarter was 28.5%, reflective of the impact of the higher-margin profile of our acquired skill business.

Although Dirk mentioned the impact on margins from the timing of a minimum wage offset in Illinois, we have been successful in gaining reimbursement increases in other states to offset mandated wage increases and largely maintain our margins.

G&A expense was 20.1% of revenue for the quarter compared with 18.4% for the second quarter last year. Approximately 50 basis points of the increase for the second quarter of 2018 was due to growth in M&A expenses, stock-based compensation, restructuring charges and severance and other costs compared to the second quarter of 2017, with another 30 basis points related to the impact of the adoption of the accounting standards update. The remainder of the increase is attributable to the G&A costs associated with our recent acquisitions, which we anticipate the ability to reduce as we complete our integration process toward the end of this year.

The company's adjusted EBITDA increased 32.3% to $11.3 million for the second quarter of 2018, while adjusted EBITDA margin increased 30 basis points from the second quarter last year to 8.6%. Adjusted net income per diluted share grew 31.6% to $0.50 for the second quarter from $0.38 for the second quarter of 2017.

The adjusted per share results for the second quarter of 2018 exclude the following: M&A transaction expenses of $0.03, restructuring charges of $0.01, severance and other costs of $0.03 and noncash stock-based compensation of $0.07. Our adjusted per share results for the second quarter of 2017 exclude the write-off of the issuance costs of $0.09, M&A transaction expenses of $0.02 and noncash stock-based compensation of $0.04.

Our tax rate for the second quarter of 2018 declined to 22.5% from 30.2% for the same prior year quarter, consistent with expectations. For the remainder of 2018, we continue to expect our tax rate to be in the low 20% range.

Our second quarter net cash from operations totaled $5.9 million. At June 30, 2018, we remain well capitalized with $69.2 million in cash on hand and capacity under our credit facilities to help support our acquisition strategy. Reflecting the impact of the acquisitions of Arcadia and Ambercare during the quarter, we now have $103.7 million in term debt.

DSOs declined to 66 days at the end of the second quarter of 2018 compared with 69 days at the end of the first quarter. DSOs for the Illinois Department of Aging were 51 days at the end of the second quarter compared with 57 days at the end of the first quarter. As Dirk mentioned, we have continued to see consistent payments from Illinois and are pleased with their efforts to keep us as current as possible.

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

[Operator]

[Operator Instructions] And our first question will come from the line of Matthew Gillmor with Robert Baird.

[Matthew Gillmor, analyst]

I wanted to ask about the acquisition pipeline comments. Dirk reiterated the expectation to close one more deal by year-end, but it also sounded like activity levels in the pipeline had increased. So I was hoping you could provide some more detail around the pipeline dynamics. If I am correct that it increased, sort of what do you think caused that? And are there any particular areas where you're seeing more activity relative to the recent past?

[R. Allison, executive]

Thanks, Matt. Well, we are seeing additional increase in our pipeline for potential acquisitions. We're working on a number of deals, none of which we're ready, obviously, to announce today. But we do continue to do a lot of work in that area. What we're seeing, it's largely personal care opportunities out there, although we do have a couple of hospice opportunities we're looking at. As far as the reason why we may be seeing additional acquisition opportunities, Matt, I think one is people understand that Addus is willing and able to look at deals. And that we -- it is part of our business strategy moving forward, so we're starting to see some opportunities maybe in the past we didn't see. I think, particularly around personal care, we have an EVV mandate that, at one time, all states had to be on EVV by January 1, 2019. That was recently delayed a year by Congress, but it's still, most states are moving forward very quickly. That's an expensive proposition for smaller personal care companies that have to make the IT investment to interface with the states. So I think we're seeing some movement there. And so really, other than that, the fact that we're well capitalized, people see that we're out there buying, I think those are probably the 2 largest reasons we're seeing an increase in our pipeline.

[Matthew Gillmor, analyst]

Okay. And then maybe one on the same-store census trend. I know the overall organic revenue growths were in line with your outlook, and there are some dynamics going on with the same-store census trend in terms of your emphasis on hours versus census, but I did just want to get an update in terms of where you are from a penetration standpoint into allowable hours. And should we expect that will continue to drive the growth rate in your hours? Or are you approaching a point where you'll emphasize the census growth over the hour growth?

