Addus HomeCare Corporation (NASDAQ:ADUS) Q4 2022 Earnings Call Transcript

Addus HomeCare Corporation (NASDAQ:ADUS) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day, and welcome to the Addus HomeCare Fourth Quarter and Year-End 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Dru Anderson: Thank you. Good morning, and welcome to the Addus HomeCare Corporation Fourth Quarter and Year-End 2022 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 2023 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 its fourth quarter 2022 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 Chairman and Chief Executive Officer, Mr. Dirk Allison.

Please go ahead, sir.

Dirk Allison: Thank you, Dru. Good morning, and welcome to our 2022 fourth quarter and year-end earnings call. With me today are Brian Poff, our Chief Financial Officer; and Brad Bickham, our President and Chief Operating Officer. As we do on each of our earnings calls, I will begin with a few overall comments, and then Brian will discuss the fourth quarter results in more detail. Following our comments, the 3 of us would be happy to respond to your questions. I first want to say thank you to all the employees at Addus HomeCare for their efforts this past year. While it’s exciting to know that we had a great year financially, it is more important to know we provide care to approximately 66,000 clients and patients in 2022. I am very proud of our team’s hard work in making sure we are able to meet the home care needs of all these deserving people.

Meeting our mission each day will continue to lead to ongoing growth for Addus. Yesterday, we announced our financial results for the fourth quarter and full year 2022, and I’m extremely proud of our operating performance. Our team grew revenue 10% to $247.1 million for the fourth quarter of 2022 as compared to $224.6 million for the fourth quarter of 2021. This resulted in adjusted earnings per share of $1.11 as compared to an adjusted earnings per share for the fourth quarter of 2021 of $0.97, an increase of 14.4%. We also exceeded $28 million in adjusted EBITDA. For the full year of 2022, our revenue was $951.1 million with an adjusted EBITDA of $101.5 million or 10.7% of revenue. Our team was able to achieve these full year results despite the first 2 months of 2022 being negatively impacted by the Omicron wave.

During 2022, we continue to see strong cash flow from operations as our states and other payers have worked — pay providers like Addus in a timely manner. This strong cash flow has allowed us to maintain a net leverage position of less than 1x adjusted EBITDA, giving us the financial flexibility to continue to implement our strategy even as the cost of debt has increased. As has been the case for us over the last few quarters, the labor environment continues to improve. During the fourth quarter of 2022, we experienced improved hiring in our Personal Care segment with hires per business day increasing approximately 10% as compared to the fourth quarter of 2021. We are also seeing this improved hiring trend continue in January and February of this year with hires per business day running ahead of our fourth quarter of 2022 performance.

A part of our improved hiring results have been due to the recent investment we made in a candidate tracking system, which allows us to better engage with potential employees as well as shortening the time between application and higher. We are continuing to roll out this system to all of our sites, a process that should be completed in 2023. Hiring in our Clinical segment has been more challenging than in our Personal Care segment, However, we began to see our clinical hiring pick up in the third quarter and continue through the fourth quarter of 2022, particularly in our hospice segment. This, along with the incremental improvement in our clinical turnover has started to relieve some of the staffing challenges we faced in the first half of 2022 in our clinical segment.

There are some geographic areas where both clinical hiring and wage pressures continue, but the overall hiring environment has certainly improved, and we expect this trend to continue in 2023. As has been announced, the COVID-19 public health emergency will end on May 11, 2023. With the ending of the emergency declaration, the enhanced federal Medicaid match that states have been receiving from the federal government will gradually phase out. The full 6.2% in extra federal funding will last through March 31, 2023. This match will then decrease to 5% for the second quarter, 2.5% for the third quarter of this year and 1.5% for the fourth quarter of 2023. Even with the reduced funding to state Medicaid plans, we believe the states in which we operate are in a much stronger financial position than before the pandemic.

During our fourth quarter, the funding we received from the American Rescue Plan Act or ARPA has allowed us to begin increasing caregiver wages, pay sign-on and retention bonuses or provide onetime bonuses to current caregivers depending on the state program. Today, we have realized approximately $24 million, of which we still have $13.8 million to utilize over the next 12 months. These funds have been helpful with our recruitment efforts to support patient care and should continue to help our hiring and retention efforts in the future as we deploy our remaining funds. As for Illinois, our largest state of operation, on January 1 of this year, we received a $0.70 per hour statewide rate increase as expected. This rate increase covers the Chicago minimum wage increase we saw last July and allows us to raise wages elsewhere in Illinois.

