Good morning. Welcome to Oppenheimer's 36th Annual Healthcare Conference. I am Michael Wiederhorn, Healthcare Services Analyst. It's our pleasure to introduce Addus HomeCare and Chairman and CEO, Dirk Allison, and Chief Financial Officer, Brian Poff. Guys, thank you for joining us this morning. We appreciate your time.
Thanks, Mike.
Thank you.
We'll start, you know, kind of with a broad level question here. We'll fire right into it. You know, maybe just start talking about how you feel about, you know, the business exiting Q4 from a fundamental standpoint.
You know, Mike, we came out of Q4 in really good shape. As you saw with our announcement of our earnings for Q4, we had a good quarter. We're in the process, as you know, of transitioning from Brad Bickham to Heather Dixon, and that's gone very well. The operations team has done well. Of course, as you all know, any time during the fourth quarter, you have the Thanksgiving holiday, then you got Christmas and the various holidays, as well as New Year's. You always have those challenges of scheduling and hiring. In our fourth quarter, we saw our hiring numbers down just a bit, not enough to be a concern, but just a bit due to scheduling of getting people in.
As you fast-forward into the first quarter, which is always something we look at, we really had a nice start to the quarter. It has basically continued through the quarter. We've had some challenges, as we mentioned on the call, late in January and early in February with some of the weather aspects, which I know some people are actually experiencing again today. The team has done a great job. Our hiring numbers have been up in the first quarter. All in all, if you look at where we think we were coming out of the fourth quarter into this year, we were very excited about our position. It really, we believe, sets us up for a nice 2026.
That's great. When we start thinking about your business and we think about, you know, your same-store targets of a 3%-5% same-store growth for 2026, what do you see as the breakdown between rates and volumes? The second part, can you talk a little bit more about your volume growth expectations going forward from there as well?
Yeah, I can start with that, and then Dirk can talk maybe about the volume side, Mike. I think the way we look at it for 2026, I think with some of the rate support that we've seen, you know, Texas kicking in in September of last year, we got another rate increase from Illinois earlier this year. We're gonna get a New Mexico rate increase, that'll kick in for us later in the back -half of 2026. I think on the Personal Care side, you know, we're anticipating, we've always talked about, you know, 3%-5% as kind of the normal target.
We think with some of the rate support we've seen, we'll probably be, you know, at or above the top end of that range for the better part of this year. The way that'll break down, you know, we've been targeting 2%-2.5% just pure volume or hours growth year-over-year. We've been squarely in that range or at the top end of that range for the last few quarters. We would expect to see that to continue, and the rest of it being rate. Then I think on the skilled segments, you know, the way we've always talked about those, you know, hospice had a great year last year.
You know, double-digit plus increases, where we're seeing, you know, 2.5%-3% rate increases from them from CMS every year. I think we would expect to see that moderate back down to what we would expect to be probably more upper single digits, probably seems more reasonable long term. Then Home Health, you know, we've had some volume, you know, challenges there. I think we've made some changes in personnel and leadership that we expect will pay some dividends, and hopefully will get them into a consistent rhythm of seeing some volume improvement there as well. With some of the rates in Home Health, you know, being flat to down, you know, we probably wouldn't expect upper single digits, but maybe mid-single digits from Home Health.
Yeah. If you talk about the volume issue, you know, there's two things we look at at volume. It's more hours for the patients we serve, and then it's new patients, obviously, the new ADC that comes on board. You know, from the standpoint of the first one of those, with our care app and some of the things we've really done with our operating team over the last two years or so, we've really seen nice incremental growth in our hours per consumer on the Personal Care side, which is really the part we're talking about right now. That has continued. We continue right now to roll out. We'll talk a little bit. I think Evan might have some thoughts later.
When you think about ADC in the Personal Care space, that's been a little challenging over the last 18 months to two years, and we've talked about it most of our calls. When the states had to go through complete redetermination, it caused these challenges, and we saw a period of time where our big states, and if you talk about them there, it's New Mexico, it's Texas, it's Illinois. Those are the ones that really move the needle.
We saw where our discharge started to exceed our new adds, and that really came about by, you know, the redeterminations were not giving us the new admissions quite as quickly due to some whether it's personnel not having enough people look at the new admissions and having to focus on a short timeframe of making sure they got through their complete redeterminations as the government had asked them to do. The good thing is in those two states, New Mexico and Texas, two of our largest states, we've seen that change now. We're now into where our new admits and new starts have exceeded our discharges for two or three quarters now, and we're starting to see our census growth for a period of time.
