Q3 2022 Aveanna Healthcare Holdings Inc Earnings Call
Good morning, and welcome to all the other health care Holdings third quarter 2022 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A at this time I would like to turn the call over to Shannon drink Avi Drake avionics chief legal.
Certain corporate Secretary. Thank you you may 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 <unk>, Shar I'll be honest, Chief financial Officer, and Jeff Schader I'll be honest 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 Dot Gov. A replay of this call will be available until November 17, 2022, we want to remind anyone.
Who may be listening to a replay of this call that all statements made are as of today November 10 2022 today.
Today's call May contain forward looking statements, which may be identified by the use of words, such as bank could 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 to materially differ from those expressed or implied on today's call.
As required by federal Securities laws, Aviano will not publicly update or revise any forward looking statements. Subsequent to the date made as a result of new information future events or changing circumstances.
Also we supplement our financial results reported in accordance with GAAP with certain non-GAAP financial measures 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 at the SEC's website at Www SEC Gov.
Whereas otherwise available separately on our website.
Following today's prepared remarks, we will open the call to questions.
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 will turn the call over to I'll be honest, Chief Executive Officer, Tony Strange Tony.
Thank you Shannon and good morning, everyone. We appreciate you investing your time to better understanding our results as well as the factors that are affecting our industry on the call today, we'll update you on our third quarter results, we will provide some insight into the labor markets and our ongoing efforts with payers to create additional capacity.
And finally, we will provide in some insight into our expectations for Q4 as well as a preliminary look at 2023.
As you've seen in our press release last night, our Q3 results clearly fall below our expectations with net revenues of 443 million and adjusted EBITDA of approximately $25 million.
Despite the ongoing disruptions in the labor market, we're seeing progress in staffing specifically as it relates to our preferred payor relationships with N. P. D. S. We now have seven preferred payer relationships, all showing signs of growth compared to the two that we discussed on our last call.
Additionally, our medical solutions business is benefiting from the market consolidation after two providers left the market in late Q2.
Finally, both our private duty services and our medical solutions produced sequential volume growth in Q3, which is typically the lower quarter of the year, both posting their best results of the year.
As referenced in the release, our biggest issues in the quarter were driven by home health and hospice.
Earlier this year, we consolidated four separate and unique operating systems into homecare Homebase.
In addition, we implemented metalogic to provide predictive data analytics.
Both will play a significant role in our ability to position all of you on a as a leader in value based care and while we're confident that these decisions are the right long term strategy for the company. We can see a short term effect within home health and hospice in Q3, our results were driven primarily by the following three factors.
Lower than expected volumes as homecare Homebase was rolled out to all 91 branches, we could feel the effect on volume during the integration phase while we completed the installed in Q2 with little disruption as we began to implement the disciplined policies associated with homecare Homebase, we saw a decline.
Both in new admissions and re certifications.
And while this impact was across our platform. It was most acute in the state of Florida within our legacy Doctor's choice acquisition.
With the benefits of homecare Homebase securely in place, we're experiencing an improvement in volumes across the board and particularly in Florida going into Q4, notwithstanding the impact of hurricane and in the first two weeks of October .
Number two higher than expected adjustments in revenue reserves, we took adjustments and additional reserves to revenue above our normal rate of about six and a half million dollars during the quarter.
These adjustments include provisions for uncollectible, a our own legacy systems increased reserves for documentation issues that occurred during the system conversion and additional adjustments for configuration issues that have since been addressed.
Dave will provide additional details in his remarks, the fourth quarter. We will continue to have a slightly elevated reserve rate before returning to normal levels in Q1 of 'twenty three with the rest of the adjustments that we discussed being more onetime in nature.
And number three higher cost associated with lower revenues as a result of the lower revenue as well as the efficiencies gained through homecare homebase. The operating team has identified about six and a half million dollars a cost that we took out in late Q3 with the full benefit being realized in Q4.
Jeff will provide some additional commentary on all of the home health hospice results during his remarks.
While we're on the topic of home health on Monday of last week CMS issued its final rule for home health payments for 2023 as Youll recall CMS proposed a net reduction of approximately four 2% up for 'twenty through 'twenty three rule.
CMS increased the market basket update as well as reduced the behavioral adjustment, resulting in a rate increase for 23.7%.
In full disclosure CMS indicated that while it would be implementing half of the behavioral adjustment in 2023, it would implement the remaining 50% at some point in the future.
Clearly this is a better outcome for the industry because it allows companies to continue to invest and caregivers and technology to better position themselves for what CMS views as the end game, where all providers are paid based on the value that they deliver.
We believe that with the investments that we've made into homecare homebase and met a logics, we are well positioned to be a winner in the value based care system with that said, we strongly urge CMS not to proceed with the additional behavioral adjustment in future years as it contradicts the shift in behavior that they're trying to encourage.
