Aveanna Healthcare Holdings, Inc. Q4 FY2023 Earnings Call

Good morning and welcome to the Aveanna Healthcare Holdings Fourth Quarter 2023 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'd like to turn the call over to Debbie Stewart, Aveanna's Chief Accounting Officer. Thank you. You may begin.

Good morning and welcome to Aveanna's Fourth Quarter 2023 Earnings Call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeff Shaner, our Chief Executive Officer; and Matt Buckhalter, our Chief Financial Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release, which is posted on our website, aveanna.com, and in our most recent annual report on Form 10-K, which will be filed with the SEC this afternoon. With that, I will turn the call over to Aveanna's Chief Executive Officer, Jeff Shaner. Jeff?

Thank you, Debbie. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q4 and full year 2023 results, and how we are moving Aveanna forward in 2024 and beyond. My initial comments will briefly highlight our fourth quarter and full year 2023 results along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payors to create additional capacity. I will then provide insight on how we are thinking about year two of our strategic transformation and overall outlook for 2024 prior to turning the call over to Matt, to provide further details into the quarter and our 2024 outlook. Starting with some highlights for the fourth quarter and full year 2023. Revenue for the fourth quarter was approximately $479 million, representing a 6.1% increase over the prior year period. Fourth quarter adjusted EBITDA was $38.7 million, representing a 30.4% increase over the prior year period, primarily due to the improved payor rate environment as well as cost reduction efforts taking hold. Finally, full year 2023 revenue and adjusted EBITDA was approximately $1.895 billion and, sorry, $139.2 million, representing a 6% and 7.6% respective increase over the prior year. As we have previously discussed, the labor environment represented the primary challenge that we needed to address in 2023 to see Aveanna resume the growth trajectory that we believe our company could achieve. It is important to note that our industry does not have a demand problem. The demand for home and community-based care continues to be strong, with both state and federal governments and managed care organizations asking for solutions that can create more capacity. I am proud of our focus and execution in 2023, as we aligned our objectives with those of our preferred payors and government partners. By focusing our clinical capacity on our preferred payors, we achieved year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts to those payors willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging labor and inflationary environment, our preferred payor strategy allows us to return to a more normalized growth rate in our business segments. Since our third quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and preferred payors, as well as the continued signs of improvement in the caregiver labor market. Specifically, as it relates to our Private Duty Services business, our goal for 2023 was to execute a legislative strategy that would increase rates by double-digit percentages across our various states, with particular emphasis on California, Texas and Oklahoma, which represented approximately 25% of our total PDS revenue. At year-end 2023, we had successfully obtained double-digit PDS rate increases in eight key states including Oklahoma. We have also achieved rate wins in an additional 11 states that were either in line or slightly better than our expectations. These combined 19 states represent approximately 55% of our PDS footprint and we expect to see positive progress into 2024 as we focus on the remaining states. As a point of reference, the majority of the rate increases were effective in the second half of 2023, which will result in a full year benefit in 2024. While we are pleased that our PDS legislative messaging has been well received by state legislatures, we still have much work to do. As an example of the work ahead, our PDN rate request was not included in the California Governor's proposed budget. We believe that we made significant strides with the governor, medical department leadership and the California legislature demonstrating the importance of PDN rate increases and how they support an overall lower healthcare