Addus HomeCare Corporation

Good morning and welcome to the Addis HomeCare Corporation first quarter 2020 earnings conference call. Today's call is being recorded. To the extent any non-GAAP financial measure is directly 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 Addis' expected quarterly and annual financial performance for 2020 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 ADIS filings with the Securities and Exchange Commission and in its first quarter 2020 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. As a reminder, ADIS has not yet filed its 2019 Form 10-K and will file its Form 10-Q for the first quarter when it finalizes the Form 10-K. As a result, all financial results discussed on this call today are preliminary. I would like to now turn the call over to the company's President and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

Dirk Allison Thank you, Drew. Good morning, everyone, and thank you for joining us for our 2020 first quarter earnings call. With me today is Brian Poff, our Chief Financial Officer, and Brad Bickham, our Chief Operating Officer. As usual, I will begin with some overall comments and then Brian will discuss the first quarter results that we issued yesterday afternoon. Following our comments, we would be happy to respond to any questions. As you saw with the preliminary financial results we announced yesterday, we had another very solid operating performance in the first quarter of 2020. Our revenue for the first quarter was $190.2 million. adjusted earnings per diluted share for the first quarter of 2020 increased to 77 cents, and our adjusted EBITDA for the first quarter of 2020 was $17.7 million. We did start to experience a reduction in our revenues beginning in the last two weeks of March due to the coronavirus, which I will discuss in a few minutes. As we previously announced, On January 1 of this year, we received a rate increase from the state of Illinois. This rate increase is to cover the minimum wage increase which occurred in Chicago and Cook County on July 1, 2019. This increase also allowed us to correspondingly increase the wages of our Illinois team located outside of the Chicago area. We appreciate that the leadership of the state of Illinois recognized the need to make adjustments to cover the costs associated with the higher minimum wages. As for additional minimum wage increases in Illinois, the city of Chicago has passed an ordinance which will raise the city's minimum wage on July 1st by $1 to $14 per hour. This accelerates the move to a $15 per hour minimum wage ahead of what the state of Illinois had already passed. Our team has been working with the state leadership to secure funding to offset this accelerated wage increase. A rate adjustment to cover this Chicago minimum wage increase was included in the governor's budget, which was presented in February of this year. However, this rate increase is dependent on the passing of a graduated tax proposal, which will be on the ballot during the upcoming November elections. We continue to advocate for increases in our rates to cover these Chicago mandated wage increases. We believe that any approved increase will benefit both our local workers and the customers that we serve in Illinois. I also want to discuss some New York budget developments that have arisen over the past few months. Effective January 1st Almost all Medicaid providers in the state of New York received a rate reduction of 1% for the services they provide. For ATIS, we estimated that this would be a reduction to our earnings of approximately $1 million per year. This reduction was in response to an anticipated state budget shortfall of approximately $6 billion. At that time, the governor of New York also appointed a committee to recommend actions for further Medicaid cost reductions to help close this budget shortfall. Per this committee's recommendations, an additional rate reduction of 0.5% was implemented for Medicaid providers effective April 1st, 2020. Without any mitigation, this would reduce our earnings by approximately $500,000. We continue to work with our New York State Associations to try and mitigate these rate reductions. Although the impact of COVID-19 on New York tax revenue is unknown at this time, it could further negatively impact the budget and increase pressure to implement further rate reductions unless advocacy to get federal relief direct to states is successful. For the first quarter of 2020, our personal care same store growth was 15%, driven largely by our rate increase in Illinois, which was effective January 1 of this year. We should continue to see solid same store growth in our personal care segment over the next few quarters, driven primarily by the Illinois rate increase. For the first quarter of 2020, our hospice same store growth was 12.1%, as our New Mexico hospice programs had solid organic growth. In addition, our Hospice Partners of America programs that we acquired at the beginning of the fourth quarter of 2019 experienced solid growth as well. Our home health same-store growth was 19.5% as we continue to see the momentum with our New Mexico home health services. Let me discuss our operations during the COVID-19 shutdown and attempt to provide some perspective on what we are seeing in the early part of the second quarter of 2020. When states first started to contemplate requiring nonessential businesses to close, the Federal Department of Homeland Security issued their definition of essential businesses. Included in that definition was home health, hospice, and personal care services. Based on this definition, all of our business segments were deemed essential as we expected. As we have now seen, each of the states that have required businesses to shut down have used some form of the federal definition, allowing us to continue to function as normally as possible. But like many others, we have been impacted by these shutdowns. Most of the schools across the country have closed, meaning