Title

Presentation

Operator: Good day, and welcome to the Addus HomeCare Fourth Quarter and Year-End 2022 Earnings Conference Call. 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 Fourth Quarter and Year-End 2022 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 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 2023 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 its fourth quarter 2022 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. 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 2022 fourth quarter and year-end 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 earnings calls, I will begin with a few overall comments, and then Brian will discuss the fourth quarter results in more detail. Following our comments, the 3 of us would be happy to respond to your questions. I first want to say thank you to all the employees at Addus HomeCare for their efforts this past year. While it’s exciting to know that we had a great year financially, it is more important to know we provide care to approximately 66,000 clients and patients in 2022. I am very proud of our team’s hard work in making sure we are able to meet the home care needs of all these deserving people.

Meeting our mission each day will continue to lead to ongoing growth for Addus. Yesterday, we announced our financial results for the fourth quarter and full year 2022, and I’m extremely proud of our operating performance. Our team grew revenue 10% to $247.1 million for the fourth quarter of 2022 as compared to $224.6 million for the fourth quarter of 2021. This resulted in adjusted earnings per share of $1.11 as compared to an adjusted earnings per share for the fourth quarter of 2021 of $0.97, an increase of 14.4%. We also exceeded $28 million in adjusted EBITDA. For the full year of 2022, our revenue was $951.1 million with an adjusted EBITDA of $101.5 million or 10.7% of revenue. Our team was able to achieve these full year results despite the first 2 months of 2022 being negatively impacted by the Omicron wave.

During 2022, we continue to see strong cash flow from operations as our states and other payers have worked — pay providers like Addus in a timely manner. This strong cash flow has allowed us to maintain a net leverage position of less than 1x adjusted EBITDA, giving us the financial flexibility to continue to implement our strategy even as the cost of debt has increased. As has been the case for us over the last few quarters, the labor environment continues to improve. During the fourth quarter of 2022, we experienced improved hiring in our Personal Care segment with hires per business day increasing approximately 10% as compared to the fourth quarter of 2021. We are also seeing this improved hiring trend continue in January and February of this year with hires per business day running ahead of our fourth quarter of 2022 performance.

A part of our improved hiring results have been due to the recent investment we made in a candidate tracking system, which allows us to better engage with potential employees as well as shortening the time between application and higher. We are continuing to roll out this system to all of our sites, a process that should be completed in 2023. Hiring in our Clinical segment has been more challenging than in our Personal Care segment, However, we began to see our clinical hiring pick up in the third quarter and continue through the fourth quarter of 2022, particularly in our hospice segment. This, along with the incremental improvement in our clinical turnover has started to relieve some of the staffing challenges we faced in the first half of 2022 in our clinical segment.

There are some geographic areas where both clinical hiring and wage pressures continue, but the overall hiring environment has certainly improved, and we expect this trend to continue in 2023. As has been announced, the COVID-19 public health emergency will end on May 11, 2023. With the ending of the emergency declaration, the enhanced federal Medicaid match that states have been receiving from the federal government will gradually phase out. The full 6.2% in extra federal funding will last through March 31, 2023. This match will then decrease to 5% for the second quarter, 2.5% for the third quarter of this year and 1.5% for the fourth quarter of 2023. Even with the reduced funding to state Medicaid plans, we believe the states in which we operate are in a much stronger financial position than before the pandemic.

During our fourth quarter, the funding we received from the American Rescue Plan Act or ARPA has allowed us to begin increasing caregiver wages, pay sign-on and retention bonuses or provide onetime bonuses to current caregivers depending on the state program. Today, we have realized approximately $24 million, of which we still have $13.8 million to utilize over the next 12 months. These funds have been helpful with our recruitment efforts to support patient care and should continue to help our hiring and retention efforts in the future as we deploy our remaining funds. As for Illinois, our largest state of operation, on January 1 of this year, we received a $0.70 per hour statewide rate increase as expected. This rate increase covers the Chicago minimum wage increase we saw last July and allows us to raise wages elsewhere in Illinois.

