Civitas Solutions (CIVI) Q4 2017 Earnings Conference Call Transcript

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Civitas Solutions (NYSE: CIVI)

Q4 2017 Earnings Conference Call

Dec. 12, 2017 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, everyone, and welcome to the Civitas Solutions Q4 and Fiscal Year 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a call to a specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions.

To ask a question, you may press *, then 1 on your telephone keypad. And to withdraw your question, please press *, then 2. And please do note that today's event is being recorded.

I would now like to turn the conference over to Dwight Robson. Please go ahead.

Dwight Robson -- Chief Public Strategy and Marketing Officer

Thank you, William. Good afternoon and welcome to Civitas Solutions Inc.'s Fiscal Fourth Quarter and Full-Year Earnings Conference Call. I'm joined by Bruce Nardella, president and chief executive officer; and Dennis Holler, chief financial officer. Before we begin, if you do not already have a copy, our press release with financial statements can be found in the Investor Relations section of our website at

Please be advised that today's discussion includes forward-looking statements including predictions, expectations, and estimates about our future financial performance, our investments, and our cost restructuring programs as well as the impact of acquisitions, rate changes, and legislative initiatives and other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business which could affect these forward-looking statements. Forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements we make today. Risks and uncertainties that could cause actual results to differ materially from these forward-looking statements are described in our Form 10-K filed with the SEC earlier this afternoon.

We're not obligating ourselves to release any update to these forward-looking statements in light of new information or future events. As a result, we caution you against placing undue reliance on these forward-looking statements and would encourage you to our filings with the SEC for discussion of these factors and other risks that may affect our future results or the market price of our stock. We will be referring to certain non-GAAP financial measures such as adjusted EBITDA, adjusted EBITDA, and free cash flow because we believe such measures are appropriate ways to discuss our financial results. However, please remember these are non-GAAP financial measures and should not be considered alternative to other GAAP measures such as net income or income from operations.

I refer you to our press release issued today detailing our fiscal fourth-quarter and full-year 2017 results for comparable GAAP measures.


With that, I'll turn the call over to Bruce.

Bruce Nardella -- President and Chief Executive Officer

Thank you, Dwight, and thanks, everyone, for joining us on today's call to discuss our fiscal fourth-quarter and full-year 2017 results. Dennis is going to be providing more detail on our financial performance a little later in the call but first, I want to briefly comment on some of the highlights of the quarter and the full year and provide an update on the external operating environment. While we are pleased with the considerable progress in the fiscal year 2017 executing on our long-term growth strategy, we are disappointed with fourth-quarter results, which were depressed by unexpected items related to the significant restructuring of our finance leadership and back-office operations of our CareMeridian SRS business, and just to remind people on the call, CareMeridian is the more medical service within our specialty rehab services business and it is about one-third of the SRS revenue. Dennis will provide more details on this transition and its impact in his comments but as we move forward, we're pleased to have this restructuring behind us, as it has made our CareMeridian business and the company as a whole a lot stronger and more efficient.


During fiscal 2017, we acquired 11 companies with total annual revenues of approximately $79 million. We continued to invest in new-start opportunities to drive organic growth. We achieved strong growth in revenue from our SRS operations and expanded our ADH platform to a third state. We also successfully implemented efficiency measures across the company to reduce administrative cost and partially mitigate pressure from labor and healthcare cost and we continued to generate strong cash flow from our operations.

To briefly recap financial results, net revenue for fiscal 2017 was $1.47 billion, an increase of 4.8% over fiscal 2016. The growth in net revenue was negatively affected by the divestiture of our at-risk youth operations in six states during fiscal 2015 and the first half of fiscal 2016. Excluding these divested operations, net revenue increased 5.3% in fiscal 2017. Adjusted EBITDA in fiscal 2017 was $160.8 million, essentially flat compared to fiscal 2016.