costs, improve patient satisfaction and quality outcomes. However, it is clear that we need to further accelerate our preferred payor strategy and government affairs efforts to continue to advocate for children with complex medical conditions. This strategy allows us to become a solution for overcrowded children's hospitals and distraught parents who want their children to be cared for in the comfort of their home. We have a proven track record of expanding our preferred payor programs and will enhance our efforts in California, similar to our approach in other states. As we look at our preferred payor initiatives in other states, our goal for 2023 was to double our PDS preferred payors from 7 to 14. In the fourth quarter, we added two additional preferred payor agreements, achieving our goal of 14. Our PDS preferred payor volumes remain consistent at 17% of total PDS volumes. We are optimistic that we will continue to execute this strategic initiative into 2024. While we are taking a national approach to our PDS preferred payor strategy, we are placing particular focus in 2024 on the State of California and continuing our positive traction in the State of Texas. Using Texas as a point of reference as of year-end, we are approaching 60% of our Texas PDN volumes with a preferred payor and still believe we have an opportunity to further improve this trend to approximately 70% in 2024. We plan to execute a similar playbook in California over the next 18 to 24 months and are optimistic we can achieve positive results. Moving to our preferred payor progress in Home Health. Our goal for 2023 was to improve our episodic payor mix by 10% from approximately 60%, to above 70% by year-end 2023. We signed a total of eight episodic agreements in 2023 and improved our episodic mix from approximately 60% at the end of 2022 to 74% in Q4. We continue to remain focused on aligning our Home Health caregiver capacity with those payors willing to reimburse us on an episodic basis and focus on improved clinical and financial outcomes. We are encouraged by our 2023 rate increases, preferred payor agreements and subsequent recruiting results. Our business is demonstrating signs of recovery as we achieve our rate goals previously discussed. Home and community-based care will continue to grow and Aveanna is a comprehensive platform with a diverse payor base, providing a cost-effective, high-quality alternative to higher cost care settings. And most importantly, we provide this care in the most desirable setting, the comfort of the patient's home. Before I turn the call over to Matt, let me comment on our strategic plan and our initial outlook for 2024. As we enter year two of our strategic transformation, we remain highly focused on those initiatives that created positive momentum in 2023. We will continue to focus our efforts on four primary strategies. First, enhancing partnerships with government and preferred payors to create additional caregiver capacity. Second, identifying cost efficiencies and synergies that allow us to leverage our growth. Third, managing our capital structure and collecting our cash while producing positive free cash flow, and fourth, engaging our leaders and employees in delivering our Aveanna mission. While executing the above key strategies, we still believe it is important to set expectations that acknowledge the environment that we are operating in and the time it will take to fully transform our company to sustain growth. Accordingly, we currently expect full year 2024 revenue to be in a range of $1.96 billion to $1.98 billion and adjusted EBITDA to be in a range of $146 million to $150 million. We believe our outlook provides a prudent view considering the challenges we face with the evolving labor market and hopefully, it proves to be conservative as we execute throughout the year. In closing, I am very proud of our Aveanna team. We offer a cost-effective, patient-preferred and clinically sophisticated solution for our patients and families. Furthermore, we are the right solution for our payors, referral sources and government partners. By partnering with preferred payors, we can and will move rate and wage metrics in meaningful ways that support our growth. This strategy allows us to hire, retain and engage more caregivers in providing the mission of Aveanna every day. With that, let me turn the call over to Matt to provide further details on the quarter and our 2024 outlook.

