Addus HomeCare Corporation (ADUS) Earnings Call Transcript & Summary

[Audio Gap] joining us today. It's my pleasure to be introducing Addus Healthcare. Addus is one of the largest providers of personal care, home care and hospice services throughout the country. Presenting today, we have Dirk Allison, who's Chairman and CEO. We also have Brian Poff, who's CFO; and then we have Brian -- I'm sorry, Brad Bickham, who's President and COO. So we're going to jump right into Q&A. If anyone has any questions, by all means, feel free to ask them. But I'll kick it off.

So the theme, it seems like -- at least one of the themes for the providers is labor costs. So talk a little bit about how labor has been impacting you, how you're managing it and maybe start off by like where wage growth is today versus where it's been historically.

You want to talk about that, Brad?

I'll start. So on the labor front, you really need to kind of break it down into the different segments. With respect to personal care, we've actually seen favorable hiring trends. We started seeing that towards the end of Q1. We actually had our highest hires per business day that we had recorded in April. It was actually a little better than March. So the hiring front is improving on the personal care side. It's also -- we're seeing some favorable trends also in home health and hospice, particularly with nurses. Actually starting to see our net hires go up on the clinical side as well. But that's the area that's probably from an inflationary standpoint. We traditionally have had raises kind of in the 2% to 3% on the clinical side. It's more in the 3% to 5%.

Let me also delineate a little bit between the nonclinical and clinical side because I think it's important to understand, with 75% of our business clinical. Majority of our caregivers that we hire are minimum wage workers. And so as we went through the main part of the pandemic and there was a lot of government help, whether that be increased unemployment later, advanced childcare credits, those are things that really our folks took advantage of, they needed. And so a lot of them stayed out of the workforce during that period of time. I think what Brad's talking about seeing in January, February and continuing on very strong through March and April is the fact that a number of those individuals have now -- that has gone, that's passed, that help us -- it's past them, and they need to be back to work. And then throw on top of that inflation because, again, when you are a minimum wage worker, you sometimes are a second income, sometimes your primary income, but certainly, your second income, and you need that income to help you keep up with the cost of living. So we believe that has probably been a positive effect that we have seen in the last few months on the personal care side.

So I think there's like a little bit of a debate about whether we're seeing some sort of temporary bolus in labor cost and then it kind of comes back to normal. I mean how are you thinking about it? Is this like a step-up that you now are going to be working off of for the future? Or do you think there's going to be some moderation or catch-up as we get back to normal?

Again, we are a little bit different from others in home care in that with -- we have about just right at 50% of our employees that are union employees. And so when we went through this increase in labor cost, those salaries did not increase. The per hour cost did not increase because they had been collectively bargained with the union. One thing we have seen over the last 5 years as it relates to cost for the personal care employee was each year, we have seen the number of states raise their minimum wage for the state, which did put a permanent increase in costs. But fortunately, all states have basically matched that and allowed us to maintain our margins. So it's turned out to be a very nice opportunity for us to not only raise the rates of the individuals that are covered by this collective bargaining agreement, but also from a revenue standpoint, very solid. On the ones that aren't covered, we have had some increases, 2% to 3%. Those will be permanent. But do you want to talk about the clinical side, what you think you're seeing there on the...

Yes, on the clinical side, it's possible that we actually could be seeing kind of a temporary increase, and then we'll revert back to a more normalized number. Those rate increases -- I mean, we accelerated our merit increase process on the clinical side. Normally, it's somewhere around late February, early March. We actually moved that forward to January just to help with the recruitment and reduce turnover rates. And then we did see some good traction from that. But I think on the clinical side, you could see some lessening of some of the wage pressure over time. And you're seeing some of that now. I understand, I'm just reading an article this morning about the travel nurses. That industry has pretty much kind of dried up.