On December 30, 2022, the State of Illinois announced an additional increase of $1.26 per hour, which will be effective on March 1, 2023, subject to approval from CMS. Once approved, our Illinois state reimbursement rate will increase to $26.92. This increase will cover the upcoming July 1 minimum wage increase in Chicago and allow us to continue to raise wages for all our Illinois employees. We believe these increases should help us to continue the favorable hiring trends we have been seeing in our Personal Care segment. I also want to give a brief update on recent developments regarding our participation in the New York Consumer Directed or CDPAP program. On February 1 of this year, the Governor of New York issued her budget, which proposes to repeal the procurement process for fiscal intermediaries who participate in the CDPAP program, eliminating the reduction of providers, which would have occurred under this process.

This budget now proposes to make changes to the MLTC program with a goal of minimizing the number of providers in the state. We believe these proposals will allow Addus to continue providing services to our current clients while growing with payers whose reimbursement rates provide for an adequate financial return. The final budget for New York is due on April 1, 2023. Once that budget is published, we will be able to refine our growth plan for New York. As a reminder, we continue to operate as normal with our MLTC partners in the New York market with respect to the CDPAP program. As we receive further clarification on the state CDPAP rates, we will evaluate whether to increase our CDPAP admissions as appropriate. Now let me discuss our same-store revenue growth for the fourth quarter of 2022.

For our Personal Care segment, exclusive of the New York CDPAP and ARPA funds, our same-store revenue growth was 7.9% when compared to the fourth quarter of 2021. Over the past 3 years, a majority of our same-store growth in PCS came from rate increases from our states. With the disruption caused by the pandemic, hourly growth has been more difficult. Recently, we have started to see a resumption of growth in same-store hours. In the fourth quarter of 2022, we saw same-store hours excluding New York CDPAP, grew 2.6% over the same period in 2021 and 1.5% on a sequential quarterly basis. This mix of volume and rate growth is more consistent to our historical averages prior to the pandemic. Turning to our clinical care operations. Our home health segment same-store revenue grew 8.3% over the same quarter in 2021, primarily as a result of our prioritizing episodic cases and declining non-episodic referrals due to the lower reimbursement rates.

As we have seen, our non-episodic referral opportunities continue to increase, our managed care team has been working with our Medicare Advantage virtual payers to adjust our contract rates to a more appropriate level, which will allow us to accept more nonepisodic volume growth going forward. Recently, we have started to see success in these efforts as we continue to discuss movement to episodic case rates for a longer-term solution. We are still in negotiations with a couple of our large payers and look forward to the completion of those discussions. Our operations team continues to work hard on both mix and staffing and home health to ensure we maximize the value of the services we provide. We remain excited about home health operation as it complements our personal care services, particularly where we participate in value-based contracting models.

Our hospice same-store revenue decreased 4.9% when compared to the fourth quarter in 2021 with a decrease of 0.9% in our average daily census as compared to the fourth quarter of 2021 as well as the resumption of Medicare sequestration. Our medium length of stay did improve to 27 days in the fourth quarter as compared to 22 days for the same period in 2021, but was down slightly from 28 days for our third quarter of 2022. While hospice continues to recover from the pandemic at a slower rate than we expected, we did see an increase in hospice admissions on a sequential basis, which is encouraging. Our hospice ADC increased to 32.3% for the fourth quarter of 2022 as compared to an ADC of 2,635 for the fourth quarter of 2021, inclusive of the ADC attributable to our JourneyCare acquisition which closed on February 1, 2022.

As for our ongoing development efforts, we continue to look at potential acquisitions that meet our strategic criteria. Our deal flow continues to consist primarily of a number of smaller acquisition opportunities mainly in our personal care and home health segments. While we have a desire to look at larger assets, deals of size have been slower to come to market, especially with the near-term reimbursement rate challenges for home health. We expect to see larger home health opportunities in the coming months as the market understands the reimbursement rates coming from CMS. In the meantime, we have been reducing our debt with our strong cash flow. Going forward, our disciplined balance sheet would allow us the financial flexibility to take advantage of any larger strategic opportunity that may present themselves.

As for our value-based care efforts, we are continuing to see positive results from our various value-based care contracts. We have now entered into 5 value-based contracts in 3 states, covering 4,800 clients. These contracts are focused on helping our clients avoid unnecessary emergency room visits and hospital admissions as well as readmissions at various time frames following a hospital discharge. In addition, we are also working on improving Addus benchmarks. To date, our outcomes data has shown our ability to help reduce costs while improving quality benchmarks. We are currently working on additional value-based opportunities for 2023. Value-based care continues to be a revenue growth opportunity, which we expect to grow to a more meaningful amount over the next few years.

I’m so proud of our team for the care they are providing to our elderly and disabled consumers and patients. The home remains one of the safest and most cost-effective places to receive care and is also the place for most elderly individuals and their families prefer to be. We believe the heightened awareness of the value of home-based care is favorable for our industry and will be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on our dedicated caregivers who worked so incredibly hard providing outstanding care and support to our consumers, patients and their family. With that, let me turn the call over to Brian.

