Earnings Call Transcript - AVAH Q1 2022

Operator, Operator

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

Shannon Drake, Chief Legal Officer and Corporate Secretary

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 at www.aveanna.com as well as on the SEC's website at www.sec.gov. A replay of this call will be available until May 19, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, May 12, 2022. Today's call may contain forward-looking statements, which may be identified by the use of words such as may, could, will 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 changes in circumstances. Also, we supplement our financial results reported in accordance with GAAP with certain non-GAAP financial measures, 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 and the SEC's website, whereas 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. Tony?

Tony Strange, CEO

Thank you, Shannon and good morning, everyone. Thank you for joining Aveanna's first quarter earnings call. This call marks the anniversary of our first full year of reporting as a public company. On our call today, we'll provide you an oversight of our Q1 results, provide a little insight into our M&A activity, pipeline, and integration. And finally, we'll provide some insight into the current trends both from a volume perspective as well as the reimbursement environment. Before we get into the details, I'd like to once again say thank you to all of the Aveanna employees. In today's environment, you can choose to work wherever you like. However, you continue to put the needs of our patients and their families first, and for that, we're grateful. Let's turn toward our results. Revenues for the quarter were approximately $451 million, compared to $417 million a year ago, which is an increase of approximately 8%. The increase was driven by the acquisitions of Accredited and Comfort Care later in the fourth quarter and partially offset by the reduction in volume related to the spike in Omicron. As we outlined on our last call, we saw a spike in the number of employees that were out of work related to COVID that began in mid-December and ran through early March. Prior to December, we were averaging between 200 and 300 employees sidelined on any given day; that number spiked to just under 3,000 in January and February timeframe. We estimate that this interruption cost us approximately $14 million to $15 million in lost revenue during the quarter. As of today, this disruption is back down to pre-Omicron levels and we expect revenues to rebound accordingly, notwithstanding any further disruptions due to additional COVID variants. However, the labor markets for caregivers, specifically for nursing, continue to be distorted. Demand for services is at an all-time high, while capacity continues to be constrained. I'll provide some more color around some of our plans to mitigate these ongoing labor shortages in just a minute. Moving on to gross margins for the quarter, they were 32.1%, an increase of 50 basis points from Q1 of ‘21. Given the increased payroll tax burden of the first quarter each year and the ongoing wage pressures, I'm especially proud of our operating team's discipline around protecting our gross margins. Adjusted EBITDA for the quarter was $38 million compared to $43.7 million a year ago. The impact of the reduced volumes associated with the Omicron variant is approximately $5 million in adjusted EBITDA. Total SG&A increased quarter-over-quarter and was driven by the acquisitions of Accredited and Comfort Care, and once these synergies are realized, our SG&A expenses are right in line with our expectations. While revenues were in line with what we forecasted on our call in March, the softness in volumes had a meaningful impact on Q1 results, and we expect these revenues to normalize in Q2, while gross margins remained strong and SG&A remains in line with expectations. We anticipate ongoing labor constraints to continue to be a headwind for revenue in the near term. While we're on the topic of Accredited and Comfort Care, the integrations of these two acquisitions are going very well. They were on schedule, and in many instances, we are actually ahead of schedule with all aspects of integration. We expect to be largely complete with the integration and all of the synergies realized by mid-year 2022, neither business was immune from the impact of Omicron. However, both businesses are performing well and will be highly accretive to the Aveanna story. A special thank you to the employees of Accredited and Comfort Care, as well as our integration management office team for all the heavy lifting that you've done to complete these integrations. As far as future M&A is concerned, we stated on our last call that we've spent the first part of 2022 focused on integration, which we've done. Our pipeline remains robust, and there are plenty of transactions to consider. We will continue to remain disciplined in our approach to transactions, focusing only on those deals where price consideration and synergies produce accretion for our shareholders. Our liquidity remains strong. We have access to approximately $400 million between cash on hand, the delayed draw term loan, and available revolver. With very little covenant restrictions coupled with our various interest rate hedges, we are well protected from the downside risk associated with rising interest rates. We're comfortable at our current leverage ratios; however, it's our desire to reduce leverage through accretive transactions and/or the use of free operating cash flow to reduce debt. Dave will provide some additional insight during his remarks. I'd like to spend a few minutes on the overall reimbursement environment and its connectivity to the labor disruption and eventually to the creation of additional capacity. Most of you have seen articles in the major news media outlets profiling the lack of capacity, mandating the patient's stay in the hospital longer and even in some instances indefinitely. Payers across the country recognize this trend and are also looking for solutions to facilitate safe discharge from the hospital into home or community-based care. The state of Arizona recently announced the approval of a program that would allow Aveanna to pay family members to provide unskilled care that could be supplemental to other skilled needs in an effort to create additional capacity to provide care in the home. We're seeing this willingness to invest additional resources into keeping patients out of higher acuity settings and in the safety of their home environments across our platform. In addition, we continue to have productive discussions with our payer partners around the shortage of caregivers and the impact that inflation is having on our ability to meet the demand of their beneficiaries, resulting in continued rate improvements across our business. In addition, there are several states that are in mid-legislative sessions that are pending legislation that would further enhance reimbursement in an effort to increase capacity. The overarching thesis is that home care is a value add in the healthcare equation and additional resources are needed to expand access to care. Before I turn the call over to Jeff for a deeper dive into our operating metrics, I'd like to spend a minute discussing our outlook for the full year 2022. On March 29, we provided full year 2022 guidance of revenues between $1,890 million and $1,920 million and adjusted EBITDA between $190 million and $205 million. In the roughly 42 days since that guidance, we haven't fully closed on additional month; other than the updates provided in my remarks, there's really no additional information that we can provide. We believe that the rationale behind our full year guidance remains sound, as you recall, we provided color around our forecast that indicated that the first half of 2022 would be difficult due to the headwinds of Omicron and ongoing labor constraints. We also provided our thoughts around ongoing rate improvements throughout the year that would allow us to continue to invest in wages, which will provide lift in the second half of the year. In summary, our results are in line with our expectations that we laid out in March. The immediate threat and impact of the Omicron variant has subsided and volumes are returning to pre-Omicron levels. On the other hand, the labor markets are challenging and will continue to present headwinds to our volumes and overall growth for the near term. State Medicaid systems, as well as Medicaid MCOs, recognize this as an issue and are willing to come to the table in a partnership to address the capacity concern. Given the challenging environment, I'm proud of our results and the tenacity of our team to continue to fight on behalf of our patients and families, fellow employees, and ultimately our shareholders. I'm proud to be a part of the Aveanna story. With that, I'm going to hand the call over to Jeff for further insight into our operating metrics. Jeff?

