Q2 2022 Aveanna Healthcare Holdings Inc Earnings Call

August 11, 2022

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 Avi honest, Chief legal officer and corporate Secretary. Thank you you may now begin.

Thank you operator, good morning, everyone and thank you for joining US today speaking on today's call are Rod Windley Avi on as executive Chairman, Tony Strange I'll be honest, Chief Executive Officer, and President David I'm sure I'll be honest, Chief financial Officer, and Jeff Shane or Aviano's, Chief operating officer.

We issued our earnings press release and filed our 10-Q yesterday. These documents are available on the Investor Relations section of our website at Ww Dot Aviano dot com as well as on the SEC's website at Www SEC Gov.

A replay of this call will be available until August 18, 2022, we want to remind anyone who may be listening to a replay of this call that all statements made are as of today August 11 2022.

Today's call May contain forward looking statements, which may be identified by the use of words, such as say could expect plan and other similar words and expressions.

All forward looking statements made today are based on management's current beliefs and assumptions about our business and the environment in which we operate these statements are subject to risks and uncertainties that could cause our actual results could materially differ from those expressed or implied on today's call except as required by federal securities laws Aviano will not publicly update.

Date or revise any forward looking statements subsequent to the date made as a result of new information future events or changes in circumstances.

Also we supplement our financial results reported in accordance with GAAP certain non-GAAP financial measures a reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and Form 10-Q, both of which are available on our website and the SEC's website.

Or is otherwise available separately on our website. Following today's prepared remarks, we will open the call for questions. Please limit your initial comments to one question and one follow up so that we can accommodate as many callers as possible in the a lot of time with that I'll turn the call over to <unk>, Chief Executive Officer, Tony Strange Tony.

Thanks, Shannon good morning, and thank you for joining I'll be honest second quarter 2022 earnings call before we begin our call I would like to say thank you to the 35000, Aviano caregivers and employees, who continue to provide exceptional service to the 87000 patients under the company's care.

These are unprecedented times and it is only through your commitment to our families that we're able to meet the needs of the patients that we serve.

Moving on to the quarter on July 19, 2022, we issued a press release to pre announce results for the second quarter and reduce our guidance for the full year, primarily driven by the COVID-19 induced disruption in the labor markets further exacerbated by high record a record high inflation.

Our results for the quarter are in line with those lowered expectations set forth in the July release.

For we get into those results I would like to spend a few minutes on the overall environment by providing some insight into our ongoing pressures in the labor market as well as positive momentum in reimbursement.

The labor market related to our business continues to be challenging across all of our business segments, but particularly challenging and our private duty segment.

While we don't break down private duty between skilled nursing services and unskilled personal care. The labor disruption is quite different approximately 60% of our Pds revenues are derived through skilled nursing services, requiring one nurse primarily lpns.

One patient's bedside for 10% to 12 hour shifts.

These skilled nursing skilled nursing businesses, where we're experiencing the greatest disruption and available caregivers. Historically these nurses have been willing to work for hourly wages that might be slightly below were skilled nursing facilities and other health care providers could pay due to the desirability to take care of <unk>.

Patient at a time in the comfort of the patients' home.

However, during the second quarter, we've seen a significant shift in this dynamic driven by two factors one inflation has driven our workforce to seek employment that can and will pay higher wages and too.

More and more health care providers are willing to hire LP ends in this environment to replace or avoid paying higher rates for travel and temporary agency our ends.

Given that our reimbursement is fixed we do not have the ability to raise wages without a corresponding increase in payment rate.

On a positive note while labor shortages exist everywhere the challenges on the unskilled business are materially less difficult than those in the skilled care.

As a result, our unskilled business continues to generate positive volume growth and continues to play an increasing role in the delivery of home and community based care.

Our home health and hospice business is also dependent on the ability to hire <unk> and lpns and while we have similar constraints related to the competitive environment, we have greater flexibility to increase wages given the variable reimbursement models.

The significant shortage of nurses in the U S will continue for the foreseeable future nursing schools are operating at capacity and the timeline that it'll take to increase that capacity will necessitate looking elsewhere to increase nursing capacity in the U S.

We're encouraging the current administration to reverse some of the immigration orders put into place by previous administrations that had the unintended consequence of making it more difficult for nurses from other countries to come to the U S for employment.

In the meantime, our most effective lever is to push reimbursement rates to allow us to pay higher wages, which brings me to our next topic the reimbursement environment.

As we mentioned in our press release in July we continue to have positive momentum regarding rate increases with our Medicaid and Medicaid managed care payers.

It's public information the state of Virginia increased Medicaid reimbursement for private duty services by approximately 70%.

<unk> of July one of this year in an effort to expedite the discharge of medically fragile children from hospitals and to avoid costly readmissions.

And while Virginia is not a particularly large state for US we passed a meaningful portion of this rate increase into wages of existing and new caregivers and are experiencing positive growth in the state with Medicaid recipients, which is exactly the outcome that the state intended.

And another of our largest states effective July <unk>, we implemented a rate increase of approximately 50%.

Roughly half of the increase will be on an hourly basis as rate. The other half of the increase is tied to value based pricing agreement the.

The agreement is based on two quality metrics staffing goals and a measured for unplanned hospitalizations, both of which are largely in our control.

This value based contract provides us with flexibility to be more competitive with wages, while protecting gross margins. In this. One example, we immediately pass through a significant wage increases and are seeing early signs of growth within this payer around 5% to 7% pre and post the increase.

<unk>.

I'll provide these two examples as evidenced that significant changes in rate can drive volume.

We're firm believers that avianca can add value to payers, we have the data the skill and the willingness to accept risk and value based pricing agreements.

We currently have five of these types of agreement in place and expect this trend to continue.

I'd like to thank our government and payer relations team, Mike Young and the entire team have done an outstanding job driving change not only through rate increases, but by creating upside through value based pricing.

On the other side of the equation, we were not successful in getting a rate increase passed in California, the industry put forth a compelling argument and had support from the states children's hospitals. However in the final hours prior to finalizing the budget the private duty rate increase was removed.

Mount an all out effort to.

And pressed for meaningful rate relief during the spring legislative session in 2023.

And with continued support from the children's hospitals across the state and ongoing pressure to get patients out of higher cost settings. We're confident that we can lead a successful effort.

We're also continuing to receive interest from states, who are exploring alternative caregiver models, such as Colorado, and Arizona, whereby we are allowed to pay parents <unk> their designee to provide certain levels of care to those patients. We fully support these programs and have been first and have seen firsthand.

In Colorado, and Arizona that they can be effective in getting patients home and avoiding re hospitalizations in a very efficient manner.

We expect to see other states continue to follow in their footsteps.

Turning to the Medicare environment. The final rule for Hospice was published two weeks ago and it was about 110 basis points better than anticipated the.

The industry pushback on the proposed rule, citing that relying on cost report data from 2019 did not adequately account for the current rate of inflation the industry still contends that the three 8% increase is still not sufficient given the higher cost. However, I believe that CMS did understand that there was <unk>.

<unk> did the argument and adjusted the final rule accordingly.

The home Health proposed rule currently provides for a net reduction in reimbursement of four 2%.

