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.

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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?

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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.

So our preferred payers value our value proposition. They believe in our value proposition paying us an appropriate wage – sorry, appropriate rate that allows us to pay at least a market level wage, if not slightly above the market level wage. And because of that, we’re seeing in that 10% of our PDS volumes, really the ability to be hiring out in front of the market. And everyone is winning. What we’re staffing is we talked about 15% to 20% greater staffing rates with our preferred payers, we’re bringing children home at a pace of almost five or six times greater than a non-preferred payer. So I think we highlight that to say even though the trends out of the first of the year were positive, our strategy is not to expect the wage market to settle or nurses just to come back and drove, our strategy is to drive rate and reinvest rate into wage and outpace the market specifically in our PDS business.

I would say, in our home health and hospice business, we’re certainly competing with our peer group in that space. And I will say that at least wages have seen in the last three to four months to have settled. And I think settled is probably the best word I can use. They don’t seem to be continue to be going up. And so we’re focused just on retaining, engaging and maintaining the core caregiving staff we have in the home health and hospice side. Hopefully, that was helpful.

Taji Phillips: Very helpful, thank you.

Jeff Shaner: Thanks Taji.

Operator: Thank you. Our next question is from Joanna Gajuk with Bank of America. Please proceed with your question.

Joanna Gajuk: Good morning, thanks for taking the question here. So I guess – can I use this as a follow-up to the prior question, which I didn’t feel like I got the answer here in terms of the preferred payer strategy and the increasing I guess, growth from that. Is that actually specifically included in the guidance or not? Because I guess you made it sound like that you have seen the rate increases in the cost guide, but you didn’t highlight the perfect strategy and whether it’s actually included in the guidance?

Jeff Shaner: Hey, good morning Joanna. Thanks for your question. Yes, in our 130 guidance, it does include the idea of rate increases. I think as we said in my prepared remarks, we’re highly focused on these three states in this year because we feel like these three states are not currently competitive with the market wages for nurses in those states. And we think we think it’s highly, highly important for California, Texas and Oklahoma to move those rates so that we can attract nurses and help solve the value proposition, which is getting patients home, and yes, we did bake the idea of overall rates into our guidance. Now in our prepared remarks, we talked about we are asking in all of those states for double-digit rate increases.

And our full year guide doesn’t – does not fully bake in the idea of these three states giving us double-digit rate increases. It’s overall rate increases. But if you think of California, the last rate increase they gave us, it was July of 2018, and that rate is no longer market. And we talked about that in the last couple of earnings calls. And so we are aggressively lobbying, using media campaigns, meeting with the governor’s office, meeting with legislatures in California. And we fully expect California to give us a sizable rate increase, not because of any other reason, then the value proposition says, if you pay a nurse of fair wage in California, we can staff the cases and we can bring these children’s home. We’ve got research in California that shows us that we save around $6,000 a day.

So bringing a child home one day faster in the state of California saves California Medicaid systems $6,000 a day, that value proposition is landing very well in the legislature as well as the Governor’s office and Medical itself, they understand investing in our services truly saves total health care costs for states like California. And although $6,000 sounds like a lot in California, it’s not materially different than any other state we operate in. We save the system between $4,000 and $6,000 a day by bringing a patient home one day faster. So I hope that addresses the guidance question, but we have a strong level of conviction on continuing to move both legislative rates and, at the same time, moving our managed care and commercial payers from being a payer to a preferred partner.

And as we define a preferred partner is both above market rate as well as value-based incentive payments.

Joanna Gajuk: Yes, thanks for the additional color, because I guess it’s an important part to understand what you include in the guidance now for the rates, I guess, is a little bit lower than maybe what you’re asking for, which is prudent. And my question is in your 10-K, you disclosed $12 million higher general professional liability expense associated with the accrued legal settlements? So can you tell us what does it relate to? And I guess it looks like that’s included in the cost of services in the PDS segment. So is it fair to adjust it because you also mentioned almost a similar amount when it comes to it sounds like lower COVID-related costs. So I just want to clarify how we should think about gross margin in the PDS segment for this quarter, adjusting for these items? Thank you.

