Q2 2019 Earnings Call
Ladies and gentlemen, and welcome to the quarter two earnings conference call.
At this time, all participants on a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
If anyone should require operator assistance during the call. Please press Star then zero on your telephone keypad.
As a reminder, today's conference is being recorded.
I don't I like to turn the call over to Mr. Anderson Ma'am you may begin.
Thank you good morning, and welcome to the Addus Homecare Corporation second quarter 2019 earnings Conference call.
Today's call is being recorded.
To the extent that any non-GAAP financial measure is discussed in today's call. You will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.
This conference call May also contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding Addus expected quarterly and annual financial performance for 2019 or beyond.
For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements without limiting the foregoing discussions of forecasts estimates targets plans beliefs expectations and the like are intended to identify forward looking statements.
You are hereby cautioned that these statements may be affected by important factors among others.
Set forth in Addus filings with the Securities and Exchange Commission and in its 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. Dark Allison. Please go ahead Sir.
Thank you drew.
Good morning, everyone and thank you for joining us for our 2019 second quarter earnings call with me today is Brian Poff, our executive Vice President and Chief Financial Officer.
As usual I will begin with some overall comments and then Brian will discuss the second quarter results that we issued yesterday afternoon.
Following our comments, we would be happy to respond to any questions.
Last week, we announced the retirement of Zixone coli, our former executive Vice President and Chief Information Officer.
I want to thank you think broadly is done on behalf of bad as these past three and a half years. He has been an important part of our senior team and instrumental in our success.
I want to wish him all the best as he enters into this new phase of retirement.
I also want to congratulate Mike Wattenberg or on his promotion to senior Vice President of information technology.
Mike has been with Addus for over 15 months following a long history of success in the health care services industry, where he has served in various I.T. leadership roles, including Chief Information Officer.
Mike's new position includes the responsibilities previously held by Zeke and I'm excited to have him take the responsibility for this important area of our company.
As we announced yesterday, our solid operating performance continued in the second quarter of 2019.
Revenue for the second quarter was $149.7 million compared to $131.3 million for the same period in 2018, an increase of 14%, which included 5.9% same store growth.
Adjusted earnings per diluted share for the second quarter of 2019 increased to 56 cents as compared to 50 cents for the same period of 2018, an increase of 12%.
Our adjusted EBITDA for the second quarter of 2019 increased 12.9% to $12.8 million from $11.3 million.
We continue to have a strong cash position with minimal debt.
As we mentioned on previous earning calls the lack of a corresponding rate increase to offset the July 1st 2018, Chicago and Cook County minimum wage increase.
Has continued to negatively affect our margins.
This lack of an increase also affected our second quarter margins.
With the passing of the fiscal 2020, Illinois State budget.
Our industry will receive two rate increases to offset the statutory minimum wage increases experienced in both Chicago and Cook County.
The first rate increase is expected to be effective on September onest, 2019, and will increase our rate to $20.28 per hour.
We understand that Illinois expected that this increase would be effective July 1st 2019, but what's delayed due to the states need to file additional information needed to obtain approval from the federal government.
This information is now been filed with the appropriate Federal Department.
With their approval expected soon.
This delay will mean, our financial results for July and August will be negatively affected by the required July onest 2019 minimum wage increase in Chicago and Cook County.
However, the September one rate increase will offset these cost we will also see an additional increase effective January onest, 2020, which will take our hourly rate to $21.84.
Once these two rate increases are effective it will have offset the past to minimum wage increases we experienced in Illinois.
We are appreciative that the leadership of the state of Illinois recognize the need to make rate adjustments to cover the cost associated with the higher minimum wage wage is mandated by statute.
For the second quarter in a row, our same store growth exceeded our stated goal of 3% to 5%.
In addition to the continuing growth in our New York market as the state led narrowing of the provider network nears completion.
We also saw nice growth in new Mexico.
Our coverage in these markets has allowed us to work with our MCR partners as they add new consumers and to benefit from increased reimbursement rates.