Given the struggled to SaaS patients at current reimbursement rates, we find it difficult to imagine any scenario where rates are lower for the for the industry to meet the needs of the fastest growing and most vulnerable segment of the population in the U S.

The industry is making the same arguments made during the hospice rule, making process and we expect to get clarity on the final rule at some point in September .

The hospice rule will be accretive to our results in 2022. However, the net of the hospice final rule and the proposed home health rule would result in a reduction of approximately $7 million to $8 million on an annualized basis beginning in 'twenty three.

If the rule was implemented as proposed.

The demand for home and community based care has never been higher.

I've been in this business for almost 35 years and for the first time, we have payers both state governments and managed care organizations, reaching out and asking what can be done to create more capacity.

<unk> been we have a waiting list for new admissions in every branch.

We have several examples of how value based contracts can provide benefits to both payer and provider, but with all that said, we're still in a firefight today.

I do believe that home and community based care will solidify its role as a value added provider in the healthcare continuum.

I'll be on it is a comprehensive platform with a diverse payer base, we provide a cost effective alternative to higher cost care. We provide this care in the most desirable setting the comfort of the patients' home.

We believe that we are a long term solution in the face of rising healthcare cost and for this reason I believe that that current homecare valuations driven by these transitory disruptions create an excellent opportunity to create value for all investors.

So, let's turn to our results as I mentioned earlier our results for Q2 were in line with the expectations that we laid out in July .

Revenues for the quarter were $443 million and adjusted EBITDA was $37 million or eight 3% of revenue.

The key takeaways from the quarter, our volume volume and volume.

As discussed we need to increase caregiver wages on average 15% to 25% in certain markets that we serve.

We will systematically go through state by state and contract by contract and adjust reimbursement rates in such a way that will allow us to be competitive on wage.

In the meantime, gross margins continued to be stable at 32, 7% for the quarter, which is up from Q1 of 2022 and the full year of 2021.

Jeff will provide further granularity on our segment results in his remarks.

From a liquidity standpoint, we have placed hedges on all of our debt in one form or another to protect the company against the rising interest rates.

We expect cash flow to be negative for the year, driven by lower EBITDA expectations as well as approximately $40 million of one time cash uses.

Even on lower volumes, we see our way to positive cash flow and have sufficient liquidity to get us there between our delayed draw term loan and mostly undrawn revolver, Dave will provide further detail around our cash flow and leverage in just a moment.

In summary, while we do not like being in a position where we're forced to chase rate, we fully understand that in the short run. It is the most immediate solution.

In the meantime, we will adjust cost where appropriate protect our gross margins and manage our cash flows.

I am confident in our team to make the necessary adjustments to navigate this difficult environment and as I said before homecare as a solution.

Those that have the perseverance to weather this storm will be rewarded.

With that I'll turn the call over to Jeff.

Thank you Tony I am proud of the resilience of our Avianca operating teams in the face of continued turbulent labor markets and the highest inflation experienced in over three decades.

Our RV and our leaders remain focused on the task at hand, bringing medically fragile pediatric and geriatric patients home and staffing their cases with highly skilled caregivers.

As Tony mentioned, we are actively shifting caregiver capacity to those preferred payors that value our services and are willing to pay us premium rates for preferred staffing and reduced unplanned hospitalizations.

More to come on that front as I detailed each of the three business segments now lets move into our Q2 operating indicators, starting with our private duty segment.

We produced $348 million of revenue during the quarter revenue was driven by approximately $9 6 million hours of care, which was flat from Q1.

Pds volumes continued to be constrained by the turbulent labor markets, primarily driven by the shortage of <unk> and Lpns.

We saw improvement in our unskilled workers and family caregiver employment trends during the quarter, but that was offset by the continued disruption to corn nursing trends.

Our Q2 revenue per hour of $36 24 was up 99 from Q2 of 2021 or two 7%.

We continue to experience significant rate improvements in 2022, and I am proud to say, we've achieved 20 pds rate increases year to date.

These rate wins include state Medicaid Pds rates as well as Medicaid managed care organization specific aviano rate increases.

As most of our state legislatures have completed their 2022 legislative sessions, we have now turned our focus to the 2023 legislative process for future rate improvements and program expansion opportunities.

We have a full slate of 2023 legislative and managed care organization preferred payer initiatives to execute on.

I look forward to engaging states like California to help solve overcrowded children's hospitals and relieve exhausted families who are struggling to care for their medically fragile child at home.

We have numerous examples of how increased reimbursement rates have a positive impact on nurse staffing levels and reduce hospitalizations.

And the yen hire private duty services reimbursement rates are the primary answer to employing more nurses and bringing more patients home.

We also have an update on the Arizona Medicaid system and its licensed health eight LH HAE program expansion that we highlighted recently as you remember this important program supports family caregivers with appropriate compensation for the unskilled care being provided to a loved one the <unk> program is in addition to the <unk>.

Guild nursing care being provided by and Avi and a nurse.

I am proud to report that we admitted our first Arizona Lecce family in July and have over a dozen families currently being credential.

I expect this important program to continue to expand across many other states, including Washington State that has endorsed a similar family caregiver program.

Washington State has stated their goal to begin this program by the end of this year.

Turning to our cost of labor on gross margin metrics, we achieved $101 4 million of gross margin or 29, 1% our wage rate of $25 68.

Per hour reflects the commitment we've made to passing through a rate wins to our caregivers.

Our Q2 spread per hour was $10 56.

In line with our expectations.

We experienced numerous private duty service rate wins effective July one.

And we will continue to actively pass through these increases in the form of additional wages and benefits to our caregivers.

Now moving onto our home health and Hospice segment for Q2 were the impact of high inflation and increased caregiver wages mileage.

And applied pressure on our gross margins.

We stand firm with the National Association for Homecare, and hospice and our industry peers and our fight against the 2023 proposed home health rate cuts.

This is the wrong time to be cutting reimbursement to the most effective highest quality in patient preferred health care setting.

As previously announced we have completed our transition to the homecare Homebase operating system and now have all 96 home health and hospice locations operating under Homecare Homebase model.

We are actively implementing the metalogic analytics tools to ensure that we are improving quality outcomes, while balancing the need for effective cost controls.

During the quarter, we produced $61 $4 million in revenue, a 22, 6% increase over the prior period.

The biggest driver of revenue growth was the impact of the comfort care acquisition.

Offset by continued labor pressures.

Q2 revenue was driven by 12400 total admissions approximately 62% being episodic.

12300 total episodes of care.

While volume was down from Q1, having the system transition now behind US allows our home health and hospice leaders to fully focus on growth.

To support this growth effort, we added sales leadership and sales resources and core southeastern markets.

We are committed to being a growth oriented geriatric provider and look to get back to mid single digit organic growth rates in the back half of this year.

Revenue per episode for the quarter was $3004 up three 7% from Q1.

This increase was driven by better episodic management and demonstrates the value of being fully transitioned to homecare homebase.

From a cost and margin perspective, Q2 gross margins were 48, 2%.

Gross margin in the quarter was impacted by higher wages and mileage driven by the current inflationary trends.