Yes. That's -- I mean, it's an interesting point about the kind of built-in rate offset in some parts of your business. I mean, I guess, in general, how do you think about as the company overall the ability to get a price increase that's going to match the ongoing inflation? Is it more or less real time? Or is there a lag between when the costs go up and the rates ultimately reflect that?

Historically, states have had a little bit of a lag. I know Brian has talked about the fact that the last couple of years, Illinois, which is just under 40% of our revenue, one of our -- it is our biggest market. They have given us a rate increase to match a corresponding minimum wage increase. Last year, it was $1 minimum wage increase in the Chicago market, which was their final increase from that standpoint. They matched it -- we're going to match it 6 months later. So we'd have a lag of 2 quarters. They ended up with some of the moneys they got from the government moving that up a couple of months. But they just announced. Now we're more into the -- in Chicago, we're more into the cost of living increase. So there is a small cost of living increase in July. The budget was passed in Illinois recently with an offsetting rate increase, which will keep our margins where they were, but it is the late 6 months. So typically, you will see most states, you would like to see them match it. I would say they're typically delayed. And then, of course, on the clinical care side, with the government coming up once a year making those rates, we're behind a little bit on those.

And what do you think the outlook for the home health rate is going to be this year? I mean we've had obviously a theoretical behavioral adjustment that CMS hasn't backed away from fully yet, at least to [indiscernible]. Do you think that there's going to be a positive rate update or how you're thinking about that?

Well, I mean, they -- right now, I think the rate increase that they've looked at for -- on the hospice side for October, a little lighter than I think people had anticipated. I think we're also optimistic that maybe with the comment period that those rates will get adjusted as well as the home health rates. But Medicare tends to lag just because of the cost report data. So there's a little bit of a gap that is not quite as immediate as you'd like to see it.

Okay. And do you think that, that proposal is going to come in better? I think a lot of people are hopeful that -- I assume as it gets more data that they have to increase it by more...

We've got hope that they'll make the right decision on that and make some adjustments to it. I know there's certainly a lot of pressure.

Yes. And I know that your rates -- you mentioned that the government's stimulus has come in for a lot of the personal care and state-based programs. How do you think about that? Is that a permanent boost? Or is there a risk in a couple of years when that money starts to -- I mean, is that permanent?

It's hard. When you're talking about a minimum wage base of employees, states hesitate to do anything that's going to keep you from being able to make sure that you can stay in that business. So I think the rate increases we've gotten -- and let me speak that we've gotten through the normal course of business, whether that's been the states have used some of the $350 billion they got from the Feds. We've had the extra 6% Medicaid match for a period of time, and the states have used that to raise rates. I think you can say those are pretty well permanent. What we are seeing now, and we've talked about it, is the ARP funds that are coming out. We're starting to see some of the states, the additional funds that the government has given them more on a temporary basis. It's going to be 1 year. They figured out the amount over a 1-year basis. You have 3 years to spend it. What we're seeing with most of our states is passing through a rate increase to Addus, in most cases, which we will pass through 100% to our caregivers. So that really won't have a financial impact to us directly. We do believe the way that Fred and his team and Brian, the way we're talking about structuring that to help us recruit and retain caregivers. So we think we can have an indirect benefit by maybe seeing our turnover rate come down. They've seen the ability to hire a little higher. So those rates will be temporary. Those will be rates that will come through. We will use in a temporary basis. We will not be giving any permanent increases with temporary money. So we'll make sure that we use the money appropriately as the states are selling. So I don't -- at this point in time, any of the rate increases we've got to date that we've recognized, I don't think they're really in jeopardy going forward.

Okay. That makes sense. And I guess we've seen the labor shortage impact different businesses differently. It seems like the sectors that aren't growing volumes all that much, it just shows up more as a labor pressure. But the ones where you have the ability to grow volumes and you're kind of on the right side of the cost of care, labor shortages impact not only margins but potentially growth. So to your point about retention, like are these rate increases more about growth and the ability to staff and meet that demand? Or is it more about just maintaining margin?