Regarding the fourth quarter, while net revenue increased 5% over the same period last year, our fourth-quarter adjusted EBITDA was again essentially flat. We closed fiscal 2017 with our largest acquisition since 2003 and began the new fiscal year strong with the completion of an even larger transaction. Moving forward, our M&A pipeline is solid with attractive opportunities in our IDD, SRS, and ADH service lines, but given the flurry of activity since June with 11 acquisitions completed in five months' time, our pipeline is much more weighted toward targets in the earlier stages of development. As a result, while we don't guide to levers of growth, we think it is prudent for investors to moderate expectations for acquisitions for the balance of fiscal 2018.

Beyond the $76 million deployed year to date, we suggest that the typical base case assumption of $25 million in acquisition capital deployment, which we understand has typically been used by analysts to build their models, is a little aggressive. We obviously would like to do more deals if we can and we will continue to be as opportunistic as possible. We were pleased to complete the acquisition of Mentis Neuro Rehabilitation in October. Founded in 2009, Mentis is a leading provider of specialty rehabilitation services for individuals recovering from acquired brain injuries in the state of Texas and it has a growing presence in the state of Ohio, with revenues of approximately $36 million for the 12-month period ending August 31, 2017, and a strong organic growth profile.

Mentis has a diverse group of referral sources drawn to their clinical expertise, ability to serve individuals with complex challenges, and proven clinical outcomes. The Texas market, in particular, is attractive for SRS services, as state law requires that insurance carriers provide coverage for cognitive rehabilitation. More important than its size, Mentis is a high-quality provider with clinical expertise and superior outcomes that make it an ideal fit with our NeuroRestorative SRS operation. Like NeuroRestorative, Mentis has demonstrated that its clinical model of care helps individuals served to achieve reductions in disability levels and a higher quality of life.

The other sizable acquisition recently completed was Habilitative Services, a Minnesota provider supporting individuals with intellectual and developmental disabilities through a continuum of residential and periodic services. Our company has deep roots in Minnesota, our largest state, through our REM operations, which this year are celebrating 50 years as a leading provider of community-based services for individuals with intellectual and developmental disabilities. I'm confident that each organization can learn and gain strength from the other and in the process expand our reach and impact in Minnesota. The unprecedented deployment of acquisition capital in recent months provides significant embedded growth for fiscal 2018 which, combined with our focus on achieving continued G&A leverage, will serve us well during a period in which we expect our organic growth will remain pressured, particularly on the bottom line, as we continue to manage through a very tough labor environment and address rising healthcare cost.

To drive organic growth, we will continue to invest in new-start initiatives across, especially in our core IDD and higher growth SRS service lines. In total, we expect to start approximately 35 to 40 new programs, including the addition of about 75 five or more beds in our NeuroRestorative SRS operating unit to support growing demand for high-quality life-enhancing services for individuals who have experienced a brain injury.

During the fourth quarter, we recorded non-cash goodwill and intangible asset impairment charges related to our adult day health business, which Dennis will speak to in greater detail but before he does so, I want to make a few comments about the development of this relatively new and fast-growing service line. We made the decision to enter the ADH business in 2014 because we believe that was an excellent complement for a mix of health and human services. While our execution into this new service line has not been perfect, the fundamentals underpinning it remain strong. The ADH market is large with demographic tailwinds driving increased demand.

Governments have long recognized the value of ADH services and they have established a track record of funding them and these services fit squarely within our mission of providing the cost-effective support necessary to help individuals maintain their independence in their communities. Today, our ADH services have a margin profile consistent with our core IDD services. We have certainly learned a lot about this business during the last three years and amended our view, at least in the near term, on the pace of organic growth. At the same time, we have made significant investments in our ADH management to position this service line for continued high growth and, as a result, we believe we could see some margin improvement over time.

While we expect near-term growth and ADH to be driven by acquisitions as we expand our geographic footprint, we remain bullish on this service and its potential in the years ahead to contribute meaningfully to the company's growth and development.

