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Addus HomeCare Corporation (NASDAQ:ADUS)

Q1 2013 Earnings Conference Call

May 2, 2013 17:00 ET

Executives

Dennis Meulemans - Chief Financial Officer

Mark Heaney - Chief Executive Officer

Darby Anderson - Vice President, Home & Community Services

Analysts

Whit Mayo - Robert Baird

Operator

Good afternoon. My name is Ian and I will be your conference operator today. At this time I would like to welcome everyone to the Addus Q1 2013 Earnings Conference Call. (Operator Instructions) Thank you. Dennis Meulemans, Chief Financial Officer, you may begin your conference sir.

Dennis Meulemans - Chief Financial Officer

Thank you, Ian. Good afternoon, this is Dennis Meulemans and thanks for joining us. Before we begin, I’ll briefly read the Safe Harbor statement. 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 our most recent Form 10-K or Form 10-Q, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement whether as a result of new information, future events or otherwise.

With that complete, I’d like to now turn the call over to Mark Heaney, our CEO.

Mark Heaney - Chief Executive Officer

Thank you, Dennis. Good afternoon and thank you all for joining Addus HomeCare’s investor call to review our 2013 first quarter results. I‘m joined today by Dennis whom you heard, our CFO; and Darby Anderson, our Senior Vice President.

For our listeners information we ask our senior leadership from around the country to listen in on this call so they can hear first-hand from our investors and so they can hear what we are communicating. I thought we had a solid quarter. Revenues were $63 million compared to $58.9 million. Income was $1.23 per share which includes the gain on the sale of our Home Health business with earnings from continuing operations at $0.25 per share.

These results tell me that we have the right goals and objectives are focused on them and that we have the right folks on the team executing on the plan. We are not done, we are not halfway done and no one is taking the rest of the year on. There are headwinds out there. Change is upon our segment and we think for the good overall, the choice is to run ahead of it or get run over by it. Our balance sheet is as strong as it has been in memory. Darby and Dennis will reference the State of Illinois payment performance but it continues to be steady and predictable as is been the case with our other payers.

Here is what our company is focused on. First, increased census in every office. Personal care is the fastest growing segment of HomeCare and HomeCare is the fastest growing segment of healthcare. And frankly there was more personal care being provided in our markets right now than when this call started. Every one of our locations is expected to generate consistent census growth. There are more and more people in need. While that is true as a percentage fewer are going into nursing homes. Our goal is a simple one. We should get more than our fair share.

Second, continue to prepare our company for the inevitable and developing shift away from state-funded care to managed care. Managed care will put pressure on providers to generate health outcomes with the same or even lower spending per patient. There are efficiencies managed care will pursue which in fact may improve consumer outcomes. We are aggressively redesigning our care system to take advantage of technology. We are managing to implement these changes within our existing operating cost structure and we are meeting with and proposing to every managed care provider we know to be in our markets. We think that the shift to managed care favors larger providers willing to invest in technology, convert to a utilization management model except to responsibility for health outcomes and ultimately to take or to sharing risk.

Third, we are concluding the transition of our Home Health business to LHC Group. I think that transition has gone very well and I want to complement the teams from both companies for their hard work and unselfish approach to the transition. Next we look forward to exploring opportunities where our two organizations can work together to serve at-risk persons at home. And finally for 2013 we have made becoming more accountable to each other to our direct-care staff, to our consumers, their families, our referral sources and expectation a more important part of our culture.

I mentioned and it’s obvious that our balance sheet and availability are strong. While not our primary focus we continue to look for acquisition opportunities which will contribute to scale or add to our footprint where opportunity exists. That said organic growth and positioning for managed care remains our highest revenue development objective. Before I turn the call over to Darby I wanted to comment on and thank one of our board members who will be leaving us on June 30. Wayne Lowell has been on Addus’s Board since shortly after our going public.

Wayne joined Addus as our Audit Chair. Wayne is leaving because of his other professional obligations preclude him from further serving on our board. I feel Wayne has made an enormous contribution to Addus in his role as Audit Chair. He is passionate and committed to the responsibilities inherent to his role and representing the shareholder and through his advice and he has done much to improve our company. We will miss his contribution and thank him greatly for his service. As was recently announced we are pleased that our Board and committee member Dirk Allison has agreed to serve as Audit Chair. We feel very good about Dirk assuming leadership of this important committee and we are lucky that we have him on our team.