Home health visits per episode and cost per visit are generally in line with our expectations and gives us confidence that we can manage the home health and hospice segment gross margins in the 48% to 50% range.

Now moving onto our ASEAN medical solutions segment results for Q2.

During the quarter, we produced $33 $5 million of revenue.

Revenue was driven by approximately 78000 unique patients served and revenue revenue per <unk>, a $430 10.

While volume and rate were consistent with Q1, I am proud of our medical solutions team as they continue to fight through unprecedented supply chain disruption.

Driven by the previously announced Abbott recall.

Avianca has emerged from this event as a leading national provider of NGL nutrition for clinically complex patients.

Once the integral supply chain returns to a more normal environment, our medical solutions business is well positioned for accelerated organic growth trends.

Turning to our cost of goods and gross margin metrics.

We achieved $14 1 million and gross margin dollars or 41, 9%.

Gross margins have stabilized in the 41% to 43% range.

We continue to evaluate ways to be more efficient and effective in our back office to leverage our overhead as we continue to grow.

While other <unk> providers decided to exit the market.

We see this opportunity to expand our national presence and to further our payer partnerships.

Long term, we remain confident in the value proposition, our medical solutions business generates for patients payers and referral sources.

In summary, we continue to fight through a difficult labor and supply chain environment, while keeping our patients care at the center of everything we do.

We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve core volumes.

While we expected Q2 volumes to have improved.

We are actively addressing our overhead by business line to be more in line with our current trends.

We plan to have our overhead reductions identified an action by the end of Q3 and.

And we expect these changes to improve our bottom line results, while still giving us the operational platform and flexibility we need to deliver on our mission.

As we look forward, we are committed to being a growth oriented company.

And all of our collective efforts are dedicated to making this happen.

These are unprecedented times and healthcare, but aviano was created to revolutionize the way home care is delivered one patient at a time and that's exactly what we're going to do.

I look forward to updating you again on our Q3 operating operating results in the coming months.

With that I'd like to turn the call over to today for additional color on the quarter.

Thanks, Jeff I'd like to start off by saying a big Thank you to our entire corporate support team for what each of you do every day to support our operators and caregivers doing everything we can to make it easier to run our business recruit and retain caregivers and provide high quality care to our patients is job one so big.

Thank you to the corporate team for all you do for Avianca.

I am sure topics, such as cash flow liquidity and credit related items are on the minds of our equity holders and lenders Tony and Jeff have already provided color on our consolidated and segment level results. So I'll jump right into these other topics.

With respect to cash flow free cash flow was negative $57 million for the six months ended July <unk> 2020 to bear in mind that this included onetime usages of cash during the first half of $11 7 million to purchase an interest rate cap and $3 5 million of repayments of CMS advances received by certain of our acquired companies.

Free cash deficit for the first six months was funded by $30 million of net borrowings on our securitization facility $15 million of borrowings on our revolver and $12 million of cash from the balance sheet.

Thinking about the rest of the year free cash will be negative, but we will be working hard to keep cash burn as low as possible as we focus on sources of cash from working capital, including driving incremental dollars in <unk> related to accounts receivable.

Bear in mind, we must still repay $25 million to the IRS for deferred payroll taxes at the end of December .

And we're looking forward to 2023, we expect to make significant progress towards breakeven from a free cash perspective.

While we are in a more limited M&A environment integration and system transition costs are expected to be significantly lower than 23% in 'twenty, two and our 23 cash flow will not be negatively impacted by the repayment of CMS advances deferred payroll taxes or the purchase of the interest rate cap all of which will be $40 million for 2022.

On the debt service front, we had approximately $1 $43 billion of variable rate debt at the end of Q2 of this amount $520 million is hedged with fixed rate swaps and $880 million is subject to an interest rate cap, which applies and limits further exposure to increases in LIBOR above 3%.

Accordingly substantially all of our variable rate debt was hedged at the end of Q2.

One last item I would mentioned related to our debt is that we have no material term loan maturities until July 2028.

From a liquidity perspective, we feel good about our ability to bridge our way to 2023 at the end of the second quarter, we had $185 million of total liquidity, considering cash balances and availability under our revolver and with the recent $25 million increase in capacity under our securitization facility as well as a $60 million draw on the delayed draw term loan.

We've increased our liquidity in August to approximately $270 million.

And as a reminder, we have limited covenant requirements under our revolving credit facility do not and do not anticipate any concerns for the foreseeable future.

Before finishing up I wanted to provide a few comments on the $470 million goodwill impairment that we recorded during the second quarter. We've been discussing the challenges we've been seeing in the labor markets and overall operating environment in 2022.

And based on our second quarter results and revised forward looking expectations. We provided updated fiscal year 2022 earnings guidance to the public markets on July 19, our.

Our lowered guidance in addition to the sustained decline in our stock price prompted us to perform an interim goodwill impairment analysis, which considers a number of inputs, including estimated fair value of the company's reporting units based on our market approach and a discounted cash flow approach.

The results of the interim impairment.

Assessment was the $470 million impairment charge that we recorded in the second quarter.

As I wrap up I'd say that as we navigate our way through the challenging macro trends and headwinds were currently facing we believe that we will continue to have ample liquidity to fund our operations and think our credit facilities are appropriately hedged against the rising interest rate environment.

We're looking forward to the future and will continue to deliver on our important mission for our patients or caregivers and our payer partners one patient at a time.

And with that I'd like to turn it over to the operator for questions.

Thank you.

At this time, we'll be conducting a question and answer session.

If you wanted to ask a question today. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

If I start to feel like to move your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the jockeys.

Suddenly may address questions from as many participants as possible. We ask you. Please limit yourself to one question and one follow up.

One moment, please while we poll for questions. Thank you.

Our first question comes from the line of Joanna <unk> with Bank of America. Please proceed with your question.

Hi, good morning, Thank you so much.

I had a question here.

I guess Tom.

Maybe follow ups first talking about.

These suites.

So coming in much better so I appreciate your admission I'm thinking specifically about it sounds like it's a small state for the company, but then you mentioned data.

The increase in weight, so would you be willing to.

Yes, Alex it's date or maybe.

More importantly, how meaningfully.

Two to the company and also I want to clarify that you're ready to talk about volumes.

That state.

Proving a 56% after.

After the rate increase so can you also give us the magnitude in Virginia. After you had the 70% increase.

Hi, there.

So first of all Joanna thanks for joining the call and the question.

I think we are.

Dave a couple of examples in my remarks, one was in Virginia and the other one I just listed as one of our larger states.

Both in Virginia, correct, Virginia is not a particularly large state for US. However, we have seen positive volume growth in Virginia related to Medicaid probably in the 3% to 5% range early one right. After we were able to pass on the wages.

In the other larger State example, that I gave with that particular payer.

We're seeing even more substantial volume growth kind of in that 5% to 7% range in terms of quantifying either of those states I'm not going to I'm not going to call that out.

Because we've already given guidance when we when we early released in July we gave our guidance of 1 billion 785 in revenue are not less than 1 billion 785 in revenue and not less than a 150 million in EBITDA and <unk>.

We're not trying to provide further guidance today or an outlook for 2022, but anecdotally. Both examples of where there had been material rate increases have given us the flexibility to pass those wages owned to caregivers in a meaningful way that would bring them.

