Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q4 2023 Earnings Call Transcript

Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q4 2023 Earnings Call Transcript March 14, 2024

Aveanna Healthcare Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Aveanna Healthcare Holdings Fourth 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 Debbie Stewart, Aveanna’s Chief Accounting Officer. Thank you. You may begin.

Debbie Stewart: Good morning and welcome to Aveanna’s Fourth Quarter 2023 Earnings Call. I am Debbie Stewart, the company’s Chief Accounting Officer. With me today is Jeff Shaner, our Chief Executive Officer; and Matt Buckhalter, 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 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, which will be filed with the SEC this afternoon. With that, I will turn the call over to Aveanna’s Chief Executive Officer, Jeff Shaner. Jeff?

Jeff Shaner: Thank you, Debbie. 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 2023 results, and how we are moving Aveanna forward in 2024 and beyond. My initial comments will briefly highlight our fourth quarter and full year 2023 results along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payors to create additional capacity. I will then provide insight on how we are thinking about year two of our strategic transformation and overall outlook for 2024 prior to turning the call over to Matt, to provide further details into the quarter and our 2024 outlook. Starting with some highlights for the fourth quarter and full year 2023.

Revenue for the fourth quarter was approximately $479 million, representing a 6.1% increase over the prior year period. Fourth quarter adjusted EBITDA was $38.7 million, representing a 30.4% increase over the prior year period, primarily due to the improved payor rate environment as well as cost reduction efforts taking hold. Finally, full year 2023 revenue and adjusted EBITDA was approximately $1.895 billion and, sorry, $139.2 million, representing a 6% and 7.6% respective increase over the prior year. As we have previously discussed, the labor environment represented the primary challenge that we needed to address in 2023 to see Aveanna resume the growth trajectory that we believe our company could achieve. It is important to note that our industry does not have a demand problem.

The demand for home and community-based care continues to be strong, with both state and federal governments and managed care organizations asking for solutions that can create more capacity. I am proud of our focus and execution in 2023, as we aligned our objectives with those of our preferred payors and government partners. By focusing our clinical capacity on our preferred payors, we achieved year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts to those payors willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging labor and inflationary environment, our preferred payor strategy allows us to return to a more normalized growth rate in our business segments.

Since our third quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and preferred payors, as well as the continued 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 represented approximately 25% of our total PDS revenue. At year-end 2023, we had successfully obtained double-digit PDS rate increases in eight key states including Oklahoma. We have also achieved rate wins in 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 expect to see positive progress into 2024 as we focus on the remaining states. As a point of reference, the majority of the rate increases were effective in the second half of 2023, which will result in a full year benefit in 2024. While we are pleased that our PDS legislative messaging has been well received by state legislatures, we still have much work to do. As an example of the work ahead, our PDN rate request was not included in the California Governor’s proposed budget. We believe that we made significant strides with the governor, medical department, leadership and California legislature demonstrating the importance of PDN 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 payor strategy and government affairs efforts to continue to advocate for children with complex medical conditions. This strategy 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. We have a proven track record of expanding our preferred payor programs and will enhance our efforts in California, similar to our approach in other states. As we look at our preferred payor initiatives in other states, our goal for 2023 was to double our PDS preferred payors from 7 to 14. In the fourth quarter, we added two additional preferred payor agreements, achieving our goal of 14.

Our PDS preferred payor volumes remain consistent at 17% of total PDS volumes. We are optimistic that we will continue to execute this strategic initiative into 2024. While we are taking a national approach to our PDS preferred payor strategy, we are placing particular focus in 2024 on the State of California and continuing our positive traction in the State of Texas. Using Texas as a point of reference as of year-end, we are approaching 60% of our Texas PDN volumes with a preferred payor and still believe we have an opportunity to further improve this trend to approximately 70% in 2024. We plan to execute a similar playbook in California over the next 18 to 24 months and are optimistic we can achieve positive results. Moving to our preferred payor progress in Home Health.

Our goal for 2023 was to improve our episodic payor mix by 10% from approximately 60%, to above 70% by year-end 2023. We signed a total of eight episodic agreements in 2023 and improved our episodic mix from approximately 60% at the end of 2022 to 74% in Q4. We continue to remain focused on aligning our Home Health caregiver capacity with those payors willing to reimburse us on an episodic basis and focus on improved clinical and financial outcomes. We are encouraged by our 2023 rate increases, preferred payor agreements and subsequent recruiting results. Our business is demonstrating 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 payor 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 the patient’s home. Before I turn the call over to Matt, let me comment on our strategic plan and our initial outlook for 2024. As we enter year two of our strategic transformation, we remain highly focused on those initiatives that created positive momentum in 2023. We will continue to focus our efforts on four primary strategies. First, enhancing partnerships with government and preferred payors to create additional caregiver capacity. Second, identifying cost efficiencies and synergies that allow us to leverage our growth. Third, managing our capital structure and collecting our cash while producing positive free cash flow, and fourth, engaging our leaders and employees in delivering our Aveanna mission.

