Addus HomeCare Corporation

Good day and welcome to the Addis Home Care's first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Drew Anderson.

Please go ahead. Thank you. Good morning, and welcome to the Addis Home Care Corporation first quarter 2022 earnings conference call. Today's call is being recorded. To the extent 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 Addis' expected quarterly and annual financial performance for 2022 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 and added filings with the Securities and Exchange Commission and in its first 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. At this time, I would like to now turn the call over to the company's chairman and chief executive officer, Mr. Dirk Allison. Please go ahead, sir.

Thank you, Drew. Good morning and welcome to our 2022 first quarter earnings call. With me today are Brian Popp, 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 first quarter results in more detail. Following our comments, the three of us would be happy to respond to your questions. I want to start by welcoming Cliff Blessing to Addis as our new Executive Vice President, Chief Development Officer. Many of you know Cliff from his long tenure leading the development team at Encompass Home Health. With our strategy to build further capability in skilled home health and hospice, along with our strong personal care platform, we were fortunate to be able to add someone with Cliff's background experience in acquiring and developing home health and hospice operations. I know I speak for our leadership team and board in saying how excited we are that Cliff has joined our team. Yesterday, we announced our financial results for the first quarter of 2022. Especially in light of the challenges we saw in the first quarter, we are proud of our strong operating performance with year-over-year growth in revenue, gross margin, and earnings. Our team was able to produce solid results for the quarter despite the pressures from increased employee quarantines due to the Omicron variant of COVID and a tight labor environment, which I will discuss in more detail in a few minutes. Our revenue for the first quarter of 2022 was $226.6 million as compared to $205.3 million for the first quarter of 2021, an increase of 10.4%. Adjusted earnings per diluted share for the first quarter of 2022 were 77 cents as compared to 74 cents for the first quarter of 2021, an increase of 4.1%. Our adjusted EBITDA for the first quarter of 2022 was $22.4 million as compared to $19.3 million for the first quarter of 2021, an increase of 16.1%. As we have discussed on our last call, during the first quarter of 2022, we saw the effects of the Omicron surge, which began in late December. As the Omicron surge continued into January, we experienced the highest caregiver quarantine levels at any time going back to the beginning of the COVID pandemic, with approximately 4% of our personal care team impacted. While this most recent surge began to decline at the end of January, it was closer to the second week of February before we saw both our hiring numbers return to a more normal level and immaterial number of caregivers entering quarantine. As of today, we continue to have a significantly reduced number of caregivers in quarantine, but we are continuing to monitor the prevalence of the VA-2 Omicron subvariant. With that many caregivers quarantined in January, in some cases up to two weeks, and personal care billed by the hour of service, we did see an expected reduction in personal care hours served of approximately 6% for January 2022. However, by March, our hours per business day had increased to the level we saw in the fourth quarter of 2021. Omicron also negatively affected our home health segment in the first quarter. In New Mexico, which has the majority of our home health operations, our revenues were negatively impacted by a number of hospital systems temporarily halting or limiting elective surgical procedures due to the rise of Omicron cases. While this impacted our early quarter home health revenues, by March, we saw our admissions and financial results return to normal. As has been discussed over the past few months by several companies in our industry, one of the most challenging issues we face today is labor pressure. This not only includes dealing with the challenge of hiring enough employees to care for our consumers and patients, but also with the reality of increasing wages due to competition in the current labor environment. During our first quarter we saw continued pressure in both of these areas. Let me give you some color. on the labor dynamics for Addis. As we discussed on our last call, we have seen the biggest impact of recent wage increases in clinical care. In our home health and hospice segments, market pressures resulted in wage increases of approximately 4 to 5% depending on clinical specialty. We have also experienced an increase in turnover in these segments as the demand for the limited number of clinicians increases across various healthcare settings. In March, we began to see improvement in our ability to hire and retain our clinical team. We believe that our upward adjustment in wages along with a general improvement in the labor market will potentially help moderate any continuing wage pressures during the remainder of 2022. During this last quarter, we began to have more visibility into how our states will be using federal ARPA funding they are eligible to receive for home and community-based service investments. At this time, 18 of our personal care states have approved ARPA spending plans and have either initiated payments or made public comments on the intended use of funds. A summary of those plans are eight of our states are providing lump sum payments. The majority of these funds will be passed through to our caregivers. Even when funds are passed completely through to our team, We intend to design the payments to help us both retain current caregivers and to help with our recruiting efforts. We have identified approximately 21.1 million in ARPA-related funding that we expect to receive from these states. Seven of our states will provide permanent rate increases for our caregivers, averaging $2.22 per hour. We expect that we will benefit from a margin on these increased rate increases. Three of our states will provide a temporary extension of rate increases averaging $2.17 per hour. We have also seen the finalization of many state budgets for the next fiscal year, including Illinois and New York. In Illinois, Governor Pritzker signed the fiscal 2023 budget on April 19th. We are pleased to have the certainty of a 70 cent per hour statewide rate increase, which will cover the July 1, 2022 Chicago cost of minimum wage increase. However, as was the case in previous years, this rate increase will not be effective until January 1, 2023. As we have experienced the last couple of years, This timing means we will have two quarters of an approximate cost of living minimum wage increase of 40 cents per hour for our Chicago-based caregivers before we receive the offsetting rate increase. Once we receive the rate increase from the state, we expect to be able to adjust wages for our remaining Illinois employees. In New York, the governor also signed the fiscal 2023 budget on April 19th. One