David Afshar: Sure, Joanna. So yes, there’s a legal matter that we’ve been defending that originally rose back in 2019, and in connection with those with legal matters we accrued additional legal settlement costs in the end of Q4. Those matters are currently under appeal, and we intend to avail ourselves of all appellate options as we disclosed in the 10-K. And so, we continue to work through that matter. As we go, you’re right, that was an additional approximate $12 million in the current quarter. A year ago quarter, what you saw was just that we had we did not have the $12 million of incremental COVID-related costs from a year ago. But I think just – to answer what I think your question might be is that we see our PDS spread in the $10 to $10.50 range and I think that’s what you could probably expect in Q1.

Jeff Shaner: And Joanna, we felt it was prudent to kind of put that on the boat, put it behind us, at least from a GAAP accounting standpoint, we thought that, that was very prudent to do to kind of clean that up at the end of the year. Outside of that, our Q4 spread would have been in the $10.50, $10.60 range. I think as Dave said, we have a payroll tax in Q1. So, we think that will be in the $10.30 to $10.50 range for Q1.

Joanna Gajuk: Okay, thank you. And if I may sneak in on the home health segment, so you said that you’re seeing some improvement there, I guess, both in cost reduction Q3 and you’re still excited about that business. Can you talk about the reimbursement of 2023 the rates? And I guess we’re waiting for the ’24 proposal to come out, so – what do you expect to see in this proposed, do you expect a second half of the behavior adjustment will be included for ’24? And I guess, if you do, can you talk about how you trying to offset that the rates growing much less than your cost? Thank you.

Jeff Shaner: Yes, that’s a great question. Thanks, Joanna. First, let us go on record with the entire home health and hospice industry by saying we do not think that, that putting the behavioral adjustment in 2024 is the right thing to do. We stand firm with the entire National Association for Home Care, all of our peers by saying that is a devastating temporary rate impact to the business, it’s unnecessary certainly inflation in the last three years of inflation have outpaced the basically flat to slightly negative rate in home health. So let me go on record by saying Aveanna supports the industry and saying that that’s not a good outcome. With that said, we are expecting rate to be continue to be a headwind or choppy for the next few years in home health.

And because of that, we’re focused on now, as Dave mentioned, we’re fully operational, fully implemented Homecare Homebase. We’re focused on operating the business, doing the things that we can do to provide the best care with the best outcomes and also provide an appropriate gross margin and margin profile. Part of that is we are committed to being an episodic reimbursed home health business. And in our comments, we commented that we’re 63% episodic business. We’re slightly ahead of that in the first quarter 2023. And I think we’re ahead of the industry in that, that we stay committed to being an episodic reimbursed primary reimbursed focus. The flip side of that is we’re not going to give away our limited home health and hospice clinical resources for discounted payers and discounted prices.

And so, we would rather take our resources and put them with the payers that value our services. And because of that, I think that we can stay and achieve and stay in that 45% to 46%, maybe 47% gross margin range here in 2023 and truly continue to grow the home health and hospice segment, but also maintain profitability at the gross margin and contribution line. Thanks, Joanna.

Joanna Gajuk: Thank you.

Operator: Thank you. Our next question is from Raj Kumar with Stephens Inc. Please proceed with your question.

Unidentified Analyst: Hi, yes this is Raja with Scott Fidel. So you just called out where you expect home health and hospice gross margins to land in 2023. So could you kind of – can you provide more insight into where you expect that to be for PDS and Medical Solutions business as well?

Jeff Shaner: Yes, Raj. I think – and Dave put it in some of his prepared remarks, AMS, we fully expect to stay in that 42% to 43% range. As you look at Q4, you’ll see we had a little bit of reserve adjustment in the quarter that brought it down just below 40%, but strong expectations for Medical Solutions this year, we’ll be right in that 42% to 43%, maybe 43.5% gross margin range. And then if you normalize PDS for that legal reserve that we took, we’re still in that 28.5%, just shy of 29% gross margin. I think, we would tell you that’s probably where we’ll land in 2023, even though we’re shifting volume away from lower-paying payers towards more appropriate paying payers with our preferred payer strategy. We will continue to pass on that incremental portion to our nurses and our caregivers to drive our volume growth. So, I think you’ll see us stay in that, Dave, I would say 28% to 29%, maybe slightly above 29% from a gross margin in PDS.