Going forward, we remain confident in our same store growth rate goal of 3% to 5% however, with the upcoming rate increase in Illinois market. We book, we should continue to see same store growth at the high end of this range for the next few quarters.
Yesterday, we announced the completion of two acquisitions Alliance home health care, a hospice home health and personal care provider in new Mexico, and foremost homecare, a personal care provider in New York City.
The alliance acquisition, primarily adds broader hospice coverage in markets in new Mexico that we previously did not serve.
Along with our Amber care hospice operation, we now have approximately 980 c. under our hospice service in the state.
Foremost homecare inside long time provider of personal care services in the New York City Metropolitan area and will become part of our VIP operation.
This will further our ability to offer personal care services to the New York City market.
Both of these companies continue to follow our strategy of targeting acquisitions in our current markets both in clinical and non clinical areas of home care.
These two companies will increase our annual revenues by approximately $25 million.
We're very excited about the addition of both alliance and foremost and I want to personally welcome all of our new team members to Atish.
As we previously announced during the second quarter, we completed the purchase of VIP Healthcare services, and New York City based provider of personal care.
Together with our south shore operation on long Island, the IP will allow us to offer full market coverage to our Mcl partners, both on long island and in the five boroughs of New York City.
Our VIP transition is progressing smoothly and I would like to thank the VIP and add his teams who continue to work on this process.
With the closing of the foremost health care acquisition, we are in a strong position to continue our growth in the New York market, our third largest state.
As discussed on our last few earnings calls we are excited about the opportunities for Addus under Medicare advantage.
We are currently contracted with national Medical Medicare advantage plans to provide personal care services to their members.
In addition, we are working with several Medicare advantage plans on the development of future benefit offerings with the goal of improving quality and reducing overall medical spend.
We believe that these opportunities will expand as M&A plans begin to realize the cost savings potential a personal care services through a more integrated care delivery model.
While we anticipate additional M&A plan participants with personal care offerings in 2020.
We feel 2021 and later is the true growth horizon for this additional opportunity for Addus.
That being said we are experiencing increased referrals from our current and my partners and we expect this trend to continue.
Before I turn this call over to Brian for a more detailed review of our second quarter financial performance.
Let me. Thank all the employees of Addus, we as a company continued to provide a very important and much needed service to our consumers at a low cost our services enabled these consumers to stay in their homes instead of progressing to much more expensive healthcare, which occur in a less animate setting.
The good work that Addus does each and every day is only possible due to the commitment and hard work of each of our employees.
Im very appreciative for the ongoing efforts of the team.
With that let me turn the call over to Brian .
Thank you Derek and good morning, everyone Addus had another strong quarter as we produced solid same store revenue growth of 5.9% in the second quarter of 2019 compared with the second quarter of 2018.
We are executing on our organic growth strategy with favorable results and we believe we are well positioned to continue this trajectory in 2019.
In addition to solid growth trends in our current operations, we look forward to the incremental benefit of the acquisition of the assets of VIP healthcare services, which closed on June one 2019, and as Derek noted we completed two additional acquisitions. Following the end of the second quarter that were effective August onest.
We also continue to evaluate and pursue other acquisition opportunities from an ongoing pipeline of potential transactions.
As Dirk mentioned total net service revenues for the second quarter increased 14% to $149.7 million from $131.3 million for the second quarter of 2018.
Personal care revenues accounted for 92% of revenue for the second quarter and increased by 10.5% over last year.
This growth reflected a 6.5% increase in billable hours per business day, and a 3.8% increase in revenue per billable hour.
The remaining growth in revenue was attributable to our hospice and home health services Hospice care revenue increased to 8.4 million from $4.7 million last year or 81% with home health contributing 3 million in revenue.
Combined our hospice and home health segments contributed $11.4 million in revenue for the second quarter of 2019 up 7.8% sequentially from $10.6 million for the first quarter of this year.
Our gross margin percentage has remained consistent at 27% for the second quarter same as the first quarter of 2019 that compared with 27.2% for the second quarter last year.
For the year to date period, our gross margin improved to 27% from 26.5% for the first half of last year, primarily due to the higher merchant margin profile of our skilled business.