Yes. I think it's really more about being able to staff up and meet the demand. I mean we're fortunate on the personal care side, in particular, to be in a segment that there's more demand than the labor supply, and that's true prepandemic. As I tell people that it was a challenging hiring environment pre-COVID. And so that's an area that we have been focused on for a number of years to try to make that as seamless as possible, make it as easy as possible for someone to apply, be as responsive as we can to get candidates through. But I think it's -- those funds, I think, will -- should help us on the volume side because we have the referrals. It's really meeting that demand and optimistic that the additional money from the ARPA will help us on the retention side, encourage existing workers to take more hours and then help us on the front end on the recruitment.

So is there a delta right now when you look at kind of what you think demand is across your businesses versus what you've been able to report the last couple of quarters? And like where are we versus the fundamental demand versus what you've been able to create?

Is this challenging to look at those numbers because unfortunately, some of our payers, the way they kind of send out referrals is kind of a blast of here's 100 clients and the first person to respond. So it's a little bit challenging to really quantify that in a meaningful way. Do know that there is a nice tailwind if we can ramp up our hiring, reduce our turnover and then also encourage people to take more hours that could certainly help us get to the high end of our normal 3% to 5% growth range.

Yes. I think we've said in the past that, I mean, not having direct intelligence on nonreferrals, but we feel just like at a high level, maybe 100 basis points or so of organic growth is probably something that we're seeing demand that we haven't been able to set for the last couple of years. So I think it might be a little accentuated even through the more recent pressure from the labor side. But definitely, it's market by market for us. I think it's fair to say as well, but definitely, a strong demand for the service out there.

And I guess when you think about the pivot that the company has made from that kind of personal care business into home health and hospice, like what's the rationale for that? Why make that move? I know that you've got some experience in hospice for sure. But the -- to some degree, when companies or when investors see that pivot, they say, is this about the opportunity of home health? Or is it saying something about personal care? How are you framing that?

Well, first off, let me say we believe personal care is the base of our business. It has been for 40 years. It will continue to be. But what we saw as we started dealing with some of our payers, we saw their request for us to do some things that start with personal care on the nonclinical side, but it needs some clinical expertise on top of it. Specifically, they're thinking through value-based care products in the future. So using New Mexico as an example. We ended up in New Mexico. Right now, we're probably the largest in each of the 3 segments in New Mexico. And what we see in New Mexico, they have 3 managed Medicaid providers that handled the Medicaid program for the state, and they take risk on that Medicaid patient. For us, we were able to start a pilot with 2 of the 3 today, and we've been in it for over a year. And what we've been able to show is that starting with personal care and using our clinical resources, we've been able to help reduce the medical loss ratio of those very high-cost patients. If you realize that our average patients in the 70s, a lot of these patients are -- not trying to in any way be disrespectful, but kind of a frequent flyer, they end up in the hospital a great deal of time. They go to the emergency room a lot. If we're able to manage those particular patients at home, we can -- appropriately, we can help reduce the overall cost of care. So what we saw was we're not trying to be a clinical home care company. We're trying to be a home care company that has all 3 levels of care, beginning with personal care. So for us, as you look out forward and you really look at some of our most recent acquisitions, we are making the acquisitions in market to begin with very strong personal care. Because again, when you think in terms of affecting the cost of care, one of the real starting points is access to that patient. You've got to be there, and you've got to see when something happens with this patient. You got to be able to tell if there's intervention needed by clinical resources. And to do that, personal care is in the home anywhere from 3 to 5 days a week, every week, whereas clinical services are not in there quite as often. So for us, it wasn't a matter of just saying we want a clinical service because we've been in it before and has a higher margin. We really felt like it was an addition to our base business that would allow us to focus more on trying to help our payers control costs in the future.