many of our employees' children are now at home. This can cause issues for those of us, such as our caregivers, who must leave their homes to perform their jobs. Because of this, some of these individuals have had to stop seeing patients until schools reopen or until they are able to obtain some sort of childcare. Additionally, our personal care operation has a large presence in New York City and Long Island, New York, Chicago, Illinois, Detroit, Michigan, and the state of Washington. All of these areas have been hotspot areas for this particular virus. In these markets, especially New York City, Long Island, and Chicago, we have seen a number of patient call-offs. This is where a patient or their family decides to skip their normal personal care service visit due to their concern of having someone, even a caregiver, in their home. We have seen caregiver call-offs for similar reasons, but these type of cancellations have been less than we had anticipated. We have also seen some health care facilities, such as skilled nursing facilities, assisted living facilities, and independent living facilities, limit our staff's physical access to provide hospice services in an effort to minimize the facility's exposure to the virus. These and other issues have led to reduction in our overall revenues. For April, our revenue reduction appears to be around 10%. We anticipate that we will continue to experience some revenue reduction during the second quarter. As part of our plan to deal with COVID-19, Addis rapidly went to a remote working environment where possible and implemented social distancing everywhere else for the safety of our team. We also started the process of sourcing personal protective equipment for our team of caregivers. PPE procurement has been particularly challenging in our non-clinical segment as compared to our hospice and home health, since historically it is not a service in which widespread PPE usage is customary. However, we understood the need to start providing masks and gloves to our personal care team in order to help protect them and our patients from the spread of this virus and to provide our patients and their families an added layer of comfort with allowing our team into their homes for service. We also needed to secure the proper PPE for our clinical operations to handle their patients, including any COVID-19 patients that may need clinical services. To obtain this PPE, our senior leaders created a rapid procurement team whose primary focus for the past several weeks has been to quickly source, acquire and distribute the appropriate personal protective equipment for our caregivers. We have navigated the additional challenges of others including state governments and the federal COVID-19 task force attempting to purchase the same PPE. I am proud to say that our team has done a great job with this project. As of today, we believe we have sufficient PPE to help provide the appropriate level of protection for our caregivers. While PPE alone does not guarantee that our team will not contract the coronavirus, it does help to provide additional safety measures for our caregivers and patients while we are performing the services that our patients need. Now that we have been able to acquire the additional PPE for our team, we have started providing services to COVID positive and presumed positive patients. Our COVID-19 patient volume is low at this time, although we anticipate and have prepared for a number of COVID patients to continue to increase in the near term. Our current case volume is equally split between our home health and personal care service lines. As part of our operations planning concerning this virus, we have identified our offices around the country that are best suited to care for COVID patients. We have provided those offices with the necessary training materials and PPE required to safely treat patients with COVID-19 virus. As we ramped up our response to this virus, we have experienced an increase in our cost to provide protective equipment to our team. We have seen certain items, such as masks, increasing costs materially above their normal price. As I mentioned, we are now providing surgical masks to all our non-clinical caregivers as well as to our personal care patients in order to make We are also seeing increased costs for PPE for our clinical care segments. So like a lot of providers, we are seeing lower revenues during this event while costs are increasing. Notably however, Addis remains a financially strong company. While our profits will be impacted during the pandemic, We as a senior leadership team made the decision over four years ago that we would operate our company in a manner that would provide us financial flexibility in times of economic challenges. While none of us expected to see a worldwide pandemic that has caused such personal and financial hardships, our decision to maintain a conservative financial position is now proving to be a great asset. While our revenues will be down and expenses up, we continue to have the ability to operate as we normally would or at least as normal as possible in these times. We continue to have substantial cash balance with very little debt. We also have the ability to borrow money under a credit facility if the need arise. And we are fortunate that we are in an industry that is needed to fight this virus, keeping our business open. Before I turn this call over to Brian for a more detailed review of the first quarter financial performance, let me thank all the employees about us. I'm extremely proud of all your efforts and know each employee works hard to live our values while serving our patients. Our patients want to be in their homes now more than ever and we are a vital part of allowing that to occur. All of us have a very important responsibility to the thousands of patients and their families who trust us with their care and I'm very appreciative for the ongoing efforts of our team. With that, let me turn the call over to Brian.

