Addus HomeCare Corporation

Good day and welcome to the Addis Homecare's first quarter 2024 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 and one on a touch-tone phone. To withdraw your question, please press star then 2. 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 2024 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 ADIS expected quarterly and annual financial performance for 2024 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 2024 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statement. The company undertakes no obligation to update any forward-looking statement, 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, Dirk.

Thank you, Drew. Good morning and welcome to our 2024 first quarter earnings call. With me today are Brian Poff, our chief financial officer, and Brad Bickham, our president, chief operating officer. As we do on each of our quarterly 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 any questions. Yesterday, we announced our results for the first quarter of 2024. These results highlight the continued strong financial performance by Addis. This performance is made possible by the hard work and dedication of all our employees as they continue to provide quality care to our clients and patients by helping to fulfill our mission of taking care of individuals in their homes. As I have said many times in the past, I'm very thankful for all that the employees do for our company. As we announced yesterday, our total revenue for the first quarter of 2024 was $280.7 million, an increase of 11.6% as compared to $251.6 million for the first quarter of 2023. This revenue growth resulted in adjusted earnings per share of $1.21 as compared to adjusted earnings per share for the first quarter of 2023 of $0.97, an increase of 24.7%. Our adjusted EBITDA of $32.4 million was an increase of 24.6% over the first quarter of 2023. During the first quarter of 2024, we continued to experience strong cash flows, allowing us to reduce our debt balance to $101.4 million. At quarter end, our cash balance was approximately $77 million, which together with our availability under our existing credit facility, continue to give us the financial flexibility to be opportunistic as we see potential acquisitions come to market. It remains our primary focus to use our financial capacity to acquire strategic operations that align with our overall growth strategy of adding clinical services where we have strong personal care presence, enhancing our existing personal care markets, and adding new personal care markets where we can enter at scale. We also believe this acquisition strategy will continue to strengthen our ability to participate in value-based contracts with our payers and to adapt to potential reimbursement changes. I want to provide some thoughts related to the final Medicaid access rule that was issued on April 22nd. As we anticipated, the proposed 80% compensation requirement was retained in this rule despite an overwhelming number of comments submitted detailing the challenges this would present. Of course, we and other providers are disappointed with the result, even though we support the overall policy aims of providing higher wages and increasing access to home and community-based services. However, several significant positive changes were made in the final rule, and I would like to touch on a few of these. First, the implementation period was extended by 50% from four years to six years. Realistically, we believe this substantially increases the likelihood that the rule will not be implemented in its current form or possibly at all for a variety of reasons, including as a result of legal or congressional action or potential administrative changes in either of the next two presidential election cycles. As important, this extended implementation timeframe give states and providers a better opportunity to plan and adjust to the specific requirements of any rule that may ultimately be implemented. Second, a number of technical adjustments were made between the original draft and final rule, which both clarify and improve the definition of allowable costs for providers like ADDIS. For example, certain costs such as training, mileage, and PPE will be deducted from total payments before calculating for calculating compliance with the 80% requirement. Similarly, refunded or recouped payments will be excluded. Also, the categories of items constituent compensation have been clarified to include PTO, retirement, insurance, including workman's compensation, and tuition payments not previously addressed. The rule also clarified and expanded certain tasks that now count as direct care work and expands the definition of direct care workers to add clinical supervisors. All of these changes combine to lessen the potential impact of the rule on our margins. While these items were addressed in the final rule, there was still not a complete specific set of definitions, although additional commentary was included in an effort to protect against the possibility of setting a definition that could be construed as too narrow. We believe this gives states a certain level of flexibility in working with providers in deciding on other potential costs that should be considered in the calculation. Stepping back to the bigger picture, there are other points worth making on the rule and its impact. We continue to believe the rule disproportionately impacts small providers and encourages scale, which will lead to further consolidation opportunities. The rule allows states to develop separate minimum compliance levels for small providers and to provide hardship exemptions, but two important factors should be noted. First, the exemption and the hardship exception both require states to create additional reporting requirements, and these requirements can only be weighed by CMS at its option to the extent applicable to less than 10% of providers. Even more crucially, The rule requires states to develop a plan subject to CMS approval to reduce in a reasonable period of time the number of providers that qualify for these exemptions or exceptions. At best, we believe these are temporary Band-Aids, not long-term solutions for small providers. Second, and I want to emphasize this point, small providers relying on these provisions will be able to pay less to workers. but they will be at a competitive disadvantage for labor with large providers like Addis who will likely be required to pay a higher rate. We believe these exceptions will provide us more access to labor, which, as we know regularly, is the primary limiting factor on revenue growth. So I'll repeat what I said last quarter. We believe that personal care providers must have scale in each state where they operate to be successful under the rule as finalized. This will not only allow the larger providers to spread their costs over a bigger revenue base, but also will provide more opportunity for meaningful advocacy with the states in which they operate, while also promoting a favorable hiring and retention dynamic. Before I leave this topic, I also want to note that we expect both Congress and individual states to review their options and take actions they believe are appropriate in reaction to the rule. Individual members of Congress already have issued calls to withdraw the rule or have introduced legislation to block finalization of certain aspects of the rule, and more may follow. Some states may institute litigation to block the rule, the outcome of which is unknown. States may also look at opportunities to increase funding in an effort to meet the aims of the rule, causing less impact to providers and clients. So in summary, six years is a very long time. We expect many more curves in the road before then, but we are confident in our strategic approach to both manage and thrive in this dynamic landscape. We are currently in the process of looking at personal care opportunities that would give us a larger presence in our current