We had some sequential census growth. We dropped a little bit in the fourth quarter, but we expect that during 2026, you'll start to see that sequential growth improve, and you'll start seeing some overall year-over-year growth improve as we come around to some of those comps that aren't quite as aggressive as they might have been before. The one state we're still working with, obviously to see, is Illinois. For whatever reason, Illinois has been a little bit behind the curve. That being said, we are now starting to see our admits exceed our discharges and moving up on starts of care coming close to that.
We believe over the next couple of quarters, you will start to see, as we wanted, not only sequential ADC growth but also year-over-year ADC growth in the Personal Care side, which again, is something we're really focused on as a team.
Perfect. You mentioned the caregiver app. You know, specific to that, what have you learned in Illinois and talk about the impact of the rollout to New Mexico and Texas, and how should we be thinking about the, you know, the app going forward?
Yeah. You know, I think the app, it was something we started working on a number of years ago and rolled it out to Illinois, obviously, as our biggest market. What we saw was the, first off, the rate of penetration with our caregivers kept growing to where we're a little over 90% of our caregivers, utilize the app in Illinois. It's not a requirement. It's something we do to make their life easier as well as to help us. We put a number of things on the app to make sense for them. They can check their hours that they're gonna get paid on this next paycheck, which is very important to make sure they're correct.
They also then can tell us they want additional hours, and then we can use that app to help us schedule those hours for them to give them more availability of work. That's proven to be quite effective in Illinois. We have seen our rates of hours served go up. We started about a year ago or so, maybe just a little less, moving that into New Mexico. Every state has its different challenges because, again, each state has different rules as to what you have to do. As we started in New Mexico, right about that time, we did the Gentiva transaction, and Texas has a great opportunity for us to increase our hours there.
Right as we had started rolling out New Mexico, we also decided to go ahead and start working on the Texas rollout, and we've now, the last few months or so, we've started rolling out into Texas, which we believe both of those markets, if they see similar dynamics to what we saw in Illinois, you'll start to see their hours per caregiver start to gradually increase, which will help our, obviously, our 3%-5% growth rate stay up at that higher end. At the same time, focusing on, as we've said, the ADC growth, which gives us new patients going forward to apply the app to. It's been a really nice addition.
I think our caregivers have appreciated the fact that we're trying to give them more control at their fingertips, and it's worked well for our team, operations team, as they try to schedule more hours.
Perfect. Shifting gears a little bit, you know, when we talk about, you know, think about Medicaid, OB3. Can you talk about the outlook for Medicaid more broadly under OB3? And how should we compare states that expanded Medicaid, like Illinois, to your non-expansion states? Kinda what are your thoughts around that and kinda what's, you know, the outlook?
Yeah. I'll start, and Brian can jump in with his thoughts. You know, I think , obviously , no one's fooling themselves when we say that with OB3 and the current administration, there's been some challenges with Medicaid. Some of the rules they've put through that we're gonna see affect, whether it's the provider tax or other issues, are certainly out there. I think the thing that probably is misunderstood is that companies like ourselves are not really the ones that seem to be in the crosshairs of this particular issue. Our industry is not, our part of Medicaid has not largely been challenged.
We could be tangentially affected by the fact that if, say, provider taxes that start next year or the year after cause the various states to have some challenges, then maybe they're gonna look for ways to save money in their Medicaid program. We believe that's where there's just a disconnect to where Addus operates because, you know, for us, we operate in a low-cost environment for taking care of a population base in a state that is growing and is costly. The over 65 population base really for us, it's in the PCS, it's probably more in the 70–75 year age group.
These are individuals that if they're not able to stay at home with somebody helping them with activities of daily living, it's not a matter of just saying, "Okay, well, they just don't get the service." They're gonna end up somewhere where they have their needs covered because, you know, once you start losing your ability to do certain things in these activities, you generally, don't get that back as an elderly individual. If they're not able to stay at home with care through Addus, they're gonna end up potentially in SNFs, where it's in most states, New York was probably the exception, but in most states, you're gonna put somebody in a nursing home that's gonna be 2x-3x more costly for the Medicaid program, in the various states.
For us, we believe, and we've spent years talking to state's leadership about this, we are an opportunity to try to control costs in the healthcare environment. Now, as you shift people, try and keep people out of nursing homes and keep them at home, the absolute dollars spent in our industry have gone up over the years, and I think that's what some of the administration has looked at. If you look at the alternative to that, you would have had a much higher growth rate in the SNF side of the equation. We think we're in pretty good shape. We have good relationships with our states.