Back from other higher paying jobs back into homecare.

Okay. So I guess again, it's good to hear that.

DSO.

Volumes picking up in Virginia, and the other state that it's even larger snack is more meaningful.

Good to hear and I guess that was my follow up but the other question I had on the covenants.

So I appreciate it.

You don't you don't meet the required because it's been drawn there as well.

Yes.

Great.

Im sure Theres, so much gentlemen, so could you tell us what is the current shrinking leverage.

And there is a calculation that is required by our credit agreement I'm coming up with.

Six six.

<unk> guidance when you adjust for the additional debt that you draw on and I guess it would go to over seven times and then <unk> I guess at the end of the year using the guidance 50, EBITDA guidance. So I'm just trying to think.

How how this fits with that with the covenant, that's called college or I guess, it's only.

Have to look at that if your jaw.

But just in case I guess you'd have to we're just trying to understand that.

The math here.

Sure Joanna and thanks for the question actually so the last part you just mentioned is that the seven six limitation doesn't become operative unless we are using more than one third of the overall credit facility.

The revolver subject to a $15 million carve out for letters of credit.

So that leverage ratio is much lower than what you mentioned and we have we have a significant amount of room. There. So I don't think it's a concern right now.

Okay, great. Thanks for the color.

Our next question comes from the line of Brian <unk> with Jefferies. Please proceed with your question.

Hey, good morning, guys.

Tony I guess followup Joanna this question as I think about the remaining states. The big States that have not raised rates for you guys. As we think about the fiscal 'twenty three legislative specials in these states.

Any color in terms of magnitude that you can share with us. So that we can think of 2023 is kind of like what the what the potential upside is to overall rates for the business.

Well.

I want to stop short of trying to give you predictions of what I think personally will happen.

I felt like we had a pretty good shot at getting a rate increase in California. This year.

And that didn't pan out.

I do want I do believe that the state of California has has to do something in 'twenty three we have.

I have not seen I have not seen children's hospitals come out and get involved in the political process as much as we saw in 2022, theyre, making a lot of noise about not being able to get patients out of the hospital. So.

This is just my opinion I think California is going to have to do something either in the interim or something legislatively in 'twenty three.

There is a crisis brewing in California.

As I go around the horn with our other stage and I talked I gave you. One example of the one state that's material for us.

Our large states, we I think we've been pretty open about it, Texas, Pennsylvania, Colorado, Florida, California.

All of those states.

Are pretty actively trying to figure out ways to solve this problem.

I think what we've used Colorado several times as an examples of being very.

Innovative in their approach and using alternative caregivers to take care of patients on the other side I think Pennsylvania has been very proactive in trying to stay ahead of our rate and wage issues.

We've had.

Florida is more of a Medicaid managed care state for us and we find.

The payers in Florida to be proactive so I think around around our horn.

I think we feel.

We feel like we're being pulled along by payers and not in such a way where we have to go fight with payers I think I think all of our payer partners both state governments as well as our managed care organizations.

Believe that.

They understand the issues today and they understand that were part of the solution and are trying to be helpful and constructive of coming up with.

Better ways to pay or more dollars to get to create more capacity Jeff anything.

Tony.

I think it is not if it's just when I think in every single state. We are working with it is just a matter of.

It's just a matter of when and I think Tony's point on California's as well said, it's not it's not a matter of if California is going to raise their pn.

Right. It's just a matter of when we accomplish that and I think we and the industry specifically the PD and industry are have locked arms with children's hospitals to ensure that that is a successful outcome and so like Tony I feel.

I felt good about 2022, and our rate opportunities both on a legislative standpoint, as well as on a.

Managed Medicare and I feel just as good or better about 'twenty three and I think we are prepared as an organization to execute on those plans.

California, we're talking to.

We've use California as an example <unk>.

<unk> has a history of when they do make a rate increase it is significant in 2018, California raise their private duty rate by 50%.

In one stroke of the pen so when that rate comes it will it should be meaningful.

That will make it a lot because I guess as my follow up as we think about those comments that you. Both of you guys. Just made so is this just officially <unk>. The demand is there we just need to weather the storm and labor and they will be driven by rate and eventually we will get back to.

The run rate growth that you were thinking about maybe 18 months ago.

I think so I think.

When we.

When you said 18 months ago, we were talking about growth rates that were.

In the five 5% to 6% company wide, our PV and growth rate was probably in that 3% to 4% range. Our home health was growing call. It 10, eight 910% same with IMS.

I think I think when the when the world in the labor markets normalize and the rates can be adjusted to reflect whatever it's going to be the new normal wage rate I do believe we will get back to that growth.

At 5% to 6% range.

Year over year.

And the reason I have confidence in that is because when you think about.

The place for all of Homecare, not just all beyond our private duty or even home health.

Home health and hospice and private duty services and medical solutions. These are all cost effective alternatives and in the larger scheme of trying to control overall health care costs. We are a mechanism by which cost can be reduced and for those reasons I think we're going to take a leadership position.

Going forward and we feel confident that those growth rates will return in.

In the meantime, the labor markets are very choppy and disrupted in and we're just going to have to weather that storm.

Thanks, Brian got it thanks guys.

The next question comes from the line of Matt Borsch with BMO capital markets. Please proceed with your question.

Yes.

On background equally can.

Can you.

The mind, yet how much of your.

TVN dredging.

Lastly from reimbursement under Medicaid State Medicaid program.

And.

And maybe.

<unk> made more progress in terms of rate modifications.

That's a great question, Matt and we have we have talked publicly generically about that so.

If you look at the overall company <unk> make up a large Medicare managed care makes up a larger pool.

Portion then does straight Medicaid.

Within even within the private duty segment the NCO.

Breakout is slightly larger than the Medicaid, but Medicaid standalone Medicaid is still a.

A meaningful piece of that business as it relates to the second part of the question I think I think we have had similar success, both with state Medicaid systems as well as managed care organizations. However, the Medicaid managed care organizations have the ability to move.

Faster.

For example, they don't have to wait for a legislative year.

Texas for example, their legislative processes every two years.

<unk>, our Medicare Medicaid managed care organization can move immediately.

When they need to matter of fact.

I made the comment.

About our payer relations team, Jeff and Mike and his whole team did a really nice job in.

Moving one of the larger Medicaid MCR in a meaningful way in an off cycle type of rate change.

And I think I think that's the benefit of dealing with the <unk> is they have a little more flexibility as to how and when they move right.

I would add as Jeff is as the conversation is the same whether were talking to a legislature or managed Medicaid.

Senior leader, it's the same conversation to move to increase staffing and to get kids home and more importantly, keep them home, we have to pass through wage rate significant wage rate tune of $45 $6 $7 an hour and so it's really the same conversation we're having.

Tony said it well the only real differences in a Medicaid legislative everyone gets the rate increase so as are we and our peers share on their rate increase when we're negotiating with managed care organizations that rate increases specific to avianca.

That's a great point.

And I guess, we're getting yet not so much.

The fundamentals, but at day.

Goodbye.

Or.

When the rate Youre looking for.

For how that has immediately.

You're looking at that in the right way.

