Addus HomeCare Corporation (ADUS) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Addus HomeCare Corporation First Quarter 2021 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'll 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 2021 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.
Dirk Allison: Thank you, Dru. Good morning, and welcome to our 2021 first quarter earnings call. With me today are Brian Poff, our Executive Vice President, Chief Financial Officer; and Brad Bickham, our President and Chief Operating Officer. Today, I will begin with some overall comments, and then Brian will discuss the first quarter results in more detail. Following our comments, we would be happy to respond to any questions. While the pandemic continues to create challenges, we begin -- we have begun to see positive momentum in a number of our markets starting in mid-February. While I expect the environment to continue to have some difficulties over the next several months, we are encouraged by the progress being made with the COVID vaccine rollout and the steady reduction in COVID cases since the peak in late December. We look forward to the time in the near future when this pandemic is no longer a disruption to both the country and to our operations. One of the important takeaways from this pandemic has been the increased understanding of the importance of home and community-based care. Addus caregivers have been an important part of the health care system as we work to keep our elderly citizens safe from the virus and made sure that these consumers had the daily help they need. I'm extremely proud of our dedicated team that has demonstrated their ability to meet our mission and execute upon our strategy even during this unprecedented pandemic. Yesterday, we announced our financial results for the first quarter of 2021. We continued our solid operating performance, even with the challenges from COVID that we are all facing. Our revenue for the first quarter was $205.3 million as compared to $190.2 million for the first quarter of 2020. Adjusted earnings per diluted share for the first quarter of 2021 was $0.74 as compared to $0.77 for the first quarter of 2020, despite both last year's first quarter being a record quarter prior to the full onset of the COVID-19 as well as the effect of the Chicago minimum wage increase, which occurred on July 1, 2020. As we had discussed on our last earnings call, the Illinois state rate increase to cover this minimum wage adjustment became effective on April 1, 2021, and will be reflected beginning with our 2021 second quarter results.
Brian Poff: Thank you, Dirk, and good morning, everyone. Addus had solid financial performance at the start of the year with consistent profitable growth and improving volume trends comparable to our pre-pandemic levels. With 2 of our 3 segments at or above our first quarter 2020 same-store revenues and our hospice ADC beginning to trend positively, we look forward to a continued return to a more normalized growth profile as the COVID environment improves. We will also benefit from the most recent rate increase from Illinois, our largest market, which became effective on April 1, 2021. Looking at the comps over the prior year period. Last year's first quarter was our strongest quarter before we really felt the full impact of COVID-19. So we were very pleased with the results for the current year quarter. Our volumes continue to improve in personal care and home health, and we are optimistic about hospice care volumes returning to pre-pandemic levels as more people are vaccinated, and we see greater facility access. We have a strong business model in place and believe we are well positioned to meet expected demand as consumers become more confident in a less restricted environment. Included in our results are the incremental benefits of the 4 acquisitions we completed in the second half of 2020; 3 in personal care and 1 in hospice, which totaled approximately $84 million in annualized revenue. Together, acquisitions completed over the past 2 years have combined total annualized revenue of approximately $214 million. We continue to have a robust pipeline of potential transactions that are in line with our strategy of adding clinical services in markets where we have personal care operations and continuing to enhance our existing personal care markets. Based on current market conditions, we remain confident that we will have opportunities to achieve or exceed our stated goal of adding a minimum of $100 million in annualized revenue through acquisition this year. As Dirk noted, total net service revenues for the first quarter were $205.3 million. The revenue breakdown is as follows: personal care revenues were $164.8 million or 80.3% of revenue. Hospice care revenues were $36.1 million or 17.5% of revenue. These results include the first full quarter of our Queen City Hospice acquisition, which closed near the end of 2020. Home health revenues were $4.3 million or 2.1% of revenue. Other financial results for the first quarter of 2021 includes following: our gross margin percentage was 29.8%, an increase from 29.4% for the first quarter last year, largely attributable to a higher mix of clinical services, which are now approximately 20% of our revenue, up from 16% in the first quarter last year.
Operator: . Our first question comes from the line of Frank Morgan with RBC Capital Markets.
Frank Morgan: Appreciate color around labor and the issues and the improvement in the worker quarantine. I'm just curious, quarantine aside labor has always been sort of the thing I think you worry about the most, Dirk. So just how do you feel about the labor market today as we sort of make our way into this post-COVID world, do you feel better or worse? Or are there any new strategies that you're considering or thinking about as the economy reopens?