In summary, we feel good about the future of our home health and hospice business. There are 10000 Americans turning 65 every day.
Home Health and hospice provides a cost effective alternative to rising health care costs and most importantly is preferred by the patient.
We expect this business to grow in the high single digits year after year and continued to produce gross margins in the high 40% to 50%.
On our last call. We spent a fair amount of time talking about the preferred payer relationships as well as value based pricing.
Well it still represents a small portion of our overall revenue we have continued to see momentum in moving our capacity towards payors that value of the role that home care can play in reducing overall healthcare cost.
Within these preferred payer agreements, we can see early signs of success with Pds growth rates in the mid to high single digits as well as the potential for gross margin expansion.
The indicators demonstrate that an all in commitment to this strategy in states where value based pricing is currently a possibility is a clear path forward for avianca.
Before we get into Q4, and 2023 I'd like to make a few comments about cash flow and liquidity.
First and foremost despite the discussion related to the adjustments that we took in home health and hospice. The revenue cycle teams have produced extraordinary results in Q3, our collections were 470 million against the goal of $445 million or 106% plan.
Dsos for the quarter dropped to 48 days. These results give us confidence that our revenues are collectible and that we will be able to convert revenue and growth into improved cash flow.
In the meantime, we have flexible covenants within our loan agreements. In addition to substantially all of our debt being hedged in one form or another.
At the end of Q3, we had nearly $280 million and liquidity. This represents more than enough access to capital to operate the business and to continue to make the necessary investments into clinical systems payer and government relations to further enhance our efforts related to the value based pricing in preferred.
Payer relationships.
Dave will provide some additional detail in his remarks related to liquidity and cash flow.
Let's turn our token focus towards Q4, and an early look into our expectations for 2023.
We expect Q4 revenues of $445 million to $450 million and adjusted EBITDA of approximately $28 million to $30 million.
These estimates include the benefit of our hospice rate increase effective October the first the ongoing benefit of the 2022 rate improvements and improved volumes in Pds, partially offset by continued reserve pressure and home health during the quarter as.
As well as the impact that we experienced during hurricane in across our private duty and home health segments.
Looking forward to 2023, we will issue specific guidance in early next year. Once the 2023 budget has been finalized and approved by our board of directors were targeting revenues greater than $1 8 billion and adjusted EBITDA in the mid $140 million range. These estimates include one.
Boeing labor market disruption and shortage of skilled caregivers the full impact of the CMS rule that we discussed earlier.
It includes home health and hospice returning to mid to high single digit growth with gross margins in the high 40% to 50% and normalized base rate.
Improvements that will receive for through private duty services as well as ongoing improvements from value based pricing and preferred relationship.
What those estimates do not include any material rate improvements from one or more significant states within our service area.
Doesn't include provisions for further disruptions from COVID-19, or other pandemics or provisions for catastrophic weather related events or fires.
Again, we'll provide precise guidance once the 2023 budget has been finalized but we believe that this provides a broad framework to begin thinking about the full year of 2023 and beyond.
Before I turn the call over to Jeff I wanted to summarize my thoughts on Avianca and the homecare industry in the eyes of our patients payers and state and federal governments as well as our physician and hospital partners home and community based care as a solution not a problem.
With higher demand for services and fewer available resources, we must be innovative and nimble in our response.
Companies that have size and scale and breadth and service levels are positioned to be successful.
We are not satisfied with our results in Q3 and for that we will take full responsibility.
We will not be defined by a single moment in time, we expect Q4 to be better than Q3, and we expect 2023 to be better than 2022.
We have seen progress in both medical solutions and private duty services, we've seen payer we've seen preferred payer models drive growth in skilled nursing care.
Innovation related to alternative caregiver models produced increased capacity, we've recognized that we have work to do in order to bring our home health and hospice business back to our level of expectation, we anticipate having all of this work finalized by the end of Q1 of 'twenty three.
I am confident that Avianca can and will position itself as a leader in the industry through these trying times.
In today's environment, our employees can work wherever they choose our employees have continually demonstrated a willingness to work hard even when times are tough. It's the same resiliency and our culture that will define our success I think each of our employees and caregivers for what you do and for calling Aviano your home with that a J.
We will provide you with some additional insight into our segment results Jeff.
Thank you Tony.
Our RV end of leaders remain focused on the task at hand, bringing medically fragile pediatric adult and geriatric patients home and staffing their cases with highly skilled caregivers.
We continue to develop our preferred payer strategy and are actively shifting caregiver capacity to those payers that value our services.
Avi on a preferred payers are identified as those payers that are willing to partner with the avianca at value based rates in return for preferred staffing enhanced clinical outcomes and reduce unplanned hospitalizations and our private duty services segment, we have seven preferred payer agreements up from two.
<unk> at the end of 2021.
We continue to work on a robust payor pipeline to shift payers from a fee for service rate to a market premium rate, including value based payment for prefer for performance.