Thank you, Dirk, and good morning everyone. Please note that the financial results discussed on this call and in our press release are preliminary and will not be finalized until the 2019 Form 10-K financial statements are completed and filed. In coordination with our current auditors, PWC, we currently anticipate the timing to completion and filing to be in advance of our standard second quarter filing deadline. ADDIS had a solid financial performance for the first quarter, marking a strong start to 2020. For the quarter, we had favorable demand trends across all of our service segments and also realized the impact of the additional scheduled rate increase in Illinois on January 1, 2020. As Dirk noted, total net service revenues for the first quarter were $190.2 million. The revenue breakdown is as follows. Personal care revenues were $160.7 million, or 84.5% of revenue. Hospice care revenues were $25.2 million, or 13.2% of revenue. and Home Health revenues were 4.3 million or 2.3% of revenues. Our first quarter results demonstrate we are continuing to execute on our organic growth strategy with favorable results prior to the impact of COVID, which impacted the last few weeks of the quarter and will be more impactful in the second quarter, as Dirk mentioned. While we are facing a challenging environment, we have a strong business model in place and believe we are well positioned to continue to support our clients and payers through the pandemic. We are also continuing to realize the incremental benefits of the four acquisitions we completed in 2019 with total annualized revenue of approximately $130 million. We continue to evaluate and pursue other acquisition opportunities and have a robust pipeline of potential transactions. However, we are approaching acquisition activity with all appropriate caution and diligence, which temporarily could lead to a delay in the near term. Other preliminary financial results for the first quarter of 2020 include the following. Our gross margin percentage was 29.4% G&A expense was 22.2% of revenue with adjusted G&A expense at 20% of revenue The company's adjusted EBITDA increased to $17.7 million or 9.3% of revenue and adjusted and income per diluted share increased to $0.77 The adjusted per share results for the first quarter of 2020 exclude the following COVID-19 direct expenses of $0.01 primarily related to additional PPE costs M&A transaction expenses of $0.09, severance and other non-recurring costs of $0.05, and non-cash stock-based compensation of $0.08. Our effective tax rate for the first quarter of 2020 was 14.2%, primarily as a result of an excess tax benefit related to equity vesting during the quarter. For the full year 2020, we continue to expect a tax rate of 23% to 25%. DSOs were 67.5 days at the end of the first quarter of 2020, and we have continued to see consistent cash flows from our payers with increased payments from the Illinois Department of Aging in particular. During the fourth quarter of 2019, the state of Illinois also authorized a one-time retroactive bonus payment related to the July 1, 2019 rate increase to be paid in 2020. While we have yet to receive, we continue to expect this payment of over $6.5 million to be paid in the second quarter. As a result of our strong earnings and collections, our first quarter net cash provided by operations totaled $20.4 million, and on March 31, 2020, the company had cash of $130.5 million, with only $60.1 million of bank debt and $218.5 million available and fully accessible under our revolver, leaving us well capitalized during the current situation. This concludes our prepared comments this morning. I want to thank you all for being with us. I'll now ask the operator to please open the line for your questions.