On December 30, 2022, the State of Illinois announced an additional increase of $1.26 per hour, which will be effective on March 1, 2023, subject to approval from CMS. Once approved, our Illinois state reimbursement rate will increase to $26.92. This increase will cover the upcoming July 1 minimum wage increase in Chicago and allow us to continue to raise wages for all our Illinois employees. We believe these increases should help us to continue the favorable hiring trends we have been seeing in our Personal Care segment. I also want to give a brief update on recent developments regarding our participation in the New York Consumer Directed or CDPAP program. On February 1 of this year, the Governor of New York issued her budget, which proposes to repeal the procurement process for fiscal intermediaries who participate in the CDPAP program, eliminating the reduction of providers, which would have occurred under this process.

This budget now proposes to make changes to the MLTC program with a goal of minimizing the number of providers in the state. We believe these proposals will allow Addus to continue providing services to our current clients while growing with payers whose reimbursement rates provide for an adequate financial return. The final budget for New York is due on April 1, 2023. Once that budget is published, we will be able to refine our growth plan for New York. As a reminder, we continue to operate as normal with our MLTC partners in the New York market with respect to the CDPAP program. As we receive further clarification on the state CDPAP rates, we will evaluate whether to increase our CDPAP admissions as appropriate. Now let me discuss our same-store revenue growth for the fourth quarter of 2022.

For our Personal Care segment, exclusive of the New York CDPAP and ARPA funds, our same-store revenue growth was 7.9% when compared to the fourth quarter of 2021. Over the past 3 years, a majority of our same-store growth in PCS came from rate increases from our states. With the disruption caused by the pandemic, hourly growth has been more difficult. Recently, we have started to see a resumption of growth in same-store hours. In the fourth quarter of 2022, we saw same-store hours excluding New York CDPAP, grew 2.6% over the same period in 2021 and 1.5% on a sequential quarterly basis. This mix of volume and rate growth is more consistent to our historical averages prior to the pandemic. Turning to our clinical care operations. Our home health segment same-store revenue grew 8.3% over the same quarter in 2021, primarily as a result of our prioritizing episodic cases and declining non-episodic referrals due to the lower reimbursement rates.

As we have seen, our non-episodic referral opportunities continue to increase, our managed care team has been working with our Medicare Advantage virtual payers to adjust our contract rates to a more appropriate level, which will allow us to accept more nonepisodic volume growth going forward. Recently, we have started to see success in these efforts as we continue to discuss movement to episodic case rates for a longer-term solution. We are still in negotiations with a couple of our large payers and look forward to the completion of those discussions. Our operations team continues to work hard on both mix and staffing and home health to ensure we maximize the value of the services we provide. We remain excited about home health operation as it complements our personal care services, particularly where we participate in value-based contracting models.

Our hospice same-store revenue decreased 4.9% when compared to the fourth quarter in 2021 with a decrease of 0.9% in our average daily census as compared to the fourth quarter of 2021 as well as the resumption of Medicare sequestration. Our medium length of stay did improve to 27 days in the fourth quarter as compared to 22 days for the same period in 2021, but was down slightly from 28 days for our third quarter of 2022. While hospice continues to recover from the pandemic at a slower rate than we expected, we did see an increase in hospice admissions on a sequential basis, which is encouraging. Our hospice ADC increased to 32.3% for the fourth quarter of 2022 as compared to an ADC of 2,635 for the fourth quarter of 2021, inclusive of the ADC attributable to our JourneyCare acquisition which closed on February 1, 2022.

As for our ongoing development efforts, we continue to look at potential acquisitions that meet our strategic criteria. Our deal flow continues to consist primarily of a number of smaller acquisition opportunities mainly in our personal care and home health segments. While we have a desire to look at larger assets, deals of size have been slower to come to market, especially with the near-term reimbursement rate challenges for home health. We expect to see larger home health opportunities in the coming months as the market understands the reimbursement rates coming from CMS. In the meantime, we have been reducing our debt with our strong cash flow. Going forward, our disciplined balance sheet would allow us the financial flexibility to take advantage of any larger strategic opportunity that may present themselves.