As the long term effects of the pandemic inflation and the nursing shortage settle and we have become steadfast in our commitment to partner with those payers who value our services and outcomes.
I look forward to continuing to update you in subsequent quarters on our progress with our preferred payer strategy now.
Now onto our Q3 operating indicators, starting with our private duty services segment.
We produced $355 $6 million of revenue during the quarter.
Revenue was driven by approximately 9.65 million hours of care, which was up slightly from Q2.
While volumes did improve we continue to be constrained by the turbulent labor markets, primarily driven by the shortage of nurses.
We experienced improvement in our preferred payer volumes with select payors year to date organic growth rates, reaching the high single digits.
Although still early these positive growth trends show us a path forward for our private duty services business.
Our Q3 revenue per hour of $36 84 was up 49 sequentially from Q2 or one 4%.
We continue to experience rate improvements in the back half of 2022 with the P. D. S year to date rate increases totaling 28.
These rate wins include state Medicaid Pds rate rates as well as M. C O specific avi on our rate increases.
All of our state legislatures have completed their 2022 legislative sessions and 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 mcl preferred payer initiatives to execute on.
We also have an update on our Medicaid program expansion efforts, such as the family caregiver model or license health aid model.
As you May recall, Arizona's Medicaid system launched its licensed health aid program recently.
I am proud to report that we have admitted over a dozen Arizona L. H E families to our service and have many more families currently being credentials.
I expect this important program to continue to expand across numerous states, including Washington, and New Jersey, both of which have recently endorsed similar programs.
Turning to our cost of labor and gross margin metrics, we achieved $100 $9 million of gross margin or 28, 4%.
Our wage rate of $26 39 per hour reflects the commitment we've made to passing through a rate wins to our caregivers.
Our Q3 spread per hour was $10 45 in line with our expectations.
Q3 experienced higher PTO usage with our summer holidays as such I expect gross margins to bounce back to approximately 29% in Q4.
Lastly in September we rationalized approximately $4 million of annualized overhead to better align our pds business with our current volume trends.
This was a necessary step in our Pds stabilization and will help us be more efficient as we move forward into 2023.
Now moving on to our home health and Hospice segment for Q3 were the impact of higher inflation has increased caregiver wages mileage and applied pressure on our gross margins.
We stand United with the National Association for Homecare, and hospice and our industry peers and our support for the 2023 final home health rule.
While CMS recognize the unprecedented times, we're facing the issue of the P. D. G M behavioral adjustment still looms large large part of the industry.
We will continue to advocate for a thoughtful solution for the for the behavioral adjustment, while recognizing the value of home health brings to the health care system.
As Tony previewed.
While we're excited to be fully converted to the homecare Homebase operating system, we've experienced some business disruptions that significantly impacted Q3's home health and hospice results.
First.
While we expected some seasonality in our Q3 volume trends, we felt the distraction of our system integration and our mission trends for both home health and hospice.
At our lowest point in mid summer, we were admitting in the low 800 home health admissions per week.
On a comparable basis. This trend improved to just over 900 home health admissions per week post labor day.
With the exception of hurricane and temporary impact on southwest, Florida, I expect us to remain in the 900 <unk>.
<unk> thousand 900 emissions per week range in Q4.
As I look forward to Q1, I see a path back to 1000 home health admissions per week, while maintaining our episodic mix and the low 60% range.
Approximately 1000 home health admissions per week equates to Avi honest sustaining organic growth rates in the 7% to 8% range year over year.
Our home Health leadership home health and Hospice leadership team is dedicated to driving sustained episodic growth.
Second the higher than expected revenue adjustments in revenue reserves totaling approximately $6 $5 million in Q3 <unk>.
During the quarter, we made the strategic decision to direct 100% of our home health and hospice team's focus towards homecare homebase and the process improvements driven by the system.
This necessary change was made to align our teams with our go forward systems processes and protocols.
Over the last 90 days, our operating clinical billings like putting teams have improved their performance materially which gives us confidence in our Q4 results.
Although I expect some revenue adjustments to bleed through to Q4, our home health and hospice revenue should rebound back into the $54 million to $56 million range.
With our home health and hospice collections significantly improving in our revenue reserve getting back down below 5%. Our Q4 gross margins should normalize in the 45% to 47% range.
Lastly.
With all home health and hospice locations fully operational on homecare Homebase, we adjusted our SG&A in line with expectations and September we eliminated approximately $6 5 million of annualized overhead.
This important outcome was achieved in large part to the long term benefit of homecare, Homebase and establishing one set of standard practices and policies.
It's been two years and four acquisitions since we re entered the home health and hospice business and I'm pleased to have all of the company integrations and system implementation now behind us.
Our commitment to establishing a home health and Hospice Division was one we made with a long term focus in mind.
