Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q3 2023 Earnings Call Transcript November 10, 2023
Operator: Good morning and welcome to Aveanna Healthcare Holdings Third Quarter 2023 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 call over to Shannon Drake, Aveanna’s Chief Legal Officer and Corporate Secretary. Thank you, Shannon. You may begin.
Shannon Drake: Good morning and welcome to Aveanna’s Third Quarter 2023 Earnings Call. This is Shannon Drake, the Company’s Chief Legal Officer and Corporate Secretary. With me today is Jeffrey Shaner, our Chief Executive Officer; Matt Buckhalter, our Interim Chief Financial Officer; and Debbie Stewart, our Chief Accounting Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and can 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission. With that, I will turn the call over to Aveanna’s Chief Executive Officer, Jeff Shaner. Jeff?
Jeffrey 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 third quarter results and how we are continuing to progress against our near and longer-term objectives for 2023 and beyond. My initial comments will briefly highlight our third quarter results, along with the 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 Matt to provide further details into the quarter and full year guidance. Let’s start with some highlights for the third quarter.
Revenue was approximately $478 million, representing a 7.9% increase over the prior year period. Gross margin was $147.3 million or 30.8%, representing a 9.4% increase over the prior year period. And finally, adjusted EBITDA was $36.2 million, representing a 46.2% increase over the prior year period, primarily due to the improved payer rate environment as well as cost reduction efforts taking hold. As we have previously discussed, the labor environment represents the primary challenge that we continue to aggressively address 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 clinical capacity.
As communicated in previous quarters, 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. However, 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 second quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and managed care payers as well as early 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 represent approximately 25% of our total PDS revenue.
Year-to-date 2023, we have successfully obtained double-digit PDS rate increases in 8 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 should continue to see positive progress throughout 2023 and into 2024 as we continue to focus on the remaining states. As a point of reference, the majority of the rate increases are effective in the second half of 2023, which will result in a full year benefit as we head into 2024. While we are pleased that our PDS legislative messaging is being well received by state legislatures, we still have much work to do. As an example of the work ahead, we received a modest increase in Texas effective September 1st and do not anticipate being included in the California budget until fiscal year 2025.
We believe that we made significant strides with both the Texas and California legislature demonstrating the importance of rate increases and how they support an overall lower health care costs, improve patient satisfaction and quality outcomes. However, it is clear that we need to further accelerate our preferred payer strategy and continue to focus on opportunities within our current infrastructure to allow us to pass meaningful wages through to our caregivers. This 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. Now moving to our progress with preferred payers. Our goal for 2023 was to double our PDS preferred payer volumes from approximately 10% to 20% by year-end.
In the third quarter, we added 2 additional preferred payer agreements raising our total to 12. Our preferred payer volumes increased to approximately 17% of total PDS volumes, and we are optimistic that we will continue to execute on this strategic initiative as we head into 2024. While we are taking a national approach to our PDS preferred strategy, we are placing particular focus on the state of Texas due to the moderate rate increase and intensifying our ability to shift caregiver capacity to our preferred payers. As of September 30, we now have over 55% of our Texas PDN volumes with preferred payers and believe we have an opportunity to further improve this trend to approximately 70% in 2024. Moving on to our preferred payer progress in home health.
Our goal for 2023 was to improve our episodic payer mix by 10% from approximately 60% to above 70% by year-end 2023. Year-to-date, we have signed 6 new episodic agreements and improved our episodic mix from 63% at the end of 2022 to 75% in Q3. We continue to remain focused on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis and are focused on improved clinical and financial outcomes. 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 continued several initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates while minimizing days in an acute care facility.
In the third quarter, our preferred payer relationships benefited from accelerated caregiver hires of approximately 3 times more than our other payers. And we continued to experience staffing rates approximately 20% to 25% greater with significantly higher patient emissions. These positive labor trends have continued into the fourth quarter and further validate our preferred payer strategy. Preferred payers reimburse us a fair rate, and we pay market competitive wage rates while also earning value-based payments for achieving positive clinical outcomes and improved caregiver capacity. We are encouraged by our 2023 rate increases and subsequent recruiting results, and our business is beginning to demonstrate 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 payer base, providing 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 briefly comment on our liquidity and refreshed outlook for 2023. On the liquidity front, we continue to make progress on improving our cash flows by focusing on attaining adequate reimbursement rates and growing our volumes. We are also seeing the benefits from the cost efficiency efforts we implemented earlier this year to right size our cost structure while optimizing our collections. As Matt will discuss further, we have ample liquidity to operate our business while we work with government and MCO payers to improve the reimbursement rates to reflect the inflationary environment.