DNA expense was 20.2% of revenue for the quarter consistent with the second quarter last year and lower sequentially by 80 basis points from the first quarter of 2018.
The company's adjusted EBITDA increased 12.9% to $12.8 million for the second quarter of 2019 compared to $11.3 million in the second quarter of 2018.
Adjusted EBITDA margin was 8.6% inclusive of the negative impact of approximately 70 basis points from the non reimbursed Chicago minimum wage increase compared to 8.6% for the second quarter of 2018.
Adjusted net income per diluted share grew 12% to 56 cents for the second quarter from 50 cents for the second quarter of 2018.
The adjusted per share results for the second quarter of 2019 exclude the following.
M&A transaction expenses of four cents restructuring severance and other costs of two cents and non cash stock based compensation of nine cents.
As previously reported our adjusted per share results for the second quarter of 2018 exclude M&A transaction expenses of three cents restructuring charges severance and other costs of four cents and noncash stock based compensation of seven cents.
Our tax rate for the second quarter of 2019 was 22.6% within the range of our expectations while for the full year 2019, we continue to expect our tax rate to be in the low 20% range. We anticipate the addition of VIP and foremost in New York with higher tax rate profiles to increase our tax rate going forward by approximately 150 to 200 basis points.
Dsos increased to 81 days at the end of the second quarter of 2019, compared with 78 days at the end of the first quarter of 2019.
While we saw the expected improvement related to payer system delays in patient transfers, we experienced during the first quarter Dsos for the Illinois Department of aging Rose to 82 days at the end of the second quarter of 2019, compared with 67 days at the end of the first quarter.
This increase relates directly to the exhaustion of the states prior fiscal year budget appropriation for home and community based services in advance of the end of the fiscal year.
The state's fiscal 2020 budget included additional appropriation to encompass the prior year shortfall as well as the current year expected spend with this commitment we have already seen positive cash flows from Illinois in the third quarter and improvement in their Dsos. We will continue to work with state leadership under the New administration to try to return to normalized levels.
Our second quarter net cash used in operations totaled $2.9 million and at June 32019, we had $54.8 million in cash on hand.
With our credit facility announced last year, we continue to have substantial capacity to support our acquisition strategy with only $39 million of bank debt at quarter end and $62.8 million. After the alliance and foremost acquisitions on August Onest.
This concludes our prepared comments this morning, I want to thank you for being with Us and I'll now ask the operator to please open the line for your questions.
Ladies and gentlemen, if you have a question at this time.
Please press the Star then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line, Brian Tanquilut from Jefferies. You may begin.
Hey, good morning, guys, congratulations on a really good quarter.
So I guess my first question as we think about what's happening in New York and New Mexico.
Do you think that this is the early stages or early signs that.
We're seeing the.
The importance of size and scale in this business, where you are able to.
Get market share or have the negotiating power with commercial or.
With the Medicaid.
Mcf as you try to get better rates.
In states, where it's managed.
Yes, Thanks, Brian .
We do think that and this goes back to the strategy that we tried to and started implementing about three years ago, where we believe that it wasn't necessarily the number of states you ran.
But it was the ability within the state to offer the coverage that Mcl partners would need and we believe as more and more states look to value based.
Pricing.
Size and the ability to negotiate with the managed care providers are the state will be important so while we've not really seen.
Much of this happening yet outside these two states we do believe in the future this will occur.
Got it and then.
Touched on the M&A opportunity a little bit with that color on the contracts that you have what are the discussions like now.
In terms of other plans there is some of these national plans that you're already contracted but in terms of.
How do you get the hours, how do you get into the value based portion of this I know we've talked about that in the past.
You might just give us some thoughts and how we should be thinking about the expansion of this opportunity.
Yes.
I think theres, a real education process going on now between providers like Addus, where weve with the personal care services, the nonclinical component of homecare.
Dealing with the Medicare advantage.
Companies, because they've not really experienced our service in the past and so what we're working with them on is trying to show them.