Now back to the quarter, where we produced $49 $9 million in revenue of $2 $9 million increase over the prior year period. The biggest impact of revenue was the comfort care acquisition offset by the revenue adjustments detailed just above.
Q3 revenue was driven by 11300 total admissions approximately 62% being episodic and 11400 total episodes of care.
We were negatively impacted by Hurricane Hurricane Ian and our Florida business in late September and into early Q4, However, our Florida business has rebounded from the storm and continues to pick up momentum as the market recovers from the devastating event.
I want to personally thank our Avi and her team for your resilience.
Commitment to patient safety and compassion displayed for one another during this tragic event.
Now on the revenue per episode for the quarter, which was $3023 up slightly from Q2.
This increase was driven by better episodic management and demonstrates the value of being fully transition to homecare homebase.
From a cost and margin perspective, Q3 gross margins were 33, 9%.
This impact was primarily driven by the revenue adjustment factors detailed above.
As mentioned I expect Q4 gross margins to settle back to settle back into the 45% to 47% range.
Home health visits per episode have trended down to just under 14 visits and overall cost per visit are in line with our expectations.
Although Q3 was a difficult quarter for our home health and Hospice segment, we firmly believe in this business and its long term value proposition.
We have an established home health and hospice platform poised for growth focus on delivering value through sound operational management and delivering excellence in patient care.
Now onto our ASEAN medical solutions segment results for Q3.
During the quarter, we produced $37 $5 million of revenue.
Revenue was driven by approximately 81000 unique patients served and revenue per <unk> of $463 41.
Volumes were up three 8% from Q2 and demonstrates our medical solutions teams commitment to growth.
Avianca has emerged from this year's national supply chain event as the leading provider of interim nutrition for clinically complex patients with <unk>.
We see our medical solutions business back on track to achieve high single digit organic volume growth trends.
Turning to our cost of goods and gross margin metrics, we achieved $16 $8 million and gross margin dollars or 44, 8%.
Gross margins have stabilized and our growth rate is improving leading to additional leverage in medical solutions.
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, an inflationary environment, while keeping our patients care at the center of everything we do.
It is clear to us that shifting caregiver capacity to those preferred payers that value. Our partnership is the path forward at Aviano.
We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes.
While we expected Q3 volumes to have improved more we eliminated $10 $5 million in total overhead to be more in line with our current trends.
These necessary changes will improve our bottom line results, while still giving us the operational platform and flexibility we need to deliver on our mission.
And finally, although disappointed with our Q3 home health and hospice results.
We firmly believe in the fundamentals of both businesses and our home health and hospice leadership team's ability to generate sustained growth positive clinical outcomes improved profitability and cash collections moving forward.
I look forward to updating you on our improved home health and hospice results. After the first of the new year.
With that I'd like to turn the call over to Dave for additional color on the quarter Dave.
Thanks, Jeff.
Tony and Jeff provided color around our consolidated and segment results and I am sure topics such as cash collections cash flow liquidity and credit related items are top of mind with our equity holders and lenders. So I'll jump right in with these items with.
With respect to cash collections, we had a great cash collections quarter, particularly within our triple H business, we collected $470 million of cash and reduced our overall receivables from $246 million at the end of the second quarter to $219 million at the end of the third quarter, which is about where we began the year.
In addition to strong Triple H collections. We also saw strong collections in our Pts businesses, including a number of successes on particularly aged accounts.
I want to thank all our revenue cycle team members and operators in the field, who contributed to our great cash collections in Q3.
And while it was a great cash collections quarter, we did have a number of revenue related items that affected the triple H business as.
As we've transitioned our triple H businesses into the homecare Homebase system, we've been working down accounts receivable and multiple legacy systems from four different acquisitions as Jeff mentioned during the third quarter, we turned our triple H team's focus fully towards the hgh <unk> system and away from legacy systems. As a result, we took additional allowances against legacy system receivable.
<unk> during the quarter the.
The incremental legacy system allowances are not something I expect to recur in the future.
In addition, as we've integrated our operations into the HVAC system, we've encountered implementation and configuration challenges, which have impacted not only volumes, but also resulted in higher allowances against our HVAC revenues. We believe the configuration issues are now a thing of the past and as we further align our operations with a disciplined processes of the CIS.
We fully expect to capture all the benefits that <unk> has to offer and put our implementation challenges behind us.
I know, we're all excited to now be focused on one triple H EMR system that we can leverage to the fullest extent possible.
When I say a big thank you to all our teams from operations to revenue cycle to accounting and finance for hanging in there over the past year during this transition.
Now turning to cash flow, we improved free cash flow in Q3 and on a year to date basis from where we were at the end of Q2 free cash flow was negative 45 million for the nine months ended October one which is a $12 million improvement from where we were on a year to date Q2 basis bear in mind, though that this included onetime cash usages of $11 7 million to purge.