As for our value-based care efforts, we are continuing to see positive results from our various value-based care contracts. We have now entered into 5 value-based contracts in 3 states, covering 4,800 clients. These contracts are focused on helping our clients avoid unnecessary emergency room visits and hospital admissions as well as readmissions at various time frames following a hospital discharge. In addition, we are also working on improving Addus benchmarks. To date, our outcomes data has shown our ability to help reduce costs while improving quality benchmarks. We are currently working on additional value-based opportunities for 2023. Value-based care continues to be a revenue growth opportunity, which we expect to grow to a more meaningful amount over the next few years.

I’m so proud of our team for the care they are providing to our elderly and disabled consumers and patients. The home remains one of the safest and most cost-effective places to receive care and is also the place for most elderly individuals and their families prefer to be. We believe the heightened awareness of the value of home-based care is favorable for our industry and will be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on our dedicated caregivers who worked so incredibly hard providing outstanding care and support to our consumers, patients and their family. With that, let me turn the call over to Brian.

Brian Poff: Thank you, Dirk, and good morning, everyone. Addus had a strong financial and operating performance for the fourth quarter, capping off another record year of profitable growth. Our results reflect strong demand for our services, led by organic growth in personal care services, well above our normal expected range of 3% to 5%, along with solid same-store growth in our home health segment. In addition to our organic growth, we benefited from our acquired operations in home health, Armada Home Health and Summit Home Health added in 2021 and Apple Home Healthcare, which we closed at the beginning of the fourth quarter of 2022. Our hospice business has continued to slowly recover from the pandemic with a return to our pre-COVID median length of stay range in the upper 20s.

Our hospice results also include the acquisition of JourneyCare, which closed in February 2022. As Dirk noted, total net service revenues for the fourth quarter were $247.1 million. The revenue breakdown is as follows: Personal Care revenues were $183.4 million or 74.2% of revenue, Hospice care revenues were $50.6 million or 20.5% of revenue, and home health revenues were $13.1 million or 5.3% of revenue. We have continued to actively pursue acquisition opportunities that meet our criteria and complement our organic growth. In 2022, we added approximately $65 million of annualized revenue with the acquisitions of JourneyCare and Apple Home Healthcare. We continue to evaluate and pursue other acquisition opportunities and believe we will see a more favorable market environment later this year as sellers, particularly in brokered processes, have been slower than expected in coming to market.

In part due to significant Medicare reimbursement uncertainty through October of last year for home health services. The final announcement of late 2022 on reimbursement changes for home health has provided more clarity and should lead to opportunities for future acquisitions in skilled home health, although we continue to monitor developments regarding future reimbursement changes and related impacts. Most importantly, we are well capitalized to continue to pursue our acquisition strategy as opportunities arise. Other financial results for the fourth quarter of 2022 include the following: our gross margin percentage was 31.9% compared with 32.4% for the fourth quarter of 2021. While we benefited from our annual hospice rate adjustment on October 1, 2022, our results reflect the negative impact of the July 1, 2022, minimum wage increase in Chicago, one of our largest personal care markets for which we did not receive a corresponding reimbursement increase.

Effective January 1, 2023, we did receive a statewide reimbursement increase in Illinois, which will offset the Chicago minimum wage increase. With another recently announced statewide increase to be effective on March 1, 2023, pending CMS approval. We anticipate our gross margin in the first quarter to be negatively impacted sequentially by approximately 120 basis points from the annual reset on payroll taxes and our annual merit increases, which are effective on March 1. These decreases will be offset slightly by the positive impact from our January 1 rate increase in Illinois, although we expect to see some minor compression from the March 1 Illinois increase. As we anticipate our gross margin contribution after wage negotiations and increases to paid time off and mileage rates from this rate increase to be in the low 20% range where our normal Illinois Personal Care gross margin is typically in the mid-20% range.

Overall, we expect our gross margin sequentially to decline by approximately 100 to 110 basis points from the fourth quarter of 2022 to the first quarter of 2023. G&A expense was 22.1% of revenue, consistent with the same percentage in the fourth quarter a year ago, but lower sequentially from 22.5% in the third quarter of 2022. Adjusted G&A expense was 20.4% for the fourth quarter of 2022, an increase over the prior year of 20.1%, but lower sequentially from 20.6% in the third quarter. The company’s adjusted EBITDA increased to $28.2 million compared to $26.7 million a year ago. Adjusted EBITDA margin in the fourth quarter was 11.4% compared with 11.9% for the same period last year. While we expected to see some margin compression in 2022, primarily due to wage pressures, we were pleased to have exceeded 11% in adjusted EBITDA margin for the first time this year.