How we can affect positive delay their bottom line through reduction of costs, especially related around items, such as emergency room visits hospitalization days re admission. So it's a it's a process Brian that takes a little time and that's why we feel like for US as we continue to move in that direction and move towards a value based care system with these.
Payors, it's going to take a little longer than starting in 2020.
I appreciate it and then last question for me as I think about M&A. Obviously, you three deals closed within the last two months.
Does this mean that.
We're done for the year or how does the pipeline look between now and year end.
Well, Brian our team wish that we work.
They would probably tell you they'd like little break, but I will assure you we're not.
Addus is a.
Part of our strategy and part of our plan is to be a growth company through not only organic growth, but also through strategic acquisitions. So we continue to be looking at both clinical and Nonclinical acquisitions.
So our belief is we have enough in the pipeline right now that we're working on that there is.
We anticipate before the end of the year, we'll be able to talk to you about additional opportunities that come with Addus.
All right sounds good thanks, Eric.
Thanks, Brian .
Thank you and our next question comes from the line of Frank Morgan from RBC Capital markets you may begin.
Good morning.
Hey, I was hoping I could get just a little more color on this on your existing Medicare advantage relationships could you talk a little bit about.
Kind of how those referral relationships are working today is it any different from what you're doing in your.
In the government side of your business. So so any.
Color on differences in services offered in maybe a little color about how those rates compare to your other rates.
Yes, Thanks Frank.
You know.
Medicare advantage, we believe is a very important part of our future and.
We're we're trying to do it in such a way with our partners that it makes sense for both of US the way. We've really started out this last years, where the benefit is more of a respite benefit.
It's probably.
A fifth of the hours that we normally see personal care patients receive from state Medicaid programs, but I think thats, partially by design thats for the.
The m- plans to be able to offer this is a service bring in new members and then to see.
How it will work going forward. So we continue to work with them today, we work with them on a per hour basis, I think in the future our goal would be to continue to develop data.
With these plans so that we can go to some sort of model that would be more value based but today again, it's very early and it's more of a respite benefit with the plans we have today.
Got you and I guess back on that narrowing of networks in New York.
Do you feel like you're you're kind of there or do you expect that.
We know that the full impact of this narrowing has been is it now in the run rate of the business, where do you think there's still more upside there.
I think it's largely completed.
Im that's not to say, we won't see some experience in.
Some advantage of that in the third quarter, but I think due to the timing that was required by the state. Most of the plans are near completion of at narrowing now that being said I will say is we continue to grow.
Such as the VIP acquisition, the foremost acquisition in the city. We continue to believe that we will be an important player with managed care providers in the city and can continue to see benefits, but the main increase that we've experienced these last 15 months is nearing Ian.
Got you and then my last one I know, it's a smaller part of the business today, but with hospice and home health care, but you're clearly.
Still making acquisition is there any color on sort of how the how your view on how the final rules shook out for hospice and then also what you're seeing on PDG on for the home health care side. Thanks.
Really.
The pdgm for the home health care side for US is very very immature we were morally mora by a rural providers are very small provider of care. So it's not an issue for us as a company today.
Obviously as we grow it could be but the fact that we're not in it today hopefully we'll take advantage of any changes that had to occur.
As far as hospice, we're still very excited about hospice and the opportunity. There. We see continued to see synergies between personal care hospice, we see synergy between personal care and home health. So were excited about all three areas that we offer and we will.
Continue Frank to look to grow we have been very careful as we've looked into the clinical side of the business, but we are we are looking and if we find a strategic acquisition.
In hospice.
That can help drive us towards our goal of 20% of our revenue then we will.
Obviously look at that and be willing to probably pay a little more than we have been willing to pay in the past.
Thank you and our next question comes from the line of Matthew Gilmore from Baird you may begin.
Hey, Thanks for the question.
I wanted to follow up on the acquisitions that you announced.
Matt This is Brian .
First on the multiple question I think looking at alliance on being a pretty good mix of skilled I think we were still very happy because the multiple that we paid for that deal was in our normal range not are maybe the higher profile that we would typically expect from skilled so that was a good mixed assets kind of similar to.