Jeff Shaner, Chief Operating Officer

Thank you, Tony. I will take a few minutes to discuss our recent labor and employment trends before moving on to our Q1 operating indicators. We have stabilized the recruitment and retention of our core caregivers. The impact of Omicron on our workforce in Q1 was significant, but I am happy to report that it is now behind us. With a vaccination rate nearing 99%, we are better prepared for any future variants and can handle them without the level of disruption we experienced with Omicron. Caregiver wages remain the primary factor affecting both new and existing employment among our nurses. Increased competition from hospitals and travel agencies has targeted our pool of qualified nurses. Fortunately, our enhanced reimbursement rates in several states help us to remain competitive when hiring and retaining nurses. In some locations, we are actively advocating for better reimbursement rates since the rise in nursing wages has exceeded the Medicaid rates for private duty nursing. Our nurses express a desire to work in homecare and enjoy the one-on-one patient interactions that home settings provide. We are committed to enabling our caregivers to deliver skilled care while earning fair wages and supplemental benefits at Aveanna. Now, regarding our Private Duty Services segment for Q1, we generated $350.2 million in revenue during the quarter, driven by about 9.6 million hours of care, which represents a 6.3% sequential increase over Q4 2021. This growth in hours was largely due to the Accredited Home Care acquisition, tempered by the challenges presented by Omicron. Our Q1 revenue per hour increased by $1.03 from Q1 2021, now standing at $36.43, a 3% rise. We are seeing further rate improvements in 2022, and so far this year, we have successfully implemented seven rate increases in our PDS segment. As many state legislators are currently in session, we anticipate further rate adjustments and expansions in Medicaid benefits throughout 2022. We commend the Arizona Medicaid system for expanding its Licensed Health Aide program, which provides necessary support and compensation to family caregivers who deliver unskilled care to their loved ones. This program complements the skilled nursing services provided by Aveanna nurses, creating a supportive environment for medically fragile individuals to remain in their homes. We are actively lobbying other states to adopt similar programs that support families, believing that this framework can enhance the unskilled care provided by loved ones and bolster our skilled services in challenging labor markets. I will be happy to provide updates on our progress in the future. Now, regarding our cost of labor and gross margin metrics, we achieved a gross margin of $98.3 million, or 28.1%. Our wage rate of $26.20 per hour reflects our commitment to sharing our rate successes with our caregivers. Given that Q1 typically experiences the highest impact from payroll taxes, I anticipate the gross margins for PDS to stabilize in the range of 29% to 30%. Our Q1 spread per hour was $10.23, aligning with our expectations and fitting within our ideal range of $10 to $10.50. As Tony mentioned, we have essentially completed the Accredited Home Care acquisition in California, and I am satisfied with the business trends, thanks to the excellent work of our IMO team in integrating the business into the Aveanna family. Now, shifting to our Home Health and Hospice segment for Q1 and acknowledging our integration team, I am pleased to report that we have largely completed the integration of Comfort Care. We are proud of the robust home health and hospice services that Comfort Care has contributed to Aveanna in Alabama and Tennessee. This acquisition underlines our commitment to acquiring high-quality assets that enhance our geographical expansion efforts. During the quarter, we achieved $66.6 million in revenue, reflecting a 37% increase over Q4 2021, with revenue growth primarily driven by a full quarter of contributions from Comfort Care, albeit impacted by labor pressures from Omicron. Our Q1 revenue came from 14,300 total admissions, of which about 61% were episodic, and we recorded a total of 13,800 episodes of care. Despite a slight decrease in our episodic admissions mix, we are focused on maintaining this rate between 60% and 65%. I am pleased with our admission volumes in both home health and hospice and our team's ability to navigate the tough labor market in Q1. Revenue per episode for the quarter was $2,898, down 1.5% from Q4, attributed to our Comfort Care patient base. From a cost and margin standpoint, Q1 gross margins were 48.7%, up 280 basis points sequentially from Q4. This improvement was driven by reduced PTO utilization, better overtime controls, and decreased reliance on contract labor. Home health visits per episode and costs per visit have met our expectations, providing us with strong confidence that we can manage Home Health segment gross margins within the 48% to 50% range. Lastly, we are thrilled to have fully transitioned our home health and hospice segment to the Homecare Homebase operating system. From the beginning at Aveanna, we decided to invest in top-tier systems to support our mission. I want to commend our Aveanna Home Health and Hospice team, our IMO Systems team, and our partners at Homecare Homebase, who have made this crucial initiative possible. I look forward to sharing more insights into our Home Health and Hospice segment as we progress. Now, regarding our Aveanna Medical Solutions segment for Q1, we achieved $33.7 million in revenue during the quarter, fueled by approximately 78,000 unique patients served and a revenue per UPS of $432.32. However, revenue per UPS saw a sequential decline of about $21 or 4.6%. This decline was primarily due to the ongoing effects of the national contract signed in September 2021 and the impact of the recent EBIT recall on our internal supply chain. In February, the FDA's shutdown of Abbott's Michigan plant, the main producer of the EleCare infant product, triggered a supply chain crisis, forcing families to make urgent decisions regarding infant nutrition. Our Aveanna team has worked diligently to find solutions and ensure product delivery to our patients. We believe this disruption is temporary and expect our suppliers to rebound by mid-summer. Now, focusing on our cost of goods and gross margins, we recorded a gross margin of $14.1 million or 41.7%. The decrease in gross margin was largely influenced by the factors mentioned earlier. I anticipate gross margins will stabilize in the second half of 2022 in the range of 41% to 43%. While these disruptions are unfortunate, I am optimistic about the efficiencies we have achieved in our back-office operations and our capacity to grow the Medical Solutions business. In March and April, we set records for patient admissions and unique patients served due to our team's dedication to finding solutions for families in need. We project that these growth trends will persist as the near-term supply chain issues begin to resolve. In conclusion, we are navigating challenging labor and supply chain environments, keeping patient care as our focal point. We will keep passing through wage increases and other benefits to our caregivers, aiming to enhance core volumes. On a positive note, we are witnessing remarkable demand for our services, alongside strong backing from state legislatures and payers through rate improvements. I am proud of our Aveanna team. Your resilience and determination to care for our patients and their families is truly inspiring. Thank you. Now, I’d like to turn the call over to Dave for additional insights regarding Q1. Dave?