Looking ahead, while we continue to operate in a dynamic environment, we expect to see stabilization in our adjusted EBITDA margin in 2023. Adjusted net income per diluted share was $1.11, compared with $0.97 for the fourth quarter of 2021. The adjusted per share results for the fourth quarter of 2022 exclude the following: acquisition and de novo expenses of $0.06; restructure and other nonrecurring costs of $0.01; and noncash stock-based compensation expense of $0.13. The adjusted per share results for the fourth quarter of 2021 exclude the following: the favorable impact of the retroactive Illinois rate increase net of $0.05; acquisition and novo expenses of $0.09; restructure and other nonrecurring costs of $0.01; and noncash stock-based compensation expense of $0.11.

Our effective tax rate for the fourth quarter of 2022 was 19.2% and benefited from several discrete credits during the quarter as well as continued strong work opportunity tax credits. For calendar year 2023, we expect our tax rate to be in the mid-20% range. DSOs were 45.1 days at the end of the fourth quarter of 2022 compared with 46.2 days at the end of the third quarter of 2022. We have experienced consistent cash collections for most of our payers and expect to see this trend continue. Our DSOs for the Illinois Department of Aging for the fourth quarter were 41.5 days compared with 35.4 days at the end of the third quarter this year. Our fourth quarter net cash provided by operations was $24.3 million. During the quarter, we made the final repayment installment on our fee roll tax deferral in 2020 under the Cares Act of $4.1 million and also had a net utilization of ARPA funds of $4.2 million.

Exclusive of these payments, our cash flow from operations would have been $32.6 million during the fourth quarter. For the full year 2022, our cash flow from operations was $105.1 million, inclusive of a positive net impact from government stimulus advances of $8.7 million. We also benefited from a positive impact of working capital changes of approximately $19 million in 2022, primarily due to our strong accounts receivable collections. As of December 31, 2022, the company had cash of $80 million and bank debt of $134.9 million with capacity and availability under our revolver of $380.2 million and $237.2 million, respectively. We have continued to focus on debt repayment in the face of rising interest rates. And as a result of our strong cash flow, we’re able to reduce our revolver balance by a net $90 million in 2022.

To date, in 2023, we have continued this focus and have further reduced our revolver balance by another $13.5 million. We have a capital structure that supports our growth initiatives and acquisition strategy as previously noted, we expect to be active in the M&A market this year. 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 would like to thank you for being with us. I’ll now ask the operator to please open the line for your questions.

See also 15 Countries that Export the Most Beef and 12 Countries that Export the Most Whiskey.

Operator: The first question today comes from Scott Fidel with Stephens.

Scott Fidel: First question, just appreciate the commentary just around the 2 Illinois rate increases and then the impacts on gross margins. Might be helpful just if you want to — if you could just give us what you would view the overall annualized revenue impact of those 2 Illinois rate increases in aggregate, obviously, that would, I guess, sort of annualize out more in the second quarter. And then just an update as well on sort of how the blended rates look across your other markets in Personal Care outside of Illinois for 2023?

Brian Poff: Yes, Scott. I’ll talk about the January 1 increase first. So based on kind of current volumes in Illinois, that’s going to result in approximately right around $12 million in annualized revenue. So obviously, coming in January 1, you’ll see a full quarter impact of that in Q1. The March 1 rate increase, which is a little larger per hour, is going to be probably between $17 million and $18 million kind of based on current volumes in Illinois, obviously, getting 1 month of impact of that in Q1, but you’ll see the full impact of that as that rolls through Q2. Outside of that, I think we’ve seen a couple of other markets that we’re going to see rate increases for I think South Carolina, which is one of our smaller markets has come through with a rate increase early this year.

Probably not going to see the same level of rate increases across the board. We’ve seen in the last couple of years. But I think overall, I’m still seeing some support in some other areas as well.