<unk> and interest rate cap in Q1, and $3 5 million of repayments of CMS advances received by certain of our acquired companies.
The free cash deficit for the nine months ended October one was funded by $20 million of net borrowings on our securitization facility and with cash from the balance sheet.
We also drew $60 million on our delayed draw term loan to replace cash used in Q4 'twenty one in connection with the accredited and comfort care acquisitions.
At the end of Q3, we had $64 million of cash on the balance sheet compared to $17 million at the end of the second quarter.
Thinking about the fourth quarter, we have the remaining $25 million of deferred payroll taxes that we will repay the IRS at the end of December and we will fund that with cash from the balance sheet.
And looking forward to 2023, we expect to make significant progress towards breaking even from a free cash flow perspective, we will continue to focus on doing the things we need to do to improve our cash flow, including growing our volumes, reducing costs, where possible and optimizing our collections.
In a more limited M&A environment integration and system transition costs should also be significantly lower than 23% in 'twenty. Two 'twenty three cash flow will also not be negatively impacted by the repayment of CMS advances deferred payroll taxes or the purchase of interest rate caps, all of which will be $40 million for 2022.
On the debt service front, we had approximately 1.4 dollars 7 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 limits further exposure to increases in LIBOR above 3%.
Accordingly substantially all of our variable rate debt was hedged at the end of Q3.
Our interest rate swaps extend through June 2026, and our interest rate caps extend through February 2027.
One last item I'd mentioned related to our debt is that we have no material term loan maturities until July 2028.
Turning to liquidity, we have ample liquidity to fund our operations as needed.
At the end of the third quarter, we had close to $280 million of total liquidity, considering cash balances and availability under our securitization facility and revolver.
As a reminder, the leverage covenants under our revolver are not applicable unless more than one third of the total availability under the revolving credit facility has been utilized subject to a $15 million carve out for letters of credit.
Should the lever leverage covenant become applicable maximum allowable first lien leverage would be seven six turns which we were well below at the end of Q3.
In summary, as I wrap up I'll say once again that we're pleased with our third quarter cash collections as our operations and revenue cycle teams executed on reducing our accounts receivable balances and as Jeff mentioned firmly believe in the triple H business and its long term value proposition.
We look forward to all the triple H initiatives that we have underway, including optimizing our performance within H C. H b.
With that I'd like to turn it over to the operator for questions.
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Your first question comes from Brian <unk> with Jefferies. Please go ahead.
Hi, Good morning, and thank you for taking my question. This is <unk> on for Brian . So My first question has to deal with the labor environment can you kind of provide some insights on what nurse recruitment looks like.
Yes, good morning, Jeff.
Thanks for your question.
As difficult as as a year as 2022 has been for US I think you'll hear optimism in our voice over the last few months.
Related to two are.
Primarily our nursing hiring and retention in our in our Pts segment in our home health and Hospice segment.
It's been a very difficult year and really following a difficult 2021, almost six quarters in a row of a very very choppy environment over the last 90 days, we have finally seen some positive both hiring and retention metrics in our in our core nursing trends specifically in our private duty services segment.
I think as both Tony and I pointed out we really see the positive momentum directly related to our preferred payers. Those payers that are that are partnering with us to be able to offer higher market reimbursement rates to us and ultimately higher wage rates to our employees. So.
I think through our seven preferred partnerships, we talked about in our Pts segment. We're finally seeing some some some movement, albeit it's very small at this point because they are the preferred payer relations touch a very small percentage of our pds business, but I think it truly shows us a path forward with.
Nursing nursing hires and retention.
Great and then just.
Go ahead I'm sorry.
Sorry go ahead.
No I was just I was just going to say that.
To pile on what Jeff said that.
Jeff and <unk>.
Mike and the whole government relations and payer relations team.
Really done an outstanding job.
Moving this idea of preferred payer relationships down the field.
And I like our plan that these guys have developed.
<unk> two government relations.
And what Jeff just talked about is I think from a macro perspective, I think what we're feeling is that when when we adjust rate in such a way that we can pay commissions.
Market wages that we can move the ball in volume, we can hire people people like our job they like our mission they want to come to work, we just got to position ourselves in a in a way that we can pay them competitive wages and if we can do that we can get the nurses and I think thats, what Jeff just said.
I think I'd take it a step further and just really kind of brag on our team a little bit I think the.
The government relations team in the payer relations team have just done an outstanding job and.
I can see a runway from here, where we can get those nurses engaged.
One of the things that we may begin sharing.
In 'twenty three is a number of caregivers that we're hiring and that's a lead that is a leading indicator for us as to where volume is going to go.
Great. Thank you for that Tony and Jeff just one follow up question, just thinking about admissions for home health and Hospice. You know you had mentioned that there are lower year over year quarter over quarter and I'm. Just curious can you break out what percentage of that was from HC HB rollout.