Yes. I think just one thing to add on that. I think often, just from a revenue synergy perspective, if you think about the demographics of most of our personal care clients and their prospective needs, whether it be home health, hospice, anything downstream, having the ability to offer all 3 levels of care in that market and having an Addus name attached to all 3, we think, obviously, there's some opportunities to move some of those patients into other lines of service that we have. We definitely see that, particularly between home health and hospice using Medalogix today to kind of look at who's eligible for hospice that might be in our home health. We think there's opportunities as well for some of those personal care patients as they get older, if they need those services, we'll be there to be able to be able to provide that service for them as well. So kind of do a full service plus just the revenue synergy aspect of it.

Yes. Is there any way to quantify that? I mean like in New Mexico, is your personal care business having a better margin? Or is there like more referrals? Or any way to kind of put a finer point to what it means to have all 3 services together?

It's not really on a margin perspective. I mean they're all unique individual lines of service. It doesn't really play that way, but there is definitely -- we're seeing some transition of patients from personal care some into home health, some in the hospice. I think we have -- we feel an opportunity to see higher numbers. I think it's more home health into hospice today, but we definitely have seen some of that movement.

Yes. I mean we have quite a few clients that have personal care but also are on hospice, are also on home health in addition to just transfers, just organically sourced within the organization. One of the things we're working on is development with the Homecare Homebase of a personal care module. So we'd have all of our clients and patients on one clinical system. Right now, a lot of the tracking and identification is a very manual process. But with Homecare Homebase, we're hoping to put in some additional data analytics, similar to what we do with Medalogix, that would actually be able to facilitate identifying a personal care client that may be ready to have those discussions about end-of-life care or making sure that we keep track of that client who goes into the hospital that more than likely will need a home health episode when they discharge.

Okay. That's helpful. And then I guess you mentioned you're working with these payers more deeply and value-based care. I mean what are the conversations? Are you actually thinking about taking bundles, upside risk? Or is it more about where it's going to enable that shift? And how does that work?

Well, right now, the pilots we have and the programs we have with them today are more of a bonus type approach, where we get paid our base fee or normal, whether it be personal care or home health. And then based on us hitting certain criteria, whether that's keeping them out of the hospital, closing care gaps, then we get a bonus payment on top of that. Now that's somewhat immaterial today, honestly. We're probably 3 to 5 years away that we believe that's really going to be a material movement for our company on the revenue side. But what we have proven is that we can do it. And one of the things we've also found as we've gone through these pilots is the amount of data that we have on even the nonclinical side. And so as Brad alluded to with Homecare Homebase, one of the reasons [Audio Gap] Eventually, we'll have enough data that we could consider taking risk. We're not there today. We need to have more information. We need to understand our -- what would be our risk, quite frankly, as a company. We don't want to jump in that until we understand it. But we do believe that down the road, that is something we can look at.

Okay. And then, I guess, one of the potential catalysts for the sector is CMS expanding use of personal care within Medicare Advantage plans. Where are you in that opportunity?

Yes. It's really because when CMS expanded it, they didn't get any more money. So basically, he said, you can offer personal care, but we're not going to pay you to do personal care. So as you would expect, most Medicare Advantage plans did, they offered a very small benefit. And when's I say that, it's more a marketing benefit that says to a family, if you need 100 hours over a year's period of rested care, whether we'll take care of your loved one and you can go out and have a break, that's kind of where the benefit is today. We do a little bit of that. It's not a material approach. But when you think about our normal patient, it's over 700 hours a year generally. So it's a -- what we need to do is we need to keep working with Medicare Advantage to let them see the benefits of -- even if they don't get additional money from the government, we can help them control their loss ratio. So we're still in the early innings of being able to show them that. And part of getting there was getting through some of these pilots that allow us to capture the data and show that we can actually do what we think we can do. And we're getting close to that. We're actually seeing some data out of New Mexico. So hopefully, in the near future, we'll be able to start making some of the inroads into the MA blends that we think we need to make.

