Addus HomeCare's (ADUS) CEO Mark Heaney on Q2 2014 Results - Earnings Call Transcript

| About: Addus HomeCare (ADUS)
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Addus HomeCare Corporation (NASDAQ:ADUS) Q2 2014 Earnings Conference Call July 31, 2014 5:00 PM ET

Executives

Larry Wyrobek - VP and Controller

Darby Anderson - SVP

Dennis Meulemans - CFO

Analysts

Dana Hambly - Stephens

Mitra Ramgopal - Sidoti

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2014 Addus HomeCare Corporation Earnings Conference Call. My name is Jackie and I will your operator for today. At this time, all participants are in a listen-only mode and towards the end of the presentation we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Mr. Larry Wyrobek, Corporate Controller. Please proceed.

Larry Wyrobek

Thank you, Jackie. Good afternoon, this is Larry Wyrobek, Corporate Controller and thank you for joining us for the Addus HomeCare Q2 2014 earnings conference call. Before we begin, I will 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 meanings 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 announcement and other reports we file with the Securities & Exchange Commission. These are available at www.sec.gov. The Company undertakes no obligation to update publically any forward-looking statement whether as a result of new information, future events, or otherwise.

With that complete, I would like to now turn the call over to Mark Heaney, the Company’s Chief Executive Officer.

Mark Heaney

Thank you, Larry. Good afternoon everyone and thank you very much for joining us for Addus HomeCare’s investor call for the second quarter of 2014. I am joined today by Darby Anderson, our Senior Vice President; and Dennis Meulemans, our Chief Financial Officer. I also want to welcome our management and staff listening in into today’s call. And while I am at it I want to thank that team for generating another good quarter of caring for an increasing number of at risk consumers while generating solid and growing financial results.

Revenues for the quarter were 77 million, a 17% increase over 2013. Net income was 2.7 million an increase of 5.7% year-over-year, income per share was $0.25. Today we have over 130 locations in 22 states. We’re serving more than 30,000 consumers. We employ over 17,000 caregivers. After that, our primary and most important focus and responsibility, we continue to focus on growth measured by census development. Our growth is being driven both organically and through acquisitions. We’ve continued to position ourselves for the shift to managed care as that payor assumes increasing responsibility for the dual-eligible population across the country. Managed care expects us to not only serve their members but to take increasing responsibilities for driving positive health outcomes and they should.

In the quarter, not only did we continue to execute on our redesign technology-based care system, we completed our move to a brand new state-of-the-art Contact Center where the team provides operational support to our site, freeing our sites to focus on, to visit with, to see and to monitor our at risk consumers with a special focus on the most acute.

Darby will report on our managed care population -- that our managed care population is steadily increasing and is expected to increase even further in the next quarter. We completed a really great acquisition in Tennessee, an important and mature managed care state. We’re assimilating that acquisition and our New Mexico acquisition from Q4. At the same time, we continued to actively prospect for and evaluate acquisition opportunities both in key markets and to deepen our presence in our current markets. I see Q2 as another good quarter where we advance the ball on each of our strategic objectives. I am excited about our business, I am excited about what we do and I am excited about how we’re doing it.

With that let me turn the call over to Darby, who can put a little more color on our performance. Darby?

Darby Anderson

Thank you, Mark and good afternoon everybody. It was a busy quarter but one in which I feel we advanced the ball on our strategic initiatives and achieved good results. Highlights include continued census growth, completion of the Aid acquisition. Effective managed care business development as well as good blocking and tackling on our core business. Average census within same-store was up 581 consumers or 2.1% over Q1 2014 and 2,280 consumers or 8.7% from Q2 of 2013.

Including acquisitions average census growth was 1,026 consumers or 3.5% over Q1 2014 and 4,350 consumers or 16.6% year-over-year. We remain pleased with our improving sales program. I attribute a portion of our Q2 census growth to the sales contest I spoke about last quarter. Initiatives like this contest are building enthusiasm and focus in our branch locations. More of our sites this quarter were steady up in census, a trend we have been seeing for a few quarters now. We’re never done but we like the momentum.