Versus lower demand that youre seeing or any other factors that contributed to that decline.
Yeah.
Maybe I'll ask it a little bit DNA assay, but but at the end of the day I think I think we saw it's not a demand issue I'll start with that it's not a it's not a demand issue I think it's really just a focus issue and by that I.
I don't I don't blame our lack of admissions over the summer on homecare Homebase. It was just the distraction of moving for companies to one.
And as you and as you know we've been heads down on the homecare Homebase invitation for almost a year. It's been this would be almost a year at the end of Q3, but the but the big movement was the last I'll call. It last five months ending really what really in September and I think it's just a distraction both for the for the clinicians for the branch teams. The sales teams as you as you ultimately sunset.
The practices of four different companies and now have the operating standards and practices of Avianca.
Clearly homecare Homebase is important supportive that as his metalogic as is as HP and different tools, we use I think most importantly.
Our home health and Hospice Division President of Rob would tell you. We now have one company we have one operating division one focus in.
It's just been two years barely two years since we acquired our first company five points.
You know in Q4 of 2020, and so getting that team to now be on one set of one focus one strategy. One set of systems has been a big deal to us and so.
I think the other day, we feel confident we've had great trends going into Q4, obviously hurricane Ian hit US right in southwest, Florida that was that was a pretty big pretty big part of our Florida business, but but really really proud of that Florida team. They bounce Taj of back from that event faster than we ever would have thought they were they were back blow and go on within about three weeks.
All employees accounted for all patients accounted for and we're really seeing that I think as you're hearing from US. We're looking into Q1 to really get back to about 1000 admissions are weak and to us maintaining that episodic mix at north of 60% is a big deal not not not lowering that.
And staying committed to that and getting back to 1000 missions a week really gets us back to growing that business and that's that's what our focus is but thanks for your question.
Thank you.
Next question Joanna <unk> with Bank of America. Please go ahead.
Hey, good morning, Thanks, so much for taking the question.
So maybe just first a follow up.
So on that.
That's a segment that disruption.
The comment around.
The body to 50 456, rather than your range.
A comment about Q4 is that correct.
That is that is correct John that getting back just a normalized quarter.
We see kind of that 54 to 56 million just kind of getting back to normal business.
We have a pretty clear line of sight at this point and about Q4 will be in <unk>.
Both both that revenue runway as well as kind of gross margins normalizing back in that kind of $45 46, 47% is where we see kind of Q4 directed directionally heading.
Because it gets when I was looking at Q2 revenue for the second one it was closer to 60.
Oh.
It doesn't mean that there's something else that targets.
No I think being low in that in the Q3, so it's kind of like a lower I guess run rate or is there some more ramp up I guess do you expect Q4 into Q1 of next year.
Yeah, No I think I think Julien when we talked about a little bit of a bleed over into Q4 from some of the additional additional reserves reserve noise.
And we see that kind of tailing off in the quarter sequestration is fully baked into our run rate now.
Suddenly from July forward, but no.
I think we see this stabilize and back in that mid to high Fifty's, if I jumped into 2023 of our budget process is still working out I'd be disappointed if our Q1 wasn't north of $60 million for homebuilding hospice out of the gate and so I think we can see ourselves back to being in the <unk> and growing from there.
But I think as some of this some of this reserves bleeds off into Q4.
We feel like we'll be kind of in the high <unk>.
Jeff You said you said it well Joanna this sequestration comment if you recall sequestration was phased in over time in the last phase of sequestration being put back in or taken back out rather.
Is July one so we had the full impact of sequestration in Q3, and then we will still be there in Q4.
Yes, exactly so thank you for that clarification there.
And I guess a question here.
And segment right, which are.
Well. Thank you Wow, so you're still talking about some some some labor shortages and whatnot, but.
The same time.
I guess, you're still saying that even for next year, you comment around that EBITDA about $140 million range does not assume any meaningful fleet updates Keith states. So can you give us any flavor for it for anything.
In terms of progress of getting additional updates.
I would be interested.
Have you received any.
I think increases in Q3 and can you tell us the magnitude of things how youre tracking and also with that 140 EBITDA.
What PV.
Yeah.
Average pricing are you assuming.
For next year. Thank you.
Well, so that was a lot and first of all thank you for pointing that out. So you are correct in the numbers that we've said for preliminary look at 2023 that number in the mid 100 <unk> of EBITDA did not include any material rate changes in <unk>.
One of our large in any of our large states. What it does include is just kind of the normalized cost of living updates that we have in many of our operating states.
But it doesn't include any material change from a large.
Like maybe like the change we saw in Virginia This past year.
As it relates to your question about Q3 from a legislative perspective.
And Jeff made this in his comments that all of our states have put through whatever rate increases we're going to see in 'twenty three 'twenty to those those are all done now.
Many states go through a legislative process every year to address rate. Some every other year.