Now, I'll make a few comments about the external operating environment, which remained stable to positive in most of our 36 states. However, at this point, rate increases are fewer in number than recent years and more of them, including in the states of Arizona, California, and Indiana, have come to us with a mandatory pass-through to wages or in response to increases in the minimum wage. At the same time, we're dealing with rate cuts in a small number of states, most notably in Iowa, where a new tiered rate structure is being implemented effective December 1, 2017, and in Wisconsin, where a large MCO is seeking to negotiate lower rates with providers. In addition, a system change for IDD being implemented effective January 1, 2018, in the state of Pennsylvania will reduce our revenue despite an overall increase in state funding that could provide an opportunity for expansion over time.

In total, the impact from actions in the states of Iowa, Pennsylvania, and Wisconsin, all of which affect our IDD service line, could be $4 million in the fiscal year 2018 and has been contemplated in our guidance. In West Virginia, the lawsuit filed in response to the 2015 waiver redesign continues to be litigated and its ultimate outcome remains unclear, as does the potential timeline for a resolution. While we hope that this headwind is largely behind us, there is a risk that we could experience further decline as a result of a challenging labor market and the potential implementation of additional rule changes in service reductions next summer. Notably, however, the state officials recently announced that the performance of state revenues has improved and, as a result, unlike the prior two state fiscal years, the governor's administration doesn't expect to implement mid-year budget cuts.

Given the headwinds we face with regard to direct labor, healthcare, and the rate actions I just highlighted, we will continue to be aggressive with regard to opportunities to leverage our G&A. During fiscal 2017, we made excellent progress toward realizing companywide efficiencies under our cost restructuring program, saving $5 million in the year and far surpassing our goal of $2 million. We expect to realize additional savings in fiscal 2018 of approximately $3 million.

In summary, the fundamentals of our business remained strong and we're pleased that our fiscal 2018 guidance reflects very solid top- and bottom-line growth and maintenance of margin despite the challenging environment. We are well-positioned to execute on our long-term balanced growth strategy and fulfill our mission by providing high -quality cost-effective services to a must-serve population of adults and children in need of support. As always, I am very grateful to our outstanding work force and thank them for their continued hard work and dedication to our mission and to the individuals we are so proud to support.

At this point, I will turn the call over to Dennis Holler, our chief financial officer, to discuss our financial results in more detail. Dennis.

Dennis Holler -- Chief Financial Officer

Thanks, Bruce. As Bruce mentioned, our fourth quarter was depressed by unanticipated charges in CareMeridian, totaling $2.4 million that were not contemplated by our guidance affirmation after the third quarter. During the third and fourth quarter, we reorganized both our finance leadership and back-office operations for CareMeridian, including the centralization of all accounting and billing operations. Although this was the right move for the company, the change created more visibility and resulted in these unanticipated charges, which include increases to our accounts receivable reserves.

At this point, we do not anticipate any additional charges associated with this management change to affect our results in 2018.


I will now cover our annual results. Our net new revenues for the year were $1.475 billion compared to $1.408 billion in 2016. Approximately 60% of $66.9 million increase came from acquisitions, with organic growth making up the balance. Organic growth was negatively impacted by an increase in sales adjustments of $7.2 million compared to the prior year.

Approximately one-third of this increase came from CareMeridian. A key driver of our organic growth continues to be our new-start programs. The impacts to revenue and EBITDA in our results are as follows. New-start investments of $16.3 million made in fiscal 2012 and 2013 generated revenues of $81.8 million and EBITDA of $18.3 million in 2017.

Investments of $11.8 million that we made in 2014 and 2015 generated revenues of $51.8 million and EBITDA of $7.6 million in our current 2017. Finally, investments of $7.4 million in 2016 generated revenues of $15.6 million and EBITDA of $1.6 million in fiscal 2017. Finally, this year we invested $5.6 million in new-start programs.

