Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q4 2022 Earnings Call Transcript

Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good morning, and welcome to Aveanna’s Healthcare Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. Today’s call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I’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: Thanks, Kamila. Good morning, and welcome to Aveanna’s fourth quarter 2022 call. My name is 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 filed with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today’s call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning’s press release, which is posted on our website, aveanna.com, and in our most recent annual report on Form 10-K. 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 Q4 and full year 2022 results and how we are moving forward at a . My initial comments will briefly highlight our fourth quarter results, along with the steps we are taking to address the labor markets, and our ongoing efforts with government and commercial payers to create additional capacity. I will then provide some thoughts regarding our outlook for 2023, prior to turning the call over to Dave to provide further details into the quarter and our outlook. Starting with some highlights for the quarter. Revenue was approximately $451 million, representing a 9% increase over the prior period.

Gross margin was $128.8 million or 28.5%, a 3.5% increase over prior year period. And finally, adjusted EBITDA was $29.7 million, representing a 35% decrease when compared to the prior year, 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 need to address in 2023, to see Aveanna begin to resume the growth trajectory that we believe our company can achieve. It is important to note that our industry does 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. To begin to capitalize on this demand and free up labor capacity, we are undertaking several initiatives.

First and foremost, our ability to recruit and retain the best talent is a function of a 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 competitive wages. While we have several initiatives underway to improve the rate we are paid by government and managed care payers for the services we provide, there are three primary areas of focus. First, we need to execute on our private duty legislative strategy to increase rates by double-digit percentages in three of our larger states, California, Texas and Oklahoma. These three states represent approximately 25% of our total PDS revenue, and we have active legislative, media and lobbying efforts in place to demonstrate the importance of these rate increases and how they support an overall lower health care costs, improve patient satisfaction and quality outcomes.

While we continually focus on legislative activities in all of our states, if we can directly impact these three states in 2023, we can accelerate our growth by increasing caregiver capacity and bringing more patients to the comfort of their own 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. Second, we need to double the number of preferred payers in 2023. We define preferred payers as those payers that support value-based care by offering us an above-market reimbursement rate and value-based payments in exchange for proven savings. We began this journey in 2022 with strong success in our Texas and Pennsylvania markets and have ongoing discussions to further expand these relationships in 2023, based on positive results generated for these payers to date.

Our PDS preferred payers represent approximately 10% of our PDS volumes to date, and we see this expansion accelerating towards 20% by year-end 2023. Our dedicated payer relations team has a robust managed care payer pipeline, and I expect us to add additional preferred pay agreements in the first half of 2023. Finally, we will continue to shift our current labor capacity to those payers that value our services and appropriately reimburse us for the care provided. We have begun a number of initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates while minimizing days in an acute care facility. Our preferred payer relationships are experiencing nurse hires approximately 2x to 3x more than our other payers. We are experiencing staffing rates 15% to 20% greater with preferred payers and significantly higher patient admissions from children’s hospitals.

The value proposition is straightforward, preferred payers reimburse us a fair rate, and we pay market competitive nursing wage rates while also earning value-based payments for achieving positive clinical outcomes and improved staff dollars. In addition to improving rates, we are also evaluating how we go to market to recruit and retain new talent. We are getting back to the basics, taking a data-driven approach to setting our expectations and proactively monitoring our execution. We are encouraged by our early 2023 recruiting results and believe our business can rebound quickly if we can 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 Dave, let me briefly comment on our initial outlook for 2023. As we start this next chapter, we believe it’s important to set expectations that acknowledge the environment we are operating in and the time it will take to transform our company and return to sustainable growth. Accordingly, we currently expect full year 2023 revenue to be greater than $1.84 billion and adjusted EBITDA of at least $130 million. 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.

Photo by National Cancer Institute on Unsplash

In closing, I am proud of our Aveanna team. We offer a cost-effective patient-preferred and clinically sophisticated solution for our patients and families. Furthermore, we are the right solution for our payers, referral sources and government partners. By partnering with preferred payers, we can and will move the rate and wage metrics in meaningful ways that support our growth. This will allow us to hire, retain and engage more caregivers in providing the mission of Aveanna every day. With that, let me turn the call over to Dave to provide further details on the quarter and our 2023 outlook. Dave?