Obviously, we've talked about our large states being California, Florida, Texas, Colorado, Pennsylvania.
And we will be paying a lot of attention to all of those states during the legislative process to make sure that people understand what's going on within private duty and as well as the negative impact it's having on their overall Medicaid budget. Because these patients are sitting in hospitals in higher cost settings waiting.
To come home and so we're going to.
Some of the.
I talked about our government relations team were actually making additional investments into government relations in 'twenty three to.
To go out and tell those stories now we will provide updates for that as we go through the year.
We will provide updates as they become public information as to what was the process keep in mind that different states have different legislative cycles some cycles.
Have fiscal years that ended June others have fiscal years that end in the end of September so any rate changes for twin any material rate changes for 23 would be phased in over some period of time based on the state and when it happened.
So so.
From that standpoint, I think.
We have no new information to give you and we will update you as we go to the last part of your question about about private duty and Jeff made the comment when he was in his prepared remarks.
We have been very disciplined about as we've received rate changes we've been aggressive about pushing those rate increases through two additional wages to caregivers and I think thats, where some of Jeff with optimism comes from is that we've seen we've seen some improvement in the number of caregivers who are paid based on.
Those rates.
I made the comment earlier, where we see increased rates when people when states and Payors invest in rates. We then came grow caregivers and as a result grow home care and when we do that we saved the state or the payer money and and Thats why I think we've gotten such good track.
And good reception from some of these value based pricing discussions that we've been having.
Jeff anything you want to add to that.
Thats not the other.
Thanks Joanne.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Your next question comes from Peter Chickering with Deutsche Bank. Please go ahead.
Hey, good morning, guys.
My questions just back on the Pvs flavor sort of.
I guess where else those are high note versus other parts of the business.
What was the third quarter comp rate, how has that changed sort of looking at <unk> versus <unk> and then as youre hiring new nurses kind of what are the wages of new hires and how does it compare versus sort of a legacy people that they work for you.
Yes, let's stick with the same theme of preferred payers right because because the momentum we're feeling in new nurse hires also the the slowdown of turnover of same store nurses are really tied around our our seven preferred payers mcl payors and the states that are pass through.
Rate increases over the last I'll call. It last 18 months.
That's where we look market by market state by state, we see the the greatest improvement in both nurse hires and nurse retention and overall nurse employment. We so that's the good news. The flipside of that is we still have markets that have not pass through states have not pass through.
Market increases that have kept up with the cost of living change of last two years. Those are the states that Tony just talked about that we're dialed in on 2023. So.
One way or another it's kind of the haves and have nots are starting to play through through the business on the Pds side and I think I think what makes us feel good.
The optimism you're hearing is our MTO payers absolutely understand this they understand the pressure they understand the issue of children being backed up in the hospital. They understand the issue of low fill rates and that's a problem for them and they're wanting to partner with us.
And I think that that conversation we've been talking now for 18 months, it's playing better and better and better at the state legislative process as well. So we have we had what we can see considered to be a very good legislative year. In 2022, we're expecting in 2023 to be even a better year and probably more important we're expecting.
To move the state in 'twenty, three that Didnt move in 'twenty, one or 'twenty two on a material basis and again that gives us confidence in those markets, where today, we still can't be competitive and nurse wages in those specific markets on being able to raise wages and retain those nurses and hire new ones and Peter we've talked about this openly in the.
Past, if you look back a year ago going back to your question about about how we are paying nurses. If you look back a year ago on average across different states, we were probably paying a <unk> 22 to $24 an hour.
In today's market, you've got to be in the high twenty's or even upwards to $30 an hour to be competitive for that are that LPN because that LPN can now go to get a job at a hospital that they couldnt have gotten a year ago.
So so with that.
It's the magnitude that we've got to move rates in order to be competitive and <unk>.
Hi, 20 to $30, an hour and in markets, where Jeff and the team have negotiated.
Great rates for people that recognize the value that we.
We provide we have been able to move those wages into those high Twenty's and Thats, where were seeing the growth come from to Jeff's point.
States are payers that are lagging behind.
Until those rate changes were not going to be able to move that metric now I will point out and Jeff's comments. He made I think you referenced $10 49.
Spread which is right in the wheelhouse of where we expect them to be if Jeff wanted to move volume in a hurry he could take that spread number down to eight or $9.
An hour and we could hire nurses at $28 an hour and we could grow the business. However would just give it all away and margin and once we give it away and margin will never get it back so sequentially, we've got to drive rate and then follow that with wage.
Okay fair enough.
Of all these really good good Street recap. So you guys did just sort of curious how we should.
Thing about interest costs for 2023 should we just take the third quarter annualize that like any color you can give us there.
Yeah, I think you'd see a bump up a little bit in Q4 as LIBOR rates continue to increase but now that they're over 3% were essentially capped so we'll see we'll see incremental interest costs in 2023 as compared to the Q3 run rate, but bear in mind that are the payments that we receive under our swaps and caps.
