Aveanna Healthcare Holdings, Inc. Q3 FY2022 Earnings Call

Good morning, and welcome to Aveanna Healthcare Holdings Third Quarter 2022 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the call over to Shannon Drake, Aveanna’s Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Speaking on today's call are Rod Windley, Aveanna’s Executive Chairman; Tony Strange, Aveanna’s Chief Executive Officer and President; David Afshar, Aveanna’s Chief Financial Officer; and Jeff Shaner, Aveanna’s Chief Operating Officer. We issued our earnings press release and filed our 10-Q yesterday. These documents are available on the Investor Relations section of our website as well as on the SEC's website. A replay of this call will be available until November 17, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 10, 2022. Today's call may contain forward-looking statements, which may be identified by the use of words such as plan, could and other similar words and expressions. All forward-looking statements made today are based on management's current beliefs and assumptions about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Except as required by federal securities laws, Aveanna will not publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events or changing circumstances. Also, we supplement our financial results reported in accordance with GAAP with certain non-GAAP financial measures. The reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and Form 10-Q, both of which are available on our website or are otherwise available separately on our website. Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up so that we can accommodate as many callers as possible in the allotted time. With that, I will turn the call over to Aveanna's Chief Executive Officer, Tony Strange.

Thank you, Shannon, and good morning, everyone. We appreciate you investing your time to better understand our results as well as the factors that are affecting our industry. On the call today, we'll update you on our third quarter results, provide some insight into the labor markets and our ongoing efforts with payers to create additional capacity, and finally, share our expectations for Q4 as well as a preliminary look at 2023. As you've seen in our press release last night, our Q3 results clearly fall below our expectations with net revenues of $443 million and adjusted EBITDA of approximately $25 million. Despite the ongoing disruptions in the labor market, we're making progress in staffing, specifically as it relates to our preferred payer relationships within PDS. We now have seven preferred payer relationships, all showing signs of growth compared to the two that we discussed on our last call. Additionally, our medical solutions business is benefiting from the market consolidation after two providers left the market in late Q2. Finally, both our private duty services and our medical solutions produced sequential volume growth in Q3, which is typically the lower quarter of the year, both posting their best results of the year. As referenced in the release, our biggest challenges in the quarter were driven by Home Health and Hospice. Earlier this year, we consolidated four separate and unique operating systems into Homecare Homebase. In addition, we implemented Metalogix to provide predictive data analytics. Both will play a significant role in our ability to position Aveanna as a leader in value-based care. And while we're confident that these decisions are the right long-term strategies for the company, we can see a short-term effect within Home Health and Hospice in Q3. Our results were primarily driven by the following three factors: lower-than-expected volumes as Homecare Homebase was rolled out to all 91 branches, which felt the impact during the integration phase; higher-than-expected adjustments in revenue reserves of about $6.5 million during the quarter; and higher costs associated with lower revenues. As a result of the lower revenue and efficiencies gained through Homecare Homebase, the operating team has identified about $6.5 million of costs that we took out in late Q3, with the full benefit being realized in Q4. While we're on the topic of home health, last week, CMS issued its final rule for home health payments for 2023. As you'll recall, CMS proposed a net reduction of approximately 4.2%. However, they increased the market basket update, resulting in a rate increase for 2023 of 0.7%. CMS indicated that while it would implement half of the behavioral adjustment in 2023, it would implement the remaining 50% at some point in the future. This is a better outcome for the industry, as it allows companies to continue to invest in caregivers and technology to better position themselves for value-based care. In summary, we feel good about the future of our Home Health and Hospice business. There are 10,000 Americans turning 65 every day, and Home Health and Hospice provides a cost-effective alternative to rising healthcare costs, which is preferred by the patient. We expect this business to grow in the high single digits year-after-year and continue to produce gross margins in the high 40s to 50s. We have continued to see momentum in moving our capacity toward payers that value the role of home care in reducing overall healthcare costs. Within these preferred payer agreements, we see early signs of success with PDS growth rates in the mid to high single digits along with the potential for gross margin expansion. We expect Q4 revenues of $445 million to $450 million and adjusted EBITDA of approximately $28 million to $30 million. Our 2023 targets are revenues greater than $1.8 billion and adjusted EBITDA in the mid $140 million range. These estimates include ongoing labor market disruption and shortage of skilled caregivers, and we believe this provides a broad framework for thinking about the full year 2023 and beyond. We are confident Aveanna can and will position itself as a leader in the industry. Now let me turn the call over to Jeff.