Bradley Bickham: Yes. This is Brad. When you look at the labor, as I tell the team in the field, I mean, it's a challenging recruitment environment all the time. We unfortunately, have a turnover in the industry, it's a little higher than we would like it to be. We're actually doing a little better than the industry statistics. That being said, we're still -- we've got the unique problem since I've been here, where we have, frankly, more business than workers. And I would rather have that than the other. But with respect to recruitment, our numbers have improved. When you look at the trends, April is looking pretty good. I think there's still some headwinds with the additional unemployment out there. Economies are reopening. But again, I think we've done a pretty good job of keeping those numbers trending in the right direction. I know we are working on kind of strategies, both utilizing the national job boards, being creative are constantly refreshing and updating our ads to make them kind of more enticing to the employees -- potential employees to click on them. And then also doing a lot of work in the communities and really stressing that we can't forget about what the local community recruitment efforts can look like.
Dirk Allison: And Frank, overall, as you know, we've talked about it for the last couple of years. Recruitment has been one of our bigger challenges. I think if you go back to last year, where we were looking at the -- what was going on and then the larger unemployment benefit from the federal government, certainly a very challenging environment. And while it's still a little bit today, as Brad mentioned, with the $300, we really are optimistic that over the next few months, we will start to see our ability to recruit and to hire, continue to improve as we've seen in the last month or 2. So we're in a much better position in our mind today than we were maybe a few months ago.
Frank Morgan: Got you. And then I guess, switching gears on M&A, your comments about maybe more of a slant toward the health -- home health care market. Just curious what you're seeing there. I know there was a recent home health care hospice relatively good size announced. But what do you see this driving the shift toward home health care? Is it valuations? Or is it just kind of you want to change your clinical mix?
Brian Poff: Yes, Frank, this is Brian. I think what we're seeing in our pipeline, I think we expected to see that coming into this year is just more potential assets coming to market out there. I think last year, I think a lot of us had expectations that we would see a lot of activity and really didn't see that. So I think, we had kind of a bolus of potential targets that are actually coming to market now. So I think we've seen a little slant of that in our pipeline. I think our focus is still largely in clinical services and enhanced personal care. And they all three legs of that stool in each of our markets. I think we just got a little more, I would say, skilled home health in our pipeline today than in the other two segments currently.
Frank Morgan: Got you. And then I guess, finally, on the margin picture, do you -- I think you called out, at least at the G&A line, the change in your clinical mix is not being able to give as much leverage. But do you still see an opportunity to really get some leverage off your G&A expense as your top line grows and I'll hop back.
Brian Poff: Yes, Rick, I think we definitely continue to see leverage, especially in our corporate G&A, but even our field G&A as we add some of these services in markets where we have personal care and other operations, we should get some additional synergies there as well. So that's our expectation is -- continued leverage as we continue to grow.
Operator: Our next question comes from the line of Matt Borsch with BMO Capital Markets.
Matthew Borsch: Yes. Maybe you could just talk a little bit more on the M&A pipeline in terms of what you're seeing in personal care, in particular, that may or may not be coming out as a result of the pandemic impacts. How has that -- how's that influenced the willingness to sell and the number of opportunities that are out there.
Dirk Allison: Yes. Yes, the problem with a lot of the personal care, the bigger ones that have come out that we could look at. There have been reasons why it would be difficult for us to look at, I mean there was a concentration in a market where we already operated, and it would have been a difficult combination or, quite honestly, some of them are revolving around the New York marketplace. And it is not -- at this point in time, New York is not a focus of our company. We need to see that particular market really stabilize and see the direction that the governor and the leaders of the state are going to take at program. So for us, well we're always interested in personal care that is our -- 80% of our business, we want to strengthen the states in which we operate, continue to look at that. It just seems like lately, the acquisitions of any size have been more on the clinical side, and for us, honestly, hospice has been very expensive. We've reached out in some strategic opportunities with HPA and with Queen City to acquire those. At this point in time, though, we also feel it's very important to add the home health service to our lines of care. As we continue to look to grow, not only with our relationships with MCOs, but as we start looking at the type of payment situations, we may look them for -- look for down the road with MCO partners.
Bradley Bickham: And Matt, just real quick, just one thing to add to that. We're not -- I think we're not really seeing, I would say, influx of personal care assets for sale as a result of the pandemic. I think, as you know, with us, particularly and others. In all the states we operate and have done a really good job of being supportive with temporary rate increases and the like for home and community-based services across the board. And I think with that, we haven't seen an influx in potential opportunities, but kind of a normal flow.