Moving to the segment revenue. Excluding revenues from our ARY operations that we divested in 2015 and 2016, our gross revenues grew by 5.8% in 2017 compared to 6.3% in 2016. Taking all of our service lines together, this year's low was almost evenly split between an increase in services provided and an increase in average rate. In our IDD service line, which accounts for approximately two-thirds of our business, revenues increased by 3.4% over the prior year to $977.8 million.

About 62% of this increase was from organic sources with the rest coming from acquisitions. Average rates and service volumes for IDD both increased by 1.7% over the prior year. For our SRS service line, which represents a little more than 20% of our business, gross revenues increased by 9.4% over the prior year to $317.2 million. Over 70% of this increase was from organic growth, the majority of which came from new starts initiated in the last five years.

SRS experienced robust growth in both volume and rate with volume increasing by 5.4% and average rates increasing by 4% over fiscal 2016. Excluding the results of the ARY operations that we divested in the first half of fiscal 2016, ARY gross revenues increased by approximately 1% over the prior year to $142.1 million. Finally, our adult day health service line, which has grown almost exclusively through acquisition increased by $21 million or about 60% over 2016.

Moving to our consolidated adjusted EBITDA. Adjusted EBITDA for the year came in at $160.8 million, which is flat year over year. Our adjusted EBITDA margin as a percentage of gross revenue decreased by 50 basis points to 10.8% compared to 11.3% in 2016. Factors contributing to this decrease in our margin include an increase in sales adjustments of $7.2 million that resulted in a decrease of 40 basis points in margin compared to the prior year.

As I discussed earlier, about one-third of this increase was due to CareMeridian. Continuing the trend from prior quarters, direct labor continued to be a drag on the margin by 40 basis points. Increasing overtime and healthcare costs continued to drive this negative leverage, particularly in our IDD business. Consistent with recent trends, direct occupancy cost increased as a percentage of revenue by 40 basis points due to increases in rent, utilities and repairs, and maintenance expenses.

And finally, as a result of our focus on improving efficiencies and maximizing our cost structure, we reduced our general and administrative cost as a percentage of revenue in almost every expense category, the largest of which were salaries and occupancy cost. This resulted in margin expansion of approximately 60 basis points compared to the prior year.

Our net income for the year was $6.3 million, a decrease of $2.9 million compared to the prior year. Net income for 2017 was negatively impacted by a total of $31 million of impairment charges related to our adult day health business. Of this total, $3 million related to our decision to rebrand the business in 2018. The rest of the impairment charge, $28 million, relates to the write-off of the entire goodwill balance recorded to date.

The ADH segment has been assembled almost completely by acquisition and, as a result, any shortfall in projected cash flows for this segment when compared to the projections originally used to calculate goodwill for the component acquisitions will lead to impairment. This was largely the case here. Specifically, there was a decrease in profit projections for ADH's core business resulting from various operating challenges including the closure of one location and increasing healthcare cost and wage pressures. Secondly, we have significantly reduced the number of new starts in our model.

This change is based upon our updated view of the markets we are currently operating in and is subject to change in the future as our new management team gains experience and competitive environment continues to evolve including additional states that we may enter over time. This write-off, which was unanticipated, depressed our book income before tax and had the effect of pushing down our effective tax rate to 22.7% for the year, which is well below the modeling guideline of 40% that we provided at the beginning of the year. We will be returning to a modeling guideline of 40% for 2018. Disregarding the impairments in 2017 and 2016, earnings per share would have been $0.63 in 2007 compared to $0.70 in 2016.

Moving on to comments on free cash flow. For the year, the company generated free cash flows of $50.3 million, compared to $63.8 million last year. Most of the $1.35-million decrease was related to any increase in day sales outstanding on our accounts receivable to 45.2, days which represented a 2.2-day increase. In addition, cash taxes were $4.8 million higher, as the prior year was still benefited by net operating loss carry-forwards, which were not available this year.

And finally, capital expenditures were about flat as a percent of revenue with our prior year but on a cash basis, they were about $3.4 million higher. We deployed $82.1 million for 11 acquisitions this year, including $30 million for the HSR acquisition that closed on the second to last day of the year. This resulted in a $43.4-million decrease in our cash balance year over year to end the year at $7.3 million. At year-end, our net leverage was $3.6 times and pro forma for all of the acquisitions we have made to date including Mentis, net leverage would be 3.7 times.