We're able to talk to them about what we can help them do if they get challenged on their Medicaid. We don't believe it's a big issue for us at this time. Brian, you can talk about some of the states that expanded and didn't expand.
Yeah, I mean, I think that, Mike, obviously, the keys for us, you know, nothing in OB3 directly impacts our services. I think the thing that we'll look at, as Dirk referenced, is maybe some of the pressures on state budgets when some of those things, you know, come into play here in a year or two. The states that took advantage of the expansion are gonna be impacted. The states that did not, you know, will not really see that type of impact. For us, Illinois , obviously is one that did. We all know we've been there for 40+ years. I think they're very appreciative of the Personal Care industry and what they do.
They're the only state that we have that actually has their own program outside of Medicaid that they pay for out of their general revenue fund to put some of these people into our level of care that maybe aren't quite qualified for Medicaid today, but they think, you know, will be fairly soon. It also saves them some money from them spending down and getting into a nursing home, as Dirk was kind of talking about. We think there's a good appreciation there. We have good relationships there. You know, Texas and New Mexico, two states that did not take advantage of the expansion. You know, Texas gave us a nice rate increase each of the last two cycles. They meet every two years.
New Mexico, you know, we were looking to potentially last year hope to add on the rate, but we were, you know, optimistic that maybe they would readdress that this year. We've heard that they will be giving a rate increase this year that'll kick in the back half of the year. I think for us, our expectation going in is that maybe you'll see, you know, a period of time where maybe you don't get quite the same cadence of rate support in certain states. I think it's been pretty nice for us to see, you know, some states continuing to give additional, you know, rate increases for our services.
Illinois this year, you know, in the original budget that Governor Pritzker has put out, you know, does not include a rate increase for us for the next fiscal. I think that's similar to what we saw last year, as well. We ended up getting something at the end before they went final. Not to say that necessarily will happen this year, but something obviously that we'll watch and our lobbyists and folks in the state will be having conversations with them about.
Okay. One topic that keeps coming up with investors is fraud and abuse. There's obviously been a lot of noise from this administration talking about fraud and abuse across the states and Medicaid, Medicare. You know, what gives you comfort that you won't see some of these impact from investigations or regulatory changes or, you know, change in the funds flow to the states? Kind of what's your thoughts around that and kind of, you know, to alleviate maybe the street? Then number two, how do you think this is impacting your competitors and the mom-and-pops and other players in the sector?
Well, first off, let us say that most of us in the industry are very supportive of making sure that fraud and abuse is not an issue in our industry. We know there's room for that, and that's why when we as a management team started back in 2016, one of the first things we did that year was we created a very healthy and strong compliance department focused on making sure that we were following the rules. When we found occasions where maybe we didn't have the proper paperwork for whatever reason, we paid it back immediately to the state or the federal government to make sure that they understood that we believe very strongly in compliance.
If you look just at Addus, we would say that we believe very strongly we're in compliance, as best as possible, and it will not affect us from an operations standpoint if they continue their focus on home and community-based care. We're comfortable with that. That being said, as you said, could it affect funds flow to the states? It could. I mean, obviously we've seen some discussion of Minnesota, and other markets that the administration has decided they may try to do some things with to try to ensure that fraud and abuse is taken care of. Our belief is, though, again, in most of our states in which we operate, we believe there have already been a lot of reviewed fraud and abuse.
There's some stringent rules in all three of our big states and most of the states in which we operate, so we're pretty comfortable. Also, there's no outlier. As you realize that, New York is really the biggest outlier we ever saw as far as the cost of the program to the state and the federal government, and we left that state over a year ago, again, due to the fact that there were things we just didn't feel like long term that could be viable for us. So as we sit here today, we believe that the focus on fraud and abuse should not be an effect to Addus, and really too much to the industry overall.
Now, your second part of the question is really a good one. That's the focus. Not everybody spends the dollars we do in making sure that we have a strong, quality and safety compliance department. That's just the way small mom-and-pop s don't always have the funds that we do to invest in things such as that. I think as you see more focus in some of these markets on fraud and abuse, what you could see is that it will be, of course, a dynamic where some of the folks that maybe can't do the things needed to effectively operate in this market around that issue might decide that it's time to consider moving on and letting somebody else take their business.