Matthew Borsch: Got it. That all makes sense. And actually, Dirk, you sort of anticipated my follow-up question, which was on New York specifically in the reimbursement environment. And I know you're not alone in facing challenges there. I guess, maybe there's not much to be said here. It's just it is what it is for right now, and correct me if I'm wrong, but there isn't really a catalyst we can see for a more partnership environment emerging in the near-term may or it should, in theory, because the funding has improved in this fiscal situation apparently as well. But sorry, I just sort of was the question here. You put answered it. But if you have anything more to say on that? I'm interested.
Dirk Allison: Yes. Honestly, the thing I would say is it is disappointing. From our standpoint, the state did get -- is getting federal money, and there's not been more support from the state as it revolves around home and community-based care. The state has put funding in their budget, but they don't always get that to the provider. It's a very difficult market. There's also changes in the way things are reimbursed there as it relates to benefits to the caregivers, which we're very excited about when minimum wage goes up as long as it's reimbursed, but New York is not, at this point in time, it's not been as forthcoming in some of the other states in supporting those increases. So right now, again, we'd love to be able to be stronger in New York, but it's not a market that at this point in time, we're going to put a lot of additional growth dollars into.
Operator: Our next question comes from the line of Scott Fidel with Stephens.
Scott Fidel: First question, just actually wanted to piggyback on Matt's question just around growth opportunities in personal care and sort of separate from, I guess, M&A opportunities. Interested in what you're seeing potentially on the geographic expansion front? And in particular, just have you -- as you're evaluating some of the potential enhanced funding that's coming through for Medicaid HCBS services. Are you seeing any states where it does seem like that, the states are committing to actually delivering that funding more to the providers and you think could open up new geographic opportunities for you?
Dirk Allison: Well, I think -- Scott, I think that is something we will be looking at and hope that as rules are clarified, there'll be some opportunities to do that. The problem that I think we have so far is that some of these additional monies that are coming through the federal government are still to arrive. And the rules around those funds have not been finalized or at least shared with the states and the providers as much as we would like. So as more clarification of those rules come out, we do believe there's some opportunities, specifically around -- we talked about the 10% additional match or Medicaid funds that's out there for a year. Yes, it is temporary. But it is monies that potentially states can use to expand their offerings in home and community case care. Potentially can use for rate increases they've already talked about. We would hope that maybe that could be utilized to make rate increases happen sooner rather than later. So these are all the things with the various states that we are discussing around the federal money.
Scott Fidel: Got it. And yes, I realize that we're sort of in that feeling our way through the darkness a little bit here with getting visibility on how these new fundings are going to be translating down into the rates. I guess in a similar vein here, but would be interested in what you're hearing, if anything, in terms of any additional details on the federal side in terms of Biden's $400 billion proposed boost to Medicaid HCBS spending? And any type of visibility you're getting into, thoughts on how that funding would actually be deployed in terms of what types of initiatives that will be allowed to be used on. And then your thoughts on what you're hearing politically in terms of general support for actually getting -- this actually included in one of these packages that are being worked on. I would assume that it's obviously part of that first infrastructure bill, would seem like something that would maybe be more appropriate in Biden's second families bill. But just interested politically and what you guys are hearing as well around support for that.
Dirk Allison: Yes. Well, what we're hearing politically is certainly, there's a lot of support for the $400 billion from the democratic side of both the House and the Senate. It does seem to be, at least at this point, the Republicans are not quite as on board as maybe the President and the Democrats -- the rest of the Democrats are. So whether or not this is going to end up being part of any bill that may or may not occur. We do believe it's an important part. We're certainly letting folks know that we think it's needed. But we will see. But as it relates to what we believe it will be used for. And again, remember, there's very little out there, very little detail that we can grasp hold of today. But we do believe that what it's probably going to be focused on is both expanding access to home and computer-based to consumers. A lot of those, there's a lot of talk about the waiting list that are out there for this care. So we believe the funds will be directed towards trying to handle some of that waiting list and giving more access to care. And then also, there seems to be initiatives around increased wages for caregivers. To make sure that the caregivers who are, in fact, providing that care have a living wage. So that's kind of what we're thinking that will be useful.
Scott Fidel: Got it. And then just one last one for me. Interested, I know it was a generally difficult backdrop for the hospice space around some of the pandemic headwinds in the first quarter. But it sounds like Queen City was able to deliver pretty solid results month-on-month throughout the quarter. Just interested in terms of, if operationally, you were able to glean anything into some of the trends that they were able to deliver around that performance and whether that would impute to you think that they were likely taking some market share in the market as well.