Thanks, Jeff, and good morning. I'll first talk about our fourth quarter financial results and liquidity before providing additional details on our initial outlook for 2024. Starting with the top line. We saw revenues rise 6.1% over the prior year period to $479 million. We experienced revenue growth in two of our operating divisions, led by our Private Duty Services and Medical Solutions segments, which grew by 6.1% and 17.5% compared to the prior year quarter. Consolidated gross margin was $148.4 million or 31%, representing a 15.3% increase over the prior year period. Consolidated adjusted EBITDA was $38.7 million, a 30.4% increase as compared to the prior year, reflecting the improved payor rating environment as well as cost reduction efforts taking hold. Now taking a deeper look at each of our segments. Starting with Private Duty Services. Revenue for the quarter was approximately $383 million, a 6.1% increase and was driven by approximately 10.1 million hours of care, a volume increase of 5.1% over the prior year. While volumes have improved over the prior year, we continue to be constrained in our top line growth due to the shortage of available caregivers, although we are continuing to see signs of improvement in the labor markets. Q4 revenue per hour of $38.04 was up $0.38 or 1% as compared to the prior year quarter. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $103.6 million of gross margin or 27%, a 12.7% increase from the prior year quarter. Our cost of revenue rate of $27.76 was sequentially flat from Q3. While we continue to experience wage pressures in the labor markets, we did improve our Q4 spread per hour to $10.28, representing a 7.6% increase over the prior year. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $54 million, a 1.1% decrease over the prior year. Revenue was driven by 9,200 total admissions, with approximately 74% being episodic and 11,300 total episodes of care, up sequentially from Q3. Medicare revenue per episode for the quarter was $3,064, up 1.8% as compared to the prior year. We continue to focus on rightsizing our approach to growth in the near term by focusing on preferred payors that reimburse us on an episodic basis. This episodic focus has accelerated our margin expansion and improved our clinical outcomes, with episodic admissions over 70%, we have achieved our goals of rightsizing our margin profile and enhancing our clinical offerings. As we enter 2024, we believe our admission growth will normalize in the 3% to 5% range. We are committed to a disciplined approach to growth while shifting our capacity to those payors who value our clinical resources. We are pleased with our gross margin of 50.9% in Q4, demonstrating our continued focus on cost initiatives to achieve our targeted margin profile. We believe this is the right long-term growth strategy and we hold a strong belief in this business and its lasting value proposition. Our Home Health & Hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care. Now to our Medical Solutions segment results for Q4. During the quarter, we produced revenue of $41.3 million, a 17.5% increase over the prior year. Revenue was driven by approximately 90,000 unique patients served, an 8.4% increase in the prior year period, and revenue per UPS of $458.80. Gross margins were 42% for the quarter, up 2.3% over the prior year period and in line with our targeted margin profile for Medical Solutions. We continue to implement initiatives to be more effective and efficient in our operations to leverage overhead as we continue to grow. While other intra providers have decided to exit the market, we see this as an opportunity to expand our national intra presence and to further our payor partnerships. In summary, we continue to fight through a difficult labor environment while keeping our patients care at the center of everything we do. It is clear to us that shifting caregiver capacity to those preferred payors who value our partnership is the path forward at Aveanna. As Jeff stated, our primary challenge continues to be reimbursement rates. With the positive momentum we experienced in 2023, we are optimistic that such trends will continue into 2024. As we continue to make progress with the rate environment, we'll pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity. At the end of the fourth quarter, we have liquidity in excess of $232 million, representing cash on hand of approximately $43.9 million, $20 million of availability under our securitization facility and approximately $168 million of availability on our revolver, which was undrawn as of the end of the quarter. Lastly, we have $32 million in outstanding letters of credit at the end of Q4. I'm proud of the progress we've made in enhancing our overall liquidity throughout the year. On the debt services front, we had approximately $1.47 billion of variable rate debt at the end of Q4. Of this amount, $520 million is hedged with fixed rate swaps and $880 million is subject to an interest rate cap, which limits further exposure to increases in SOFR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026, and our interest rate caps extend through February 2027. One last item I'll mention related to our debt is that we have no material term loan maturities until July 2028. Looking at cash flow. Cash provided by operating activities was positive $22.7 million for the quarter, and free cash flow was positive at approximately $12.5 million. While Q4 benefited from some timing-related items, which we expect to be moderate headwinds into Q1 cash flows, we continue to believe we'll be a positive operating cash flow company in 2024. We also expect to see continued cash flow benefits as our top line and cost management initiatives come to fruition. Before I hand the call over to the operator for Q&A, let me take a moment to address our initial outlook for 2024. As Jeff mentioned, we currently expect full year revenue to be in the range of $1.96 billion to $1.98 billion, and adjusted EBITDA range of $146 million to $150 million. As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year and our volumes grow. Accordingly, we expect approximately 20% of our full year adjusted EBITDA guidance to be recognized in the first quarter and approximately 44% of our full year guided adjusted EBITDA to be recognized in the first half of 2024. As most of our annual rate increases typically become effective in the second half of the year, we expect our adjusted EBITDA to ramp as we use those increases to attract and retain more caregivers and drive volumes. Our EBITDA will also ramp as we realize the benefits of our continued cost savings initiatives. In closing, I'm proud of all of our Aveanna team members and their hard work in achieving our 2023 results. I look forward to the continued execution of our 2024 strategic plan and updating you further at the end of Q1. With that, let me turn the call over to the operator.