Now talk just a little bit about what has generated our first quarter results. Let me turn the call over to Darby Anderson.

Darby Anderson - Vice President, Home & Community Services

Thank you, Mark. I too view the results in this quarter as solid. Mark has set forth on our objectives as organic census growth, managed care, our care system and leadership development. In the first quarter our census trend was up in more locations than the previous quarter. To be clear our objective is to achieve growth in all locations and to not allow sites to drift with flat to down census. As part of our plan to achieve this we are implementing a customer relationship management software or CRM system to better monitor and evaluate the effectiveness of our sales efforts.

We are accelerating sales training programs to our agencies, implemented new growth performance metrics and revised bonus incentive plans at all levels to reward that growth. In positioning ourselves to maximize our opportunities and the shift to managed care our focus is in our existing states. In October of this year, California begins enrollment into the approved Dual-Eligible and Medicaid Managed Care initiatives in eight of the largest counties in that state.

We are communicating with virtually all of these plans and all of these counties and have opened an office in San Diego County in advance of implementation of the initiatives there. New Mexico begins transition of consumers from an existing home and community-based service managed care program into a full-risk coordinated Medicaid managed care project called Centennial Care in the fall of this year as well. Again we are meeting with all of the selected plans in that state.

Illinois enrollment of Chicago and Central Illinois consumers into the Dual-Eligible project begins in January of 2014. We have completed or in the process of completing standard provider contracts with all of the selected plans as they complete their readiness reviews with the state. We have ongoing meetings with these organizations regarding the transition. Personal care in New Jersey is already under managed care. We want to grow our census in this state and are acting on our plan to do so. And finally we opened a location in Detroit, Michigan on April 1 represents Addus’s 20th state of business and Michigan has a Managed Care initiative scheduled to begin in 2014.

Turning to our NuCare system we are adding to our centralized contact center and effective team to support 13 additional sites rolling into that system in the second quarter of this year. We’ve accelerated the rollout of our telephony or (NYSEMKT:EVV) system to meet a state mandate in Illinois that requires all providers to utilize an (EVV) system by July 1st. We also continue to receive very positive feedback from our employees and customers in our beta site for this care system. Last week we held the productive and engaged regional leadership meeting and from that experience I am confident our team understands, supports and is committed to achieving the objectives of the company. The primary mission being census growth, will again implementing the care system and positioning for the shift to managed care.

Regarding Illinois the State continues to purchase more and more HomeCare. As they do so they proportionately reduce their nursing home spending on seniors. I mentioned in our last call that the Department on Aging had exhausted this year’s budget. A supplemental appropriations bill has passed both the house and senate on a combined vote count of 159 to 2 demonstrating continued support for HomeCare. This bill an additional supplemental funding will be sent to governor for his consideration.

In closing, I remain confident we have the right objectives in the right priority as well as the right team to execute. I’d now like to turn the call over to Dennis for more perspective on the financial results.

Dennis Meulemans - Chief Financial Officer

Thank you, Darby and good afternoon. Just a reminder consistent with our year end recording we have changed our reporting for all years to include all revenues and expenses for our your home and community business as continuing operation and the revenues and expenses related to the sold Home Health business as this continued operation. Mark and Darby both described our performance as solid. Let me summarize. Census was up, revenues were up; income was up, cash was up, (NYSE:AR) was down, our debt was down and most importantly the internal enthusiasm for the company and moral is up.

Highlights for our first quarter were net revenues from continuing operations for the quarter increase 7% to $63 million compared to $58.9 million for the same period in 2012. Net income from continuing operations was $2.7 or $0.25 per diluted share an increase of 56% when compared to the reported net income from continuing operation of $1.7 million or 16% per diluted share for 2012. Net income including discontinued operations and the gain on the sale of the Home Health business was $13.3 million or $1.23 per diluted share compared to the 2012 results of $630,000 or $0.06 per diluted share.

As we have stated in our press release our quarterly comparables are influenced by two one-time events. Our first quarter of 2013 results were positively affected by one-time $520,000 credit for Workers Opportunity Tax Credits earned in 2012 but realized in the first quarter of 2013 with the passage of the America Taxpayer Relief Act in early 2013. This treatment of these credits substantially reduced income tax expense for the quarter. Our effective tax rates for future quarters will not include this benefit and accordingly our effective tax rate will be approximately 39% the calculated rate as if this benefit had not been realized in the quarter.

