Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning, and welcome to the Aveanna Healthcare Holdings First 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 Shannon Drake, Aveanna’s Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Shannon Drake: Thank you, Maria. Good morning, and welcome to Aveanna’s first quarter 2023 earnings call. I’m Shannon Drake, the company’s Chief Legal Officer and Corporate Secretary. With me today is Jeff Shaner, our Chief Executive Officer; and Dave Afshar, 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 any 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 quarterly report on Form 10-Q filed with the SEC. With that, I will turn the call over to Aveanna’s Chief Executive Officer, Jeff Shaner. Jeff?

Jeff Shaner: Thank you, Shannon. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our first quarter results and how we are progressing against our near- and longer-term objectives for 2023 and beyond. My initial comments will briefly highlight our first quarter results, along with the early progress we are making in addressing the labor markets and our ongoing efforts with government and managed care payers to create additional capacity. I will then provide some thoughts regarding our liquidity and refreshed outlook for 2023 prior to turning the call over to Dave to provide further details into the quarter and full year guidance. Starting with some highlights for the quarter.

Revenue was approximately $466.4 million, representing a 3.5% increase over the prior year period. Gross margins was $144.5 million or 31%, which is essentially flat when compared to the comparable prior year period. And finally, adjusted EBITDA was $28.5 million, representing a 25% decrease when compared to the prior year period, primarily due to the costs associated with the current labor environment. As we have previously discussed, the labor environment represents the primary challenge that we are aggressively addressing in 2023 to see Aveanna resume the growth trajectory that we believe our company can achieve. As a reminder, we do not have a demand problem. The demand for home- and community-based care has never been higher with both state and federal governments and managed care organizations asking for solutions that can create more capacity.

As communicated in our previous quarter, our ability to recruit and retain the best talent is a function of rate. Our business model offers a preferred work setting that is mission-driven, providing a deep sense of purpose for our teammates. But our caregivers need to be able to provide for themselves and their families in this inflationary environment, and we must offer a competitive wage. Since our year-end earnings call, I am pleased with the progress we have made on several of our rate improvement initiatives with both government and managed care payers. 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 in three important states, California, Texas and Oklahoma, which represent approximately 25% of our total Private Duty Services revenue.

In the first quarter, we were able to demonstrate the value we create for medically fragile patients in Oklahoma and have successfully secured a double-digit rate increase, which was retroactive to January 1 of this year. Since the Oklahoma rate increase, we have doubled the number of caregivers hired per week in Oklahoma, demonstrating the impact rate increases have on our ability to attract caregivers at the right wage profile. We have also made significant strides with the Texas legislature that gives us increased optimism that we will achieve our targeted double-digit rate increase for our Texas private duty nursing business beginning September 1. While this rate increase isn’t guaranteed at this stage, early indicators reinforce our optimism that our efforts are gaining meaningful traction.

Finally, we have spent considerable time with the California legislature and the governor’s office, demonstrating the importance of these rate increases and how they support an overall lower health care cost, improve patient satisfaction and quality outcomes. Based on our actions to date, we believe that we are taking the appropriate steps needed to support our requested increase in this upcoming California budget cycle that is effective July 1. While there is still much work to be done on the legislative front, we believe that we can accelerate our growth by increasing caregiver capacity and bringing more patients to the comfort of their home. By passing meaningful wages through to our caregivers, we 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 also discussed the need to double the number of preferred payers in 2023. We define preferred payers as those payers that support value-based care by offering an above-market reimbursement rate and value-based payments in exchange for proven savings. Our goal for 2023 was to double our volumes from Private Duty Services preferred payers from approximately 10% of volumes to 20% by year-end 2023. In the first quarter, we’ve added two additional preferred pay agreements in key markets. Our preferred payer volumes increased to approximately 13% of PDS volumes. Also, we have a robust preferred payer pipeline and are very optimistic we will continue to execute on this strategy – sorry, strategic initiative throughout 2023. Finally, we discussed the need to shift our current labor capacity to those payers that value our services and appropriately reimburse us for the care provided.