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

Good morning. You have Taji Phillips on for Brian. Thank you for taking my question. So maybe to start, the midpoint of your guidance implies that margins will be roughly 7.5% for 2024. Maybe can you talk to the building blocks that are or key assumptions that are built into your margins for 2024? And what would need to happen to see the business outperform your implied guidance? And then lastly, if you can provide much detail, break down the margin expectations across all three segments?

Hi Taji, good morning, and thank you for your question. I'll begin, then hand it over to Matt. As we look at our 2024 guidance, we have strong visibility into rates coming out of 2023. Firstly, we have solid momentum from the 19 rate increases we've implemented, with five or six of those effective January 1, 2024. This gives us a positive start to the year. We also have clarity on our Home Health & Hospice final rule, providing good visibility for this year. We're currently focused on developing a legislative plan for 2024, with most deadlines in the middle to late part of the year. In Matt's remarks, he mentioned that we anticipate 20% of the implied guidance will occur in Q1. It's important to note that Q1 is typically our seasonal low point, with several payroll tax challenges following the holidays. However, as of early March, we're off to a great start this year and are pleased with our position to date. We expect to see growth throughout the year, with Q1 as our low point. We are cautious but remain committed to our strategic plan aimed at rebuilding the company. Our overarching goal is to achieve 10% adjusted EBITDA, which we expect to reach in about a year. We have a clear understanding of the actions we need to take, and we're focused on executing them effectively. Our team has demonstrated its ability to follow the business plan, as shown in 2023. With that, I'll turn it over to Matt for further insights on our guidance.

Yes. I think you expressed that very well, Jeff. I believe you captured it perfectly. The guidance for 2024 is a sensible approach and aligns with our performance and leadership in the wider market. Regarding margin expansion, Taji, I don't anticipate any significant changes in gross margin expectations based on our current business platforms; they will remain steady. There is potential for better performance due to our preferred payors and state rate increases exceeding expectations. However, this doesn't automatically enhance your gross margin profile, as we are reinvesting those funds back into our caregivers and workforce to drive volume growth. These volumes will help leverage our overhead. We also continue to implement cost-saving initiatives across the organization. We made good progress in 2023 and will maintain that momentum in 2024. We will adjust where possible, but we are committed to investing in areas that will lead to improved clinical outcomes and excel in initiatives for our preferred payors through value-based care. Therefore, we expect to see a gradual increase in EBITDA throughout the year. That's how you should interpret it.

Well said. Anything else, Taji?

Yes. Just one more question for me, Jeff. Last question on we thinking about the labor environment, I really appreciate the commentary in your prepared remarks. But how should we be thinking about wage inflation in 2024?

Yes, I believe Matt explained it well, Taji. Our main focus is on rate, which drives incremental rate. As you consider our margin profile, I think Matt articulated it effectively. In our Home Health & Hospice business, we achieved 50.9% gross margins for Q4. It has taken us about two years to reach that 50% target. I'm really proud of the Home Health & Hospice team for their hard work in getting us there. When we look at margins, gross margins will remain consistent in 2024, similar to the run rate we saw in Q3 and Q4. Every rate increase we receive, whether from preferred payors or government agencies, will be passed on to caregivers. This is our value proposition to preferred payors and our government partners. I believe you can expect gross margins to be stable throughout the year. As Matt mentioned, we are focused on driving growth in PDS, Home Health & Hospice, and AMS. We are excited about achieving both top-line and bottom-line growth in 2024, as we anticipate. Thank you, Taji.