Yes. It is.

Tony mentioned it was effective July one and we pass through wage July one. So we didn't I think you've heard us in historical times talk about we sometimes we would delay that wage pass through a few weeks or months in these times, we announced our wage faster.

As probably the market did as well, but we announced our wage pass through literally the week of July 4th and so it just demonstrates how powerful it is to get incremental wage and other benefits like mileage reimbursement and things like that into the hands of the caregivers as fast as humanly possible and as Tony said I'm pleased with the first.

Five or six weeks, we've had in Virginia. It is a small smaller part of our Medicaid business, but.

We've had meaningful movement in our staffing rates, our ability to bring kids home and eventually to be able to admit new children.

To our services.

My last thing just a follow up.

Do you think your scale.

Clearly.

<unk> segment.

Good.

I think advantages.

Right.

It's a smaller plane hurricane flattering storm im sort of curious.

Going to shake out.

The whole industry.

Well, Matt I'm going to brag on I'm going to brag on our operating team and our government payer relations team I do believe that our scale really does matter and.

This team went to one of our larger MTO players and said guys in order for us to be the partner that you want and need us to be this is the rate that we have to be paid in order to fulfill your objectives and in a matter of two to three weeks.

I think our size and scale gave us the ability to negotiate that rate and that value based pricing contract in such a way that I don't think we could have done that if we werent a relevant provider in that particular state and that I would just add is the difference between being a partner and a vendor and I think with our size and scale.

We can be a partner to these managed care organizations.

And we are talking to hundreds of managed care organizations on a weekly basis. So.

Tony mentioned that we've had five value based contracts from Q4 through.

Year to date through the end of July I expect we will have another two or three between now and the end of the year. So it will be almost 10 value based contracts in our Pts segment.

I believe as time moves on that will continue to grow and grow significantly.

Thanks, Matt.

Great. Thank you.

Our next question is from the line of a J Rice with credit Suisse. Please proceed with your question.

Thanks, everybody.

I appreciate the comment about the $7 million to $8 million of headwind is.

The rate reduction I guess in whole milk goes through.

Taking about.

Yes, I'd add Scott.

Any updated thoughts on whether you will be successful in getting any modification on that and then second.

Are you looking.

Ed activities you can undertake.

To mitigate some of that is any of that in the planning or do you wait and see how it all plays out first.

Well a J.

My guess as to what the outcome is going to be is probably worth about the same as yours.

I don't have any line of sight as to whether we will be successful or not I do feel with conviction that the industry has right on its side.

I do understand the rule, making process and how the.

And how the market basket update is calculated and that is relying on cost report data from 2019 in 2000.

At Best 2020.

And given the inflation.

We're going through right now that cost report data is not reflective of what it takes to hire.

Caregivers today.

And I think we saw that in the hospice rule, making process, whether it was adequate or not I think CMS acknowledged the fact that there needed to be an adjustment made.

We're hoping that we can get the same clarity with CMS on the home health rule as to what the what the outcome is going to be I can't predict that.

As it relates to adjustments.

I think our stance is we need to do the right thing and take care of the patient and provide the patient with the level of care.

The physician's orders require.

And we will want to do that in the most efficient manner possible.

With that said there are there are levers within the business.

It affects both.

Reimbursement rate and profitability, we will always try to be transparent and provide the level of care that the patient needs.

Jeff made in his comments you did.

Talk about the final implementation of homecare Homebase, we we've digested that very quietly over the last year.

And and we have it fully implemented throughout all of our home health and hospice businesses, we believe that the system.

<unk> allow us to manage data that's going to allow us to be more efficient in the delivery of care as well as provide us with support that would allow us to.

Need less overhead.

And I think with I think regardless of what the outcome is with the proposed.

Rate change I think those things will allow us to be more efficient going forward.

So.

Regardless of whether we get the large rate cut or a better rate cut or no rate cut.

We can whether there's opportunities for us to be more efficient.

Okay, and obviously the focus is sort of weather and the current labor storm.

And getting some clarity around some of these rate updates, but long term.

The story had been.

Funding consolidation opportunities in post.

Clarity on the rate update.

Home health, there likely will be.

A new round of deals available company thought about.

Obviously.

Spending time talking about your leverage situation today.

Any any thoughts about how you might participate in that consolidation a bit re accelerates or are we just in a holding pattern here for the next year or so as things play out.

Yes, Hey, Jay it's rod.

We've kind of I think everybody is kind of done this we've pushed pushed our big focus of M&A basically into a neutral position but.

That doesn't mean that we're not.

Doing smaller tuck ins. So there is I would tell you that all the wage disruption in the end.

And the med proposed Medicare cuts are putting pressure on the mom and Pops. So I can tell you that there is certainly a lot of activity in that area and so we'll continue to look for.

Tuck in acquisitions in markets, where where we can grow that business. So I would say our M&A activity is greatly muted, but but is concentrating on the smaller in scale and rod would you agree that.

<unk>.

Going to the.

Sellers' expectations will get.

We will have to get adjusted based on the outcome now yes. It based on the outcome of the proposed rule so to your point a J.

The rule stands is probably going to accelerate.

Consolidation, but probably yet.

At a lower price.

I guess I guess, making sure.

Sure I'll make it clear I was thinking about.

And maybe you guys have something what would your capacity be it.

To do transactions, you're talking about on the smallest scale, obviously, but.

I mean could you still.

As you think about the cash flow prospects within the parameters of the covenants Novartis you talked about could you still do $50 million $100 million of deals over the next few years, saying that things are opening back up in 'twenty three or.

What is the capacity you think of it now, but you could do it a different configuration.

Well, Dave mentioned in his remarks, we've drawn down we replenish the cash that we used to buy comfort care and a credit do we replenished that cash on the balance sheet. So we have that cash available valuations are coming down there are there is additional debt.

However, we'd want to do that in such a way that we could delever at the same time. So the answer is yes, if the right opportunity.

<unk> itself, we have the capacity.

Move forward now to Raj point, it's probably not large transformational type acquisitions, but it's it's strategic regional local opportunities, where we can add to an existing geography. We can further leverage our overhead and then also don't forget that that.

We still have great equity partners, we have.

Bo.

<unk> vein and JC Whitney and other a couple of other large investors that have indicated interest that should the right opportunity to present itself. We've got folks that are.

Ready enable to to write checks we're not yes.

Yes.

I think our M&A activity has slowed down, but we're not sitting on the sidelines.

Okay, alright, thanks, a lot.

Thanks JJ.

Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.

Hi, Thank you.

You talked earlier about some regulatory changes in certain states that allow you to.

Your family members.

Impactful could that be to hours and.

How much of your focus in Spain.

Hey, Nathan.

Sure.

Family members.

Yes, Thats great question. Sarah This is Jeff I think I think we saw Tony talked about Colorado being innovative in nature of how I was one of the first states to really endorse.

Kind of the full suite of not only skilled care therapy in the home enteral nutrition the home, but also the idea of a family member.

Who is who has already staying home to their loved one, but probably not able to work or on some form of unemployment our welfare moving to a Medicaid type type reimbursement, where they would be involved and so we think of Colorado is kind of the inventory if you will of this.