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As it relates to our refreshed outlook for the year, based on the strength of our first 9 months results and the continued rate improvement, we are comfortably raising our full year revenue guidance to a range of $1.87 billion to $1.88 billion and an adjusted EBITDA guidance range of $134 million to $137 million, respectively. We believe our revised outlook provides a prudent view considering the challenges we still face with the current inflationary labor environment and hopefully, it proves to be conservative as we close out 2023. Finally, I am really proud of our Aveanna team as they have continued to execute 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 various rate increases across the country and through our expanding preferred payer relationships. With that, I look forward to updating you on our results at the end of Q4. And let me turn the call over to Matt to provide further details on the quarter and our revised 2023 outlook. Matt?
Matt Buckhalter: Thanks, Jeff, and good morning. I’ll first talk about our third quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023. Starting with the top line, we saw revenues rise 7.9% over the prior year period to $478 million. We experienced revenue growth in all 3 operating divisions led by our private duty services, Medical Solutions and home health and hospice segments, which grew by 8.2%, 7.3% and 6.3% compared to the prior year quarter. Consolidated adjusted EBITDA was $36.2 million, a 46.2% increase as compared to the prior year, reflecting the improved payer rating environment as well as cost reduction efforts taking hold. And I’ll take you a deeper look into each of our segments.
Starting with private duty services. Revenue for the quarter was approximately $385 million, an 8.2% increase and was driven by approximately 10.1 million hours of care, a volume increase of 4.5% 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 beginning to see signs of improvement in the labor markets. Q3 revenue per hour of $38.13 was up $1.29 or 3.7% as compared to the prior year quarter. We expect to see continued improvement in 2023 as we execute on our rate increase initiatives. 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 $104.5 million of gross margin or 27.2%, a 3.6% increase from the prior year quarter. Our cost of revenue rate of $27.78 which is a 5.5% increase as compared to the prior year, represents the rate pressures we continue to experience in the labor markets. Our Q3 spread per hour was $10.35, representing a 0.9% decrease year-over-year. As a reminder, our Q2 spread did benefit from some timing-related items and did normalize in our expected $10 to $10.50 range for Q3. Moving on to our home health and hospice segment. Revenue for the quarter was approximately $53 million, a 6.3% increase over the prior year. Revenue was driven by 9,300 total emissions with approximately 75% being episodic and 11,200 total episodes of care.
Medicare revenue per episode for the quarter was $3,046, up 0.8% as compared to the prior year. We have intentionally focused on rightsizing our approach to growth in the near term by focusing on preferred payers 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 think about Q4, we expect marginal growth in admissions and total episodes with additional improvement coming in early 2024. We are committed to a disciplined approach to growth while shifting our capacity to those payers who value our clinical resources. While we are pleased with our gross margin of 47.9% in Q3, demonstrating our continued focus on cost initiatives to achieve our targeted margin profile.
We wrote off the majority of the remaining goodwill associated with the home health and hospice business, representing $105 million noncash charge — this noncash charge reflects our renewed focus on preferred payer relationships, while our cost management initiatives mature over the next several years. 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 and hospice platform is dedicated to creating value through operational effectiveness and the delivery of exceptional patient care. Now to our Medical Solutions segment results for Q3. During the quarter, we produced revenue of $40.3 million, a 7.3% increase over the prior year. Revenue was driven by approximately 88,000 unique patients served, an 8.6% increase over the prior year period and revenue per UPS of $457.6. Gross margins, which were 43.2% for the quarter were flat on a sequential basis from Q2 and in line with our target margin profile for Medical Solutions.
We continue to implement initiatives to be more effective and efficient in our operations to leverage our 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 payer partnerships. In summary, we continue to fight through difficult labor and inflationary 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 payers who value our partnerships as the path forward at Aveanna. As Jeff stated, our primary challenge continues to be reimbursement rates. With the positive momentum we saw in Q3, we’re optimistic that such trends will continue into 2024.