Bradley Bickham: Yes, Scott, this is Brad. On the Queen City, I mean, we're very impressed with the ability that they have showed to grow the business, particularly during the integration process. And I think one thing that really demonstrated to me was the fact that are having density in the ALS and ILS that they service was very important. It allowed them to keep access in those facilities. I think during the pandemic, we haven't really tracked the market share numbers, but I suspect they probably -- we have probably done a pretty good job of taking some market share in those markets. But I think it really goes to show that having density in facilities, if there's any type of shutdown or we're going to pair the list of providers, you're more apt to be the ones that stay in the facilities in Mexico.
Operator: Our next question comes from the line of Brian Tanquilut with Jefferies.
Brian Tanquilut: Thanks for all the color that you've got so far. I guess, Dirk, my question for you. I mean, having been in the hospice space for a long time. We're seeing, obviously, a broad-based challenge or headwind in the hospice business. How are you seeing this kind of like recovery out of that happened? And what do you as a provider need to do to turn that business around? Or is this merely a waiting game of just waiting for the recovery post-COVID?
Dirk Allison: Well, part of the issue around medium length of stay, it has to do with the fact that a lot of times -- sorry, I'm not sure what happened there. A lot of the median length of stay, a lot of the longer length of stay patients come from assisted living facilities, SNFs. And we've seen -- not only have we seen the sense in those facilities go down, but we've also seen, as we've talked the access. So what's happened is it's now skewed more of the admissions we're getting to acute care facilities, those that have a shorter length of stay. We also believe that probably as a natural progression of the pandemic, I apologize. I don't know if that's the phone system on the other side. But I'll continue to try to push through. We do believe that as we see this pandemic, the vaccination roll through and the pandemic become less of an issue, we're hoping to see that a couple of things happen. One, there is a census in the nursing homes that return more to a normal level and that the families that we believe maybe during the pandemic, have delayed the discussion around hospice may have -- might be because they're working from home, and they're able to take care of their family member longer. We believe that would return to something that's more normal. So for us, we're not just stopping there and saying, ADC is going to return through length of -- medium length of state growth over the next few months. We're working with our sales team. We're looking at places that we can try to drive additional length of stay. But I do believe as an industry itself, overall we should start seeing over the remainder of the year, some improvement in that and leading more back towards the normal level of medium length of stay around the mid-20s.
Brian Tanquilut: Got it. And then, Brian, when you think about the different moving parts on the different reimbursement rates or state reimbursements that are changing. So between Illinois, the sequester delay and also the increase in wages in July. If you don't mind just walking us through kind of like your estimates of the numbers, like sequential changes from Q1.
Brian Poff: Yes. I mean, let's look at where sequentially. During the Q2, to your point, Brian, you'll see the benefit from the Illinois rate increase, which is going to be offset partially by the increase in wages in our non-Chicago workers. So there will be some margin there. It'll be helpful. So it'll move our gross margin up slightly from where you see in Q1. You won't have any other real impact in Q2 and Q3, you'll see kind of an offset in Chicago minimum wage increase that Dirk referenced in his comments, so we'll see kind of that normal 40 basis points or so reduction there as we don't have reimbursement offset until July unless something changes and Illinois is able to pull that forward, and we're in conversations to see if that's possible. And then you get through the end of the year. And sequester, I think as long as that's out there, we are benefiting like a lot of folks from that as well.
Operator: Our next question from the line of Mitra Ramgopal with Sidoti.
Mitra Ramgopal: First, just -- I know you talked about federal funding, increased federal funding for the industry and also the heightened focus of health care being done more in a home setting. I was wondering just from an M&A perspective, if that's resulting in maybe driving up valuations, as you look at opportunities.
Dirk Allison: Mitra, I think there's definitely a lot of appreciation for our home care services, especially through the pandemic, even more so. I think prior to COVID obviously, there was a value proposition there. I think through COVID, you also see a lot of choice and reaction to a pandemic type environment and people's preference to be in their homes. So I think there's definitely an appreciation in the space, and that's driving more of the clinical services we've seen, I think, more of those multiples climb out, particularly in hospice sound proves through last year. I think personal care multiples that we've seen, the ones that we typically would target have been pretty consistent. We haven't seen a lot of movement in those multiples at this point.
Mitra Ramgopal: Okay. That's great. And then on Medicare Advantage, I was wondering if you have an update there. I know that was seen as a nice potential growth opportunity for you and things got delayed as a result of the pandemic in terms of maybe implementing some programs, et cetera. Just wondering if you're seeing any pickup in the environment here.
Bradley Bickham: Mitra, this is Brad. With respect to Medicare Advantage and other value-based arrangements possibilities, we're certainly seeing increased discussion around it, and we're actively engaged in those discussions. We've got several projects out there that are implemented or at various stages of implementation. So I think long term, there's certainly a -- it's a nice tailwind for the industry. There's a lot more discussion on the federal level about a long-term benefit just recently. So I think there's lots of opportunities. I think the MA piece is still, as we said, a couple of years away from seeing any real meaningful numbers there. But I think in the near term, we're starting to see some pretty interesting projects that we're participating in that I think will further demonstrate the savings that our services can provide.