And is that the issue? Is that you kind of need to have all 3 businesses in a market before you could prove it out? Because it would conceptually makes sense to me that you'd be saving money, but they just don't want to move until they can see -- this means more expense. They can't see the savings over here until you actually show it to them.

Yes. I think the Medicare Advantage payers, I believe they think home health can help save money, keeping it at home. I think what they're still coming to grips with is that personal care can be a part of that and it can be on the front end of that and can help also save money. We believe up and above, which is home health by itself can do, but that's something we're still having approved. And I think we're still, again, as we said, somewhat early in that. But we are seeing -- interesting enough, we've had a couple of projects out in New Mexico. Now we're seeing a couple of the payers in Illinois want to enter into a program with us. So I think you'll see us start to grow this a little bit. We made a comment on our last call that we're going to make some investments into the value-based care. And really, that's around software technology to allow us not only to capture data, but then to look at that data and use it appropriately. Brad mentioned Homecare Homebase. We have another project going on that will help us with the data collection. So I think those are things that we see enough of a future. We believe it's going to be important to a company like Addus that we're willing to make those investments now.

And then can you talk a little bit about the M&A backdrop? I mean how much cash flow do you have? How do you think about using your balance sheet? What kind of deal outlook can you guys do each and every year?

Yes. I think we expect this year -- I mean, last year, our cadence, I guess, on deals was a little slower than we'd seen for the few years prior. I think we see good opportunities this year to not only continue to add clinical services where Dirk mentioned we had strong personal care, but we continue to also enhance and add personal care assets that make sense. So we thought the overall market was a little slow around the turn of the year, but we expected that to start picking up in the spring. I think the case of conversations that we're having with folks, that seems to be coming to fruition. I think our view is multiples are probably going to come back to earth just a little bit in certain of the segments compared to where they were last year. But I think we feel like we're very well situated from a capital perspective to be able to continue to be aggressive. So today, we're thinking that still net just over 1x levered and have good capacity on our revolver. Our business view on a normal year kind of a run rate where we are now should be generating $65 million to $70 million in cash flow a year. So for a certain amount of our deal flow, we can actually fund that through cash flow. And we're trying to be cognizant of rising interest rates, and I think having that ability and not having to necessarily lever up is going to be helpful for us as well. But we're willing to do that for the right deals. I think we've indicated that in the past, even if it's a larger, more strategic opportunity, those are things that we're definitely open to pursuing. But it hasn't made a lot of sense for us as far as how it would fit with our operations, our segments in our geography. I think if we can find those type of assets this year, we're going to be in a good position to again be opportunistic.

Would you say that the clinical assets are the focus? Would you say the clinical assets are the focus and then personal care secondary? Or how do you think about...

Yes. I think we would tell you that right now, we have a pretty good base of personal care, and we will continue to look to strengthen certain states with that. But we'd like to focus more this year probably on the home health side of the business, bringing that in on top of our personal care markets. Part of what we had done is we announced it recently, we really upgraded the position that runs our M&A department. And we brought in a gentleman from a home health company, previous home care experience to really help us focus. He will be looking at personal care also. But really, I would say, right now, our #1 focus this year will be more slanted towards home health.

And how does hospice -- is hospice like a third priority?

Hospice is -- we've already had 2 really nice acquisitions, the HPA out of Alabama, brought in 5 or 6 states, Queen City. And then now, I guess, the third, we just closed on JourneyCare up in Illinois to give us very strong Illinois presence. So I would say probably hospice will be more fill-in, strengthening the markets where we're in today as opposed to doing any kind of major hospice acquisition.

Okay. That's helpful. And then I guess -- when you think about the overall margin profile of the company, I mean, where do you see that shaking out? I mean as the business mix over time moves, is there a way to think about where that goes?