Finally, as we have announced recently, in October we successfully marketed and closed a $75-million fungible tranche to our existing term loan. This debt was used to fund the Mentis acquisition. In November, we completed an amendment to our senior credit agreement which extended the maturity of our revolving credit facility to the same time as our term loan, which is in January 2021. This move effectively gets us more runway on our current capital structure, which we view to be favorable.


A few comments on the fourth quarter. Net revenues during the fourth quarter were $380.4 million compared to $362.2 million during the fourth quarter of 2016. Approximately 60% of the $18.2 million increase in revenues came from acquisitions with organic growth making up the balance. Organic net revenue results were negatively impacted by an increase in net sales adjustments of $3.4 million partially due to the higher accounts receivable reserves in CareMeridian.

Our adjusted EBITDA for the quarter came at $42.4 million, a decrease of $200,000 or 0.5% compared to the fourth quarter of 2016. Adjusted EBITDA as a percentage of gross revenue decreased by 80 basis points to 11% compared to 11.8% in the fourth quarter of 2016. Although the cost trends that persisted for the entire year continued in the fourth quarter including margin contraction coming from direct labor, occupancy and healthcare offset to a large degree by leveraging of G&A, the CareMeridian charges were the biggest driver impacting the quarter by about $3.1 million. In addition, the quarter-over-quarter comparison was impacted by $1 million of higher M&A transaction costs, a significant portion of this increase related to the Mentis acquisition which did not contribute to our results in the fourth quarter but will do so significantly in future periods.


Moving to the annual guidance for fiscal 2018. We are expecting net revenues of between $1 billion 570 million and $1 billion 620 million and adjusted EBITDA to be between $172 million and $177 million. In addition, we are providing the following modeling guidelines for fiscal 2018. The annual tax rate of 40%, depreciation and amortization expense of $80 million, interest expense of $36 million, average basic and diluted shares outstanding for the year of $38 million, stock-based compensation expense of $10 million and capital expenditures of 3.3% of net revenue.

And with that, I'll turn it back to Bruce.

Bruce Nardella -- President and Chief Executive Officer

Thank you, Dennis. And at this point, William, we can open the lines for questions.

Questions and Answers:


Thank you. We will now begin the question-and-answer session. To ask a question, you may press *, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press *, then 2. And at this time we'll pause for a moment to assemble our roster.

And our first questioner today will be Kevin Fischbeck with Bank of America/Merrill Lynch. Please go ahead.

Kevin Fischbeck -- Bank of America/Merrill Lynch -- Analyst

Great, thanks. I want to start with the adult day health business. The goodwill writedown, obviously you're saying your expectations for cash flow going forward are less than what you thought and the organic growth rate, I guess, in particular. Why has the [Inaudible] coming in lower than you thought? Are you seeing more rate pressure or are you seeing a demand issue? What's the cause there?

Bruce Nardella -- President and Chief Executive Officer

I am sorry, Kevin. This is Bruce. Could you just repeat that question? I didn't catch the last part of it?

Kevin Fischbeck -- Bank of America/Merrill Lynch -- Analyst

Sure. So, you took a goodwill writedown on adult day health business because of an expectation that organic growth rate's going to be less than what you had been assuming previously. Just wanted to get more color on why it's lesser. Is there more rate pressure on that business than you expected or is there more of a demand issue?

Bruce Nardella -- President and Chief Executive Officer

No, it has nothing to do with rates, thankfully, which is a good thing. As you know, we just recently broke into our third state. So, for the most part, we were in only two states and the opportunity is there, we still believe is there, but we have a lot more learning to do before we want to take on additional de novo expansion in those particular markets. That's Massachusetts, Maryland in particular and most recently New Jersey.

