Addus HomeCare Corporation

Good day and welcome to the Addis Homecare's third 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 third 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 forecast, 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 third 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 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 third 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 these earning calls, I will begin with a few overall comments, and then Brian will discuss the third quarter results in more detail. Following our comments, the three of us would be happy to respond to any questions. To begin, I want to highlight a few items from our third quarter performance. First, even with the continuing labor challenges we are seeing in parts of our industry, our team grew revenue 11% to $240.5 million for the third quarter of 2022, as compared to $216.7 million for the third quarter of 2021. This resulted in adjusted earnings per share of 94 cents. As we saw in our second quarter of this year, we had strong cash flow from operations in our third quarter, totaling $18.3 million. This reduced our net leverage position to less than one times adjusted EBITDA. We are proud of our conservative balance sheet and believe our disciplined approach has put us in a strong position to take advantage of future acquisition opportunities that may occur in spite of the current economic environment. I'm very pleased with not only our third quarter performance, but also with our results year to date, especially in light of the COVID spike we experienced during the first two months of the year and to a lesser extent at the beginning of the third quarter. Our team has continued to perform and provide excellent patient care despite these reoccurring challenges. As we discussed last quarter, the labor environment remains a challenge. However, As we started to see in the second quarter, we did experience improved hiring in our personal care segment with hires per business day for the third quarter of 2022 increasing approximately 3% as compared to our hires per business day in the second quarter of this year. Hires per business day in the third quarter of 2022 were up approximately 14% over our hires per business day in the third quarter of 2021. We are seeing this improved hiring trend in October with Hires for Business Day running ahead of our third quarter of 2022 performance. As previously mentioned, we are investing in technology that will help us to further improve our sourcing, hiring, and onboarding process to increase our personal care hiring numbers to meet the robust demand of our services. While hiring in our clinical segment is more challenging than in our personal care segment, we are seeing improvement over the last few months with an increased ability to hire new clinicians, as well as a modest reduction in our clinical turnover numbers. Overall, we feel the trend in both hiring and turnover is moving in a positive direction in all segments of our business, which should help us serve more consumers and patients. During our third quarter, the funding we received from the American Rescue Plan Act, or ARPA, has allowed us to begin to increase caregiver wages, pay sign-on and retention bonuses, or provide one-time bonuses to current caregivers, depending on the state program. This has been helpful with our recruitment efforts over the past quarter and should help our hiring and retention efforts, as we have a significant portion of these dollars still to be utilized. As for Illinois, our largest state of operations on July 1st, minimum wage increased by approximately 40 cents per hour for our Chicago area personal care workforce. This negatively impacted our gross margin in the state during the third quarter. However, we will receive a 70 cents per hour statewide rate increase effective January 1st, 2023. Once we receive the statewide rate increase, we will likewise adjust wages for our remaining Illinois employees, which we believe will help with caregiver recruitment while positively impacting our gross margin profile in Illinois. Now let me discuss our same-store revenue growth for the third quarter of 2022. For our personal care segment, exclusive of the New York Consumer Directed Program, or CDPAP, and ARPA funds, Our same store revenue growth was 7% when compared to the third quarter of 2021, up from a same store growth of 2.5% for our second quarter of this year's as we expected. We experienced increasing personal care admissions in August and September with this positive momentum continuing into October. I also want to give a brief update on recent developments regarding our participation in the New York CDPAC program. As you know, the state initiated a request for offer process in 2019. Ultimately, we were not selected as a winner in that process, along with many other providers in the market. We subsequently appealed this decision as we believe the criteria used to select the winning providers lacked transparency. Recently, the state has rescinded the RFO and has allowed all providers of a certain size to continue indefinitely in the state Medicaid CDPAP program, which eliminates overhang of potential transfer of our existing state Medicaid CDPAP clients to other providers. In order to qualify, providers simply need to respond with an attestation, which we will submit before the November 29, 2022 deadline. Separately, the state made reimbursement changes under the Medicaid CDPAP program that made an appropriate level of profitability challenging. As a result of both of these actions, we continue