Our first quarter 2012 results from continuing operations included the gain on the sale of our Portland Home Health license for $495,000 or $0.03 per diluted share. For comparative purposes our pro forma earnings from continuing operations were $0.20 per diluted share in 2013 after normalizing for the WOTC credit compared to 13% earned in 2012 after normalizing for the sale of the Portland Home Health license. This represents a 54% improvement in adjusted earnings on a year-over-year basis.

Cash flows from operations during the quarter were $13 million which includes the gain on the sale of the Home Health business and the losses incurred in the discontinued operation. Interest expense was $208,000 or three tenth of a percent of revenues in the first quarter of 2013 a decline of $196,000 when compared to 2012. We eliminated all outstanding debt balances with the proceeds of a sale of the Home Health business but retained a flexibility afforded the company through its bank line of credit which remains unchanged as of 3/31/13.

Our home and community business reported an increase in net service revenues of $4.1 million or 7% to $63 million when measured on a year-over-year basis this growth was fueled by a 5.3% increase in average in census combined with a 7% increase in billable hours. We would point out that the average billable hours per census per month increased in the first quarter a trend we anticipate will decline 2012 levels as the Illinois Department of Aging implements technical changes to their payment processes which we estimate will reduce our revenues and operating income by approximately $600,000 per quarter. The net effect of this change will be to compress our gross margin percentage by approximately 75 basis points.

Our gross profit margin for the quarter declined over the prior year by 40 basis points to 25.1% in the first quarter driven largely by unfavorable auto claim expense in the quarter when compared to experience in this area in 2012. Our general and administrative expenses were down slightly on a year over basis to $11.5 million substantially attributable to our continued focus on cost management.

Now, let’s turn to our balance sheet and cash flow statements. Our accounts receivable net of reserves were $60.6 million as of March 31, 2013 representing a $10.7 million reduction from the balance reported on December 31, 2012. Our payments from the State of Illinois were strong in the quarter and we made substantial progress on collecting our accounts receivable for our Home Health business which we retained with the sale of that business unit. At March 31, we had no long-term debt compared to the $16.5 million as of December 31 as we used the proceeds from our Home Health sale to reduce debt. We retained flexibility under our bank line of credit which remains unchanged from the end of the year. We had $17.8 of available cash on our balance sheet at the end of the quarter.

Adjusted EBITDA has been refined to exclude discontinued operation in addition to the other adjustments. Adjusted EBITDA was $4.4 million in the first quarter of 2013, an increase of 9.4% from $4 million in 2012. This summarizes my comments I would have to say our quarter was solid. I’d like to return the discussion back to Mark for closing remarks and for any questions.

Mark Heaney - Chief Executive Officer

Thank you, Dennis. I said in our last call that we are excited about the opportunity before us. The clarity and the focus that has come to our company since the sale of the Home Health business is palpable and this should be increasingly evident in our performance. We should serve more people, we should scale the business, we should configure our system of care to meet the new demands of the emerging market. We think the coordinated managed care is the right public policy for serving our population. We accept that providers have to and can do more, better with the same. We think the providers who embrace the challenge of the opportunity will provider better care, we’ll be better stewards of the limited human and financial healthcare resources that need to be spread more efficiently to a growing at risk population that these providers will generate better health outcomes and in return these organizations will grow consistently and profitably.

We’re very proud of our team and they‘re each excited about the opportunity before us unlike all of us they very much appreciate the support of our investors and our partners. With that Ian, let us open the call up for questions and comments from our listeners.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Now the question comes through from the line of Whit Mayo at Robert Baird. Please go ahead.

Whit Mayo - Robert Baird

Okay, thanks. Sounds like a brand new company now.

Mark Heaney

I'm not even going to say any word, thank you.

Whit Mayo - Robert Baird

May be just start with Detroit and San Diego aside from the large number of duals in those two markets you’ve got a number of providers are involved in the lot of Medicare ACOs as well just may be talk strategically about those two markets why those two was it just a function or the pace of the conversion of duals in those states or was there anything else perhaps driving it?

Darby Anderson

Yeah, well, this is Darby with regard to San Diego first we operate in Southern California had for a long time Riverside, San Bernardino Counties we do have some experience in San Diego opportunity came along to bid on more traditional feed-for-service contracting and we took that opportunity and we’re awarded so opened the office there lots of health plans San Diego is one of the more unique in California with five I think designated health plans there so felt like the time was right to take advantage of that contract, open the location, start services so we can speak to the health plans more directly about what we can provide there. With regard to Michigan, it is a state we’ve been looking at for a long time it’s a good solid HomeCare state, Detroit I think is on the rise in terms of its rebirth as a major metropolitan city in the United States again sort of combined with the move to managed care it was and a very ease of entry they prompted us to bite the bullet and start that operation now in advance of managed care.