As we continue to make progress with the rate environment, we will 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 third quarter, we had liquidity in excess of $236 million, representing cash on hand of approximately $48.3 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 had $32 million in outstanding letters of credit at the end of Q3. I’m proud of the progress we’ve made in enhancing our overall liquidity throughout the year. The debt service front, we have approximately $1.47 billion of variable rate debt at the end of Q3.
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 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 positive $25.7 million for the quarter, and free cash flow was approximately positive $16.9 million. While Q3 benefited from some timing-related items, which we expect to be a moderate headwind to Q4 cash flows, we continue to believe we will end the year as a positive operating cash flow company.
While we expect to see continued cash flow benefits as our top line and cost management initiatives come to fruition as we head into 2024. Before I hand the call over to the operator for Q&A, let me take a moment to address our fresh outlook for 2023. As Jeff mentioned, we are comfortable raising our full year revenue guidance to a range of $1.87 billion to $1.88 billion and adjusted EBITDA guidance range of $134 million to $137 million, respectively. In closing, I’m proud of all of our Aveanna team members and their hard work in achieving these results. I look forward to the continued execution of our 2023 strategic plan and updating you further at the end of Q4. With that, let me turn the call over to the operator.
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Q&A Session
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Operator: Now I will be conducting our question-and-answer session. [Operator Instructions]. Our first question today is coming from Brian Tanquilut from Jefferies. Your line is now live.
Unidentified Analyst: You have Taji [Ph] on for Brian. So my first question is going to be on the final home health ruling. Obviously, we saw the 80 basis point bump, which is a positive revision. Just curious how the team is currently thinking about that and the impact of the business and then also to — obviously, we still have the temporary adjuster on the table. But just curious how you’re thinking about that. And you’ve made a lot of great strides in improving the episodic mix in the business as referenced on the call. So I guess how that informs the outlook for 2024?
Jeffrey Shaner: Good morning, this is Jeff. Yes Taji, I’m going to step up, and I’ll start with kind of where you ended that question is how we think of early thoughts on 24 guidance. And I’ll go back to kind of the corporate company, right? We talked about 19 PDS state rate improvements. That’s a great year for us. It was slightly better than we expected, even though we didn’t achieve the full Texas and California rate increase in 2023, it was in line to better than we expected. So we’ve got nice momentum rolling from our entire PDS segment into 2024. I’ll add that you probably saw we had about 4.5% year-over-year growth in Q3. That’s the strongest year-over-year growth we’ve had since COVID. So continued momentum, the rate increases are working.
We’re deploying more caregivers to more homes, helping more families. So really nice momentum moving out of 23 and 24 for our PDS segment. And then as you said, although home health and hospice is a much, much smaller segment to us, we certainly were pleased with the Hospira final rule. And I think you’ll find us to be directly in line with our peers on the home health rule that we continue to be disappointed in CMS’ unwillingness to address the labor and inflationary environment over the last 3 to 4 years. We obviously appreciate the fact that the final rule was better than the proposed rule. But at the same day, as our peers have said, as the National Association from Home Care has gone on record, the home health industry is still facing much, much, much greater raising wages and inflation and the lack of recognition from that from the rate is disappointing.
So — at the end of the day, that’s not going to slow us down, Taji. We’ve got a great business model. We were very pleased with our 75% episodic mix in Q3. We expect that to be above 70% as we end the year. And I think as you’ve heard Matt and I talked about now for a couple of quarters, our home health and hospice business has been fixed internally — clinically, we’re strong, financially were strong, and we are disciplined to grow this business to the payers who are going to pay us on an episodic basis. So we’re excited about 24%. And although the home health rule, we still feel falls far short. We’re excited about the momentum that we carried in 2024.
Unidentified Analyst: Great. Really appreciate the commentary. And then I know we always have a commentary around we don’t have a demand problem. It’s really like labor. So just curious, I mean, it’s encouraging to hear that it’s improving, and we’ve been seeing the same thing in our data checks. Just curious, how should we be thinking about directionally not asking for any guidance, but how like wages — wage inflation for next year? What’s the right assumption? And then obviously, I see based off the guidance, margins will be slightly north of 7%. Is that still a proper launching point for next year? Is there anything else that we may be contemplating outside of just the rate increases and initiatives you’re making on the rate side and then also too, just like inflationary cost, hopefully moderating?