The amort here than we did last year had a really reasonable multiple with a decent amount of skill business, but came with some personal care. So we're very happy but that was definitely.
In the range that we've seen historically foremost with kind of what's going on in New York that was that was a lower multiple than is in our range. Its a smaller asset I think we've talked.
Previously that for those smaller tuck ins as multiples tend to be tend to be lower anyway, but with what's happened in New York.
Obviously, we had we had a decent amount of leverage in that situation. So a great multiple paid there.
But it provided a little bit of a strategic advantage for us as well at it. They most likely were going to get shook out and give us an office in Manhattan that we didnt have with with VIP system coverage. There. So we were happy to do that and I think there's definitely other opportunities in the M&A pipeline in the New York City area. As this transition has occurred so other other things that we're continuing to look at.
Okay Fair enough and then.
Maybe following up on the Illinois rate update.
And I was kind of curious if you could give us some sense for the impact on on margins and in the past you've talked about.
The timing issue, having a 70 basis point drag I guess, it could be a little bit.
Larger in the third quarter, just on a temporary basis once the rate up dates come through or do you get all the 70 basis points.
Back as we're looking at 2020, and how does if you could kind of update us as well with respect to that 10% long term margin target sort of how close do you think you'll be once once these rates come through thanks.
Yes. This is Bryan again, I definitely think with the September one increase that will help offset the dollar increase in Chicago that became effective this July 2019.
Help offset a little bit of what we took last year by the time, we get to January increase our expectation is that we'll cover that as well.
And should be consistent with our kind of our typical profile as you know when when it's a state increase not Chicago specific increase we have to go through our process.
For our downstate workers as well that is an ongoing process that we haven't finalized, but we haven't anticipated.
Rate that we think we'll get out of that so we keep a pretty consistent margin profile to our existing business. After those three but definitely it is helpful to get us back towards the 10% target that we've talked about on the acquisitions that we've announced are helping with that as well. So when we get that rolled through in January with that leverage we would anticipate getting getting them.
Like to make things simple so when we thought about Illinois, and we think about 2020, when everything's fully baked in we modeled about a $40 million gross revenue and a low twentys gross margin and I think at the time. We talk you guys had not yet completed your negotiations downstream with the FDA you.
So now that we're a few weeks passed that or are those still pretty decent walking around assumptions to think about the impact for 2020.
Yes, I think those are still decent nothing's really changed I think the only thing that's really impact that is just the expected timing. We expect to July one of this move back a little bit as the state work with the government, but nothing else is really changed as far as the.
The components.
Okay.
And the other thing I wanted to follow up on is.
I know there was some discussion.
You know at a board level about M&A and trying to accelerate.
And do some different things with M&A, just given the difficulty in finding assets I know amedisys is kind of thrown in the towel and they're doing something different with the development strategy, but.
Yeah again, it's been a few weeks since we've talked about that but whats the latest and greatest on.
On that and do you think that's something that we'll be notable you know.
Months or years out in terms of your pace of spend.
Yes, I think John I can I can start under Ken can add some color as well, but just on M&A I think our pipeline is still pretty robust we have a pretty strong focus as a team.
Continuing to do strategic acquisitions areas and so we we definitely had those conversations internally Weve mission, which are we have the right resources dedicated to that area from a sourcing perspective, and as well as integration. So I think that that's ongoing.
Really isn't a large change but is always a primary focus of ours to grow through acquisition.
Yeah, and I think.
One of the things John that we have seen over the last three years as we've added to our team.
We brought on very experienced leadership.
That in the past has been successful with growing companies through acquisitions multi site companies.
And so we now feel like that we are.
We're in a position today to look at some larger acquisitions nothing that I would say would be.
How you say this is it's not a bet the farm type strategy, but it's certainly something that might be a little larger than we've looked at in the past it's strategic if it gives us coverage in the states in which we operate if it asked.
Clinical Nonclinical services, you know again, all preparing for the future in our mind that revolves around two things one Medicaid personal care.
Is eventually going to benefit of size that can notion negotiate rates and give coverage to the managed care providers that outsource that service and then.