Mitra Ramgopal: And then finally, just on the vaccines and the rollout, et cetera. Just wondering from a -- internally as it relates to your caregivers, employees, et cetera, if we've heard cases of number of individuals not wanting the vaccine, especially in the health care arena. Curious if that has been an issue for you in terms of your employees and caregivers, et cetera?
Dirk Allison: Yes. On the vaccine front, we've made good progress. I think it's a -- we're not as far along as we'd like to be overall. But part of that is just some regional differences in the pace of the availability of the vaccine. When you look at our skilled segment, in our Home health division is probably about just under 50% fully vaccinated. Hospice is not quite to that level. It's probably more in the 40% level, there's more geographic dispersion there. personal care is lagging a little bit behind the skill sectors, but mainly because just access was as not -- as widely available at the time. I think now what's encouraging is that you don't have to schedule the appointments. You can just show up and get vaccinated. And I suspect that we'll start seeing some pretty good traction there because I think just the ease of obtaining the vaccine, the improvement there is going to be a big driver.
Operator: . Your next question comes from the line of Matt Larew with William Blair.
Matthew Larew: I was just wondering if there's a way that you could try to quantify the impact in New Mexico on assisted living, independent living facility restrictions in terms of your access. And then maybe give us a sense for how as vaccinations system have improved your access has approved?
Dirk Allison: Yes. Certainly, when we look at just our admission trends, where we really were impacted was a pretty significant reduction in those ALS and the ILS and the SNFs. What we have seen in the near-term is SNF admissions actually have improved incrementally. So we're starting to see some traction there. Overall, admission volume even in New Mexico was very robust. So we weren't disappointed in admission volume. It's just a lot of it was late stage. That being said, when you look at kind of where we were last year from the perspective of ALS and ILS, certainly, we're not where we want to be. On those admission volumes in New Mexico. But I think there's some optimism that since facilities are starting to open up more in New Mexico. And keep in mind, it was probably one of the more locked down states throughout the pandemic. I mean they started kind of early on locking facilities that are down and locking to stay down. And they've just now really get starting to reopen.
Bradley Bickham: And I think we also -- if you look at all of our markets related to hospice, the majority of our markets did grow. So New Mexico, having this difficulty with being a little bit more locked down than others and being our second largest market, did have a little bit more of an effect that you would like to see.
Matthew Larew: Okay. And then actually I just wanted to go back to announcement you made intra-quarter about Homecare Homebase and integration with the CellTrak EVV function. Just curious what you think that product will look like. Ultimately, that'd be exclusive to Addus? What are you contributing to the project? Just -- we'll kind of be curious what the plans are for that? I know you said it would roll out in early 2022. It sounds like an interesting tool potentially.
Dirk Allison: Yes. Well, first off, it is a true partnership with Homecare Homebase and CellTrak. We are not investing dollars into the software creation. What we are investing is time and expertise. One of the things that we were able to do with Homecare Homebase is we probably are one of the top personal care providers in the country, and we understand what we, as a company, at least, need to run our business properly, the type -- data we need input and output from systems to allow us to have some of the access that we have today on the clinical side. So our partnership there, while it will not be exclusive, we will be the company to really decide how that software system operates. And our goal, as you would expect, because we're going to have personal care all the way through hospice services, we would like to be able to have that record and be able to see that patient regardless of what level of care they are in our company and get the same data out of that. So that's really the aspect we have with Homecare Homebases today.
Matthew Larew: Okay. And then, Dirk, just going back to a comment you made about, let's dig an impact to the mid-20s. Obviously a lot of moving parts there, but maybe just -- would that be kind of a 2 or 3 quarter time period? Just kind of how long do you think it will take to get back to sort of normalized length of stay?
Dirk Allison: Well, we've gone from 15 days up now to 18 in April. So we've grown 3 days, which while it doesn't sound like a lot as a percentage, it's a nice move. To get back to the mid-20s, you're probably going to see the third and fourth quarter of this year, it takes us to get there. So we believe by the end of 2021, you should see our medium length of stay closer to where we would expect it to be, which is that mid- 20 number.
Operator: There are no further questions. I will now turn the call over to MDirk Allison for any closing remarks.
Dirk Allison: Thank you, operator. I want to thank everyone for their interest in Addus today and for being part of our earnings call. We hope you have a great week. Thank you.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