Scott Fidel: Okay. Got it. And then a follow-up question. Just wanted to follow up on Dirk’s commentary just on I guess, sort of the updated framing around the M&A pipeline? And Brian, I know you mentioned as well sort of maybe picking up middle later this year. I’m assuming is that sort of implying wanting — the market wanting to also get visibility into at least the proposed 2024 rates for home health in Medicare, just given some of the uncertainty around some of the proposals that CMS had talked about for next year as well. And that would be the first part. And then the second part, I guess, if you wanted to just sort of update us on your prioritization list between home health, personal care, hospice in terms of how you’re prioritizing M&A in the pipeline here?

Dirk Allison: Yes, Scott, I do think the question of what’s going to happen with the home health rates long term is still somewhat to be answered. I mean, obviously, last year, there was a period of time where we didn’t know a whole lot based on what had been announced by CMS as to what the actual rule is going to be by the time it came through. We still have a little bit of that going forward, as you know, trying to figure out exactly what the rates are going to be. And I think the real question lies in what sellers and the purchasers are thinking. I don’t know that all sellers today have come to the place where they have factored in that there might be future limitations on the rate increase. And so their expectations for price may be still a little high.

I think from us as purchasers and others in the industry, we’re trying to be very careful and strategic as to what we pay for deals until we truly understand the ruling. So I think that has affected some of the — as Brian said, some of the larger broker deals that we may see, particularly around in the home health market. Going forward, the prioritization really continues to be quite consistent from what we’ve been telling you for the last few quarters. Our prioritization as far as where we will use our acquisition dollars will be really around personal care as well as home health. At this point in time, we’re probably not as focused on hospice as we have been in the past. We think we have a nice operation around the hospice coverage around our personal care market.

So we’re really trying to grow home health. And we’re really also continuing to look for those strategic opportunities to grow personal care, either strengthening the states in which we currently operate are potentially entering into new states where we would like to go. So that will be our focus that you’ll see over the next few quarters in 2023.

Operator: The next question comes from Tao Qiu with Stifel.

Tao Qiu: Could you talk about any shift in discharge rate or referral sources that may have impacted this quarter on the hospice side? And since you mentioned the positive hiring trend, which contributed to the 6.6% quarter-on-quarter growth in the admissions there. Should we expect a relatively strong sequential gain in ADC in the first quarter this year? And additionally, JourneyCare, I know it has played a major part last year. And when compared to your $50 million annual revenue expectation, should we expect any upside in terms of the continued ramping up of performance there?

Dirk Allison: Yes, happy to take those questions. First, when you look at the just kind of mix from an admission and discharge rates, we haven’t — what we have seen is certainly some improvement in our median length of stay year-over-year. We’re kind of back to that upper 20s where we were pre-pandemic. We did see a 1-day slide sequentially. I think the one area where we’re still seeing an opportunity for improvement is when you look at nursing home, discharge length of stay and median length of stay, those still haven’t recovered. So we’re tending to get those patients later in the cycle. And I think some of that may resolve itself with the ending of the public health emergency and some of the special rules around SNFs and related to skilling patients that you did not have to have the prior 3-day hospitalization that was previous pre-pandemic.

So I think there’s certainly some opportunities there. When you look at from the standpoint of what does Q1 look like. We certainly have added a lot of staff. So that’s very helpful to help with the growth aspects. But I still think you’re going to see a little bit of a bumpiness in hospice in probably the first half of the year and more of the growth is going to come through in the second half of the year. And part of it is related to what I just said, related to expiration of the — some of the allowances under the PHE. With respect to JourneyCare, we’ve fully integrated JourneyCare into our processes, our systems, I think it’s just poised for some growth. But again, they still have some of the same issues that you see for I think they’re going to be kind of challenging in the first couple of quarters related to some of the — can we get more nursing home business.

And particularly, can we get patients that come on service a little earlier out of those facilities.

Tao Qiu: Got you. And also, it sounds like you’re going to get pretty strong rate growth in personal care services this year, and with the improved hiring trend when you return to a more normalized volume growth as well. So should we — when we look at the organic growth profile, should we expect that you can sustain kind of the top end of that 3% to 5% growth? Or do you foresee yourself doing even higher than that?