Two we believe it's very important news Medicare advantage continues to push it.
Area that not only do we offer personal care, but we have the ability to offer some clinical services along with that.
To help our and my potential M&A partners. So you'll continue to see us look in those directions as it relates to potential M&A targets.
And then last one from me is.
I think some of your peers have.
Our thinking that and this is hard to pull off I know, but.
Ideally sort of this blended hospice personal care home care model, creating a continuum.
Is there I mean, just given how expensive those assets are is there a.
Maybe market by market plan B, where you are.
Partner with other providers and trying to go with one sort of package too yes.
Medicare Medicaid type plans or do you think that it's going to be a a buy and build versus a JV model.
Well I think each company has their own thought processes, others believe in the JV model, we have not as of yet entered into that type of relationship we like to the process of building.
Our own ability to control, we believe has been controlling the quality of cost through ownership if possible and so the fact that we already have a large personal care.
Presence and that's probably one of the most difficult presence to build across the nation.
We believe strongly we can come back behind it and try to add clinical resources to it that one of the points you brought out.
Still there and that is.
The evaluations it takes to acquire these clinical services are a little higher at less especially on the hospice side and so thats always going to be a challenge.
Right.
Do you think other people have said now that we've got this.
Pdgm rule out maybe the dam breaks a little bit on home health.
Acquisitions, but it takes a heck of a lot of infrastructure and modeling to move from where we are now to.
Pdgm business is that something you think is the case and if so where you have to build them. Some more infrastructure for modeling I know again some of the peer companies have been spending a year plus to get ready for this is that something if you went back into how else do you have to build out that sort of modeling and process capability or do you think you can buy it.
Well the fact that we're not he in homecare and hany.
Material way prior to Pdgm coming in we believe that.
If we continue to grow in that area. It will be after the rule is.
In effect, and we will be able to to see how it affects these companies and we believe that that time be able to buy it so thats more our thinking today.
Okay.
Thanks, so much.
Thanks, John .
And as a reminder that start one for question start one.
Our next question comes from the line of Mitra Ramgopal from Sidoti you may begin.
Yes, hi, good morning.
Just a couple of questions.
We saw the last couple of quarters same store.
Trending above what you've guided to in the past that 3% to 5%.
Just wondering how we should think about that.
The remainder of this year and.
Going into 2020, obviously youve benefited from New York and I was wondering if that 5% plus w. feels pretty sustainable.
Mitra you know, we still we are still confident long term in a 3% to 5%.
Organic growth rates still our goal that we want to give to our.
Our.
Our shareholders potential shareholders and guys such as yourself that work with us that being said, we're getting a nice increase from Illinois.
Hopefully effective.
September 1st and then followed up by the January Onest, So we're going to be pushing.
At the high end.
Slightly above that growth rate, probably for the next four quarters or so as as those price increases flow through so yes, we don't really want to change our stated goal to encompass that because we feel that is kind of an extraordinary.
Change for that.
That is being done to take care of statutory increases in minimum wage and that will fall off so long term, we're still three to five but we do believe we will be at the high end or a little above for the next four quarters.
Okay. No that's great and then just on the labor front side as you look in terms of.
Growth over the next few years.
Do you see labor constraints as a potential headwind in terms of being able to find sufficient caregivers.
Given tight market out there.
Yes, it's probably our single biggest.
Impediment to growth today.
We talk about it as a team as a leadership team constantly I know that our operations team along with our.
HR and other folks in our company are doing everything we can to use technology and other areas too.
Increase our ability to recruit but I do believe right now with the economy like it is and some of the minimum wage law increases that or leveled the playing field for a number of companies I think it is going to continue to be a difficult aspect of our operation for the next.
A few years.
Okay. Thanks, again for taking the questions.
Thank you and I'm showing no further questions at this time I would like to turn the call back to <expletive> Allison for closing remarks.
Thanks, very much operator, let's now I'd like to thank everybody today for your continued interest in Addus and for your participation on our earnings call. Today Hope you have a great week. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.