Dave Afshar, CFO

Thanks, Jeff. I'll go ahead and provide a summary of the first quarter results. First quarter 2022 revenue was $451 million, an increase of $33 million or 8% from the first quarter of ‘21. Our Q1 revenue was comprised of $350 million in PDS segment revenue or 78% of total revenue. Home Health and Hospice segment revenue was $67 million or 15% of total revenue and our Medical Solutions segment contributed $34 million of revenue in the first quarter or 8% of total revenue. Comfort Care and Accredited acquisitions in Q4 drove revenue growth in the first quarter of 2022 and combined with the Doctor's Choice acquisition in April 2021 drove our overall 8% revenue growth in Q1 ‘22 from the year-ago quarter. Home Health and Hospice segment revenue increased $35.1 million in the first quarter of 2022, compared to the first quarter of 2021 and PDS segment revenue was flat over the comparable periods. While the acquisition of Accredited contributed incremental PDS revenue in the first quarter, the Omicron variant pressured our PDS clinical workforce, constraining caregiver recruitment and retention, and negatively impacting PDS patient volumes. Medical Solutions segment revenue was down slightly, decreasing by 3% over the Q1 comparable quarters. Now turning to gross margin. Our gross margin percentage increased 50 basis points to 32.1% in the first quarter of ‘22 from 31.6% in the year-ago quarter. This was attributable to the revenue growth in the Home Health and Hospice business, which has a higher gross margin percentage than our PDS business, net of decreases in gross margin percentages in our PDS and Medical Solutions segments. Field contribution margin decreased to 12.4% in the first quarter of ‘22 from 14.9% in the first quarter of ‘21. Corporate expenses were 8.1% of revenue in the first quarter of 2022, as compared to 6.6% of revenue in the first quarter of 2021, primarily as a result of growth in our non-cash share-based compensation costs, as further discussed in footnote nine to our financial statements and in our MD&A. In addition, we incurred incremental compensation and benefits costs necessary to support a public company infrastructure as well as to support the integration process for the companies we acquire and then also incremental professional services associated with those integration activities. Adjusted corporate expenses were 5.2% of revenue for the first quarter of ‘22 as compared to 4.7% of revenue in the first quarter of ‘21. The principal adjustments from corporate expenses to adjusted corporate expenses and integration costs and non-cash share-based compensation can be found in the corresponding table in our press release. Moving on to operating income, net income, and adjusted EBITDA. Operating income was $13.8 million for the first quarter of 2022 as compared to $28.3 million in the first quarter of ‘21. In addition to the $6.2 million decrease in field contribution, the $9.2 million increase in corporate expenses, and the $1.7 million decrease in acquisition-related costs drove the $14.5 million overall decrease in operating income over the comparable first quarter periods. Net income was $25.3 million in the first quarter of ‘22, compared to $5.8 million in the first quarter of 2021. The primary drivers of the increase were the $14.5 million decrease in operating income and a $38.3 million non-cash gain recorded in other income related to a material increase in the valuation of our interest rate swap and cap during the first quarter of 2022. The significant valuation gains resulted from accelerated market expectations of future increases in interest rates during the first quarter of 2022. Adjusted EBITDA was $38 million or 8.4% of revenue for the first quarter of 2022 as compared to $43.7 million or 10.5% of revenue for the first quarter of 2021. Adjusted EBITDA benefited from $3.1 million of American Rescue Plan Act recovery funds received during the first quarter of 2022. Turning to operating cash flow. Cash used by operating activities was $9.5 million for the first quarter of ‘22, a decrease of $23.4 million from net cash used of $32.9 million in the first quarter of 2021. The decrease in net cash use was due to a number of items outlined in the liquidity and capital resources section of our 10-Q, the most significant of which was $21 million in relatively higher payments against accounts payable and accrued liabilities in the first quarter of 2021, compared to the first quarter of 2022. Net of a decrease in operating income in the first quarter of ‘22 compared to ‘21 and also net of changes in significant non-cash items that affect operating income and share-based comp. When you think about our operating cash flow in relation to our adjusted EBITDA for the first quarter of 2022, the most significant drivers of variances between the two include cash paid for interest, M&A-related costs, which include acquisition-related costs and integration costs, both of which you can find in our adjusted EBITDA reconciliation in MD&A, COVID-related costs, which can also be found in our adjusted EBITDA reconciliation, and a net usage of cash for working capital-related items, which can be found in our statement of cash flows in the section titled changes in operating assets and liabilities. I'll now provide an update on liquidity, credit facilities, and hedging. As of April 2, 2022, we had cash of $17.4 million with the following liquidity available under our credit facilities: $182.4 million of available borrowing capacity under our revolving credit facility, $10 million of availability under our securitization facility, and $200 million of availability under our delayed-draw term loan facility for future acquisitions. With respect to our cash collections in DSO, we collected $428 million against our revenue of $451 million during the first quarter of 2022, and our DSO was 46.5 days. The primary driver of the sequential increase from 44.9 days in Q4 of 2021 was associated with our Home Health and Hospice business. And one item, I'd like to congratulate our revenue cycle and field teams on is their work with the annual revalidation of third-party insurance in the PDS business, which typically occurs in the first quarter of each year and requires a significant amount of preparation and execution. Each year, we continue to improve our processes in this area and our teams performed well on it in the first quarter of ‘22. Turning to our credit facilities. Our outstanding debt approximated $1.4 billion as of April 2, 2022, the components of which can be found in our indebtedness table and liquidity and capital resources section of the 10-Q. Our interest rate exposure under our credit facilities was hedged with the following instruments: $520 million notional amount of interest rate swaps that convert variable rate debt to fixed rate and $880 million notional amount of interest rate caps that cap our exposure to LIBOR at 3%. In summary and as I wrap up here, I'm proud of the resilience of the Aveanna team as we work together to build this great company. Our people and culture are what make us special. We're confident that the Aveanna platform and infrastructure is primed for growth once we navigate through the current labor market headwinds. With respect to the interest rate environment, we've taken proactive steps to reduce our exposure to these pressures by implementing interest rate hedges that reduce our exposure to rising rates, and we continue to benefit from a strong liquidity position, which is supportive of our strategic initiatives. And with that, operator, I think we're ready to open it up for questions.