Dirk Allison: Well, I think you could certainly say that we are we’re excited about the potential for growth this year in personal care, we would tend to believe that it could be to the upper end of that 3% to 5%. We’re not ready to adjust that level. At this point in time, we want to see what continues to happen over this next year. I think the exciting part for us, as I mentioned in our comments was the fact that for the first time since the pandemic has occurred, we are starting to see over the last couple of quarters growth in personal care volume in the hours provided. And I think that’s very exciting because that was a struggle that all the industry had for the last 2, 2.5 years. And now that we’re able to hire more individuals are coming back on service, we’re able to then put them to work, seeing this hourly growth and then put on top of that, just normalized rate impact, we believe that 2023 will be a nice year for us.

Brian Poff: Yes. And Tao real quick, I’ll just piggyback a little bit on that. Just keep in mind, obviously, Q1 comps back to last year, impacted by the Omicron wave, I think, just across the board, we probably expect some pretty robust same-store numbers. But again, that impact last year compared to this year is going to be a big part of that difference. But with some of the rate increases we got, particularly with 2 rate increases this year from Illinois, which is our largest personal care market is definitely going to be helpful, I think, on the personal care side from a rate perspective.

Operator: The next question comes from Brian Tanquilut with Jefferies.

Taji Phillips: It’s Taji on for Brian. Just a couple of questions for me this morning. So just going back to your discussion around contract negotiation for home health, right? So as you negotiate contract terms with Medicare Advantage payers, I’m curious what leverage points you’re employing to successfully get those rates. And also, what does appetite look like from the payers to secure the value-based contracts like the case rate you had mentioned previously?

Brad Bickham: Yes. We’ve actually — when you look at kind of from a leverage standpoint, I mean, these are the payers that are our largest payers on the home health side. They also tend to be in the markets where we have significant personal care presence as well. And so I think that is kind of a primary leverage point. These are also payers in certain instances where we have existing value-based arrangements or we’re talking with them about adding value-based arrangements. So that’s really kind of our leverage point when looking at can we get an episodic or case rates in place. I think there’s still a lot of appetite from payers to explore value-based arrangements. I think we’re starting to build a good track record around what we’ve accomplished.

And so there’s really no shortage of interest in those types of arrangements. I think it’s really a matter of making sure that we have the wherewithal to do good with those projects. So you definitely don’t want to stretch too far. So we’re just making sure that we’re building out some infrastructure relate it to value based, that should help us be able to take on more of those cases. And as Dirk alluded to in his comments, this is something that we think has a tremendous opportunity for us down the road, but it’s going to take a little while to get there, make it meaningful from a revenue standpoint.

Taji Phillips: Great. And then just one more follow-up. I think this is more so for Dirk. You had mentioned with the PHE, just the elimination of the enhanced federal Medicaid match. So what are the offsets that will create that stability, even though the enhanced federal Medicaid match programs ending in May, I think, Dirk, you had mentioned that in your commentary?

Brad Bickham: Yes. This is Brad, actually. I think when you look at those — the reduction in the match, I also think about redeterminations that were put on hold, which, again, we don’t feel like we will have much, if any, impact from redeterminations on the Medicaid roles. Just when you look at the patient population that we serve, elderly fixed income chances of them being bumped out the roles is probably negligible. However, there are individuals that were added to Medicaid that may not qualify now. And I think that’s in large case, why the match is being eliminated and lives being phased out as you see those redeterminations take place.

Operator: The next question comes from John Ransom with Raymond James.

John Ransom: Dirk, I know it’s a small piece of your business, but I’d be interested in your perspective on hospice, some of the cross currents we’re seeing. Do you think this is a temporary thing? Or do you think something structural has differed in that marketplace?

Dirk Allison: Thanks, John. It seems there’s been a little bit of change in the industry. I think you can see that in that all the providers of hospice over the last couple of quarters have had some struggles as far as growth. There’s a question whether with the pandemic, there was a lot of increased elderly deaths that came through that period of time. And so the question is — some of the indications are, if you look at the government data, the hospice has gone down a little bit over that time frame. So while I don’t believe and I don’t think we as a team believe that’s going to be a long-term change in the hospice environment. We do think there’s some short-term impacts as those — probably those early deaths of elderly patients that would have been on hospice as that kind of moves through when we get back to a more level operation as we consistently have seen in the hospice environment.