state. We are also looking for opportunities where we can enter new states in a material way. Personal care is a valuable service to our elderly and disabled population, and we are optimistic that states will evolve their programs to remain viable regardless of the rule. During the first quarter, we continued to experience good results related to our ability to hire caregivers especially in our personal care segment. During the first quarter of 2024, our personal care hiring was equal to what we saw in the first quarter of last year at 84 hires per business day. Sequentially, our hires per day were up 5% over the fourth quarter of last year, despite some weather difficulties in January. In addition to our strong hiring numbers, we continue to see consistent momentum in the Starts for Business Day over the past few quarters. As for our clinical segments, hiring has continued to improve over what we experienced in the early part of 2023. As we have over the past couple of years, we continue to utilize the funding we received from the American Rescue Plan Act, or ARPA. To date, we have received approximately $38 million of which we have over 13 million remaining to be utilized. We continue receiving these funds in the first quarter of this year, and as we have previously shared, these funds have been helpful with our caregiver recruitment and retention efforts to support the delivery of personal care services. In addition to utilizing the ARPA funds for direct recruitment and retention of caregivers, we continue to utilize the funds to improve our caregivers' experience through the implementation of enhanced caregiver training and continued development of a caregiver application that we believe will improve our retention and overall service delivery. In our personal care segment, our services continue to receive favorable reimbursement support from many of the states in which we operate. Although some of the federal financial support to states have been reduced, we feel confident that personal care services continue to show real value to state Medicaid programs as well as our managed care partners through a reduction in overall cost of care. As for our clinical segments, effective October 1, 2023, Medicare hospice reimbursement was increased by approximately 3.1%. On January 1 of this year, home health Medicare reimbursement was increased by approximately 0.8%. Although this year's home health rate increase was below what is required to cover ongoing operating cost increases, we believe that traditional Medicare home health reimbursement pressures are likely to moderate over the next few years. Now let me discuss our same-store revenue growth for the first quarter of 2024. For our personal care segment, our same-store revenue growth was 9.3% when compared to the first quarter of 2023. During the first quarter of 2024, we saw personal care same-store hours for business day remain flat as compared to the same period in 2023 as we experienced difficult winter weather in a couple of our key markets early in the first quarter of this year. We did see a sequential improvement in hours each month in the quarter as we moved past these early weather challenges. We continue to see our investments in hiring and scheduling optimization initiatives take hold and contribute to our hours growth. Turning to our clinical operation, our hospice same store revenue increased 5.8% when compared to the first quarter in 2023. While our same store ADC was down 0.9% when compared to the same quarter last year and flat sequentially, we did see a nice improvement in our same store ADC during February and March. This ADC growth has continued into April. As of the end of the first quarter of 2024, our hospice medium length of stay, exclusive of our journey care and recently acquired Tennessee quality care operation, was 27 days as compared to 25 days for the fourth quarter of 2023. For comparison purposes, we have historically excluded our journey care operation as it has a higher proportion of shorter length of stay patients due to our inpatient units in the Chicago area. We are encouraged by the steady sequential improvement in both ADC and admission volume in our hospice segment early this year and anticipate those favorable trends continuing in 2024. Our home health segment, same store volume, decreased 3.1% over the same quarter in 2023, but did increase 1.7% on a sequential basis. As most home health providers have experienced, we continue to be affected by the movement of Medicare beneficiaries from Medicare fee-for-service to Medicare Advantage, but we feel we may be seeing a leveling off of this shift in the market we currently serve. We are continuing to work with our Medicare Advantage payers to obtain higher per visit rates as we work in parallel to transition to episodic or case rates. We are also continuing to focus on process improvements to increase our efficiency around staffing, referral conversion rates, and collections. While home health is our smallest segment and only 5% of our revenue, we feel it complements both our personal care services, particularly where we participate in value-based contracting models, and our hospice services by allowing us to provide the full continuum of home-based clinical care. Acquisitions will continue to be an important part of our growth strategy at Addis. Even with the various challenges we have seen, we are committed to using our capital to make sure we meet the strategic goals we have publicly discussed. With the Medicaid access rule finalized, we are focused on opportunities that will help us obtain the needed skill in our current personal care markets to operate more efficiently. We are also open to entering select new states with personal care services. If we can do so through transactions which will give us the scale we feel is important to be successful under the new Medicaid access rule. As for our clinical segment, we are focused on home health opportunities which operate in certain of our personal care states where we have the opportunity to continue our growth in value-based care and to complement our existing hospice operation. As far as our value-based care efforts, I noted last quarter that we continue to gather data which demonstrates material reductions in both emergency room visits as well as percentage of patients readmitted to the hospital at various post-discharge intervals. We continue to believe our success is due to our ability to provide both non-clinical personal care services to identify changes in condition and clinical resources as needed for specific skilled patient care interventions. We are now utilizing this information as part of our conversation with various Medicare Advantage and commercial payers to demonstrate how ADDIS can be an integral part of providing quality, cost-effective care to plan members that can reduce the overall medical loss ratio by simultaneously improving overall quality of care. During the first quarter of 2024, we began to use our new value-based care management system. We are excited about this technology as it will allow us to increase both the scale and efficiency of our value-based program, which we believe is important to further develop these types of relationships with our large payers. Before I close my remarks, I want to once again say how proud I am of our team for the care they are providing to our elderly, and disabled consumers and patients. There is no question that the majority of clients and patients want to receive care at home, which remains one of the safest and most cost-effective places to receive this care. We believe the heightened awareness of the value of home-based care is favorable for our industry and will continue to be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on both our dedicated caregivers and other employees who work so incredibly hard providing outstanding care and support to our clients, patients, and their families. With that, let me turn the call over to Brian.