Thank you, Tony. Our Aveanna leaders remain focused on the task at hand, which is bringing medically fragile pediatric, adult and geriatric patients home and staffing their cases with highly skilled caregivers. We continue to develop our preferred payer strategy and are actively shifting caregiver capacity to those payers that value our services. Aveanna preferred payers are those willing to partner with us at value-based rates in return for preferred staffing and enhanced clinical outcomes. In our Private Duty Services segment, we have seven preferred payer agreements, up from two at the end of 2021. We continue to work on our robust payer pipeline to shift payers from a fee-for-service rate to a market premium rate, including value-based payment for performance. We saw some turbulence due to the labor shortages in our workforce, primarily driven by a shortage of nurses. However, we experienced improvement in our preferred payer volumes with select payers, and year-to-date organic growth rates are reaching high single digits. Our Q3 revenue per hour was up 1.4% sequentially, and we expect gross margins to bounce back to around 29% in Q4. In the Home Health and Hospice segment, we have faced challenges due to higher inflation affecting caregiver wages. We stand with the National Association for Home Care and Hospice in support of the 2023 final home health rule. As mentioned, we've seen disruptions in Q3 related to our Homecare Homebase rollout and are confident in our path moving forward. The Florida business has rebounded faster than expected post-Hurricane Ian, and we believe we can return to 1,000 home health admissions per week while maintaining our episodic mix. I want to thank our Aveanna team for their resilience, commitment to patient safety, and the compassion they've shown during these difficult times. With that, I’ll turn it over to Dave for additional comments on the financials.

Thanks, Jeff. Regarding cash collections, we had a great quarter, especially within our Home Health and Hospice business. We collected $470 million of cash, reducing our overall receivables significantly. While we had a strong quarter, we did face some revenue-related items in our Home Health and Hospice sector. As we transitioned our business into the Homecare Homebase system, we experienced higher allowances against our legacy system receivables. Overall, we expect to make significant progress towards breaking even from a free cash flow perspective in 2023. Our liquidity remains strong, with $280 million available to fund our operations as needed. As I wrap up, I'm pleased with our cash collection results and feel optimistic about the initiatives underway. Thank you.

Thank you. We will now begin the question-and-answer session. Your first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hi, good morning and thank you for taking my question. This is Taji on for Brian. My first question has to do with the labor environment. Can you kind of provide some insights on what nurse recruitment looks like?

Taji, good morning. This is Jeff. It's difficult as a year as 2022 has been for us. I think you'll hear optimism in our voice over the last few months related to our nursing hiring and retention in our PDS segment and our Home Health and Hospice segment. Over the last 90 days, we have finally seen some positive both hiring and retention metrics in our core nursing trends, specifically in our Private Duty Services segment.

To follow on what Jeff said, the government relations and payer relations team have done a fantastic job advancing the preferred payer relationships. When we adjust rates and can pay clinicians market wages, it allows us to grow. It's about positioning ourselves to pay competitive wages to get nurses on board.

Just one follow-up question on admissions for Home Health and Hospice. You had mentioned that they're lower year-over-year and quarter-over-quarter. Can you break out what percentage was from HCHB rollout versus lower demand?

It's not a demand issue. I think it's a focus issue. The distraction from moving four companies to one has been significant. However, we feel confident that we can get back to approximately 1,000 admissions per week in Q1. Thanks for your question.

Maybe just first a follow-up on the Home Health and Hospice segment disruption. Is that $54 million to $56 million revenue range for Q4?

Yes, that is correct. We see that range as where we will normalize as we progress through Q4.

Just curious how we should think about interest costs for 2023? Should we just take the third quarter to annualize that?

Yes, Pito, I think you'd see it bump up a little in Q4 due to LIBOR increases, but it will be capped moving forward. As you think about interest expense, consider both the payments we receive under swaps and caps, and the LIBOR component being capped at 3%.

I want to thank you all for your interest in our business. We're focused on improving results as we move forward. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.