The demand is there, the rates are solid but one thing we found, for example, the investment required, it's much more expensive and it takes longer. So, just about halfway through the year we installed a new management team. They are getting up to speed very quickly and we're going to reassess our organic positioning and our ability to invest as they get more experience under their belt and we break into new states. So, that's where we stand right now.

Who knows what the future will bring.

Kevin Fischbeck -- Bank of America/Merrill Lynch -- Analyst

So, you seem to be thinking that the growth is a little bit more muted than you thought and that the cost from new starts is a little bit higher than you thought. Why is there still the kind of focus for capital planning going forward?

Bruce Nardella -- President and Chief Executive Officer

Because of the sort of demographic fundamentals, we think, remain very, very solid and specifically, there is a longer-term CAGR growth rate in this service line of about 5%. The aging of America continues. There seems to be a broad recognition among states that this is an effective service line in terms of quality outcomes as well as managing state's financial commitments efficiently and it fits squarely within our mission to keep people in their most independent settings and communities of their choosing. So, all of those things continued to sort of provide a very, very strong, I think, potential growth profile here.

And where we stand right now, we have a business that is very consistent with our larger service line. The IDD service line, I think, over time, as I mentioned earlier, we're hopeful that we'll be able to leverage our recent investment in the overhead and infrastructure and as we grow, hopefully, expand the margin.

Kevin Fischbeck -- Bank of America/Merrill Lynch -- Analyst

OK. And this may be the last question. You talked about how the margins were down, I think, 50 basis points this year. Do you have a nice breakout of some of the buckets, as far as labor cost pressures, [Inaudible] offsets, things like that? Do you have like a similar kind of way to think about the guidance for margins being flat next year? It sounds like you're expecting labor costs to be [Inaudible].

Can you talk about some of the other puts and takes that kind of allow you to get back to a flat margin for 2018?

Bruce Nardella -- President and Chief Executive Officer

Yeah, I'll take that and certainly, Dennis can add to it. The way we look at it is we are still going to experience some margin erosion because of labor and increased healthcare costs. We just know that that will be the case. Frankly, we're hopeful that it will be less we are accounting for margin erosion from that.

The really aggressive performance on our acquisitions though is bringing in revenue in the aggregate at higher margin business. That is going to help and we're going to continue with our efficiencies and continue to drive down energy G&A cost. And then finally, we're very aggressively growing our SRS business, as you saw, for the year about 9.4%. We believe that we're going continue that aggressive growth into next year.

So, all of those things put together are going to help combine to produce about a flat margin.

Kevin Fischbeck -- Bank of America/Merrill Lynch -- Analyst

OK. All right, thank you.


And, as a reminder, if you would like to ask a question, please press *, then 1. And our next questioner will be Richard Close with Canaccord Genuity. Please go ahead.

Richard Close -- Canaccord Genuity -- Analyst

Great. Thank you. I appreciate the comments on M&A and guidance there with respect to the upcoming fiscal year. As you talk about the pipeline and you say it's tilted more toward early stages, can you give us some additional commentary in terms of timelines on acquisitions, when they come into the pipeline, what's the duration that they might be in the pipeline? We appreciate, I guess, that it's robust now but just trying to gauge given this flurry, we should see some slowdown but could that accelerate as we progress in the fiscal '19.

Dennis Holler -- Chief Financial Officer

Yeah, sure, Richard. I would say this. We have not seen this concentrated amount of activity in the history of the company, 11 acquisitions in a five-month period of time, deploying last year $82 million and then coming out of the chute very quickly in 2018 with deploying $76 million. So, we have never seen this before.

So, in some sense, we're in uncharted territory. I wish I could give you a more formulaic answer to how long potential acquisitions are in our pipeline before they either fall off or across the finish line but I got to tell you I've been with the company 22 years, I continue to be amazed at how unpredictable it really is. As we just discussed, frankly, the Mentis opportunity came to us in relatively short order. It was not on our radar screen halfway through the fiscal year and it popped.