We've had a few states added at it in the last year, primarily Arizona, and New Hampshire, where not a new Hampshire today, but but certainly we're in Arizona, we talked about that we mentioned in our comments Washington State has very.

Very openly talked with the industry about adding it between now and the end of the year and we're currently in negotiations are not currently in conversations with.

The Department heads in Washington State.

It's right now it's.

Hours for families that are also on private duty. So it's incremental hours for families who are already receiving private duty nursing. So think of the population primarily being.

Families, who have are medically fragile child at home, but are receiving some kind of nursing services at home and we see that being the primary.

<unk> base that most states are targeting because of the because of the significant need that those families need but I think we used the word many states I think the reality is on the environment today with labor and.

The amount of staffing that the industry is not able to do I think we could see this getting up to 50 States certainly 30 40 states.

From a handful today over the next kind of two to three years.

Certainly aviano has endorsed it the industry has endorsed that at the family Caregiver model is is a necessary model in today's world and so we're we're certainly champion.

Great.

And then maybe I can take a Dave question, a little bit different of a way.

You guys talked earlier about.

Yes.

Obviously, there are some great challenges.

Can you go through and you talked about not sitting on the sidelines or.

The right acquisition.

What would you need to see macro or internally to go back to you.

Your normal pace of.

M&A, where it's not.

Okay strategic transformation, all you can't Miss it opportunity, but just to get back to that that you paid.

That's normal.

So that's a thoughtful question.

So I think it's a cascading effect and I think if you go all the way back to the top what we really need to see is our volume growth return to that 5% to 6% and what will happen when that is the case.

Our infrastructure is such that when we're growing 5% to 6% year over year, our gross margins have been very steady and we can hold on to that gross margin.

And then our EBITDA will adjust own its own probably back into that $200 million run rate. When we when we're back in that 200 plus million dollars run rate I think everything then becomes more stable, where we can we can start looking out and start being a little more strategic as it relates to.

Just.

On the M&A pipeline, but it really has to start with with that return to normalized growth, which is going to be driven by the combination of rate and increased wages.

Yes.

Okay very helpful. Thank you.

Thank you Sir.

Our next question is from the line of Peter Chickering with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my questions ill take another shot at Joanna as pricing question I. Appreciate the commentary on the positive rate increases as kind of Virginia as well as some of those contracts, but can you provide color on what the blended price increase you got as of July one across your portfolio and then any color on how youre pvs hours.

<unk> has been again across the whole portfolio in July versus <unk> with this increases.

Yes, Peter this is Jeff.

I think the way to think about it is pre pre COVID-19 and kind of the disruption labor markets, we expected rate to be in that 1%, maybe one a quarter percent, specifically I'm talking private duty service here for a minute.

And I think that.

That was that was what we were seeing in our trends in this environment that number we felt like we believe between one quarter and 2% I think we're seeing getting closer to the upside of that being in the high one pushing 2%.

I think as it relates to volumes.

I think in Tony's comments, you really saw us.

We are seeing volume improvement directly tied to significant rate improvements and by significant I don't mean, getting a one or 2% cost of living adjustment to market, I mean, 15%, 18%, 20% and a state or 15 20, 25% rate increase in <unk>.

And we're able to see that movement.

As we think of July our volumes in PD and had been not not terribly different than they were at the end of the quarter in Q2. So our overall volumes in PDL have not have not increased from where they were in Q2 <unk>.

As Tony talked and I think we.

We validate we see or we see our unskilled and our family caregiver volumes, increasing but until we stabilize we're in 30 Medicaid states in our Pts business until we stabilize enough of the states related to the LPN and RN, we're still there's still enough churn in the states.

We've not received meaningful rate increases that that business has not gotten back to positive organic growth rates.

And it might be helpful. Peter when.

When we think about rate increases, we think about states and sometimes even contract by contract as being its own ecosystem. So we don't take rate increases that we receive in one state and then pass along wage increases to eight other states and try to use that.

Use that one rate increase to help other issues. So it's a matter of fact in examples that Jeff was given in some of our Medicaid managed care organization, sometimes we pay our wage differential is different between one payer to another and so a nurse it works for payer a.

That worked with patient with payer a might get paid one rate and a nurse that worked with payor b patient might get paid a totally separate rate there is less and so.

Jeff made the comment that we are moving capacity to those places and payers that recognize the quality and the value that we can bring.

Sometimes that is that's one contract by one contract even patient by patient.

Okay Fair enough and then.

On the guidance.

We provided our guidance on the first quarter are essentially halfway through <unk>, and then sort of cut it after the quarter ended which implies that the back half of the quarter and to Q was worse than the first half mathematically you're assuming that the first half EBITDA is the same as the second half EBITDA, but the trend was down during the back half of <unk> I am assuming what have you assumed.

<unk> sort of ramping from where we exited two Q to get to sort of equality in the back half of the year. Thanks, So much.

It's all it's all of the above of everything you just said and yes.

If you wanted to dissect the quarter.

When we gave the guidance kind of in late in Q <unk>.

Late in Q1, we had begun to see coming out of <unk>, we had begun to see a little bit of improvement as we went through.

April .

And we had we had seen hours improve as as one would expect them to do in Q2, if you recall.

It was late April early May when we started seeing gas prices go up and hit the four $4 50, plus or the $5 range. We saw inflation really kind of take off late April early may we saw a substantial difference in our ability to hire caregivers.

And retained caregivers probably around.

The towards the end of May.

When that really changed so to your point there is some downside we saw significant downside in the second half of the quarter versus the first half a quarter now to your point we all.

So haven't adjusted our outlook for some of these rate improvements had just been talking about so went to hell that guidance. The way we put it out there just to refresh everybody's memory.

What we guided to was revenues of not less than 1 billion 785, and EBITDA not less than $150 million and so we haven't updated that guidance at all.

But those are the moving pieces that go into the second half of the year hopefully that helps.

Great. Thanks, so much guys.

Thanks Peter.

Our next question is from the line of Ben Hendrix RBC capital markets. Please proceed with your question.

Hey, guys. Thank you very much.

You've talked extensively about your commitment to preserving the PD and gross margin in the 30% context, but youre in negotiations with states. Many Ceos are you seeing any pushback urging you to meet them halfway and sacrifice some margin.

Specialty net increased involvement from children's hospitals, and other health systems to around improving discharge it.

Yeah.

Thoughtful question Ben the answer is no because we can demonstrate pretty carefully because that number youre talking at the gross margin number that doesn't include any of the overhead associated with the scheduling of the patient the clinical management of the patient the overseeing of the physician's orders medical.

All of all of those kind of things are hard cost and and we have the ability to outline those cost for our payer partners and so I think.

Jeff jump in here I think our partners believe that 30% margin is probably fair.

We havent that Hasnt come up at all in any of our discussions it's really.

It's really the conversation of we're asking for some number of eight or $10 more per hour, including value based components and is the commitment to that preferred payer that we will move the needle by passing through that a significant portion of that rate increase to two the caregiver and thats really where our conversations are we we can tell the the payer specific.

Managed care payer and legislatures. So this is where we're paying LPN. Today. This is what the market is thats. The Delta we will pass that delta through via the rate increase and we have and we've we've been able to show them.