[R. Allison, executive]

Well, we will always emphasize hour growth if you ask us to just pick one because we bill by hours. But we do believe we've gotten to the point in time where census is now becoming, again, part of what we look at. In fact, if you look at this quarter, we had the first sequential increase in ADC quarter-over-quarter since, I think, the third quarter 2016, when we really started deemphasizing ADC and started emphasizing hours. We'll continue with an emphasis on both of those going forward. Our operating team has done a really good job in the second quarter, starting moving focus back to both of those. We'll continue to look at that as we go forward.

[Matthew Gillmor, analyst]

And one more for me. On the Illinois rate issue, and I understand this is just a timing issue of when they actually provide the rate update to offset the minimum wage increase. I wanted to get a sense for, as you're talking with the -- your local folks there and the lobbyists, if you had any kind of confidence level you could give us in terms of whether that gets passed in this veto session. And is there any chance that it would be on a retroactive basis so you'd be caught up for this mismatch in the back of half of the year?

[R. Allison, executive]

Well, I think, historically, Matt, what you have to look at is this happened to Illinois once before, and they waited a year to make an adjustment to the rate. Whether we got a little higher rate than we would have otherwise is open for debate. We certainly didn't get a retroactive adjustment, so I'm not assuming we will get that. I'm not sure how -- what the probability is that we will get something in the veto session in November. If the election goes as we expect and the Democrat wins the governorship, if the veto session is not something we are able to have go our way, then we will be working right after the January time frame where the new governor takes effect to work with the legislator to get this passed. We had a lot of discussions with the legislator. We actually had a bill out there, an amendment to the budget that was going to give us this increase. We felt like, right up until the very end, it was going to be done. And then due to the dynamics of how politics and Illinois have been the last 4 years with a Republican governor and a Democratic congress, it was one of the things that went by the wayside to get everybody to sign the budget. So we're very confident it's a matter of timing. Whether that is something we get in January or have to wait till July of next year, we believe that it will occur.

[Operator]

The next question will come from the line of Mitra Ramgopal with Sidoti.

[Mitra Ramgopal, analyst]

Just on the reimbursement and what you're seeing with the state of Illinois. I was wondering if there are other states you're currently involved in that you're tracking in terms of maybe facing a similar issue down the road.

[R. Allison, executive]

Actually, Mitra, we had really positive results this year. Every state came through. We got some nice increases, covered the minimum wage increases. So with the exception of Illinois, I would say we did very, very well. And again, with Illinois, let me emphasize. While it's disappointing that they didn't pass it in the budget, we do believe they understand the importance of giving that to all the companies. This isn't just an Addus issue. This is anybody in the state that is affected by minimum wage that the state reimburses. So we're very confident they understand the critical nature of getting this passed because smaller companies will not be able to handle this higher minimum wage while not getting reimbursed for it. Companies like ourself, while we would rather it not occur, we certainly can handle it without missing a beat as far as growth and acquisitions, things we're going to do in the future. So we're comfortable we'll get it with Illinois. All other states did a really good job this year.

[Mitra Ramgopal, analyst]

Okay. No, that's great. And as you look in terms of acquisitions and expanding, are you consulting with some of your managed care partners in terms of maybe some of the places they would like to see you in? And also, I assume you're also keeping in mind reimbursement in any new states you're looking to enter.

[R. Allison, executive]

Absolutely. If you look at our acquisition strategy, one of the first things we look at is the financial or the fiscal ability of the state, the minimum wage environment in the state. We're not opposed to minimum wage increases, but they need to be smaller and ones that the state understands. If we find states like that, we absolutely have put them on the target for us to look for acquisitions. As it relates to working with our MCO partners, yes, we've had a number of MCO partners come to us and say, "We work with you well in one state. We have a couple other states we'd like to have some additional people come into. Would you consider going in?" And we are looking in those states. But as we look in those states, understand we stayed very disciplined in our approach. Our deals have to be accretive. They have to fit our strategy of allowing us eventually to get to 1 or 2 in the state as it relates to personal care. It's very helpful if we can find behind the scene a place where we can add hospice into those markets so that we offer more than just one home care-based service. So I would say that our discussions with our MCO partners as it relates to acquisitions, growth, potential M&A, all of those are very strong and ongoing.