That could affect our ability to do smaller deals. Some of the deals we've done in the past year or so, we're starting to see some opportunities for small acquisition opportunities coming up, and some of that could be driven by the fact that people are concerned. Again, from Addus' standpoint, we're very comfortable. It doesn't mean that we are perfect, but it does mean that we go spend a lot of money and try to do what we can to make sure that any issue that's a problem is taken care of with the state and federal government right up front.
No, that's perfect. You were mentioning you have potentially smaller deals. You know, let's move over to M&A. You know, what are you seeing in the pipeline? Are you seeing more of these smaller deals come out? Are you still more focused on the PC S side, or are you seeing skilled deals as well? You know, in terms also, if you can discuss your appetite as well.
Yeah, Mike, I think for the moment, we're probably primarily still focused on PCS. I think that's our best opportunity today. I think we continue to see things in our pipeline that are similar to the deals we did last year, you know, probably in markets that we're in, primarily, you know, creating more density at low multiples. I think Personal Care deals on the small end continue to be in the, you know, mid-single digits for really small ones. Maybe they go up into, you know, 7x-8x if they're a little more sizable. But those are the kinda things that we're probably looking at, I would say, early this year.
As we've kinda indicated previously, we think there are maybe a couple of larger opportunities that are private equity backed that might be available later this year that would obviously be ones that we would be interested in looking at. I think they're in geographies that would make sense for us. I think in the past, you know, some of the larger deals have had geographies that weren't desirable for us, particularly New York. The ones that we believe are gonna come to market later this year do not have presence in that area, so should be something that we hopefully will be able to be engaged on.
I think on the skilled side, I think where we sit today, you know, hospice deals, while we love the hospice business, obviously, hospice deals continue to be very expensive. I think if we can find things on the smaller end, maybe at reasonable multiples in markets where we have, you know, Personal Care or Home Health today, we think there's some advantages there. We would definitely look at those, but I think there's probably a limit to what we'll pay. On the Home Health side, you know, I think, you know, we'll obviously be very interested to see what the proposed rule looks like this year after kinda the back and forth we saw last year.
I think for the moment, we're probably in a similar position of, you know, we see value in Home Health, particularly where we have, you know, hospice and Personal Care and that overlap. If there's, you know, deals that make sense in those markets at reasonable multiples, those are things that we'll continue to look at, but probably nothing on the material side in Home Health for the moment.
You know, you mentioned about multiples. Valuation aside, what would be the ideal type of strategic acquisition? Are there any new states that would be attractive for you to enter?
Yeah. I think for us, the ideal acquisition, ideal for us meant , I just kinda have to put it out there into the atmosphere, it would be something that has all three lines of care. We've done those in the past in states that we're in or multiple states that we're in. There aren't a lot of those that would have, you know, Personal Care, Home Health, and hospice. You know, we definitely see, and part of our strategy is the revenue synergies between those three lines of care in that population. If we could find deals that, you know, would bring all of those into a market in a sizable way or in multiple markets, you know, those would be things that we'd be probably most interested in.
I think for us talking about, you know, markets, I think we're mostly focused on the markets that we're in today. I think there could be a few additional states that would make sense for us, maybe that are adjacent to states that we're in today. The keys for us there are, you know, population density. We look at, you know, support, particularly for Personal Care services, the status of the state's budget, are they fiscally responsible? Have they been supportive, but are they in a good position as well financially? If there's Managed Medicaid presence in those markets, that typically is a positive for us.
While a lot of states today don't give, you know, narrow networks or preferred providers or ability to negotiate rates, we can do that in New Mexico today, but most don't. You know, we think down the road, you know, those could be some opportunities that would benefit us if we had size and scale in certain of those markets.
Perfect. You know, speaking about a previous deal, you know, can you give us any color? You know, how is Gentiva integration of that, what you're seeing in terms of margin ramp there? Any other color that you wanna kinda mention?
Yeah. I can talk a little bit about that. I think, you know, the integration largely, you know, has been complete for some time. I think bringing them on board, you know, we brought them in to our operations. It was a carve-out of a larger organization, so there wasn't a lot of, you know, back office work to do, synergies to be had. They kinda just rolled into our operations. But I think it's gone very well. I think the teams have integrated very well into our culture. They had a similar culture, I think, in their division.
I think they maybe just weren't, you know, probably quite as used to getting some attention as they should have been in a larger hospice organization. I think coming into our organization has been a benefit to them. I think from the margin perspective, it's been as expected. You know, probably not gonna see, you know, opportunities for necessarily margin expansion out of Gentiva. I think Texas coming in as the largest state, their margin profile, I think, as everyone knows, is a little lower than typical, but has been very steady.