Operator, Operator

Thank you very much, sir. Ladies and gentlemen, we will now be conducting the question-and-answer session. Our first question is from Matt Borsch of BMO Capital Markets. Please go ahead.

Matt Borsch, Analyst

Thank you. Can you just give us a sense of where maybe the composition of your guidance, particularly on the revenue side may change just based on the trends that you've now seen in the first quarter and made coming into the second quarter as well, I mean in terms of the growth that you are seeing and expecting in Home Health and Hospice versus Private Duty.

Tony Strange, CEO

So, Matt, that's a great question. When considering our guidance, we generally don't provide segment or quarterly forecasts. However, most of the challenges we've discussed regarding the first half of the year are largely related to Private Duty, primarily due to labor constraints with caregivers, as well as the effects of Omicron. Our Home Health business is also facing some labor difficulties, but I believe it is less affected by the issues we encounter with nurses. Therefore, I would say the labor constraints are more significant in Private Duty. While Omicron impacted all our businesses, the labor challenges were more pronounced in Private Duty. Regarding our guidance, we indicated on March 29 that most of the impact from the Omicron variant would occur in the first quarter, with some residual effects into the second quarter. Yet, the labor constraint situation isn’t expected to resolve with the departure of Omicron, and we anticipate that it will continue to develop. Additionally, as Jeff mentioned, with the seven rate increases we have observed so far and ongoing dialogues with various MCOs and payers, along with legislative initiatives considering rate increases, we foresee a positive rate environment for the foreseeable future. While we can discuss the timing of these rate adjustments throughout the remainder of 2022, I believe we will see favorable rate changes every quarter. As these changes occur, we can quickly reinvest those funds into wages. Ensuring better wages will likely lead to an increase in volume. In fact, it’s public information that Pennsylvania implemented a significant rate increase for these services effective January 2022, which was around 10% or 11%. We observed that our volumes remained steady during this quarter, even as other sectors faced declines due to Omicron. Therefore, we are confident that as rates increase, volumes will also improve, reinforcing our optimism for the remainder of 2022. I hope that answers your question, Matt.

Matt Borsch, Analyst

Well, you certainly did. Thank you for all that detail. I'll let you go to the next analyst.

Operator, Operator

Thank you, sir. Our next question is from Joanna Gajuk of Bank of America. Please go ahead.

Joanna Gajuk, Analyst

Good morning. Thanks for taking the question. So first, I guess in the press release, I'm sorry, you mentioned $3.1 million funding you received this quarter, under the American Rescue Plan Act, there was, I guess, signed in early March. So the question is, was this included in the guidance that you contemplated funding coming through? Yeah.