We have begun several initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates while minimizing days in an acute care facility. In the first quarter, our preferred payer relationships benefited from accelerated nurse hires up two times to three times more than our other payers, and we continued to experience staffing rates 15% to 20% greater with significantly higher patient admissions. The value proposition is straightforward. Preferred payers reimburse us a fair rate. We pay market competitive nurse wage rates while also earning value-based payments for achieving positive clinical outcomes and improved staffed hours. While we are encouraged by our early 2023 rate increases and subsequent recruiting results, we believe our business can rebound quickly 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 payer 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 a patient’s home. Before I turn the call over to Dave, let me briefly comment on our liquidity and refreshed outlook for 2023. On the liquidity front, we continue to make progress on improving our cash flow by focusing on attaining adequate reimbursement rates and growing our volumes. We are also implementing initiatives to rightsize our corporate cost structure while optimizing our cash collections. As Dave will discuss further, we have ample liquidity to operate our business while we work with government and payers to improve the reimbursement rates to reflect the current inflationary environment.

As it relates to our refreshed outlook for the year, while we exceeded our original revenue and EBITDA goals for the – in the first quarter, we have several rate initiatives that still need to come to fruition over the next few months with particular emphasis on Texas and California. That being said, on the strength of our first quarter results, we are comfortable reiterating our full year revenue and adjusted EBITDA guidance of greater than $1.84 billion in revenue and at least $130 million in adjusted EBITDA, respectively. We believe it is important to continue to set expectations that acknowledge our environment we are operating in and the time it will take to transform our company and return to sustainable growth. We believe our outlook provides a prudent view considering the challenges we face with the current inflationary labor environment, and hopefully, it proves to be conservative as we execute throughout the year.

Finally, I am proud of our Aveanna team as we execute on our 2023 strategic objectives. The power and efficiency of the home as a health care setting remains critical to our patients, families, payers, referral sources and government partners. The value of our clinical workforce continues to be recognized through the various rate increases across the country and through our expanding preferred payer relationships. I look forward to updating you on our results at the end of Q2. With that, let me turn the call over to Dave to provide further details on the quarter and our 2023 outlook. Dave?

Dave Afshar: Thanks, Jeff, and good morning. I’ll first talk about our first quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023. Starting with the top-line. We saw revenues rise 3.5% over the prior year period to $466.4 million. We experienced revenue growth in both our Private Duty Services and Medical Solutions segments, which grew by 6.5% and 10.7%, respectively, while our Home Health & Hospice segment declined by 15.8% as compared to the prior year quarter. Consolidated adjusted EBITDA was $28.5 million, a 25% decrease as compared to the prior year. Now taking a deeper look into each of our segments, starting with Private Duty Services. Revenue for the quarter was approximately $373 million, a 6.5% increase and was driven by approximately 9.8 million hours of care, a volume increase of 1.8% over the prior year.

While volumes 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 beginning to see early signs of improvement in the labor markets. Q1 revenue per hour of $38.12 was up $1.69 or 4.7% as compared to the prior year quarter and is a $0.46 or 1.2% sequential improvement as compared to Q4 of 2022. We expect to see continued improvement in 2023 as we execute on our rate increase initiatives, and we continue to be encouraged with our ability to attract caregivers and address the market demand for our services when we obtain adequate reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $104.2 million of gross margin or 27.9%, a 0.2% decrease from the prior year quarter.

Our cost of revenue rate, $27.47, which is 4.9% increase as compared to the prior year, represents the rate pressures we saw in the labor markets throughout 2022. That being said, our cost of revenue rate improved in the first quarter by $0.61 or 2.1% on a sequential basis. Our Q1 spread per hour was $10.65, representing a 4.2% year-over-year improvement and an 11.2% sequential improvement as compared to Q4 of 2022. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $56.1 million, a 15.8% decrease over the prior year but a sequential improvement of $1.4 million over the previous quarter. We’re pleased with the gross margin improvement from 41.9% in Q4 of 2022 to 44.6% in the current quarter as we continue to focus on additional direct and indirect cost initiatives necessary to achieve our targeted gross margins in the 45% to 46% range.