We completed the Aid & Assist acquisition effective June 1st. We’re enthusiastic about our new team in Tennessee under the direction of David Coppeans. David was one of principles of the acquired entity and he’ll be running our business in that market going forward. We had all of the leadership of Aid & Assist up to our support center for orientation, they’re just a super group and Aid & Assist has earned and enjoys a great reputation in the State of Tennessee and with the three managed health plans responsible for the Medicaid long-term services program in that state. We’re pleased to have them join our team.

Our work with managed health plans continues to be positive. Our managed care case load is growing in New Mexico and Illinois. Our coordinated acquisition in our existing locations in New Mexico had a very good quarter growing census. And based on data from the State of Illinois we are expecting 20% to 30% of our current Medicaid waiver case load to transition to managed care under the duals program beginning in September.

We continue to work on our opportunity in California as well, as the managed care demonstration projects begin. As I mentioned last quarter we have many of the contract relationships we need there but progress in California has been slower. We’re ready but the state and the plans continue to work out rates and funding. While we’re focused on managed care opportunities we cannot take our eye of the ball of what remains the majority of our business, state managed homecare services. And I am pleased with our focus in this area.

We moved our corporate headquarters which we call the support center over one weekend in the month of May. The new facility is fabulous and the move came off without a hitch. The move included the opportunity to build a full contact center which will support our care system model and provides the room for growth needed to expand that model.

We continue to advance our technology and the features of our Addus Mobile Portal application and enhancements to our care system designed to improve both the effectiveness and the efficiency through better monitoring of alerts and the centralization of on-call functions. We closed underperforming sites in the State of New Jersey and three affiliated offices serving Central Washington State and we’re also pleased that the State of Illinois continues to pay us well.

And finally it’s often an overlooked element of our business, but I am very pleased and frankly proud of our human resources department and our branch teams who together continue to put up improved trends in managing unemployment and workers’ compensation claims and our work opportunity tax program. You may have seen and we’ve gotten some questions about the recent U.S. Supreme Court ruling on the Harris versus Quinn case. This case involved an independent provider homecare worker in the Service Employees International Union, the SEIU.

I want to be clear that this case has no impact on our longstanding and important relationship with SEIU or any of our existing collective bargaining agreements. In closing I want to thank our management, supervisory and direct care employees now numbering 17,750 strong for their enthusiastic support of our mission to make it possible for people to live, where they want to live for as long as they want to live there.

And with that I’ll turn the call over to Dennis to walk through the numbers.

Dennis Meulemans

Thank you, Darby and good afternoon. As Mark and Darby have said this was a good quarter. Net service revenues from continuing operations for the quarter increased 17.1% to 77 million year-over-year and 7.4% when measured sequentially. Net income from continuing operations was 2.7 million or $0.25 per diluted share an increase of 5.7% when compared to prior year results, a 15.9% increase in income when measured sequentially.

Net income from same-stores was 2.5 million acquisitions adding 145,000 of that amount. Revenues were driven by an 8.7% increase in same-store census with an additional 7% added through acquisitions. Same-store revenues increased 6.7% to 70.2 million. Acquisitions added an additional 6.8 million or 8.8% of our revenues. This included one month of revenues from the recently closed Aid & Assist acquisition.

We’re beginning to see measureable shift in our revenues from government payors to managed care and have indicated our disclosure of this key metric, initiated the disclosure of this key metric. Revenues from managed care are now 6% our revenue base up from 1% just last year. As Darby noted, we expected this to grow. Revenues were driven by census increases combined by a half hour increase in average billable hours per census per month. This increase in billable hours per average census is primarily a function of higher authorized hours in our new acquisitions.