to serve our existing CDPAP clients under the state Medicaid program, but ceased taking any new referrals. While we now have clarity on the future of our existing clients, we are evaluating the current reimbursement environment under the state Medicaid CDPAP program to determine whether we will resume accepting inbound referrals for that program. In the meantime, we and other providers are also lobbying extensively and are hopeful the state will make the necessary adjustments to return providers participating in the state Medicaid CDPAP program to a manageable margin and allow the resumption of services for those in need. As a reminder, we continue to operate as normal with our managed long-term care plan partners in the New York market. Turning to our clinical care operations, while our home health segment same store revenue was flat when compared to the prior year, we did see a 15.1% increase in same store admissions over the third quarter of 2021. This quarter, we saw a shift in our mix of patients towards non-episodic care. Our operations team is working to improve this mix to a more historical level. We are also in discussions with our Medicare Advantage payers concerning adjustments to our contract rates. In addition, Brad and his operation team are working on our staffing mix as we expand our presence in home health. We are excited about our home health operation as it complements our personal care services, particularly where we participate in value-based contracting models. While our hospice same-store revenue was flat when compared to the third quarter in 2021, we did see an increase of 1.2% in our average daily census as compared to the third quarter of 2021, and a sequential increase of 1.5% as compared to our second quarter of this year. While we had similar admissions to what we saw in the second quarter of this year, starting in late August, we did experience a higher than normal discharge rate. During October, we started to see higher admissions volumes while our discharges started to return to a more normal level, which we believe should grow our ADC. Our medium length of stay improved to 20 days in the third quarter as compared to 23 days for the second quarter of 2022, bringing our medium length of stay back in line with pre-pandemic levels, although part of this increase was due to the elevated discharge rate in the quarter. Our hospice ADC increased to 3,280 for the third quarter of 2022, as compared to an ADC of 2,629 for the third quarter of 2021, inclusive of the ADC attributable to our journey care acquisition, which closed on February 1st of this year. On October 1 of this year, we closed our acquisition of Apple Home Healthcare, a Chicago-based skilled home health provider. Apple Home Healthcare serves approximately 450 patients in the 11-county metro area in and around Chicago. This acquisition furthers our strategy of building out both home health and hospice services in markets where we have a strong personal care presence. With three clinical care acquisitions in 2022 in our largest personal care market of Chicago, we have strengthened our ability to serve patients while allowing us to work more closely with MCOs, including Medicare Advantage plans. I want to welcome all the Apple Home Healthcare team to the Addis family. As for our ongoing development efforts, We are pleased with the level of activity in our pipeline as we look for acquisitions that meet our strategic criteria. Our deal flow over the last two quarters has consisted of a number of smaller acquisition opportunities across all three levels of care. We are now starting to see a number of larger assets being brought to market, and we expect to see more of these scale opportunities in the coming months. We were excited by the CMS announcement yesterday of a slight 0.7% increase for 2023. While this increase is smaller than we would like to see, we are appreciative of the change by CMS moving away from the proposed decrease of 4.2%. We expect to be able to take advantage of more home healthcare acquisition opportunities that should occur now that the final rule has been published as we remain well capitalized. As for our value-based care efforts, We are seeing positive results from our various value-based care contracts. As a reminder, we currently have four value-based care contracts in three of our states. These contracts are focused on helping our patients avoid both unnecessary emergency room visits and hospital admissions, as well as readmissions at various timeframes following a hospital discharge. We have recently received positive feedback from our value-based care partners as our personal care and home health teams have improved patient results. In addition to our four current contracts, we are working on two new opportunities which should start early in 2023. We are also in negotiations with a number of additional MCOs and ACOs for potential contracts around value-based care. As we have previously mentioned, our value-based efforts are relatively immaterial today but we expect them to grow to a more meaningful amount over the next few years. I am 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 where 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 work so incredibly hard providing outstanding care and support to our consumers, patients, and their families. I want to thank each of our team members and tell you how proud I am of the job you've done in the past and continue to do each day. It is important that we always focus on our mission, putting our consumers and patients first. With that, let me turn the call over to Brian.