Jeff Shaner, Chief Operating Officer

Hey, Joanna. This is Jeff. I'll start by saying we received funds from the federal government and state mega programs related to the American Rescue Plan Act throughout 2021. You're right that we received ARPA funds in the first quarter, and we expect to receive more in the second, third, and fourth quarters as part of our plans for the year. We obtain ARPA funds in various ways, including temporary rate increases and permanent rate increases, such as the one Tony mentioned in Pennsylvania. We also receive temporary lump sum amounts intended to pass directly to caregivers. Overall, the rates are being supported and driven by federal support for Medicaid programs. As Tony pointed out, whether it’s a permanent rate in Pennsylvania, a temporary rate in North Carolina, or a one-time payment in another state, all of this aims to help realign caregiver wages. That's what we observed in the first quarter, and I believe we will continue to see that in the second quarter and beyond.

Tony Strange, CEO

So, Jeff, would you agree with this? In Pennsylvania, the rate increase we discussed is likely funded by ARPA funds. These funds are being channeled through the State of Pennsylvania as a rate change. I concur with how Jeff explained it, Joanna, that when we consider ARPA funds, they represent additional rates. I recall another rate increase around 2021 or late 2020 in North Carolina, which was initially termed a 'temporary rate increase' but has now become a permanent rate increase. We constantly see rate changes, including ARPA funds through temporary and permanent rate increases. In our view, it is all factored into our guidance regarding positive rate changes.

Joanna Gajuk, Analyst

Go ahead, sir.

Jeff Shaner, Chief Operating Officer

No, just add to Tony's point and the intention of that rate is that may be passed through to the caregivers in some form or fashion to help realign caregivers and that is what we have done and continue to do.

Joanna Gajuk, Analyst

No, that's probably makes sense. So okay, so I guess you have been contemplating that funding and I guess you've been talking about the expectation for better rates throughout the year, when we spoke last time at the end of March. So then when I think, so the follow-up question, so when I'm thinking about the rate, the PDS segment average rate per hour. We should use that Q1 rate as a starting focus in the shale is like okay, I guess we have to exclude that $3 million, but it sounds like there is going to be additional funding coming through the following quarters anyway, so I guess is that the way to think about it that $36.40 something in the quarter as our kind of starting point and grow from there. Thank you.

Tony Strange, CEO

That's a great question, Joanna. I want to point out that the quarter does not reflect the impact of the Accredited acquisition. As we mentioned, the Accredited business primarily consisted of less skilled or unskilled types of services, so I believe that the $36.30 figure is more influenced by the inclusion of Accredited's volume in our results. To answer your question, yes, we expect to see increases in reimbursement rates throughout the remainder of 2022. Additionally, we anticipate wage rate increases for the rest of the year, and overall, we expect our spread per hour for the PDS segment to stay within the range of $10.25 to $10.50 as we progress through the upcoming quarters. You're definitely thinking about this in the right way.

Joanna Gajuk, Analyst

Thank you.

Operator, Operator

Thank you very much. The next question is from Pito Chickering of Deutsche Bank. Please go ahead.

Pito Chickering, Analyst

Hey. Good morning, guys. Thanks for taking my questions. Just back to the labor markets question. Can you give us an update in terms of what you're seeing, in terms of active nurses in recruitment in both Home Health and PDS in April and May?

Jeff Shaner, Chief Operating Officer

I believe Tony articulated it well. Using the example from Pennsylvania, we see that we can continue to keep the reimbursement rates competitive. We've managed to retain and reengage nurses, and as we approach July 1st, which is an important date for many state legislatures, we are concentrating on states where the reimbursement rates have not kept pace with the current market for nurses in the Private Duty Services segment. When we discuss this in August, I anticipate we will share positive updates about additional rate increases in those states necessary to effectively reengage nurses at the level we expect. Our lobbying efforts, both individually and as an industry, have made strides in states that have lagged behind in adapting to the current wage environment for caregivers. As I mentioned earlier, wages are the most critical factor influencing decisions. While culture and engagement matter, wages ultimately drive the decision-making process. To secure the right wage rates to engage caregivers, we must continue our dialogue with legislators and payers. As Tony noted, we have found them to be consistently open to these discussions.

Tony Strange, CEO

So, Pito, my comments will provide additional insights on that. In my view, a year or two ago, mission was equally significant, and nurses tended to move to places where they felt connected to a mission. That has always been in our favor. The jobs we offer have a strong mission and are attractive to nurses. However, given the current inflation trend, I believe that mission has become less prioritized as people are focusing more on wages. Until we can match the wages offered by hospitals, surgery centers, and skilled nursing facilities, we may continue to face challenges. Nevertheless, as Jeff mentioned, I believe we are making progress to compete effectively in those areas. Once we reach that point, I am confident that the mission will regain its prominence, and we will be in a good position moving forward. All of this reinforces my belief that as the year progresses, our wage situation will improve.

Pito Chickering, Analyst

So just sort of go back into there, I understand that as rate increases, they're positive and that's a good example, and the wage great is critical to this, but as you look to your portfolio as a whole today, how is the active nurse percentage right now and recruitment going or are you just completely dependent upon July 1 rate increases to get things back to normal levels?

Jeff Shaner, Chief Operating Officer

I use July 1 merely as an example since many of our state legislatures have effective dates of June 30 and July 1. Let me step back and say that in our Home Health and Hospice business segment, where we employ full-time benefited caregivers, we have managed the Omicron challenge much more effectively. Our turnover and retention rates align with our expectations, and our reliance on contract labor and overtime has appropriately decreased. By employing full-time benefited caregivers and utilizing technology such as Homecare Homebase, along with Medalogix and Muse as better predictive tools, we are now more strategically able to allocate our staff in the Home Health and Hospice segment. Regarding our PDS segment and the ongoing challenges in this business, as mentioned by Tony and me, we are constrained by the rates we can negotiate with our state legislatures and payers. I want to emphasize that we have had very optimistic rate discussions with our payers and legislators over the last few quarters. We are dependent on when they make decisions, which occurs during their annual budgeting process. Therefore, I anticipate a strong outcome for us in Q2 concerning rates, and as we have consistently done, we will continue to pass that incremental increase through to our caregivers to help us recruit and retain more staff.