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Brian Poff: Thank you, Dirk, and good morning, everyone. Addus had a strong financial and operating performance for the fourth quarter, capping off another record year of profitable growth. Our results reflect strong demand for our services, led by organic growth in personal care services, well above our normal expected range of 3% to 5%, along with solid same-store growth in our home health segment. In addition to our organic growth, we benefited from our acquired operations in home health, Armada Home Health and Summit Home Health added in 2021 and Apple Home Healthcare, which we closed at the beginning of the fourth quarter of 2022. Our hospice business has continued to slowly recover from the pandemic with a return to our pre-COVID median length of stay range in the upper 20s.

Our hospice results also include the acquisition of JourneyCare, which closed in February 2022. As Dirk noted, total net service revenues for the fourth quarter were $247.1 million. The revenue breakdown is as follows: Personal Care revenues were $183.4 million or 74.2% of revenue, Hospice care revenues were $50.6 million or 20.5% of revenue, and home health revenues were $13.1 million or 5.3% of revenue. We have continued to actively pursue acquisition opportunities that meet our criteria and complement our organic growth. In 2022, we added approximately $65 million of annualized revenue with the acquisitions of JourneyCare and Apple Home Healthcare. We continue to evaluate and pursue other acquisition opportunities and believe we will see a more favorable market environment later this year as sellers, particularly in brokered processes, have been slower than expected in coming to market.

In part due to significant Medicare reimbursement uncertainty through October of last year for home health services. The final announcement of late 2022 on reimbursement changes for home health has provided more clarity and should lead to opportunities for future acquisitions in skilled home health, although we continue to monitor developments regarding future reimbursement changes and related impacts. Most importantly, we are well capitalized to continue to pursue our acquisition strategy as opportunities arise. Other financial results for the fourth quarter of 2022 include the following: our gross margin percentage was 31.9% compared with 32.4% for the fourth quarter of 2021. While we benefited from our annual hospice rate adjustment on October 1, 2022, our results reflect the negative impact of the July 1, 2022, minimum wage increase in Chicago, one of our largest personal care markets for which we did not receive a corresponding reimbursement increase.

Effective January 1, 2023, we did receive a statewide reimbursement increase in Illinois, which will offset the Chicago minimum wage increase. With another recently announced statewide increase to be effective on March 1, 2023, pending CMS approval. We anticipate our gross margin in the first quarter to be negatively impacted sequentially by approximately 120 basis points from the annual reset on payroll taxes and our annual merit increases, which are effective on March 1. These decreases will be offset slightly by the positive impact from our January 1 rate increase in Illinois, although we expect to see some minor compression from the March 1 Illinois increase. As we anticipate our gross margin contribution after wage negotiations and increases to paid time off and mileage rates from this rate increase to be in the low 20% range where our normal Illinois Personal Care gross margin is typically in the mid-20% range.

Overall, we expect our gross margin sequentially to decline by approximately 100 to 110 basis points from the fourth quarter of 2022 to the first quarter of 2023. G&A expense was 22.1% of revenue, consistent with the same percentage in the fourth quarter a year ago, but lower sequentially from 22.5% in the third quarter of 2022. Adjusted G&A expense was 20.4% for the fourth quarter of 2022, an increase over the prior year of 20.1%, but lower sequentially from 20.6% in the third quarter. The company’s adjusted EBITDA increased to $28.2 million compared to $26.7 million a year ago. Adjusted EBITDA margin in the fourth quarter was 11.4% compared with 11.9% for the same period last year. While we expected to see some margin compression in 2022, primarily due to wage pressures, we were pleased to have exceeded 11% in adjusted EBITDA margin for the first time this year.

Looking ahead, while we continue to operate in a dynamic environment, we expect to see stabilization in our adjusted EBITDA margin in 2023. Adjusted net income per diluted share was $1.11, compared with $0.97 for the fourth quarter of 2021. The adjusted per share results for the fourth quarter of 2022 exclude the following: acquisition and de novo expenses of $0.06; restructure and other nonrecurring costs of $0.01; and noncash stock-based compensation expense of $0.13. The adjusted per share results for the fourth quarter of 2021 exclude the following: the favorable impact of the retroactive Illinois rate increase net of $0.05; acquisition and novo expenses of $0.09; restructure and other nonrecurring costs of $0.01; and noncash stock-based compensation expense of $0.11.