David Afshar: Thanks, Jeff, and good morning. First, I’ll talk about our fourth quarter financial results and liquidity before providing detail on our outlook for 2023, starting with the top line. We saw revenues rise 9% over last year to $451 million. We saw revenue growth across all three of our operating segments with private duty services, home health and hospice, and Medical Solutions growing by 9.3%, 12.4% and 0.7%, respectively. Consolidated adjusted EBITDA was $29.7 million, a 35% 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 $361 million, a 9.3% increase and was driven by approximately 9.6 million hours of care, a volume increase of 6.1% over the prior year.

And while volumes improved over the prior year, we continue to be constrained in our top line growth due to the shortage of available caregivers. Q4 revenue per hour of 3,766 was up $0.82 sequentially from Q3 or 2.2%, and we were pleased with the rate improvement we experienced throughout 2022. Turning to our cost of labor and gross margin metrics, we achieved $91.9 million of gross margin or 25.4%, a 0.8% decrease from the prior year quarter. Our cost of revenue rate of $28.08 reflects the commitment we’ve made to passing through our rate wins to our caregivers as well as continued rate pressures that we see in the labor market. Our Q4 spread per hour was $958, we experienced improvement in our preferred payer volumes with select payers year-to-date organic growth rates reaching the low double digits.

We continue to be encouraged with our ability to attract caregivers and address the market demand for our services when we obtain adequate rates. Moving on to our home health and hospice segment. Revenue for the quarter was approximately $54.7 million, a 12.4% increase over the prior year and a sequential improvement of $4.9 million over the previous quarter. We’re also pleased with our gross margin improvement from 33.9% in Q3 to 41.9% in Q4 as we continue to focus on additional direct labor cost initiatives necessary to achieve our targeted gross margins in the 45% to 46% range. As we discussed in the third quarter, we’re excited to be fully converted to the Homecare Homebase operating system. We’re beginning to see admission trends for the division return to a more normalized level.

As a point of reference, at our lowest point in mid-summer, our weekly home health admissions were in the low 800s. In Q4, we averaged approximately 850 home health admissions per week with an episodic rate of 63%, we believe we will return to more than 900 home health admissions per week in the first quarter of ’23, while maintaining our episodic mix. Our fourth quarter revenue was driven by 11,000 total admissions with approximately 63% being episodic and 11,000 total episodes of care. Revenue per episode for the quarter was $309, essentially flat with the third quarter. Although 2022 is a difficult year for our AAA segment, we firmly believe in this business and its long-term value proposition. We now have an established platform that is poised for growth focused on delivering value through sound operational management and delivering excellence in patient care.

And now moving on to our Medical Solutions segment results for Q4. During the quarter, we produced revenue of $35.2 million, a 0.7% increase over the prior year. Revenue was driven by approximately 83,000 unique patients served and revenue per UPS of $423.51. Volumes were up 2.4% from Q3. However, revenue per UPS was $39.90 lower than Q3, which resulted in margins declining to 39.7%. As a result, our gross margins were $13.9 million, a $1.4 million decline over the prior year quarter. However, we expect revenue per UPS and gross margins to rebound in the first quarter of ’23 to our typical margin profile. Continue to evaluate ways to be more efficient and effective in our medical solutions back office to leverage our overhead as we continue to grow, while other enteral providers decided to exit the market in ’22, we see this as an opportunity to expand our national Inderal presence into 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 a path forward at Aveanna. And as Jeff stated, our primary challenge is reimbursement rates as we continue to make progress in 2023 with the rate environment, we’ll pass through those wage improvements and other benefits to our caregivers in the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity. At the end of the fourth quarter, we had liquidity in excess of $230 million, representing cash on hand of approximately $19.2 million, $35 million of availability under our securitization facility, and $180 million of availability on our revolver, which was undrawn as of December 31.