Whit Mayo - Robert Baird

Was that an acquisition in Detroit or?

Darby Anderson

No.

Whit Mayo - Robert Baird

No, okay. And on the fee-for-service contract that you won in San Diego how different is that than what you’re doing in Riverside County?

Darby Anderson

It’s very similar in terms of the nature of the services provided it’s just a slightly different funding stream it’s not the Medicaid Personal Care, IHSS program but Older Americans Act Funding and some I believe San Diego County Funding.

Whit Mayo - Robert Baird

Okay. And may be for Mark just a general update on the status of the various conversations you’re having day-to-day with the health plans and at what point do you think you can come back to the market and potentially communicate some milestones or contract wins is relates to the duals?

Mark Heaney

Sure. This is of course the duals projects come over, come online as they come online. Darby mentioned in his comments that California begins to face in its duals project in the fall September, October. And we would hope that has this very large population of shifts into managed care to the extent that their consumers who need agency directed care rather than self directed care that we will be a preferred provider so we would hope to see things in the third and fourth quarter. Illinois comes along in the beginning of the New Year although readiness is underway.

With one of the things that we expect to come out of this is we just believe that the demand for service will remain high and increase because we are getting older, but the demands put upon the providers by managed care will thin the herd and it will be harder for the small providers got to love them to sustain and meet the challenge. Darby mentioned New Jersey we with New Jersey has been managed care and we haven’t gotten our fair share and we expect to see we put some people in place there we should be increasing there also and these initiatives that Darby has initiated. We see those as beginning to show green shoot that was the third quarter or fourth quarter start.

Whit Mayo - Robert Baird

Okay. And may be one more and I’ll hop in the queue if there is anyone else that’s questions but I was curious about the telephony mandate and Illinois with the Department of Aging I think you said that everyone has been compliance by July if I heard that correctly just curious what the cost to achieve that will be for you and whether or not you think all providers for Illinois and the Department of Aging will be able to comply with that?

Darby Anderson

Whit this Darby again. In terms of our cost now there is the pluses and the minuses out of the (EVV) technology we do see some cost reductions and efficiencies those are kind of baked into our care system and it’s kind of a sort of pay-as-you-go technology where we don’t have a lot, there is no CapEx expenditures or anything like that it’s a per visit charge that we’re incurring and then some of the efficiencies offset that. So I couldn’t give you any kind of a number on our cost implementation at this point. To your second question it’s a question I founded a lot I absolutely believe that there are providers that either won’t be able to comply or frankly will choose not to without a existing IT infrastructure you don’t gain those efficiencies that I described from the (EVV) technology so I’d be concerned about those providers continuing. We do expect to see consolidation and providers exiting the program to what extent it’s very difficult to predict at this point.

Mark Heaney

But, this is Mark Heaney I agree with Darby completely but in some I would tell you that it’s easier for us because we’re so far down the line already we’ve already done so much investment in (EVV) frankly beyond what the State of Illinois is requiring by far. And second there are providers that upon there are providers who with this notice have informed the department that they’re done already so then it’s just starting here.

Whit Mayo - Robert Baird

Okay. Well great guys thanks.

Mark Heaney

Thank you, Whit.

Operator

Thank you. And we another question for you, this comes from the line of (Alexander Renker). Please go ahead Alexander.

Unidentified Analyst

Hi guys, congrats, great quarter.

Mark Heaney

Thank you.

Unidentified Analyst

I just got a quick question regarding the trends on in state nursing spending relative to HomeCare is this something that Illinois on a state level that ahead or behind the curve on and what are you seeing in other states?

Mark Heaney

Alexander, I am sorry we didn’t hear you real loud could you just try that one more time louder.

Unidentified Analyst

Sure.

Mark Heaney

There you go.

Unidentified Analyst

Hang on let me switch to my handset here.

Mark Heaney

That’s even better.

Unidentified Analyst

Okay, great. So regarding nursing homes spending to HomeCare you mentioned that this is something that’s seem to well underway in Illinois where are they relative to other states with this trend?