Unidentified Analyst: Right yes thank you for the color. And then as a follow-up, what are your expectations for operating cash flow and CapEx in 2023? And then what do you expect leverage to come to in 2023, at the end of 2023?

Jeff Shaner: Thanks, Raj. I’ll hop it to Dave here in a second. I think it’s just important. Dave and I are both very confident in our overall liquidity position. And I give Dave credit, a couple of years ago he hedged all of our debt. Virtually all of our debt is hedged. And we have a great lending group. We have great equity partners that are fully committed to Aveanna. So as we think of overall liquidity, I think Dave and I both feel very confident. I do want to give Dave in his collection team’s credit they’ve done an unbelievable job in collecting our cash. We just ended 2022. We basically collected 99.99% of our revenue for the year. So 100% of our revenue was collected in cash in ’22, which is a phenomenal outcome in this business.

And then Dave just does a really nice job managing our cash position, making sure that we’ve got ample room for borrowing capacity. So that we can manage our business and invest in the business so as I talk today, I just want to say, I’m as a new guy, as a new CEO, I am very confident in our overall liquidity position, and just that we’ve got a great team with a lot of tenure managing the important parts like collections, like cash management. So I think we’re in a great position as we start the year, and we’ve got opportunity to invest in our company as needed.

David Afshar: Thanks Jeff. And just to add on with regarding the question on CapEx, we’re judicious with the CapEx dollars this year. So in the past, we’ve seen CapEx at around 1% of revenue. I think we’ll see lower than that this year so judicious with the CapEx dollars. In terms of operating cash flow, our goal is to turn operating cash positive in the second half of the year. So we’re working towards that. And we think we’ll make significant improvements from where we landed last year, both on operating cash and free cash flow. The one thing I will call out is as we look at our cash flows as we go across 2023 is based on how we account for our derivatives since we don’t use hedge accounting, the benefits of our interest rate caps will come through operating cash flows. Benefits of our interest rate swaps will come through financing cash flows. And that’s one of the reasons why we focus on free cash flow to incorporate the benefits of our interest rate swaps in 2023.

Unidentified Analyst: Right, thank you very much.

Jeff Shaner: Thanks Raj, appreciate you.

Operator: Thank you. Our next question is from Pito Chickering with Deutsche Bank. Please proceed with your question.

Benjamin Shaver: Hi guys, we have Benjamin Shaver on for Pito. Thanks for taking the question. So when you’re looking at the leadership at the central level and also at the divisional level, do you guys believe you have the right team in place or do you think there needs to be some adjustments in 2023? Thank you.

Jeff Shaner: Hi Benefit, good morning. Great question and Ben, I think as you think about our organization, I made the comment about our – the experience and maturity we’ve got at our cash collections, RCM, as I look out in the business and actually all three of our business divisions, our division presidents or our region presidents, they average between a low of 20 years of experience in the high of 30 to 35 years of experience, most of those years have been with us or with companies that we’ve run in the past, whether it be Gentiva, Health Field, PSA. And so, as we think down in the business, both at the payer relations, government affairs, sales, clinical oversight, operating side of the business, all the way down through the business down to the actual branch locations, we’ve got a tremendous amount of tenure, both on the Medicaid side, the private duty side, on the home health and hospice side as well as our medical solutions team.

And so we are blessed in the fact that we’ve got a deep bench of 10-year talent. We’re having – we’re bringing some new blood in, some younger blood ends, even the younger folks in, so we can continue to replenish the talent as many of our leaders are in their second and third decade of leading post-acute health care companies. But I don’t worry every night about the quality of our leadership team at any level in our organization. I will say, and you’ve heard us say this before, in the last two years, we took one FTE in payer relations and government affairs to now approaching 20 bodies. So we have significantly increased our government payer relations teams and we continue to invest in those teams because they are producing the greatest outcome for our company.