Tony Strange, CEO

Pito, you didn't ask the question this way, but I'd like to take this opportunity to respond. The other day, someone asked why we don't just implement the wage increase immediately and allow the rate to adjust, which would help fuel our growth. The issue in our Private Duty business is that once we increase the wage, we cannot reverse it. If we were to increase wages significantly and our anticipated rates fall short, we wouldn't be able to retract that increase. I commend our operating team for their discipline in gradually passing through the wage increases as the rates become available. While this approach has slowed our growth, it has also safeguarded our margins, and that will continue to be our strategy.

Pito Chickering, Analyst

All right. Thanks so much.

Operator, Operator

Thank you. The next question is from Brian Tanquilut of Jefferies. Please go ahead.

Brian Tanquilut, Analyst

Hey. Good morning, guys. I guess my first question. Tony, since you mentioned that Q1 was essentially in line with what you guys were expecting internally, maybe if you can share with us any color on how we should be thinking about the second quarter, just so we can avoid kind of like missing versus three burdens.

Tony Strange, CEO

Sure. Well, so Brian, I'll try. I'm going to stop short of we don't provide, we don't provide quarterly guidance. Our guidance, while we did try to provide color between first half and second half, we really don't provide quarterly guidance per se. I think the way that the Street is thinking about it today is not all of that off. I think we will continue to have headwinds related to wage pressure in the second quarter. We've seen the impact that that's had on volume, and I think that will continue now. Jeff made the point; while we're not talking about any one payer or any one state, a lot of our state agencies have a June 30 fiscal year-end and so fortunately or unfortunately, a lot of those rate changes will end up happening at the end of June, which won't benefit Q2. So I would tell you that I don't think we're ready to provide you a number that we think that for Q2, but I think we will continue to face headwinds.

Brian Tanquilut, Analyst

No. I appreciate that. I totally understand. I guess my second question, as I think about the P&L and where the shortfall was versus the Street, it looks more in the Home Health side, so and also regional expenses came in a decent bit higher. So maybe just anything you can share with us in terms of what happened in the Home Health side of the business and just any thoughts on how much you can bring or if you can bring regional expenses down on a dollar basis going forward.

Jeff Shaner, Chief Operating Officer

Yeah. Brian, it's a great question. It's Jeff. I think part of the reason we announced the completion of the Homecare Homebase rollout today is because that has been a distraction for that team and a headwind for that team for the last seven months. We started that implementation in September of last year. We've rolled four companies, four acquired companies onto that platform. You've been around long enough and covered enough of us that it's a major, major, major lift. We're going to continue to get some of the synergy realization from that system between Q2 and Q4 of this year, but really getting our Home Health and Hospice division to one platform, one set of systems, and being able to report data at a much, much deeper level and to be able to respond accordingly. We knew what we wanted to achieve in our Home Health and Hospice business today. We acquired five points almost two years ago and part of this was the realization of that. So we do think we'll continue to see gross margin improvement, as I mentioned in my comments, but we also believe we'll see continued field contribution even though we don't report that segment individually; we expect to see continued profitability improvements in that business due to all the things I just mentioned and I think we're well positioned for that at this point.

Brian Tanquilut, Analyst

Got it. Thank you.

Jeff Shaner, Chief Operating Officer

Thanks, Brian.

Operator, Operator

Thank you. The next question is from Sarah James of Barclays. Please go ahead.

Sarah James, Analyst

Thank you. So it sounds like you guys are reiterating guide, but maybe there could be some movement within it. I just want to make sure if I'm understanding this right, last quarter you talked about there being potentially up to $30 million of COVID impact in 1Q and it sounds like today, you're talking more about $14 million to $15 million and then last quarter you talked about the rate increases coming into play in 1Q and 2Q and it sounded like today, it's more 2Q. So I guess, do I have the changes right and does that imply some movement within the range?

Tony Strange, CEO

I'm going to try to clarify that. Regarding our full year guidance, we still expect revenue to be between $1.89 billion and $1.92 billion, and that hasn’t changed. Referring to our earlier comments about the impact of COVID and Omicron, I believe we mentioned that the overall impact would be around $30 million, with some effect in Q4 and Q1 and a smaller portion in Q2. For Q1, we anticipated revenue to be between $14 million and $15 million. However, despite these discussions, our outlook for the entire year remains consistent based on what we know at this time.

Sarah James, Analyst

And on the rate side, are they coming in slower or being implemented slower or was your expectation always that this is more of a 2Q event?

Tony Strange, CEO

No, I mean I think they're going to come in throughout the year. I mean, Jeff made the comment about mid-year and my comment earlier about a lot of states being on the June 30 fiscal year end, so by definition a lot of them come in mid-year; but no Jeff made the comment throughout the year, we've had seven different rate increases, and we anticipate that trend to continue throughout the year.

Jeff Shaner, Chief Operating Officer

Yeah. And Sarah, I think by the time we're getting into well into Q3, I mean I think we'll be in the mid-teens to high-teens again talking about another year, and last year we had 24 rate increases, that was a record and that was certainly driven by COVID and some of the federal funds that were in play in 2021. But I think we'll be in that same $15 million to $17 million, $18 million range by time we get to September and October. We do have some states that are also a September and October fiscal year-to-date, so I think we're very pleased with the seven year-to-date through the end of April, and I think we'll be in great shape midyear and very well by the time we end Q3.