As soon as the contract signed that were able to get kids out of the hospital and more importantly increased staffing rates and thats, what they want they want to keep the kids home. It's still a difference of a few hundred dollars a day.

At home with a company like <unk> versus three or $4000 a day in the NICU pick you and make you pick your beds are full so it's not a hard proposition to sell.

It's really passing through that wage to the caregiver.

We've been effective in doing that.

And then I mean, when I say that we can quantify this for our payer partners and I'll use. One example, it cost between one and one 5% of revenue to bill and collect in this business and we can go through that same exercise and show what it costs to run payroll show what it costs to run the branch overhead the scheduling.

<unk> and so when you when you go through all of that 30% gross margin is not is not unreasonable.

Thank you very much.

Thanks Brent.

Thank you. Our final question today comes from the line of Lisa Gill with Jpmorgan. Please proceed with your question.

Hi, This is Andrew on for Lisa I, just had a quick question.

Other than wage increases are there any auctions.

The company is taking to tap.

Tackle retention and recruitment for managing labor.

Just wondering if there's anything other than the anticipated reimbursement increases that youre looking at to handle labor headwinds.

And your question specifically to the proprietary services or just in general.

Remedies.

Yes, I think I think that's the main lever in that business right. Because it is an hour of reimbursement for an hour of wage.

Our home health and hospice segments, we have other levers that we can manage for that gross margin, but in this business now it's pretty straight pretty straightforward.

And it's primarily driven by wage right. It's in the Pds business segment, it's really the wage rate is the number one driver of of higher end and retention.

Alright. Thanks.

Thank you.

Thank you at this time, if each end of our question and answer session. I will now turn the floor back to Tony Strange for closing remarks.

Thanks, operator, and I want to thank everybody for joining our call today and again I want to say, we believe that home care is a solution not a problem.

And we think that Avianca is well positioned where a comprehensive provider we have a very diverse payer background and we have a leadership team that has been through this fight on more than one occasion.

With that we think that.

We think that homecare creates a tremendous opportunity to create value for all investors and shareholders alike. So with that thank you.

Our call and we look forward to updating you on our future progress.

This will conclude today's conference. Thank you for your participation you may now disconnect. Your lines at this time and have a wonderful day.

[music].

Good morning, and welcome to Avianca Health Care Holdings second quarter 2022 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 Avi honest, Chief legal officer and corporate Secretary. Thank you you may now begin.

Thank you.

Good morning, everyone and thank you for joining us today speaking on today's call are Rod Windley Avi on as executive Chairman, Tony Strange I'll be honest, Chief Executive Officer, and President David I'm sure I'll be honest, Chief financial Officer, and Jeff Shane or Aviano's, Chief operating officer.

A replay of this call will be available until August 18, 2022.

Want to remind anyone who may be listening to a replay of this call that all statements made are as of today August 11 2020 to.

Today's call May contain forward looking statements, which may be identified by the use of words, such as May could expect plan and other similar words and expressions.

Eight or revise any forward looking statements subsequent to the date made as a result of new information future events or changes in circumstances.

Or is otherwise available separately on our website. Following today's prepared remarks, we will open the call for questions. Please limit your initial comments to one question and one follow up so that we can accommodate as many callers as possible in the allotted time with that I'll turn the call over to <unk>, Chief Executive Officer, Tony Strange Tony.

Thank you Shannon good morning, and thank you for joining I'll be honest second quarter 2022 earnings call before we begin our call I would like to say thank you to the 35000, Aviano caregivers and employees, who continue to provide exceptional service to the 87000 patients under the company's care.

These are unprecedented times and it is only through your commitment to our families that we're able to meet the needs of the patients that we serve.

Our results for the quarter are in line with those lowered expectations set forth in the July release.

Before we get into those results I would like to spend a few minutes on the overall environment by providing some insight into ongoing pressures in the labor market as well as positive momentum in reimbursement.

The labor market related to our business continues to be challenging across all of our business segments, but particularly challenging and our private duty segment.

Side for 10% to 12 hour shifts.

These skilled nursing this skilled nursing businesses, where where it has been experiencing the greatest disruption in available caregivers. Historically these nurses have been willing to work for hourly wages that might be slightly below were skilled nursing facilities and other health care providers could pay due to the desirability to take care of one.

Patient at a time in the comfort of the patient's home <unk>.

However, during the second quarter, we've seen a significant shift in this dynamic driven by two factors one.

Inflation has driven our workforce to seek employment that can and will pay higher wages and too.

More and more health care providers are willing to hire LP and in this environment to replace or avoid paying higher rates for travel and temporary agency our ends.

Given that our reimbursement is fixed we do not have the ability to raise wages without a corresponding increase in payment rates.

On a positive note while labor shortages exist everywhere the challenges on the unskilled business are materially less difficult than those in the skilled care as a result, our unskilled business continues to generate positive volume growth and continues to play an increasing role in the delivery of home and community based care.

<unk>.

Our home health and hospice business is also dependent on the ability to hire <unk> an LPN.

And while we have similar constraints related to the competitive environment, we have greater flexibility to increase wages given the variable reimbursement models.

In the meantime, our most effective lever is to push reimbursement rates to allow us to pay higher wages, which brings me to our next topic the reimbursement environment.

As we mentioned in our press release in July we continue to have positive momentum regarding rate increases with our Medicaid and Medicaid managed care payers.

This is public information the state of Virginia increased Medicaid reimbursement from private duty services by approximately 70% effective July one of this year in an effort to expedite the discharge of medically fragile children from hospitals and to avoid costly readmissions.

And another of our largest states effective July 1st we implemented a rate increase of approximately 50% roughly half of the increase will be on an hourly basis as rate. The other half of the increase is tied to value based pricing agreement.

The agreement is based on two quality metrics staffing goals and a measured for unplanned hospitalizations, both of which are largely in our control.

<unk>.

I'll provide these two examples as evidenced that significant changes in rate can drive volume.

Our firm believers that avianca can add value to payers, we have the data the skill and the willingness to accept risk and value based pricing agreements.

We currently have five of these types of agreement in place and expect this trend to continue.

We will Mount an all out effort.

And pressed for meaningful rate relief during the spring legislative session in 2023.

And with continued support from the children's hospitals across the state and ongoing pressure to get patients out of higher cost settings. We're confident that we can lead a successful effort.

We fully support these programs and have been first and have seen firsthand in Colorado, and Arizona that they can be effective in getting patients home and avoiding re hospitalizations in a very efficient manner.

We expect to see other states continue to follow in their footsteps.

Turning to the Medicare environment. The final rule for Hospice was published two weeks ago, and it was about 110 basis points better than anticipated.

<unk> did the argument and adjusted the final rule accordingly.

Home Health proposed rule currently provides for a net reduction in reimbursement of four 2%.

Given the struggled to SaaS patients at current reimbursement rates, we find it difficult to imagine in any scenario where rates are lower for the for the industry to meet the needs of the fastest growing and most vulnerable segment of the population in the U S.

The industry is making the same arguments made during the hospice rule, making process and we expect to get clarity on the final rule at some point in September .