While executing the above key strategies, we still believe it is important to set expectations that acknowledge the environment that we are operating in and the time it will take to fully transform our company to sustain growth. Accordingly, we currently expect full year 2024 revenue to be in a range of $1.96 billion to $1.98 billion and adjusted EBITDA to be in a range of $146 million to $150 million. We believe our outlook provides a prudent view considering the challenges we face with the evolving labor market and hopefully, it proves to be conservative as we execute throughout the year. In closing, I am very 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 payors, referral sources and government partners. By partnering with preferred payors, we can and will move rate and wage metrics in meaningful ways that support our growth. This strategy allows 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 Matt to provide further details on the quarter and our 2024 outlook. Matt?

Matt Buckhalter: Thanks, Jeff, and good morning. I’ll first talk about our fourth quarter financial results and liquidity before providing additional details on our initial outlook for 2024. Starting with the top line. We saw revenues rise 6.1% over the prior year period to $479 million. We experienced revenue growth in two of our operating divisions, led by our Private Duty Services and Medical Solutions segments, which grew by 6.1% and 17.5% compared to the prior year quarter. Consolidated gross margin was $148.4 million or 31%, representing a 15.3% increase over the prior year period. Consolidated adjusted EBITDA was $38.7 million, a 30.4% increase as compared to the prior year, reflecting the improved payor rating environment as well as cost reduction efforts taking hold.

Now taking a deeper look at each of our segments. Starting with Private Duty Services. Revenue for the quarter was approximately $383 million, a 6.1% increase and was driven by approximately 10.1 million hours of care, a volume increase of 5.1% 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 continuing to see signs of improvement in the labor markets. Q4 revenue per hour of $38.04 was up $0.38 or 1% as compared to the prior year quarter. 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 $103.6 million of gross margin or 27%, a 12.7% increase from the prior year quarter. Our cost of revenue rate of $27.76 was sequentially flat from Q3. While we continue to experience wage pressures in the labor markets, we did improve our Q4 spread per hour to $10.28, representing a 7.6% increase over the prior year. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $54 million, a 1.1% decrease over the prior year. Revenue was driven by 9,200 total emissions, with approximately 74% being episodic and 11,300 total episodes of care, up sequentially from Q3. Medicare revenue per episode for the quarter was $3,064, up 1.8% as compared to the prior year. We continue to focus on rightsizing our approach to growth in the near term by focusing on preferred payors that reimburse us on an episodic basis.

This episodic focus has accelerated our margin expansion and improved our clinical outcomes, with episodic emissions over 70%, we have achieved our goals of rightsizing our margin profile and enhancing our clinical offerings. As we enter 2024, we believe our admission growth will normalize in the 3% to 5% range. We are committed to a disciplined approach to growth while shifting our capacity to those payors who value our clinical resources. We are pleased with our gross margin of 50.9% in Q4, demonstrating our continued focus on cost initiatives to achieve our targeted margin profile. 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 & Hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care.

Now to our Medical Solutions segment results for Q4. During the quarter, we produced revenue of $41.3 million, a 17.5% increase over the prior year. Revenue was driven by approximately 90,000 unique patients served, an 8.4% increase in the prior year period, and revenue per UPS of $458.80. Gross margins were 42% for the quarter, up 2.3% over the prior year period and in line with our targeted margin profile for Medical Solutions. We continue to implement initiatives to be more effective and efficient in our operations to leverage 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 payor partnerships. In summary, we continue to fight through a difficult labor 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 payors who value our partnership is the path forward at Aveanna. As Jeff stated, our primary challenge continues to be reimbursement rates. With the positive momentum we experienced in 2023, we are optimistic that such trends will continue into 2024. As we continue to make progress with the rate environment, we’ll 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 fourth quarter, we have liquidity in excess of $232 million, representing cash on hand of approximately $43.9 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 have $32 million in outstanding letters of credit at the end of Q4. I’m proud of the progress we’ve made in enhancing our overall liquidity throughout the year. On the debt services front, we had approximately $1.47 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 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’ll 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 $22.7 million for the quarter, and free cash flow was positive at approximately $12.5 million. While Q4 benefited from some timing-related items, which we expect to be moderate headwinds into Q1 cash flows, we continue to believe we’ll be a positive operating cash flow company in 2024. We also expect to see continued cash flow benefits 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 initial outlook for 2024. As Jeff mentioned, we currently expect full year revenue to be in the range of $1.96 billion to $1.98 billion, and adjusted EBITDA range of $146 million to $150 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 20% of our full year adjusted EBITDA guidance to be recognized in the first quarter and approximately 44% of our full year guided adjusted EBITDA to be recognized in the first half of 2024. 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 those increases to attract and retain more caregivers and drive volumes. Our EBITDA will also ramp as we realize the benefits of our continued cost savings initiatives. In closing, I’m proud of all of our Aveanna team members and their hard work in achieving our 2023 results. I look forward to the continued execution of our 2024 strategic plan and updating you further at the end of Q1.