I'll start with that. Dirk can chime in. No. I think we get this question a lot. I think where we are over the last couple of years, we've been pretty focused on just through volume and scale and growth and leveraging our G&A. We've been able to get our bottom line EBITDA margin up above. We stated a couple -- a few years ago that our goal was to get over 10%. I think last year, we were over 11%. There's going to be a couple of things that will impact us this year. I think you've got -- sequester holiday is going to be ending and phasing out. You've got some labor pressure. So I think our short-term view this year is our expectation is margins will probably stay fairly consistent just with those pressures unless we're able to do a little more on the M&A front. I think a bigger piece for us, too, is we've grown the clinical side of the business in that mix. It's a higher profile just from a margin perspective. It's 25% of our business today. I think with Journey, a full quarter in Q2, that will actually be closer to 27%, but that continues to grow. As we just talked about the focus on M&A, that should be helpful in bringing that bottom line margin up. So the question we get is, where is it going? Where does that happen? I think that's a harder question for us to frame. We were targeting 10%. We're above 11%. We think there's still opportunity to continue to see some bottom line expansion. But I think it's more a factor of mix and growth and scale.

Okay. Excellent. And then, I guess, what we've seen historically for home health is that MA plans have historically played a pretty big discount to the home health companies versus fee-for-service. I mean where are you on demonstrating that value proposition to them? What is the opportunity to close that rate? And over what time period will it take to do that?

Yes. I mean that's probably the biggest challenge for the home health sector right now, is just trying to demonstrate that value and really being able to get -- sit down and negotiate with those payers in a meaningful way. I think that's where actually the personal care component can be helpful when you start trying to bundle those services together to give you some additional leverage with the plans. I mean truth be told, I mean, like many providers, I mean, if you are having challenges on the staffing front, all things being equal, you'll probably go and do the -- an episodic case rather than trying to staff an MA fee-for-service per visit case. So I think that at some point, that's going to be the realization. That if you want to have adequate coverage for your members, you're going to have to adjust those rates and looking at doing things creative that are win-wins for both sides.

Yes. For what it's worth, Humana seem to be changing it's tone a little bit saying that -- it sounds like the industry is giving some pressure back to MA plans saying, well, why would we take you if we can take fee-for-service? We only have so many nurses. So hopefully that starts to change the dialogue. Maybe since they don't cater there, they're open-minded that other companies are, but that's helpful. And then, I guess, is there anything on the horizon from a regulatory perspective that you guys are really focused on as an opportunity? Or we talked about the behavioral adjustment, but like is there anything else that's out there that you guys see as an opportunity or risk that you're worried about?

Not really. I mean I think the ARPA is the big one as far as a tailwind for us. As those funds come in, I think they should help translate into increased volumes on the personal care side. But the reimbursement environment is relatively stable right now. I mean I know there's discussions about doing some -- maybe doing some changes with PDGM around that. You've got the value-based contracting on the home health side that's been pushed out a year. That's certainly something we're preparing for to make sure that we're well positioned to take advantage of that.

Is there any potential that, that temporary funding for the states gets permanent? Or do you expect that to go away?

Well, you tell me what the Republicans are going to do. I think if the President had his way, that would probably be more permanent. They seem to have an understanding and a belief that home-based care for the elderly is very important. But with the political environment, it may be difficult to get that through.

The administration seems to be very supportive. I think there were certain elements of the Build Back Better plan that would have been very beneficial to us and taking away some of that temporary nature and locked in some of the permanent. So I think some of the states, to Dirk's earlier point, are -- they're not looking for a fiscal cliff where all of a sudden, they have to pick up the bill. But if that becomes longer term or permanent through federal funding, I think that could be an opportunity. So what we hear is there's a lot of support for those type of programs. It's just finding what's the right vehicle to attach it to legislatively. So things -- all that we're monitoring. But it feels like at least this administration, to Dirk's point as well, there's a lot of support for home care services. They see the value and really appreciate it. So hopefully, there's some different momentum that can come from that.

All right. Great. That's all we have time for, but thank you very much.

Thanks, Kevin.

Thanks, Kevin.