So we’re still excited about hospice. I want to make sure you understand that just because it’s not a focus for our M&A at this point in time, that’s largely because we already have about 20% of our revenue in hospice, and we really believe that to get the balance of home health and clinical services set on top of our personal care network is really the strategic way to move forward in the next year or 2.

John Ransom: And so I mean, just a follow-up on that. Do you think length of stay are going to be any different in the future than they used to be? Is there more government scrutiny with and somethings like that? Or again, do you think this some of the struggles maybe your peers have had with shorter length of stay and getting bottleneck referrals? Do you think that’s also temporary notwithstanding the demand issue, structural demand issue on the mortality? Do you see anything with referral networks, length of stay, that kind of thing changing?

Dirk Allison: Well, I think we saw during the pandemic that our length of stay was challenged. That was the industry probably due to what Brad mentioned earlier, and that is we were receiving the hospice patients that were coming on board over the last couple of years seem to have been later in their stage of — in the hospice stage. So their length of stay, once we came on service tended to be shorter than what we had seen historically. The question will be, will we start to see that longer length of stay as the nursing homes, the SNFs get back to after the emergency is declared over. Will it get back to more of the normal approach that when we receive clients straight from a nursing home, the length of stay for those clients tended to be longer.

If you look at the last couple of years, we’ve still received a lot of hospital hospice referrals and their length of stay has not changed a great deal, but those tend to be the shorter length of stay patients. So our belief is we will start to see that change over the next year or 2. But as to what point it really reverts back to a more normalized level, that’s still a question for us.

Operator: The next question comes from Matt Larew with William Blair.

Matt Larew: I wanted to follow up on the comment about home health rates it’s been on the Medicare Advantage side, been a theme for a number of the companies in the space and for years really in terms of getting adequate reimbursement. You referenced your leverage point around Personal Care. But just curious maybe what percentage of your book of business today, you feel on the MA side, you feel like you’re getting adequate reimbursement, what’s unique about the situation and how you’re approaching payers today that might be different than 1 or 3 or 5 years ago?

Brad Bickham: Well, I think when you look at the MA business, we’ve had purposely kind of slow down some of the referral volume that we saw in Q4 and really to get the attention of some of the payers out there. We have found though, once we start having conversations with them they understand some of the challenges that we won, we haven’t really revisited these rates in a while. We’ve had certainly some inflation around wages that need to be addressed. And if they want to have adequate coverage for their beneficiaries, they need to do something about the rates. So we’ve had some success. I think the way we’re approaching is let’s try to get some near-term wins, let’s focus on if we’re on a non-episodic let’s get those non-episodic rates adjusted, right to where we’re at in a position where we can start taking on those referrals, and they become profitable for us.

And at the same time, let’s look at the longer-term solution, which is honestly, we need to move towards an episodic type rate that is more comparable to Medicare fee-for-service. So we’ve had some good traction with the MA plans, both on the near-term solution, but then also on that longer-term solution in investigating and looking at episodic because I think they realized this isn’t — I think we’re kind of reaching a point where if they want to have the coverage that they need, they’re going to have to adjust rates. Also, I think they’re looking for we’d like to partner with people that we can look at potential value-based types of arrangements. So I think that bodes well for us, particularly where we have the personal care footprint that complements the home health footprint to be able to do something creative on the rate side.

Matt Larew: Okay. And then following up on some of the investments you made in terms of candidate tracking and both to engage the potential higher than decreased time to hire. Is there anything you can maybe quantify for us in terms of how that’s improved the metrics you track on the hiring side? And then referenced rolling it out to all your sites in €˜23. So maybe where that roll out today? And what’s kind of the course of rollout over €˜23, just so we could think about how that might continue to improve throughout the year.

Brad Bickham: Yes. So on the candidate tracking system, we initiated it first with our clinical side, lower volume just to make sure we get kind of address any issues or bugs in the system. That was successful earlier this past year by about midyear. We then piloted at several of our personal care sites actually kind of split it out a couple of locations in each region. And I wanted to spend some time there because if you look at just volume of hiring that we do on the personal care side is significant. So we wanted to make sure that the system was working as planned. And so we’ve had those rollouts have been successful. We’re now ready to take it to the rest of the personal care locations, which we’ll do over the next probably 2 quarters to get all of the regions on the new candidate tracking system.