Thank you.

Thank you. Our next question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Hi, great. Thanks, guys. Just appreciate all the commentary about the preferred payor progress in Texas and expectations to go to 70% this year. I was wondering if you could remind us kind of where we are in California and where that could go in the near term in terms of preferred payor relationships on the PDN side? And then separately, kind of in areas where we're not yet seeing that double-digit rate increase in budgets, how do we think about how much of the PDN, preferred payor penetration can make up for that shortfall? Thanks.

Good morning, Ben. Thank you for your great question. In California, we have been focused on the government affairs legislative process for over two years. It's well-known that the state is facing a deficit of approximately $50 billion to $80 billion this coming year, presenting both significant challenges and opportunities for budget management. We've made substantial progress in our discussions with the current governor, his staff, and the leadership, including Dr. Ghaly and the legislature. Looking ahead, we plan to accelerate our preferred payor strategy in California. Unlike Pennsylvania or Texas, where over 90% of our business comes from Medicaid MCO, more than 50% of the pediatric population in California still relies on Medi-Cal. Families are increasingly discovering options like the whole child model program and various commercial and Medicaid MCO plans. As they seek coverage for their children, especially for acute care in home settings, a shift is occurring in our population as we move into 2024. Although it’s still under 50% of the population, we are encouraged to accelerate our preferred payor strategy in California. We're committed to our legislative strategy as well since the current reimbursement rate of $44.12 for Medi-Cal is not competitive with the rising wages needed. You asked for a specific metric, which we haven’t publicly shared yet, but we plan to reassess that throughout 2024. We are optimistic about our dual approach in California, leveraging our successes from other states like Texas and Pennsylvania. Currently, two or three of our 14 preferred payors are based in California, and they provide reimbursement rates above the Medicaid PDM rate. I hope this information is helpful, Ben.

Yeah, thank you very much.

Anything else, Ben?

I think that's it for me for now. Thank you.

Awesome. Thanks, Ben.

Thank you. Our next question comes from the line of Raj Kumar with Stephens Inc. Please proceed with your question.

Hey, this is Raj on for Scott Fidel. A quick question on just when we think about '23 and all the momentum gain across the three business lines, where do you see the most upside in 2024 among the three business lines?

Good morning, Raj, and thank you for your question. I believe that all three of our business segments have significant growth potential and can deliver excellent results. As Matt mentioned, we have concentrated on cost efficiencies and synergies over the past 18 months. We are in a solid position to manage our corporate overhead while maintaining good leverage. I think we will take the most pride in the recovery of our Home Health & Hospice segment. As many remember, we faced challenges in that area about a year and a half ago, and we are still completing the integration of four companies and shifting towards home care. We are focusing on both clinical and financial outcomes. As we enter 2024, our main goal is to grow the business while achieving outstanding clinical results. I am incredibly proud of Shannon, Mary, and the entire Home Health & Hospice team for successfully turning that segment around and positioning us well for the coming year. We also have strong momentum in our PDS and AMS businesses this year. Revitalizing our Home Health & Hospice segment was one of our top five priorities, and I am extremely proud of the discipline we’ve established, focusing on providing solutions for payors that will reimburse on an episodic basis. As Matt highlighted, we aim for an episodic rate above 70%, and we ended the year at 74%, which is exactly where we want to be. I am very proud of the team as we approach 2024, Raj.

Great. For my follow-up, considering cash flow and the goal of being operating cash flow positive, how would you describe the working capital dynamics for 2024 and the potential to enhance the EBITDA conversion rate to operating cash flow?