Sarah James, Analyst

Great. And last question, could you just update us on how the Workday rollout is going?

Tony Strange, CEO

What you said Workday, do you mean Workday or Homecare Homebase?

Sarah James, Analyst

The Workday that allows you to pay your employees or.

Tony Strange, CEO

No. It's going great Sarah, it's almost like an ATM machine that people get to walk by, I mean the caregivers have taken it and groves and run with it. I came out of the exact count, but we have thousands, thousands of caregivers, somewhere in the tune of 3,000 to 4,000 caregivers that utilize it on any given week. And as you know, we pay all of our PDS caregivers weekly and the caregivers have loved it, they've enjoyed it, those who need it and want it to have access to it. Those who don't are fine, but no, it's been a great value added and pretty quickly, it went from being something new and shiny to just being something that was being utilized every week by thousands of caregivers. So it's been a nice addition to our toolbox if you will, of recruitment retention tools, but other than that, it's going great. Thanks for asking.

Operator, Operator

Thank you. The next question is from A.J. Rice from Credit Suisse. Please go ahead.

A.J. Rice, Analyst

Hi, everyone. I want to revisit the program that's being rolled out in Arizona. You mentioned it could serve as a model for other states. I understand some aspects of the Private Duty side, but I'm curious about how it benefits the adult side as well. Does it enable nurses to provide care that qualifies for Medicare reimbursement, allowing patients who might otherwise need institutional care to remain at home? How does this initiative assist you on the adult side?

Tony Strange, CEO

I see it as entirely part of the Private Duty Services segment. While some of the patients may be adults, it's important to distinguish this from Home Health and Hospice intermittent care; it fits within Private Duty Services. As you mentioned, this involves new hours for the same patients we are already caring for in nursing, specifically in Private Duty nursing, where they receive skilled care from either LPNs or RNs. With the addition of these new hours, care is being supplemented by family members or close friends, assisting with the nurses' activities. The template originated in Colorado, where we've successfully implemented this program for over five years. We believe this model will not only be adopted in Arizona but could also be implemented in several other states. We are currently discussing this with many states to adopt a similar structure. This model is additive rather than subtractive, and it remains within the unskilled realm of Private Duty Services.

A.J. Rice, Analyst

Okay. And my follow-up question was going to be to ask you about the competitive landscape. I think in your prepared remarks, you said your deal pipeline remained robust. Are mom-and-pop regional providers, are they dealing with the labor challenges that you're describing in pretty much the same way? Is there any reason to think you're doing better and therefore, they might be looking to partner? Have you seen anyone drop out of the market because they just can't get the staff at a reasonable rate to continue to serve patients?

Tony Strange, CEO

It's a great question, A.J. I'll break your inquiry into two parts: Home Health and Hospice, and Private Duty. In the Home Health and Hospice sector, I would say no, they're not completely insulated from the nursing shortage. We are seeing these companies face staffing challenges, although it's not to the extent of giving up entirely; they've reduced volumes and similar adjustments. Moreover, many of the transactions we consider have adjustments related to COVID, where companies are indicating that if it weren't for COVID, their performance would be stable, indicating they're facing similar struggles. On the Private Duty side, the staffing and labor issues are significant. Companies lacking the size and scale to implement strategies like daily pay, which Jeff and Sarah mentioned, are finding it very tough. We've noticed some Private Duty companies expressing that they can no longer operate under these circumstances. This situation does create opportunities for us, but as I mentioned earlier, we are being very disciplined in our approach. We are aware of our valuation and what is required for any deal to benefit us and our shareholders. Thus, we are cautiously advancing in M&A while continuing to pursue growth at the same time.

A.J. Rice, Analyst

Okay. Just maybe clarify that; so if someone says that we can't do this anymore on the Private Duty side, do you have to buy them out or can you just assume their patients or if they can't make it, you're probably not going to be able to cover those patients, how do we think about that?

Tony Strange, CEO

I wouldn't say they are just closing the door. What I meant to clarify is that it's becoming increasingly difficult to find nurses and effectively operate this business. Size and density are crucial, especially when staffing. For instance, staffing 10 patients spread 20 miles apart is much more challenging than handling 100 patients who are just 4 to 5 miles apart, which simplifies things on the Private Duty side. However, the Private Duty sector is currently facing challenges. We have conducted internal research to better understand our caregiver population, including their preferences, reasons for leaving, and reduced working hours. We have received valuable insights. Caregivers who enjoy the Private Duty sector are passionate about the work and mission. They appreciate our orientation process, find it easy to work with us, and value our leadership. The key issue is wages; with rising gas prices and living costs, they need to seek higher pay. Interestingly, the most positive feedback from our caregivers indicates that they would like to return to work, but only if the compensation improves. We have a clear understanding of what is needed to encourage caregivers to reengage in Private Duty, and that involves offering them more money.

Pito Chickering, Analyst

Right. Okay. Thanks a lot.

Operator, Operator

Thank you. The next question is from Ben Hendrix of RBC Capital Markets. Please go ahead.

Ben Hendrix, Analyst

Thanks guys. Just a really quick follow-up on the Home Health side, kind of with Comfort Care almost nearly integrated with the Homecare Homebase rollout done, I just wanted to get an idea of what kind of efficiencies you can expect to gain from a margin perspective in that segment, maybe color on visits per episode, how that's trended, and kind of where that can go now that you've got Homecare Homebase, Medalogix, and Muse up and running. Thanks.