It’s pretty intuitive. It takes a little bit of training but pretty straightforward. But what we’ve seen is, one, increase in candidate flow to start with, but we’ve also seen that reduction from the time that someone submits an application to their actual hiring. And it’s been — depending on whether it’s a clinical services or PCS, we’ve seen anywhere from 1 or 2 days savings to versus really on the PCS side, where we’ve seen probably 4 to 5 days acceleration of that process.

Operator: The next question comes from Joanna Gajuk with Bank of America.

Joanna Gajuk: I’m sorry if you mentioned this earlier, but actually, I just want to follow-up on the last commentary did you give some stats in terms of your net hires in your personal care, how things are trending in Q4 and into Q1?

Brad Bickham: Yes. So if you look on the clinical side, we actually had a nice net hire. We added probably about 80 net hires on the clinical side, primarily on the hospice front, our hiring on PCS. Certainly, if you look year-over-year, it was, I think, about 10% greater than it was prior year, sequentially down a little bit. That’s mainly because of the holiday season. You see some less slowness in Q4. Good to see our January and February numbers look solid. So more in line kind of with the Q3 type number. So good hiring momentum on the personal care front. And again, as we said, the clinical hiring has certainly improved really since kind of midyear last year.

Joanna Gajuk: Okay. That’s helpful. And I guess I’ll say on the personal care, so you mentioned some positive trends there on rates, but also on the volumes, the hours per business to improve sequentially. As we think going forward about the following quarters. Is it fair to assume volumes in the normal situation should be growing sequentially over the quarter? Or is there some seasonality in the business?

Brad Bickham: No. I mean I think there tends to be a little less seasonality related to personal care. I mean where you have seasonality primarily is if you have a depending kind of winter storms can affect it. A little slowness and it tends to be, frankly, in Q4 around December and the holidays. But we saw, in spite of that, some nice growth. So Q1, I think when we look at Q1, Q2, Q3 should be nice, steady growth with the hiring numbers that we’re seeing.

Brian Poff: Yes. Keep in mind, Joanna, just to piggyback on that a little bit. So in Personal Care, a lot of our markets, if we have missed visit things, we have the ability to make those up and reschedule those on different days. Again, that’s market to market. So it’s not always a guarantee, but we do have a little bit of flexibility if we run into some of those things. There’s a little bit of ability to work around those in certain spots.

Joanna Gajuk: And I had a follow-up on the cash flow, which you mentioned it was very strong. You’ve included some of the maybe, call it, onetime type funding your receivable, it’s not repeatable. But how should we think about operating cash flow for this year versus this $105 million? How much should we exclude kind of as a onetime not repeatable? And where would you think you could land for this year for cash flow?

Brian Poff: Yes. If you look at 2022, so it was $105 million, but if you kind of back out the net positive impact from the ARPA funds and then you back out kind of those working cap changes that I mentioned in my comments was around $19 million. So you back those out, that’s $27 million, you probably would have been more in the $75 million-ish, $80 million range off of our EBITDA of over $100 million. So that’s a pretty strong conversion rate still. So I think to expect something more in that range would be more probably opportunity for 2023. I think €˜22, we’re not going to continue to see $20 million in net working cap improvement even as we grow. That’s probably more of a onetime thing. But that 75% conversion rate is probably something you should expect on a consistent basis.

Joanna Gajuk: This is great. That’s helpful. And the last one, a follow-up. So you were talking about working with the other home health — sorry, on the rates, working with the Medicare Advantage plans. I don’t remember, did you disclose, can you tell us what is your mix of Medicare fee-for-service versus the Medical Advantage previsit versus Medicare Advantage episodic type of contracts volumes like percent of visits.

Brad Bickham: Yes. We haven’t disclosed that in the past, but I mean we’re probably a little over half of our businesses in Medicare are episodic and a little less than half is non-episodic. And again, we’re working on that mix and certainly made some good progress in Q4 related to that.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Allison for any closing remarks.

Dirk Allison: Thank you, operator. I want to thank each of you today for your interest in Addus and for being part of our earnings call today, and we hope you have a great week. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.