Yes, that's a great question. Combining the concepts of cash flow and liquidity, I anticipate we will face moderate challenges in the first quarter, which we've also mentioned in our script. Additionally, we will experience the usual seasonal impacts during Q1, including headwinds related to state taxes and some re-engagement with the workforce following the holidays. Our third-party liability season will also extend the days sales outstanding a few days in Q1. However, we expect a rebound in Q2 and Q3 as cash starts to flow in, leading to a slight dip in Q1 followed by recovery in the subsequent quarters. We are looking to enhance our liquidity in 2024, which presents a valuable opportunity. Moving forward, we are contemplating small mergers and acquisitions where suitable. We'll evaluate deals as they arise, likely leaning towards the latter half of this year or into 2025. For now, our focus is on operating our business efficiently, converting EBITDA into cash, and enhancing our liquidity position.

That's well said, Matt. And the one thing I'll add is there's been a tremendous amount of conversation nationally over the last 22 days on Change Healthcare and UnitedHealthcare. I couldn't be more proud of Matt, our team, our billing leadership team. Although Aveanna doesn't build claims directly through Change Healthcare directly, some of our vendor partners do, and our team has done an amazing job of getting bills out the door, ensuring that Aveanna continues to be paid for the great work that we have done. And it's been a lot of hours, it's been a lot of overtime, it's been a lot of work and workarounds. But it's a relatively low impact to Aveanna, specifically the Change issue, but our team has worked incredibly hard in the last three weeks to ensure that our liquidity, and cash flow is solid. And I'm proud to say that it is. And so kudos to our RCM billing teams who've really just worked to make that a reality for Aveanna. Thank you, Raj.

Thank you for all the color.

Thank you. Our next question comes from the line of Pito Chickering with Deutsche Bank. Please proceed with your question.

Hi there. You've got Kieran Ryan on for Pito. Thanks for taking the questions. Apologies if you've touched on a few of these things, I just wanted to confirm a couple of points. First off, on the margin expansion for 2024 guidance implies 20 basis points. Is it fair to say from your commentary that we should expect that to come through the SG&A line with maybe some potential for outperformance on gross margin. But as far as what's guided, that's most likely to come in SG&A, correct?

Yes, good morning, Kieran. We have established our infrastructure to support our growth. If you look at our performance in Q3 and Q4 and project that into 2024, it will provide a clearer picture of our gross margins, especially considering the improvements in Home Health & Hospice. I would say there is minimal to moderate opportunity for improvement in gross margins, but where we believe we can excel this year will be in overall revenue growth and volume increases, which will be reflected in our adjusted EBITDA. Matt, do you have anything to add?

I think you nailed it. Gross margins kind of flat on our H2 results from 2023, kind of reengaging that through 2024. Obviously, a little bit of seasonality in here in the front half of the year, specifically Q1, which is some state tax implications that occur. But then from there, just good old-fashioned leveraging overhead, nipping and tucking where appropriate, taking some costs out where appropriate. But I think that's where you'll see that 20 basis point margin expansion on the bottom line.

Thank you. Lastly, as we consider revenue and PDS growth in 2024, which could be in the 4% to 5% range, how should we think about the contributions from volumes versus rates in 2024? Thank you.

Yes. In the past, we would have indicated that the rate would have been 1% for an entire year. Looking at 2023, we experienced a 3.8% increase in rate and a 3.5% increase in volume, resulting in over 7% growth. I believe the range of 4% to 5% is appropriate for us. We had a successful year with 19 state rate increases, 8 of which were in double digits, and our preferred payors represented 17% of our total PDS volume. We plan to maintain that engagement in 2024. I would estimate a split where half of the growth will come from rate and half from volume. There is potential for better performance if we can bring in more preferred payors, but a 50-50 split is how I would project it.

Thanks a lot.

Thanks, Kieran.

Thank you. Ladies and gentlemen, there are no other questions at this time. I'll turn the floor back to Mr. Shaner for any final comments.

Thank you, Melissa, and thank you, everyone for your interest in our Aveanna story. We look forward to updating you on our continued progress at the end of Q1. Thank you and have a great day.

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