With that, let me turn the call over to the operator.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Taji Phillips: Good morning. You have Taji Phillips on for Brian. Thank you for taking my question. So maybe to start, the midpoint of your guidance implies that margins will be roughly 7.5% for 2024. Maybe can you talk to the building blocks that are or key assumptions that are built into your margins for 2024? And what would need to happen to see the business outperform your implied guidance? And then lastly, if you can provide much detail, break down the margin expectations across all three segments?

Jeff Shaner: Hi, Taji. Good morning. Thanks for your question. Taji, I think as — I’ll start and I’ll turn it over to Matt. But I think as we think of our 2024 guidance, we have very good visibility into rate coming out of 2023. So I think first, first in that story is we’ve got solid momentum from our 19 rate increases. I think five or six of those rate increases were effective 1/1 of ’24. So we’ve got nice momentum rolling into the year. We know our Home Health & Hospice final rule. So really good visibility into this year. Obviously, we’re now working on legislative plan for 2024, which most of those come due mid to late year, so our heads are down on the year. In Matt’s prepared remarks, he talked about 20% of the implied guide, we think will be in Q1.

We would remind everyone, Q1 is our — from a seasonal standpoint is our low point. We’ve got a lot of payroll tax headwinds in Q1 coming out of the holidays. But we’re off — sitting here in early March, we’re off to a really nice start to the year. We’re very pleased on where we are to date. So I think you’d see it, from our standpoint, building throughout the year, Q1 being our low point, but pleased — we have levers to pull. I think big picture, we remain prudent. I’ll used the word prudent in our guidance, that we continue to execute against our strategic plan to rebuild the company. Our ultimate goal, Taji, is still to get back to 10% adjusted EBITDA. And we’re still a year or so from that point. But we see — we know the plan or executing as a plan to get us back to that 10% target.

And I think you’ll see a build throughout the year. And I think the most important part is, as we said in our comments around our four strategic initiatives for this year, we know exactly what to do. We know how to do it, and it’s just about us executing. And I think as we showed in 2023, that this team knows how to execute against our business plan. So with that, Matt, let me turn to you on more insight on guidance?

Matt Buckhalter: Yes. I think that’s really well said, Jeff. I think you nailed it. 2024 guidance, I think, is a prudent concept and consistent with how we have been performing and leading the broader markets. On margin expansion there, Taji, I don’t think you really think anything on gross margin to be different than what you’ve come to expect with our current business platforms, that will be consistently in line. Potential for outperformance associated with it could be continued overachieving of our preferred payors and overachieving of our state rate increases. Once again, that doesn’t necessarily increase your margin — gross margin profile because what we’re doing is taking those dollars and reinvesting them back into our caregivers and back into our workforce to really drive those volumes.

What those volumes driving or leveraging overhead with it. And we continue to have cost savings initiatives throughout the organization. We did a really nice job of it in 2023. We’re continuing to do it in 2024. We’ll nip and tuck where we can, but we’re also going to invest in the right areas that will demonstrate better clinical outcomes and really overachieve for our preferred payor initiatives through value-based care, too. So in line with where we expect, see that build and EBITDA build throughout the year. And I think that’s the way you should think about it.

Jeff Shaner: Well said. Anything else, Taji?

Taji Phillips: Yes. Just one more question for me, Jeff. Last question on we thinking about the labor environment, I really appreciate the commentary in your prepared remarks. But how should we be thinking about wage inflation in 2024?

Jeff Shaner: Yes. I think Matt just said it really well, Taji. We still focus — our focus is on rate, which then drives incremental rate. So I think as you think about our margin profile, Matt said it well. And I will point out in our Home Health & Hospice business, you saw 50.9% gross margins for Q4. It’s taken us about two years to get that back to the 50%. That was our target. Really proud of the Home Health & Hospice team for how hard they work to get it there. But I think, as we think of margins, gross margins and Matt said it well, they’ll be consistent in 2024 as we saw kind of Q3, Q4 run rate. Every rate increase we earn, whether it’s a preferred payor or a government state or federal agency, we’re going to pass that rate or a large portion of that rate through to the caregivers.

That is our value proposition to our preferred payors. It’s our value proposition to our government partners. So I think you’ll think of gross margins being consistent in the course of the year. And as Matt said it well, we’re really trying to drive the growth levers, both in PDS, Home Health & Hospice and AMS. So we’re really excited to get the top line and also bottom line growth in ’24, where we expected. Thanks, Taji.

Taji Phillips: Thank you.

Operator: Thank you. Our next question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.