I’ll also mention that we’ve made significant investments in our clinical outcomes, our data analysis and the ability to prove our value-based story through clinical outcomes. So our clinical team has grown as well. And that’s part of why we talked about cost reductions, and we’ve invested significant dollars in these core areas, at the same time, we’re going to go back through the business and just find areas where we can be more efficient and more effective so that we can truly get our profitability back up towards that 10% goal, we’ve had all along. Thanks, I appreciate the question.

Benjamin Shaver: And just one more follow-up real quick, I appreciate the color you gave on kind of free cash flow conversion, but do you guys have any leverage ratio that you’re shooting for coming out of ’23?

David Afshar: We don’t typically provide guidance on leverage. I mean, obviously, we’d all like it to be lower, as we drive our operating cash and drive our free cash, the ultimate goal of that is to ultimately build cash on the balance sheet and lower our net debt and leverage. So, I’d just say that we’re very focused on operating the business and driving all the benefits that Jeff and I have talked about. And like we said, getting to positive free cash – I’m sorry, positive operating cash in the second half and just driving on all fronts there.

Benjamin Shaver: I appreciate, thank you.

Jeff Shaner: Thanks Ben.

Operator: Thank you. And our next question is from Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Jeff Shaner: Hi, Ben good morning.

Ben Hendrix: Good morning, thank you very much. And just a quick follow-up on those executive – or I’m sorry, on the PD legislation efforts in California, Texas and Oklahoma, just wondering if you could kind of handicap each of those and kind of let us know what your thoughts are on kind of the probability of actually getting those at a double-digit level that you’re expecting, where is the biggest headwinds? Where is the most likelihood and kind of how you’re handicapping that increase overall? Thanks.

Jeff Shaner: Great, question Ben. And yes, I think I’ll state the obvious, and that is the value proposition is the same conversation in every 1 of our 33 states. It’s the same, it’s not unique to California compared to Oklahoma. It’s the same exact conversation, which is just investing an additional $150 to $200 a day in incremental nursing wages in the home saves you between $4,000 and $6,000 a day, right? And it’s – the research shows that our medically fragile patient population is spending anywhere between a minimum of 30, a maximum of 90 extra days in children’s hospitals that is unnecessary for their care because there’s not enough home nursing services. So the research, the conversation is the same across, what’s different is each state has its own budget process, its own set of issues, its own set of priorities.

And so that’s really where we get into the — to your point, the uniqueness in each state. At the end of the day, I would tell you I believe firmly that California, Texas and Oklahoma will all pass through PDS rate increases. I’m hopeful that, that will be in this legislative session in 2023. And I think I think they – the legislatures that we have talked to in the States, we’ve spoken with the Governor’s offices in all three states, they understand the issue. They are supportive of the issue. I think what it comes down to sometimes Ben is sometimes there’s just other macro stuff going on. And if you take California as an example, sometimes there’s just macro stuff going on in the state that has nothing to do with nursing, children, home services that just takes the attention of a governor or a legislature away from an important issue like ours.

And so, end of the day, as Tony and I talked about in the last couple of calls, these states are going to pass through rate increases. It’s just a matter of when and how much, I’m confident that we’re going to come out of this summer with a very good outcome in all three of these states. It may not be exactly, I think, as Joanna mentioned, we’ve asked for more in each state than we’ve assumed we’re going to get in our guidance, right? And that’s just us being prudent. But we’re not asking for $1 a rate increase. I mean, we’re asking for 20%, 25%, 30%, 35%, 40% rate increases in these states because that’s what it takes to ultimately materially move the needle in the home nursing. So again, you’re hearing me be positive. California has a July 1 effective date.

