Addus HomeCare Corporation (NASDAQ:ADUS) Q1 2024 Earnings Call Transcript May 7, 2024
Addus HomeCare Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Addus HomeCare’s First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.
Dru Anderson: Thank you. Good morning, and welcome to the Addus HomeCare 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 Addus’ 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 Addus 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 statements. The company undertakes no obligation to update any forward-looking statements, 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, sir.
Dirk Allison: Thank you, Dru. 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 and 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 continued strong financial performance by Addus. This performance is made possible by the hard work and dedication of all of 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 home.
As I have said many times in the past, I’m very thankful for all the employees — 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 time frame gives 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 cost for providers like Addus. 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 workmen’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 combined 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 provider. Even more crucially, requires states to develop a plan subject to CMS approval to reduce in a reasonable period of time the number of providers that qualify 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 Addus, who will likely be required to pay a higher rate.
We believe these exceptions will provide us more access to labor, which, as we note 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 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 them, 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 will 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 viable 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 per 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 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 per 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 move past these early weather challenges. We continue to see our investments in hiring and scheduling optimization initiative take hold and contribute to our hour of growth. Turning to our clinical operation, our hospice same-store revenue increased 6.8% 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 first quarter of 2024, our hospice medium length of stay, exclusive of our JourneyCare 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 JourneyCare 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 rate as we work in parallel to transition to episodic or case rate. 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 important part of our growth strategy at Addus. 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 scale 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 nonclinical 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 Addus 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 relationship 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.
Brian Poff: Thank you, Dirk, and good morning, everyone. Addus had a strong start to 2024, continuing our momentum with an impressive financial and operating performance for the first quarter. Our results included solid year-over-year organic growth of 9.3% in Personal Care Services, well above our long-term expected range of 3% to 5%, but in line with our expectations. This growth reflects steady volumes as well as continued favorable rate support for Personal Care Services in some of our larger markets. We were pleased to see consistent positive year-over-year trends of our hospice business in the first quarter, inclusive of our Tennessee Quality Care acquisition. Our hospice same-store revenue growth of 5.8% was our third consecutive quarter of sequential increase and the highest percentage increase we have seen since prior to the COVID pandemic.
We continue to see favorable admission trends as we have experienced three consecutive quarters of sequential same-store admission growth. Same-store revenue for our Home Health Services, which is 6% of our business, was down 15.1% from the same period a year ago as we continue to intentionally limit admissions from payers with less favorable reimbursement rates. We remain focused on maintaining a consistent margin profile in our Home Health business as it complements our Personal Care and Hospice Services. Acquisitions remain an important part of our growth strategy with our primary focus on markets where we can leverage our strong personal care presence and add clinical services or enhance and expand our personal care services in strategic geographies.
With our size and scale and the support of a strong balance sheet, we are well positioned to execute our strategy, and we are optimistic we will see attractive acquisition opportunities in 2024. As Dirk noted, total net service revenues for the first quarter were $280.7 million. The revenue breakdown is as follows: Personal Care revenues were $208 million or 74.1% of revenue. Hospice Care revenues were $55.9 million or 19.9% of revenue. Home Health revenues were $16.9 million or 6% of revenue. Our first quarter results include the operations of our most recent acquisition, Tennessee Quality Care, a provider of home health, hospice and private duty nursing services, which we acquired on August 1, 2023. Other financial results for the first quarter of 2024 include the following.
Our gross margin percentage was 31.4% compared with 31.2% for the first quarter of 2023. As expected, gross margin was affected in the first quarter of our annual merit increases and the annual reset of payroll taxes as well as compression from certain collective bargaining negotiations. In the absence of any additional mix changes from M&A, we anticipate our gross margin percentage to remain materially stable over the next few quarters and consistent with our historical annual pattern. G&A expense was 21.8% of revenue compared with 22.4% of revenue for the first quarter a year ago and a decline sequentially from 22% in the fourth quarter of 2023. Adjusted G&A expense for the first quarter of 2024 was 19.9%, a decrease from 20.8% in the comparable prior year quarter and down sequentially from 20.6% in the fourth quarter of 2023, primarily as a result of lower legal expenses and the normal timing of certain accrual.
The company’s adjusted EBITDA increased 24.6% to $32.4 million compared with $26 million a year ago. Adjusted EBITDA margin was 11.6% compared with 10.4% for the first quarter of 2023, reflecting continued leverage on our increasing revenues. With a solid start to 2024, we continue to expect our adjusted EBITDA margin percentage for the full year to remain above 11% consistent with 2023. Adjusted net income per diluted share was $1.21 compared with $0.97 for the first quarter of 2023. The adjusted per share results for the first quarter of 2024 exclude the following: acquisition expenses of $0.12 and noncash stock based compensation expense of $0.12. The adjusted per share results for the first quarter of 2023 exclude the following: Acquisition expenses of $0.06 and noncash stock based compensation expense of $0.13.
Our tax rate for the first quarter of 2024 was 25.7%, in line with our expectations. For calendar 2024, we continue to anticipate our tax rate will be in the mid-20% range. DSOs were 34.6 days at the end of the first quarter of 2024 compared with 39.1 days at the end of the fourth quarter of 2023, primarily as a result of continued consistent cash collection from the majority of our payers as well as some ordinary course timing differences from certain payers. Our DSOs for the Illinois Department of Aging for the first quarter were 30.2 days compared with 49.5 days at the end of the fourth quarter of 2023. Our net cash flow from operations continues to be very strong, coming in at $38.7 million for the first quarter. We received approximately $10.2 million in ARPA funding during the quarter, partially offset by $2.4 million in ARPA funds utilized.
Net of the ARPA activity, our cash flow from operations in the first quarter would have been $30.9 million. While we continue to see strong cash flows, we benefited from approximately $8.4 million in net working capital changes in the first quarter, which was primarily related to favorable timing on receivable payments. We would anticipate these timing differences to normalize over the course of the full year and continue to expect our cash flow to represent approximately 80% of unadjusted EBITDA. As of March 31, 2024, the company had cash of $76.7 million with capacity and availability under our revolver of $486.9 million and $377.5 million respectively. With our strong cash flow, we have continued to pay down debt and reduced our revolver balance by an additional $25 million in the first quarter.
Importantly, we have the financial flexibility to continue to pursue our strategic growth initiatives, including acquisition. As mentioned, we will continue to selectively pursue acquisitions in 2024 that are consistent with our goal of bolstering our personal care services and adding complementary clinical service. At the same time, we will continue to diligently manage our net leverage ratio, which is currently well under 1x net of cash on hand. This concludes our prepared comments this morning, and we’d like to thank you for being with us. I’ll now ask the operator to please open the line for your questions.
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