Unidentified Company Speaker

Alexander, there is the Department on Aging actually commission the study a number of years back that I can send to you and we can make available on our website, but it does demonstrate the community care program and the number of seniors that resided nursing homes and alluring of that spending I was careful of my comments to talk about the department and this data shifting proportionately spending less for seniors in nursing homes and we went out and looked at the actual nursing home expenditures you wouldn’t necessarily find that line going down, because other populations are filling those beds, but.

Unidentified Analyst

Right.

Unidentified Company Speaker

The study I was talking about is specific to seniors and I’d be happy to show that with you.

Mark Heaney

Yes, that is a tough question for what other I would tell you just as because we do a fair amount of public policy work I think that the mega trend that states that are investing and have done investing in home community based services as in a day is flattening of nursing home placement against an increasing that’s elderly population that’s clearly the trend.

Unidentified Analyst

Okay, excellent, that’s helpful. Thank you.

Mark Heaney

Thank you, thanks for the question.

Operator

Thank you for your question. And we have further question from Whit Mayo of Robert Baird. Please go ahead Whit.

Whit Mayo - Robert Baird

Hey thanks. Dennis can you talk a little bit about the Sarb-Ox compliance costs at what point do you begin to incur those costs and can you help may be frame up the size for us?

Dennis Meulemans

With the technical process is that we measure the value of the non-control shares as of June 30 and if that extra value if the market value of those shares exceeds $75 million. We are obligated to test and remediate all internal controls and the auditors are required to audit those results. The – you can look at our proxy and do the math but I’ll help you on it but the price is approximately $13 a share. So we’re at that price on June 30th we would have to have the results of our internal controls out of it for the year ending 12/31/13. We are in the process of exploring the additional cost and to estimate what the impact would be. I’ve heard from others that have gone through this process that it could be $0.5 million to $700,000 in additional cost.

Whit Mayo - Robert Baird

Okay. But to be clear that’s not a cost that you would likely incur until after you close the books on 2013, correct?

Dennis Meulemans

It would be a cost we would incur in 2013.

Whit Mayo - Robert Baird

Okay. So after June 30th that’s when you would have to begin to bulk-up for Starbucks?

Dennis Meulemans

That’s correct.

Whit Mayo - Robert Baird

Got it. Okay. And any other cost to be mindful obviously we look at our model for the next couple of quarters just as you invest in some of your care system just anything to be maybe highlight to help us out to get the sequence of quarters maybe inline.

Dennis Meulemans

Whit I know I’ve looked at your model and I think the trend you have for the remainder of the year is reasonable but we don’t as Mark indicated we’re trying to manage within our cost structure all of the additional cost for moving our technology forward.

Whit Mayo - Robert Baird

Okay. So outside of the 500,000 that’s an annual number so outside of the incremental Starbucks compliance cost, there is nothing that major to think to think about.

Dennis Meulemans

Well I would point out as we did in the earnings release there is change in reimbursement from the State of Illinois.

Whit Mayo - Robert Baird

Yeah, that’s fair, that’s fair.

Dennis Meulemans

That’s the number that you need to cognizant off.

Whit Mayo - Robert Baird

Got it, okay. And maybe one last one here is Mark you mentioned acquisitions coming back to the forefront of the strategy or I guess you’re getting to see some opportunities out there, just curious what’s your looking at what markets kind of how you think about evaluating some of these opportunities? Thanks.

Mark Heaney

Well I want to emphasize that our job one is organic census growth, two is staying dead-eye focused on revamping our care system to configure for Managed Care because that is flat out where the opportunity is for the organization. We have availability and there are opportunities. The opportunities that we would want to look at we’d have to make sense in terms of footprint in opportunity post acquisition reduce risk relative to change. And second would be that which would give us diversification in scale. With – there are 12,000 HomeCare companies out there and there is some really good ones. And we will look at the opportunities that they’re presented to us.

Whit Mayo - Robert Baird

Okay. Alright. Thanks a lot guys.

Mark Heaney

Thank you, Whit.

Dennis Meulemans

Thanks.

Operator

Thank you. There are no further questions at this time.

Mark Heaney - Chief Executive Officer

Ian, thank you very much. I’d like to thank everybody for participating in the call, good questions and we look forward to speaking with you in 90 days. Thank you all so much.

Operator

Thank you ladies and gentlemen. That concludes your conference call. You may now disconnect. Thank you for joining us. Enjoy the rest of your day today.

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