Texas is a September 1 effective date, Oklahoma, an October 1 effective date. We’ll know the answer to all three of these by early June, some cases, late May. So we’re heads down for the next 90 days, driving this agenda, not only in these 3 states, but every single 1 of our 33 states, and I think we feel very confident we’re going to have a great year related to government affairs rate in PDS.

Ben Hendrix: That’s great, thank you very much.

Jeff Shaner: Thanks Ben, appreciate it.

Operator: Our next question comes from Matt Borsch with Water Tower Research. Please proceed with your question.

Matt Borsch: Hi, good morning and thanks for squeezing me in. I had a question about – I know demand trends are not an issue. You’ve got more demand than can be handled for yourselves in the industry. But how do you see that evolving on the PDS side for maybe in the near term and longer term? I mean it’s more clear we can see that the accelerators of demand on the adult home health side. Can you just talk to that?

Jeff Shaner: Yes Matt and good morning. Thanks for the question. I think – there are more children who need more home care services in America than there are home care companies to take them home are the appropriate rate. So, we don’t lose sleep at night on is our demand 18 months, 24 months, 36 months in the future, going to be less, more equal to on the PDS side of the business. I think as the federal government has leaned into home and community-based services, which is now a defined term in CMS and the federal government that’s good for us. That is a broader group of families who can receive both highly, acute skills at home, moderate acute skills at home and even lesser acute skills at home. And I think as we think of the long-term macro 10-year outlook, I think PDS has got great tailwinds from a long-term demand standpoint, it truly will come down to the supply of caregivers, both family caregivers in the home and skilled acute nurses that are coming to the home.

And so again, it’s a great question. To us, the long-term demand metrics for PDS still make a ton of sense, and it continues to be a supply issue for as far as we can see in the next three to five years, it truly continues to be the ability to attract and retain both skilled and lesser skilled caregivers.

Matt Borsch: And maybe just a follow-up on a different topic, I know you’ve talked a lot about the rate side of the business. And I gather that on the rate side, a lot of the problem is organizational attention and initiative, whether you’re talking about a state agency or managed care commercial payer. Is that about right or do you have some of these, because you can say, higher rate is going to save you money. And do you find that you have real opposition to that argument or people with a different theory?

Jeff Shaner: No. But by the way, your question is very thoughtful, Matt. And that is a lot of times it’s just giving the attention, right? It’s getting the attention of the legislature of Texas or the Governor and getting their attention to matter. As I think of MCO payer partners, it’s a similar conversation. It’s just that the MCO partners figured it out faster, that they see, hey, I can say, $5,000 a day. Even if they start giving us what’s called single case agreements, which mean that they approve one family at a time at a new rate, we see the MCO partners moving in a matter of hours and days versus months and years from our state partners. So the MCO partners are just able to move faster than their legislative counterparts.

I will say, over the first – we’re about 18 months into this strategy. We now have markets where we have a preferred payer in a specific market and then we have non-preferred payers, the non-preferred payers. It took them about nine months to call us and say, why can I get any of your nurses? And our answer was, because unfortunately, you’re not you’re not a partner of ours in this market. And so we’ve seen MCO payers go from not interested now, not now to, “Oh my God, what do I have to do to get what the other pay in this market has gotten from Aveanna which to us shows the power of the partnership, and I think, again, I’ll go back to the legislative comment. I think you read into it right. It’s just getting the attention of the right people in a legislative process like a California to understand the issue.

They all get the issue. They — it’s not hard to sell the issue. It’s just getting their attention from floods and snow and gas prices and all the other stuff that’s on their desk to deal with in making this a priority. And that’s really our job is to – and our lobbyist job is to just drive this home.

Matt Borsch: Great, thank you. I’m pushing out.

Jeff Shaner: Thank you, Matt.

Operator: There are no further questions at this time. I would like to turn the floor back over to CEO, Jeff Shaner for closing comments.

Jeff Shaner: Well, thank you, operator, and to everyone. Thank you for joining our earnings call today. And most importantly, thank you for your interest in our Aveanna story we look forward to updating you on our progress at the end of Q1 in mid-May. Have a great day, and operator, thanks so much.

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