Tony Strange, CEO

Yeah. It's a great question, and I think in my prepared remarks, we said that we still see some room for gross margin improvement. We're running right in that 48.5%, pushing 49%. We still think there is about another point, point-and-a-half left there for improvement. And then I'll just say Homecare Homebase takes a little bit of time to get fully digested, and I think it's the reason why we really haven't spent a lot of time talking about it over the last few quarters as we were digesting it. We've just added Medalogix and Muse to both our Home Health and our Hospice business. We've enjoyed the partnerships getting to know those guys. And I think as Homecare Homebase settles in, as we're able to get one set of reports for all of our Home Health and Hospice businesses, one thing is that we all love about Homecare Homebase is just, they've got the best data, they've got the best reporting and the best actionable items. I think all of us believe that we can continue to get more cost efficiencies out of the Home Health and Hospice side of the business now that we're on that platform. So and just get a better insight as you said, whether it's cost per visit, whether it's visits per episode, whether it's case mix, whether it's just putting the right nurse in the right home at the right time. I think the thing that I'm most excited about is the ability for Rob and I to manage the business on a go-forward basis, knowing that we've got the best data. And so I think obviously you hear excitement in our voices; it's been almost 10 months since we signed a contract and started the implementation process with Homecare Homebase. So we're glad to be on the other side of it and glad to be focusing now just on driving the efficiencies.

Ben Hendrix, Analyst

Great. Thanks guys.

Operator, Operator

Thank you. Our last question is from John Ransom of Raymond James. Please go ahead.

John Ransom, Analyst

Hey. Just to kind of tag on to the labor and how money solved the things. So first question, do you have just sort of a range of update you expect to get in the second half of the year in percentage terms.

Tony Strange, CEO

I think the best way to answer that question is to refer back to our call on March 29, where we stated that we would anticipate EBITDA for the second half of the year to be in the range of $215 million to $220 million. For us to achieve that, we need to reengage more nurses in the workforce. While we haven't specified what that number might be, increasing the number of nurses is essential to meet our targets.

John Ransom, Analyst

What I mean by that is, let's say, you're going to pay $100 on average for all your states, do you think a 5% rate increase is in the card, so it goes to $105? You said you have seven updates, I'm just trying to think about your pricing, kind of how to baseline your pricing expectations as we sit today realizing we don't have all the details.

Tony Strange, CEO

Yeah. I understand your question better now. And Jeff, why don't you chime in? But the answer to your question, no, John, it's not a 1% or 2% market basket update kind of pricing; it is meaningful price change. But why don't you give some color around that, Jeff?

Jeff Shaner, Chief Operating Officer

Yeah. John, a couple of our biggest states, two of our biggest five states are in their final legislative process and have a July 1 effective date. So in those two states, we have meaningful, talking a north 15% to 20% movement in the reimbursement rate on the table in the legislative process and with the full intention that we would move wage rates in the $5 or $6 an hour type range in those markets, so that's the kind of movement we're talking about negotiating.

Tony Strange, CEO

Well, and Pennsylvania would be a great example. Pennsylvania just raised rates, so 11% at the beginning of this year, so that's a great data point that shows you the kind of magnitude we're talking about.

John Ransom, Analyst

All right. So if we were to think about this, so let's just use dollar, so it might be less confusing. So let's say you got a $6 an hour increase in a state, are you just having to turn around right around and pay $6 back to the nurse? There's really no more earnings to total pass through or do we think about that that you keep your kind of historical margin and there is a little bit for the company that goes back to the caregiver.

Tony Strange, CEO

I believe you're thinking about it correctly. I think our margins will either hold steady or potentially expand slightly, but most of the rate increase beyond the margin will go directly to the caregiver.

John Ransom, Analyst

A 10% increase in gross profit dollars is something like that. So, I understand. Yes. And then I have a follow-up.

Tony Strange, CEO

John, I'm sorry the connection is a little tough, but I want to make it clear. We're not considering rate increases to boost our margins. Jeff mentioned that gross margins in the Private Duty business are expected to settle around 29% to 30%. We don't anticipate that rate increases will raise that number to 31% or 32%. Instead, we will redirect everything except the margin back to the caregiver.

John Ransom, Analyst

Yeah. So the margin stays the same, the dollars are hard and you get some G&A leverage. That's the way to think about it.

Tony Strange, CEO

And growth. We get growth and G&A.

John Ransom, Analyst

All right. My other question is obviously the numbers have been what we all wanted, do we have any debt covenant step-up in the next year or two that you would care to flag?

Tony Strange, CEO

From a maintenance covenant standpoint, we have a first lien leverage covenant set at 7.6 times credit adjusted EBITDA, which gives us considerable leeway. This situation only applies if we are in a compliance period with around a third or more of our revolver drawn. Based on that ratio, we have ample room to maneuver.

John Ransom, Analyst

Okay. That's it for me. Thank you.

Tony Strange, CEO

Thanks, John.

Operator, Operator

Thank you very much. There are no further questions at this time and I would like to turn the floor back to Mr. Tony Strange for some closing comments.

Tony Strange, CEO

Thank you, operator, and we really do appreciate all of your time this morning and appreciate your interest in Aveanna. As always, we'll make ourselves available to the extent that anybody needs to do some additional follow-up, we'd be glad to spend time with you individually. With that, we look forward to updating you after Q2 and have a great day. Thank you.

Operator, Operator

Thank you very much, sir. Ladies and gentlemen, that concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.