Our effective tax rate for the fourth quarter of 2022 was 19.2% and benefited from several discrete credits during the quarter as well as continued strong work opportunity tax credits. For calendar year 2023, we expect our tax rate to be in the mid-20% range. DSOs were 45.1 days at the end of the fourth quarter of 2022 compared with 46.2 days at the end of the third quarter of 2022. We have experienced consistent cash collections for most of our payers and expect to see this trend continue. Our DSOs for the Illinois Department of Aging for the fourth quarter were 41.5 days compared with 35.4 days at the end of the third quarter this year. Our fourth quarter net cash provided by operations was $24.3 million. During the quarter, we made the final repayment installment on our fee roll tax deferral in 2020 under the Cares Act of $4.1 million and also had a net utilization of ARPA funds of $4.2 million.

Exclusive of these payments, our cash flow from operations would have been $32.6 million during the fourth quarter. For the full year 2022, our cash flow from operations was $105.1 million, inclusive of a positive net impact from government stimulus advances of $8.7 million. We also benefited from a positive impact of working capital changes of approximately $19 million in 2022, primarily due to our strong accounts receivable collections. As of December 31, 2022, the company had cash of $80 million and bank debt of $134.9 million with capacity and availability under our revolver of $380.2 million and $237.2 million, respectively. We have continued to focus on debt repayment in the face of rising interest rates. And as a result of our strong cash flow, we’re able to reduce our revolver balance by a net $90 million in 2022.

To date, in 2023, we have continued this focus and have further reduced our revolver balance by another $13.5 million. We have a capital structure that supports our growth initiatives and acquisition strategy as previously noted, we expect to be active in the M&A market this year. At the same time, we will continue to diligently manage our net leverage ratio, which is currently well under 1x net of cash on hand. This concludes our prepared comments this morning, and we would like to thank you for being with us. I’ll now ask the operator to please open the line for your questions.

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Q&A Session

Operator: The first question today comes from Scott Fidel with Stephens.

Scott Fidel: First question, just appreciate the commentary just around the 2 Illinois rate increases and then the impacts on gross margins. Might be helpful just if you want to — if you could just give us what you would view the overall annualized revenue impact of those 2 Illinois rate increases in aggregate, obviously, that would, I guess, sort of annualize out more in the second quarter. And then just an update as well on sort of how the blended rates look across your other markets in Personal Care outside of Illinois for 2023?

Brian Poff: Yes, Scott. I’ll talk about the January 1 increase first. So based on kind of current volumes in Illinois, that’s going to result in approximately right around $12 million in annualized revenue. So obviously, coming in January 1, you’ll see a full quarter impact of that in Q1. The March 1 rate increase, which is a little larger per hour, is going to be probably between $17 million and $18 million kind of based on current volumes in Illinois, obviously, getting 1 month of impact of that in Q1, but you’ll see the full impact of that as that rolls through Q2. Outside of that, I think we’ve seen a couple of other markets that we’re going to see rate increases for I think South Carolina, which is one of our smaller markets has come through with a rate increase early this year.

Probably not going to see the same level of rate increases across the board. We’ve seen in the last couple of years. But I think overall, I’m still seeing some support in some other areas as well.

Scott Fidel: Okay. Got it. And then a follow-up question. Just wanted to follow up on Dirk’s commentary just on I guess, sort of the updated framing around the M&A pipeline? And Brian, I know you mentioned as well sort of maybe picking up middle later this year. I’m assuming is that sort of implying wanting — the market wanting to also get visibility into at least the proposed 2024 rates for home health in Medicare, just given some of the uncertainty around some of the proposals that CMS had talked about for next year as well. And that would be the first part. And then the second part, I guess, if you wanted to just sort of update us on your prioritization list between home health, personal care, hospice in terms of how you’re prioritizing M&A in the pipeline here?

Dirk Allison: Yes, Scott, I do think the question of what’s going to happen with the home health rates long term is still somewhat to be answered. I mean, obviously, last year, there was a period of time where we didn’t know a whole lot based on what had been announced by CMS as to what the actual rule is going to be by the time it came through. We still have a little bit of that going forward, as you know, trying to figure out exactly what the rates are going to be. And I think the real question lies in what sellers and the purchasers are thinking. I don’t know that all sellers today have come to the place where they have factored in that there might be future limitations on the rate increase. And so their expectations for price may be still a little high.

I think from us as purchasers and others in the industry, we’re trying to be very careful and strategic as to what we pay for deals until we truly understand the ruling. So I think that has affected some of the — as Brian said, some of the larger broker deals that we may see, particularly around in the home health market. Going forward, the prioritization really continues to be quite consistent from what we’ve been telling you for the last few quarters. Our prioritization as far as where we will use our acquisition dollars will be really around personal care as well as home health. At this point in time, we’re probably not as focused on hospice as we have been in the past. We think we have a nice operation around the hospice coverage around our personal care market.