[Mitra Ramgopal, analyst]

Okay. And then as you look in terms of potential transactions, are you seeing more competition in terms of other entrants in the marketplace and valuations maybe moving a little on the higher end? Or no change there?

[R. Allison, executive]

Well, on the personal care side, we're not seeing a lot of competition. Most of your bigger companies tend to stake out a state or 2 that they want to be strong in. And we aren't in those with -- in a competitive nature. Most of the deals we're looking at today, very little competition. Or if the competition is there, maybe it's smaller PE firms. Multiples in the PE range seem to still be around the 6 to 7 in the personal care range. Now hospice is different. We're not going to pay 12, 14x for hospice. If PE firms want to pay that, then they can. We will look at strategic hospice opportunities, mainly in markets that make a lot of sense for us. And we will try to pay -- we'll have to pay, obviously, more than we will for personal care. We'll have to pay up some. But strategically, we're willing to do that if we see that it fits in our market, where we have some opportunities for synergies, not only cost synergies, but also sales synergies between the personal care network and the hospice market.

[Mitra Ramgopal, analyst]

Okay. And just on the -- given the tight labor market out there, I was just curious if you're having any difficulty in terms of attracting caregivers? And what's kind of the environment out there for you?

[Brian Poff, executive]

Yes. Mitra, I mean, with the current environment out there with minimum wage pressure and kind of seeing that gap close between what we used to be able to offer to our caregivers and what minimum wage is today has put some pressure on it. But our teams have been very focused. They've done a great job in recruiting caregivers. It is a tight labor market in all health care services, so something that we experience like many others. But we've done a great job. And our -- Brad, our COO, and his team are doing a wonderful job and focused in that area.

[Mitra Ramgopal, analyst]

And then one final question quickly, Brian, if you can give me a sense as to how much you have available in terms of your credit facilities following Ambercare and Arcadia.

[Brian Poff, executive]

Yes. Total all-in combined outside of our DDTL that's remaining, our core [ EN ] and our revolver, we have north of $200 million in availability still to this day.

[Operator Instructions] And our next question will come from the line of Dana Hambly with Stephens.

[Jacob Johnson, analyst]

This is Jacob Johnson on for Dana. A quick follow-up on the debt, Brian. How much do you have left -- how much room do you have left on the delay draw?

[Brian Poff, executive]

Right at $19 million is left, Jacob.

[Jacob Johnson, analyst]

Okay. And then -- so on gross margins, it sounds like Chicago is about a 70 basis point pressure. But I guess, we would think that the addition of hospice and home health should be somewhat accretive to gross margin. So is it possible that some of the impact from the minimum wage hike will be offset, sort of just due to the mix of business in the third and fourth quarter?

[Brian Poff, executive]

Yes, Jacob. If you look at second quarter, remember, we had Ambercare in there for 2 months in the quarter. So you've seen some of that impact already. You should see a little bit of movement still with another month and a full quarter in Q3. But yes, you're right. That should help keep us in that level.

[Jacob Johnson, analyst]

Okay, got it. I guess, a question on M&A. A lot of talk this morning about personal care, hospice and entering into new states, but I haven't heard you mention private duty. Is that a line of business that still interests you? And is that something that sort of M&A -- you'll use M&A to grow it or maybe something you'd try to grow organically?

[R. Allison, executive]

No. We like private-duty personal care. It is a market that we would like to be able to grow quite a bit in. We'd look for additional -- we're looking for additional deals from an acquisition standpoint in that market. The biggest challenge, Jacob, we have there is that most of the larger private-duty nurse or private-duty personal care companies are franchise models. And that's not a model in which we participate or operate in. So most of your private side personal care deals will be smaller transactions, but we do continue to look for them.

[Operator]

And I'm showing no further questions. I would now like to turn the conference back over to Mr. Allison for closing remarks.

[R. Allison, executive]

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

[Operator]

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