of the provisions included in this budget, which impacted providers, was an amendment to the CDPAC fiscal intermediary RFO process, which we have been discussing over the last year. The amendment authorizes all entities who submitted an RFO application and who serve a minimum number of clients to be able to contract with the department and continue to operate in all counties contained in their application. This amendment favorably impacts ATIS and will allow us to continue providing CDPAP services. While we are excited to be able to continue our long history of serving CDPAP clients, we expect to continue our strategy of limiting our services to working with payers that have maintained a reimbursement rate which will allow us to make a reasonable return on our services. The New York budget also eliminated the 1.5% Medicaid rate reduction that we saw in last year's budget. In addition, Medicaid rates were increased 1% effective April 1, 2022. Together, this means we will see a 2.5% increase on a portion of our New York business. While this is good news for our current New York business, we will continue to be focused on assuring that our managed care payers properly pass through these positive adjustments. With these changes to New York Medicaid reimbursement, we expect to see our New York operations stabilize. Now let me discuss our same-store revenue growth for the first quarter of 2022. Our same-store revenue growth for the personal care segment exclusive of New York's CDPAP program and initial ARP funds was 0.9% when compared to the first quarter of 2021. However, as we stated in our earnings release yesterday, exclusive of the impact of the Omicron variant, our same-store growth in personal care would have been within our target range of 3 to 5%. We are happy to see that our March performance showed a strong recovery from the impact of Omicron, which occurred early in the quarter. Our personal care hires per patient day increased to 84 hires in March as compared to 64 hires per day in the difficult month of January. With strong hiring levels continuing into April, we expect to see our personal care same-store revenue growth return to our targeted range. Turning to our clinical operations, our home health segment same-store revenue was down 0.5% from prior year as we saw the previously discussed Omicron impact on volumes in January and early February. While we were affected by this issue in the early months of the quarter, we saw March home health admissions increase steadily with the overall favorable trend continuing into April. We are excited about our home health operation and it complements our personal care services. We will continue to focus our efforts on expanding these services into our existing personal care markets. As we had anticipated, our hospice same-store revenue continues to improve and increased 4.4% over the first quarter in 2021 in spite of the Omicron challenges. We experienced solid same-store admission growth in the first quarter with admission volume increasing 1.9% over the first quarter of 2021 and 2.4% over the fourth quarter of 2021. Medium length of stay improved to 20 days in the first quarter as compared to 17 days for the first quarter of 2021. We did, however, see a slight decrease in minimum length of stay on a sequential basis. Medium length of stay increased in March 2022 to 22 days with this improvement continuing in April. Overall, our hospice ADC increased to 3,320 for the first quarter of 2022, inclusive of our JourneyCare acquisition completed during the quarter, as compared to an ADC of 2,400 for the first quarter of 2021. As I mentioned, we closed on our acquisition of the operations of JourneyCare Hospice, a not-for-profit hospice with an excellent clinical reputation, and one of the largest hospice operations in the Chicago metro area. We now provide all three levels of care in our northern Illinois market and will continue to look at opportunities to increase our home health and hospice coverage throughout the state. Our team has been working diligently on the integration of JourneyCare into Addis. While there are a number of integration items remaining, I'm happy to report that we are on track with this process and within our expected timeline and budget. The JourneyCare team has been a great addition to Addis, and I'm excited about the potential for growth in this historically strong personal care market for Addis. With the addition of Cliff Blessing to lead our development efforts, we are reaffirming that acquisitions remain an important part of our growth strategy. While we remain interested in all three levels of care, Our current focus is on acquiring additional companies that operate in our personal care markets and in the home care segment. We continue to believe that acquisitions will remain an important part of achieving our 10% minimum annual revenue growth target, which we had had for the past few years. Over the past year, we have been participating in a number of projects with managed Medicaid payers to demonstrate our ability to help them improve outcomes for high-cost, high-risk members. We have now begun to collect and analyze data demonstrating that our efforts engaging both personal care and clinical services are having a positive impact on overall health costs and outcomes. These projects have primarily focused on efforts to limit hospital readmissions, unnecessary emergency room visits, and closing of care gaps. I'm excited to report that we are now ready to move to the next phase in our value-based care efforts. Over the next 12 months, we will begin investing in additional technology and analytics that will enable us to scale these activities and increase the number of our patients who are covered under a value-based approach. As we continue in this process, these investments will enhance our ability to effectively use the data we are collecting to improve clinical outcomes and better manage the cost associated with these patients. While we still believe that any material increase in our revenues from these efforts is two or three years away, we are excited about the potential of our value-based care approach. The COVID pandemic has reaffirmed the value of taking care of elderly and disabled consumers and patients in their home. Home remains one of the safest and most cost-effective places to receive care and is also the place where most elderly individuals and their families prefer to be. Over the past two years, we have continued to invest in planning, preparation, and materials to assist us in safely and effectively fulfilling our role as an important care provider, allowing these consumers and patients their wish to stay at home. We believe that this heightened awareness of our value of home-based care is favorable for our industry and will continue to be a growth opportunity for our company. We also understand and appreciate that our operations and growth are dependent on our dedicated caregivers who work so incredibly hard providing outstanding care and support to our consumers, patients, and their families. I am thankful for each of our team members and I'm proud of the job they have done in the past and continue to do each day. It is important that we all focus on achieving our mission by putting our patients first. With that, let me turn the call over to Brian.