Revenue growth was moderated by a slight decline in average revenues per billable hour. Gross profit margin percentage on same-stores improved by 90 basis points to 26.4% when compared to the prior year, this improvement was largely attributable to positive trends in our workers’ compensation program for our same-stores, when combined with our new acquisitions gross profit margin increased 140 basis points to 26.7% as these acquisitions exhibit higher profit margins.

General and administrative expenses increased 3.3 million over the prior year quarter, this increase includes 1.7 million attributable to G&A expenses related to all acquisitions and includes approximately 536,000 in one-time M&A expenses related to the Aid & Assist purchase. The remainder is primarily attributable to increased cost for our investments in technology and to our SOX 404 compliance program which was not required in 2013.

We were able to estimate an increase in our ability to capture work opportunity tax credits for 2014 in the quarter. This is a process that can take up to one year to complete and our estimates are based on current expectations for actual approvals in all of 2014. As a result, our effective tax rate has declined to 30.9% for the quarter which increased our EPS by $0.02 per share. We currently estimate our effective tax rate for all of 2014 to be 32.8%. Adjusted EBITDA for the quarter increased 27.8% to 5.9 million, compared to 4.6 million in the prior year quarter.

Now let’s turn to the balance sheet and our cash flow statements. Cash flows from operations were 14.3 million driven by our operations and substantial increase in payments from the State of Illinois realized in the quarter. Cash increased 2.6 million in the quarter after considering amounts extended for the acquisition of Aid & Assist and our move to the new contact center.

Our accounts receivable net of reserves were 48.7 million as of June 30, 2014 representing a 10.3 million decrease from the balance reported on March 31st, and a 12.6 million decline since year-end. Our payments from the State of Illinois were again strong this quarter. The state tends to increase payments as it nears its fiscal year-end. At June 30, we had 19.5 million in cash, no long-term debt and approximately 40 million available under our credit facility to be used for future acquisitions and other corporate purposes.

This concludes my comments. I would like to turn the discussion back to Mark for closing remarks and any questions.

Mark Heaney

Dennis, thank you very much. So I would like to make a comment, I want to close with my opening statement which is that and I think I speak for everybody in the organization that we’re excited about our business, we’re excited about what we do. We’re excited about we think what we do is really important. We’re excited about the opportunity to do more of what we do for many, many more people. Darby mentioned our new space, it’s actually just not new space it really symbolizes the new and exciting opportunities before us. We have serving the growing at risk population the right way for years to come. I did not mention it in my comments but I invite folks to take a look at our new Web site that we have out and in the Web site you can also get a look at the new support center.

Folks thank you very much. Jackie we’ll turn it back to you.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Dana Hambly with Stephens. Please proceed.

Dana Hambly - Stephens

Just a couple of questions from me on the closed offices, what was going on there? It looks like you are out of one state, so are you out of New Jersey now? I am just trying to get some sense if it’s just the markets you are in that weren’t good or it is something about the particular offices that you had to shut down?

Darby Anderson

Yes. Dan. Hi. This is Darby. We routinely look at our businesses on a monthly basis. We’re out of New Jersey. We were a small presence there in New Jersey and with the rate pressures from managed care it just didn’t meet -- it wasn’t going to meet our expectations. We may take a look at that market again in the future or we may not depending on how things settle out there from the managed care perspective.

Dana Hambly - Stephens

Okay. And you’re still in Washington or is it just that part of the state just the census wasn’t there for you?

Dana Hambly b- Stephens

Yes. The three offices in Washington, they are all kind of affiliated serving the central part of Washington State which is a huge rural geography about 15,000 square miles. So the travel and other costs related to serving that area as well as looking at the total available population to serve again just wasn’t going to be something that could meet our expectations in the near-term.

Dana Hambly - Stephens

And then Dennis on the margins, could you just help me out a little bit you talked about on the gross margin improvement in workers’ comp and then also the new states that you are in just a higher gross profit profile. Can you key out in the gain, how much came from the workers’ comp? How much came from the new acquisitions?