On the same token, other acquisitions sometimes are there for a period of two years. So, all I can say is that I feel that with the focus of our team here both in the field and in our corporate office, I'm confident that that pipeline will be repopulated and then we'll be able to execute and, as I said, continue to execute on acquisitions in the fiscal year '18 but just probably not at the pace, certainly not at the pace that we've done over the last five months.

Richard Close -- Canaccord Genuity -- Analyst

OK, I'm going to jump back to the ADH to follow up on Kevin's question. You talked about changing the management team there. What's the reason behind that? Are we doing something wrong? What caused the decision to switch out?

Dennis Holler -- Chief Financial Officer

Well, we really didn't change the management team, Richard. We created a management team. And sometimes this happens when you're focused on growing aggressively via acquisitions, which we have done here in the first three years. So, we had some good leaders at the center level but we were essentially trying to pull off this growth strategy with everyone sort of pulling together and along with their day jobs trying to grow this service line.

So, halfway through the year we said, "OK, that's it. Let's put full-time management." We redeployed people. They're 100% focused on growing this service line, learning it, and having it become much more productive for us. So, it was really more of the creation of the management team which came after we cobbled together a bunch of acquisitions relatively quickly.

This is not too different, if you think back, Richard. I know you have a long history with the company but perhaps even predating you, at first our SRS business was managed as part of our human services operation and then after a couple of years we decided to pull it out, shine a spotlight on it, give it its own management team and infrastructure and that's when we began to see it really take off. So, that's what we're looking to produce here.

Richard Close -- Canaccord Genuity -- Analyst

And then can you just remind us like when you purchased that business, I think, it was initially September of 2014, if I'm not mistaken, but what you initially thought the organic growth potential was in ADH in terms of what your targets maybe were internally and what the margin profile you thought you were going to be able to achieve in that business?

Dennis Holler -- Chief Financial Officer

Yea, I don't recall the growth other than we thought it was going to be a solid balance between acquisition in new starts. So, what we're saying is we're going to continue to focus on the growth but for the near future it's going to be focused on growth through acquisitions. The margin profile we anticipated would be higher and we thought it would be more consistent with our SRS type operations and, again, reflecting back on the comments of just a minute ago, we could still get there by we invested the dollars in the overhead and the management team now and I think it's going to take some time to leverage that investment.

Richard Close -- Canaccord Genuity -- Analyst

And then my final question will be on the open occupancy that you talk about in certain programs. Can you go into a little bit more detail? What programs are those? And then is this something systemic or long-lasting you think?

Dennis Holler -- Chief Financial Officer

Well, the programs that we're seeing largely are group care and our waiver-based group homes primarily in our IDD business and I think, frankly, it's a reflection on our staff's ability to focus on filling those vacancies with people who need our services but they haven't been able to focus as much attention because they're trying to fill their shifts. So, their focus has been on hiring and trying to retain staff and, as a result, would have some increased vacancy of 1% or 2% and that really hurts. As you know, we manage our vacancies very, very closely and I think it's simply because our staff are focused on filling shifts rather than making sure they're filling those vacancies with people who need our services and supports.

Richard Close -- Canaccord Genuity -- Analyst

OK, thank you.


And, once again, if you would like to ask a question, please press *, then 1.


And there look to be no further questioners, so, this will conclude the question-and-answer session. I'd like to turn the conference back over to Bruce Nardella for any closing remarks.

Bruce Nardella -- President and Chief Executive Officer

Well, thank you very much, William. We appreciate everyone being on the call today and we look forward to speaking with you at the conclusion of our 2018 fiscal first quarter. Thank you.


And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.

Duration: 48 minutes

Call Participants:

Dwight Robson -- Chief Public Strategy and Marketing Officer

Bruce Nardella -- President and Chief Executive Officer

Dennis Holler -- Chief Financial Officer

Kevin Fischbeck -- Bank of America/Merrill Lynch -- Analyst

Richard Close -- Canaccord Genuity -- Analyst

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