Last, we had $20 million of outstanding letters of credit as of December 31. 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 all the benefits of the efforts Jeff and I have talked about today. As a reminder, regarding revolver availability, the leverage covenants under our revolver become applicable if more than 30% of the total revolver facility availability under the credit facility has been utilized, subject to a $15 million carve-out for letters of credit, should the leverage covenant become applicable, maximum allowable first lien leverage would be 7.6. On the debt service front, we had approximately $1.46 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 2026 and our interest rate caps extend through February 2027, and one last item I would mention related to our debt is that we have no material term loan matures until July 2028. Looking at cash flow, 2022 cash used in operating activities was $48.4 million. and free cash flow was negative $81.5 million. Bear in mind, though, that 2022 cash flows were impacted by certain CARES Act items, including the final $25 million repayment of deferred payroll taxes to the IRS in December, and the repayment of $3.5 million of CMS advances over the course of 2022.

And looking forward to ’23, we expect to make progress on improving our cash flow by focusing on improving reimbursement rates and growing our volumes, reducing costs and optimizing our collections. In a more limited M&A environment, integration and system transition costs should be significantly lower than 2022. And our 2023 cash flow will also not be impacted by the CARES Act items I just discussed. Before I hand the call over to the operator for Q&A, let me take a moment to address 2023 guidance. As Jeff outlined, we currently expect full year 2023 revenue to be greater than $1.84 billion and adjusted EBITDA of at least $130 million. As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year and our volumes grow.

Accordingly, we expect approximately 18% to 19% of our full year adjusted EBITDA guidance to be recognized in the first quarter and approximately 43% of our full year guided adjusted EBITDA to be recognized in the first half of ’23. 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 with that, let me turn the call over to the operator. Operator?

See also 15 Best US Stocks for Foreigners and 26 Companies that Donate to Nonprofits.

Q&A Session

Operator: Thank you. And our first question is from Brian Tanquilut with Jefferies. Please proceed with your question.

Taji Phillips: Hi, good morning. You have Taji on for Brian. And thank you taking my question. So Jeff, as I think about the three priorities that you laid out for the year. I just kind of want to dive deeper into the preferred payer strategy. As it relates to your guidance, is the 10% improvement that you’re expecting by the end of the year already embedded in the guidance? And if not, can you kind of just quantify what that flow-through would look like to the bottom line?

Jeff Shaner: Yes. Taj, good morning. Thanks for joining this morning. I think — I’m going to go back to our prepared remarks for a minute and just say as we think of our guidance, we recognize our guidance is likely conservative yet as we sit at this point, very, very prudent. I think as Dave and I have thought about the year, we felt like it was important to kind of reset expectations and then show our commitment to beating those expectations. As you think of the year, Taji you think of our – especially our three states we talked about California, Texas, Oklahoma, most of those or all of those rate increases would be effective in Q3 and the being of Q4. So if you listen to Dave’s comments, our guidance would suggest that second half of the year is significantly greater than first half of the year, I think Dave talked about 43% of the guidance in the first half of the year and implies 57% of the guide in the second half of the year.

And really, the driver of that is two things. It’s the rate we just talked about the improvement in rate driving the second half of the year. But also one of our key initiatives this year was to identify and reduce costs where appropriate, both in corporate and field. And so as some of those cost reductions play out through the year, we see a greater profitability in the second half of the year. But those are the two primary drivers of that. We don’t comment on any specific state and the actual revenue or percentage growth in any specific state. But those are the two biggest drivers, Taji, of our guidance. And yes, they are baked into our at least $130 million, but I think we also recognize that it’s prudent for us to be conservative at this point.

Taji Phillips: Great, thanks for that color. And just one more follow-up just on the labor front just curious, I guess, how your metrics that you’ve seen in Q4 have trended in relation to the beginning of the year, right? And essentially, how does the outlook look currently, right? Like are you seeing an uptick in applications as your retention improving throughout the year? We’d just love to see how that’s been trending as the years go on?

Jeff Shaner: Absolutely, absolutely and it’s a great question, Taji. Like many of our peers, we experienced positive recruitment applications and hiring trends right out of the New Year. So coming out of the holidays, we saw more applications. We saw more people interested in coming back to work, new and these were new applicants, applicants who had not worked with us before. So that was a nice trend out of the New Year. And I think we’ve seen our peers experience similar trends. I think the part that we would want to pound home though is those are good trends. They’re not as good as our preferred payer trends. And our preferred payer strategy, as we laid out, as we talked about today, we’re seeing caregiver hires pushing three times greater than our non-preferred payers.