Dennis Meulemans

Dana if you look at our schedules we breakout the acquisitions separately, so you can see the amounts for both the items. We’re seeing positive trends in our workers’ comp expense in our same-stores. But that said this is something we continually work on and manage. One quarter does not make a long-term trend but we think that certainly it’s a positive sign and as Darby indicated a positive comment on our HR team and agency level team in that area.

Dana Hambly - Stephens

And then just were there any extra costs with shutting those offices down or the transition over to the new headquarters in the quarter?

Darby Anderson

I’ll answer to the shutting down the offices, no. And the transition to the new headquarters we absorbed within our normal cost structure.

Operator

(Operator Instructions) And your next question comes from the line of Mitra Ramgopal with Sidoti. Please proceed.

Mitra Ramgopal - Sidoti

Let’s start with the follow-up on the earlier one and maybe Darby you can give us a sense in terms of going forward with additional offices? Is that something we can probably expect again in the second half of the year or is this something you do maybe once a year?

Darby Anderson

We do it from time-to-time, I can’t comment kind of looking forward but it’s a monthly financial review process that we go through and we’ve got branches on performance improvement plans. But from time-to-time you got to tighten the muscle.

Mitra Ramgopal - Sidoti

And then Mark I was just trying to get a sense especially with regards to the Aetna and Centene demos et cetera, maybe you can help us understand how census growth is growing in those two areas?

Mark Heaney

Well I would be happy to answer but I would be lying to you, so I am going to turn you back to Darby.

Darby Anderson

Census growth has continued, it’s been -- some of it is a transition from other Medicaid programs but those pilots are performing well and on schedule.

Mitra Ramgopal - Sidoti

So in terms of obviously the number going from 1% to 6% for managed care, that is something, when we look at it, is it more just benefiting from volume or do you also expect for example benefiting from more favorable pricing or is that difficult to get?

Darby Anderson

I’ll comment to the latter part of your question on the pricing. It’s not a function of higher pricing at this point. The dual demonstrations and the transition to managed care, for the most part in our states our coming with rates of reimbursement exactly as we saw them in the traditional Medicaid programs. To the other part of the question what is the increase I will differ a little bit from Dennis but I believe we have to factor in the coordinated acquisition adding some significant revenues which are primarily under the managed care program in Centene care.

Dennis Meulemans

And I’d add to that Darby while only one month from Aid that is predominantly a managed care business as well. So it’s really at this point Mitra growth through the acquisition. But there is growth in our pilot programs and we’re expecting more in the second half of the year.

Mark Heaney

Mitra this is Mark, I’d like to just comment. We want to be tracking and talking about the shift to managed care. We’re going to report the number of persons that we’re serving through managed care, if they come from acquisition, if they come organically I think we’d probably tell you that. But what’s important is that managed care is making up a more and more important part of our book. And then within managed care are we organically growing the business or not which is we have hold those offices to that test also.

Mitra Ramgopal - Sidoti

And I am not going to hold you to this I promise but if you had to -- based on the trends you’re seeing and if you had to look out over the next maybe three years even five years. Where do you see that 6% going to?

Mark Heaney

Darby just pointed at me and he said back away.

Darby Anderson

So I’ll answer that. Look Mitra we are very clear, and we say it in our -- any of the presentations I have said it at your conference. I can’t give you a number on that. I can tell you that we expect that managed care is going to take over an increasing number of these programs across the country. And overtime managed care is going to become an increasingly important payor to us. At some point in time we believe that the states will get out of this business and convert the management of the dual eligibles to managed care, that can happen in three years, five years, six years we just think it’s a megatrend.

Operator

And at this time we have no questions.

Larry Wyrobek

Thank you all very-very much and we look forward to visiting with you in another 90 days. Thank you all. Thank you, Jackie.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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