We continue to see admission trends for the division return to a more normalized level. As a reminder, at our lowest point in mid-summer, our weekly home health admissions were in the low 800s. In Q4 of 2022, we averaged approximately 850 home health admissions per week with an episodic rate of 63%. These positive trends continued in Q1 of 2023, where we experienced approximately 900 home health admissions per week while improving our episodic mix. Our first quarter revenue was driven by 11,700 total admissions with approximately 68% being episodic and 11,900 total episodes of care. Medicare revenue per episode for the quarter was $29.69, essentially flat with the prior year quarter and sequentially. And although 2022 was a difficult year for our Home Health & Hospice segment, we firmly believe in this business and its long-term value proposition.

We’ve established – we have an established Home Health & Hospice platform poised for growth, focused on delivering value through sound operational management and delivering excellence in patient care. We expect to see sequential improvement throughout 2023 as our direct and indirect cost initiatives take hold. Now to our Medical Solutions segment results for Q1. During the quarter, we produced revenue of $37.3 million, a 10.7% increase over the prior year. Revenue was driven by approximately 85,000 unique patients served and revenue per UPS of $439.29. Gross margins were $15.3 million, a $1.2 million or 8.5% improvement over the prior year quarter. Gross margins, which were 40.8% in the quarter, represented a 0.9% decline as compared to the prior year quarter, but a 1.1% sequential improvement as compared to the fourth quarter of 2022.

We continue to evaluate ways to be more efficient and effective in our back office to leverage our overhead as we continue to grow. While other enteral providers decided to exit the market in 2022, we see this as an opportunity to expand our national enteral presence and to further our payer partnerships. In summary, we continue to fight through a difficult labor and inflationary environment while keeping our patients’ care at the center of everything we do. It’s clear to us that shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Aveanna. As Jeff stated, our primary challenge is reimbursement rates. With the positive momentum we saw in Q1, we’re optimistic that such trends will continue into the second quarter with sequential improvement expected in all segments.

As we make progress in 2023 with the rate environment, we will pass through wage improvements and other benefits to our caregivers in the ongoing effort to better improve our volumes. Now moving on to balance sheet and liquidity. At the end of the first quarter, we had liquidity in excess of $215 million, representing cash on hand of approximately $34.4 million, $20 million of availability under our securitization facility and approximately $162 million of availability on our revolver, which was undrawn at the end of the quarter. Lastly, we had $38 million of outstanding letters of credit at the end of the quarter. As we look at the timing of earnings for 2023 and the related cash flows, while we may draw on the revolver for short-term timing-related items throughout the year, our goals are for the revolver to be undrawn as of year-end and, more importantly to drive positive operating cash flows in the second half of the year as we begin to realize the benefits of all the efforts that we’re working so hard on.

On the debt service front, we had approximately $1.48 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 LIBOR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June of 2026, and our interest rate caps extend through February of 2027. One last item I will 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 $7.5 million for the quarter as a result of certain onetime working capital items, and free cash flow was $2.9 million.

We also expect to see cash flow benefits throughout 2023 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 refreshed outlook for 2023. While we’re pleased with our first quarter results, we believe it’s prudent to maintain both our original revenue and adjusted EBITDA guidance of greater than $1.84 billion and at least $130 million, respectively. The trends we saw in the first quarter continue, and we’re successful in obtaining the requisite rate increases needed in California and Texas. We would plan to update our guidance in the back half of the year. As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year and our volumes grow.

We now expect approximately 45% of our full year guided adjusted EBITDA to be recognized in the first half of 2023. 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 the increases to attract and retain more caregivers and drive volumes. Our EBITDA will also ramp as we realize the benefits of our cost savings initiatives. And finally, as we wrap up National Nurses Week tomorrow, we would like to take a moment to recognize our incredible caregivers and the impact they make in the lives of our patients and their families every day. And with that, I’ll turn the call over to the operator.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Operator: Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Operator: Our next question comes from A.J. Rice with Credit Suisse. Please proceed with your question.

Operator: [Operator Instructions] Our next question comes from Joanna Gajuk with Bank of America. Please proceed with your question.

Operator: Our next question comes from Scott Fidel with Stephens Inc. Please proceed with your question.

Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Jeff Shaner for closing comments.

Jeff Shaner: Thank you, Maria, and thank you, everyone, for joining our Q1 earnings call today. And again, thank you for your interest in our Aveanna story. We look forward to updating you on our progress at the end of Q2 in August. Thanks, and have a great day.

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