I think looking forward, the one thing that we've talked about, they are on, you know, their EMR. We are gonna be bringing them into our Homecare Homebase environment at some point in the future, probably late this year to sometime in 2027, and we've talked about some redundant cost being eliminated at that time. You know, we do see some synergies still to come, but that'll be a little bit later as we've talked about.
Kind of looking at from a macro environment, you know, kind of obviously, we, you know, oil and gas is definitely a hot topic right now. You know, can you remind us what the direct exposure to, you know, gas is for your business?
Yeah. Pretty minimal. Keep in mind, most of our mileage rates and things like that, especially through our, you know, union folks are run through collective bargaining are kinda static, but it's less. Our total mileage spend is less than 1% of our revenue. Pretty small overall.
Perfect. All right, moving on to labor hiring. You know, how should we think about the labor market outlook for hiring, and do you see any competitive issues on the PC side due to immigration or state specific issues there as well?
You know, if you really look at our hiring, I think we mentioned on our call, the first quarter's actually gone fairly well, except for two, three weeks when we got hit with some weather. Our hiring per day numbers are back up, which is good to see. For our standpoint, they're at a point where we can hit our 3%-5% growth without any real issues. Are there areas where it's a little tougher? I'll say probably from the PC aspect, it's been pretty solid, most places that we've been looking at to hire.
I think the challenging aspect, if you think about our hiring at all, is maybe in some of the bigger markets, more in the clinical side, where that's where you see for us a lot more direct competition where nurses, CNAs, others have opportunities maybe to do other things. While that has eased tremendously over the last three or four years from what we saw when the pandemic moved through, there are still a couple markets that we have a little challenge. Overall, hiring has really been a solid beachhead for us the last year to 18 months.
Anything specific to the skilled side as well or no?
Skilled side has gotten much better. There are still challenges. Listen, nurses are tough to hire just in general, just because of the number of nurses and the need for nurses across the United States, but we've done pretty well. We've been able to, you know, mainly in our Home Health business is smaller, as you know, but our hospice business is a little larger, and we've been able to do a good job of making sure that in those positions that we need to fill, we've been able to do that. Right now, I would say hiring overall is not our top concern.
Perfect. Yeah, we're getting close to the end of time here. One question that we're gonna be asking every company today, you know, kinda what are you seeing as the role of AI in your business model or as an opportunity there?
You know, we tend to be very careful with things like that, to just make sure we understand how it can help us. We are using AI on our hiring side, in our , kinda in that process to get people on board. We've started experimenting with that, and it's come into some of the systems we use, it's really helped us. We have created an AI committee that is made up of all the departments in the company, and we're focused on how do we identify areas where AI can be a benefit to us and then move forward in that direction.
You know, you probably will see a lot of work around back office situations, not so much eliminating positions, but maybe limiting the number of positions as we grow, being able to become more efficient as we are able to use AI going forward. It is something which is definitely on our mind, and it is something we talk about at each of our bimonthly to quarterly operations meetings that come in. At this point in time, we're using it in that one process in payroll and recruiting right now and looking at other areas.
One last question before the end here. Is there anything you believe you wanna point out to the investor community that you think is misunderstood or being underappreciated by the marketplace?
You know, Brian and I have been out a lot. Brian's done a good job of talking to shareholders. You know, I think the biggest issue out there, we've already touched on, Mike, and that is, you know, government interference, especially with the administration that's out there today, really focusing on Medicaid and the various aspects of Medicaid. Listen, I'm not saying it's not an issue. We all know that anytime the government looks at things, you gotta be careful and prepared. But I think it's really probably misunderstood how it could affect our industry. Again, we go back to what I said earlier. This is a population that has to have care.
It's not a choice that you say, "I do or don't want care." If I need help bathing or feeding myself, getting to my doctor's office, they're gonna need help either with a company like ourselves or, as we said, going into a SNF facility where it can be done at a much higher cost. Again, we are absolutely aware of some of the challenges that the current administration has thrown our way, talking about Medicaid, but we believe strongly that what we do is a very valuable service and is much needed and will continue.
The states support it, which I think that's probably one of the things people need to understand is the states in which we operate are very supportive of this program, which I think will help as we deal with the federal government.
Well, we're done with time. I wanna thank you very much for your participation today, and really, you know, it's great to hear your thoughts on the industry and obviously Addus specifically. Dirk and Brian, thank you very much for today.
Thanks, Mike.