If the rule was implemented as proposed.

Sure.

The demand for home and community based care has never been higher.

<unk> been we have a waiting list for new admissions in every branch.

We have several examples of how value based contracts can provide benefits to both payer and provider.

But with all that said, we're still in a firefight today.

I do believe that home and community based care will solidify its role as a value added provider in the healthcare continuum.

I'll be on it as a comprehensive platform with a diverse payer base, we provide a cost effective alternative to higher cost care. We provide this care in the most desirable setting the comfort of the patients' home.

So, let's turn to our results as I mentioned earlier our results for Q2 were in line with the expectations that we laid out in July .

Revenues for the quarter were $443 million and adjusted EBITDA was $37 million or eight 3% of revenue.

The key takeaways from the quarter, our volume volume and volume.

As discussed we need to increase caregiver wages on average 15% to 25% in certain markets that we serve.

We will systematically go through state by state and contract by contract and adjust reimbursement rates in such a way that will allow us to be competitive on wage and.

In the meantime, gross margins continued to be stable at 32, 7% for the quarter, which is up from Q1 of 2022 and the full year of 2021.

Jeff will provide further granularity on our segment results in his remarks.

From a liquidity standpoint, we have placed hedges on all of our debt in one form or another to protect the company against the rising interest rates.

We expect cash flow to be negative for the year, driven by lower EBITDA expectations as well as approximately $40 million of one time cash uses.

In summary, while we do not like being in a position where we're forced to chase rate, we fully understand that in the short run. It is the most immediate solution.

In the meantime, we will adjust cost where appropriate protect our gross margins and manage our cash flows.

I am confident in our team to make the necessary adjustments to navigate this difficult environment and as I said before homecare as a solution and those that have the perseverance to weather. This storm will be rewarded.

With that I'll turn the call over to Jeff.

Thank you Tony.

Im proud of the resilience of our Avianca operating teams in the face of continued turbulent labor markets and the highest inflation experienced in over three decades.

Our RV and our leaders remain focused on the task at hand, bringing medically fragile pediatric and geriatric patients home and staffing their cases with highly skilled caregivers as.

More to come on that front as I detailed each of the three business segments now lets move into our Q2 operating indicators, starting with our private duty segment.

We produced $348 million of revenue during the quarter revenue was driven by approximately $9 6 million hours of care, which was flat from Q1.

Pds volumes continued to be constrained by the turbulent labor markets, primarily driven by the shortage of Rins and Lps.

We saw improvement in our unskilled workers and family caregiver employment trends during the quarter, but that was offset by the continued disruption to core nursing trends.

Our Q2 revenue per hour of $36 24 was up 99 from Q2 of 2021 or two 7%.

We continue to experience significant rate improvements in 2022, and I'm proud to say, we've achieved 20 pds rate increases year to date.

These rate wins include state Medicaid Pds rates as well as Medicaid managed care organization specific aviano rate increases.

Most of our state legislatures have completed their 2022 legislative sessions, we have now turned our focus to the 2023 legislative process for future rate improvements and program expansion opportunities.

We have a full slate of 2023 legislative and managed care organization preferred payer initiatives to execute on.

I look forward to engaging states like California to help solve overcrowded children's hospitals and relieve exhausted families who are struggling to care for their medically fragile child at home.

We have numerous examples of how increased reimbursement rates have a positive impact on nurse staffing levels and reduce hospitalizations.

And the yen tire private duty services reimbursement rates are the primary answer to employ more nurses and bringing more patients home.

We also have an update on the Arizona Medicaid system and its licensed health a la program expansion that we highlighted recently as you remember this important program supports family caregivers with appropriate compensation for the unskilled care being provided to a loved one the <unk> program is in addition to the <unk>.

Nursing care being provided by and Avi and a nurse.

I am proud to report that we admitted our first Arizona Lecce family in July and have over a dozen families currently being credential.

Expect this important program to continue to expand across many other states, including Washington State that has endorsed a similar family caregiver program.

Washington State has stated their goal to begin this program by the end of this year.

Turning to our cost of labor on gross margin metrics, we achieved $101 $4 million of gross margin or 29, 1% our.

Our wage rate of $25 68 per.

Per hour reflects the commitment we've made to passing through a rate wins to our caregivers.

Our Q2 spread per hour was $10 56.

In line with our expectations.

We experienced numerous private duty service rate wins effective July one.

We will continue to actively pass through these increases in the form of additional wages and benefits to our caregivers.

Now moving onto our home health and Hospice segment for Q2 were the impact of high inflation and increased caregiver wages mileage.

And applied pressure on our gross margins.

We stand firm with the National Association for Homecare, and hospice and our industry peers and our fight against the 2023 proposed home health rate cuts.

This is the wrong time to be cutting reimbursement to the most effective highest quality in patient preferred health care setting.

As previously announced we have completed our transition to the homecare Homebase operating system and now have all 96 home health and hospice locations operating under Homecare Homebase model.

We are actively implementing the metalogic analytics tools to ensure that we are improving quality outcomes, while balancing the need for effective cost controls.

During the quarter, we produced $61 $4 million in revenue, a 22, 6% increase over the prior period.

The biggest driver of revenue growth was the impact of the comfort care acquisition.

Set by continued labor pressures.

Q2 revenue was driven by 12400 total admissions approximately 62% being episodic.

12300 total episodes of care.

While volume was down from Q1, having the system transition now behind US allows our home health and hospice leaders to fully focus on growth.

To support this growth effort, we added sales leadership and sales resources and core southeastern markets.

We are committed to being a growth oriented geriatric provider and look to get back to mid single digit organic growth rates in the back half of this year.

Revenue per episode for the quarter was $3004 up three 7% from Q1.

This increase was driven by better episodic management and demonstrates the value of being fully transitioned to homecare homebase.

From a cost and margin perspective, Q2 gross margins were 48, 2%.

Gross margin in the quarter was impacted by higher wages and mileage driven by the current inflationary trends.

Now moving onto our ASEAN a medical solution segment results for Q2.

During the quarter, we produced $33 $5 million of revenue.

Revenue was driven by approximately 78000 unique patients served and revenue revenue per <unk>, a $430 10.

While volume and rate were consistent with Q1, I am proud of our medical solutions team as they continue to fight through unprecedented supply chain disruption.

Driven by the previously announced Abbott recall.

Avianca has emerged from this event as a leading national provider of NGL nutrition for clinically complex patients.

Once the integral supply chain returns to a more normal environment, our medical solutions business is well positioned for accelerated organic growth trends.

Turning to our cost of goods and gross margin metrics.

We achieved $14 $1 million and gross margin dollars or 41, 9%.

Gross margins have stabilized in the 41% to 43% range.

We continue to evaluate ways to be more efficient and effective in our back office to leverage our overhead as we continue to grow.

While other <unk> providers decided to exit the market.

We see this opportunity to expand our national presence and to further our payer partnerships.

Long term, we remain confident in the value proposition, our medical solutions business generates for patients payers and referral sources.

In summary, we continue to fight through a difficult labor and supply chain environment, while keeping our patients care at the center of everything we do.

We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve core volumes.

While we.

Expected Q2 volumes to have improved.