We'll also increase.
You could as you.
Think about interest expense think about the margin that we pay on our first and second lien and then think about.
The LIBOR component being capped at 3% if you wanted to forecast the net.
Call it interest expense in 2023.
So you just sort of in the one sort of when all said said together or is this more of the 130 131 40 range is that the right level.
That's probably a fair estimate.
Okay Fair enough, and then which sort of leads to the next question sort of from a free cash flow breakeven standpoint kind of what what EBITDA do you guys think that you have to achieve in order to get to sort of free cash flow breakeven.
I think we will make a lot of progress towards that in 2023 are we expect our EBITDA to grow from from where we are in 2022 I can't give you.
Specific estimate on what that would be because theres a lot of moving parts, but what I can say is that without $40 million in one time.
Usages of cash this year, including the social deferred social security payment the growth in EBITDA as I mentioned in our lower M&A environment, we're going to have lower integration and systems related costs. So we will make significant progress in 2023 towards breakeven.
Okay.
Sorry go ahead.
I just said thank you.
And then last question for me here, just if you could.
Talked about.
A lot of volatility within doctor's choice, because the rollout of homecare Homebase and Metalogic just sort of curious you can give some more details of what you saw.
Specifically in the Doctor's choice. Thanks, so much.
At the end of day is for some of the step up a second and just say all four companies. We acquired at four different four different operating practices. They were on three different systems or three different versions of systems. They all had different standards that they were different markets. The Florida market is very different than than Minnesota, Iowa.
Recover and in Alabama, I think at the end of the day each company had its own path inside of Avianca and through homecare Homebase and for whatever reason, the Florida business was a little bit choppy in the process. We had we had a little bit more turnover.
And maybe just with a little bit slower to kind of come around to being a part of the Avi on a family and so we had a decent model leadership turnover, there and I think at the end of day I would tell you.
I would tell you fast forwarding hurricane Ian showed us how great the Florida team as part of <unk>. They they not only handle the hurricane event, but how they how they treated each other how they got back to business got back to treating their patients I think really showed us kind of they're a part of the <unk> family now and so each each.
Integration takes on a different life of its own.
The nature of the Beast in M&A and I would tell you sitting here today all of US are on the table not one of US would wouldn't have done the doctor choice integration, we should be in Florida. These are great markets, great Medicare markets and long term, where we're still very excited about being in that business in that state as well said Jeff.
I'll Echo what you said about our employees down there those guys did an unbelievable job in responding and Ria and.
And recovering from Hurricane Ian and I'll Echo, what Jeff said as well.
The Doctor's choice acquisition will be a great acquisition for us.
One of the things that we will benefit from from the implementation of Homecare Homebase is.
And I'll say this in a positive way homecare Homebase is a rigid system.
And it forces you to do things right. The first time every time and I'll use. An example, if you if you don't have the face to face requirement for a patient or you don't do the <unk>.
<unk> of admission process with them there is a hard stop in the system is you've got to go do this right in order to move forward and I think while it's been a little bit painful in Q3, I think over the long term.
Homecare Homebase will make us a better company, giving us a disciplined infrastructure to kind of build that business around so I'm pretty excited about it going forward.
Thanks Peter.
So much.
Next question that Hendrix with RBC. Please go ahead.
Hey, Thanks, guys I just wanted to follow up on your comments around the around the home health final rule and in your comments about how the behavioral assumptions kind of negate the value based efforts more broadly I just wanted to know if you're a government relations folks have had conversations with CMS around.
This kind of.
And we're able to gauge their receptivity detection argument and then and then secondly, how the better than proposed rule impacts kind of legislative momentum into year end with trying to stay somebody's behavioral cuts.
Over a over the intermediate term.
Thanks.
I think the first questions were yes and no.
So yes, our employ our folks our teams are well engaged rod sits on the board of knock as well knock us.
Extremely engaged in this process and I think shares we shared the same position that Nokia is that while we are very appreciative and we think CMS did the right thing in the short term.
We're going to continue with the pressure going forward that we don't believe that the behavioral adjustment is is warranted matter of fact.
To your question about my comment.
CMS is actually trying to incentivize behavior through value based pricing. They are incentivizing companies to do the right thing for the patient to help the patient get better stay out of the hospital get rehabilitated returned to activities of daily living and at the same time when they cut those behavioral adjustments there.
We're basically taking away the incentive of the behavior. They are trying to create and so for those reasons. We believe if they really want to move the industry to a value based pricing arrangement that they've got to leave enough dollars in there to incentivize.
The companies to want to do the right things and provide more care if necessary and thats. The piece that we don't think the behavioral adjustment takes into account is that CMS is really trying to encourage doing more for patients keeping them out of the hospital and then rewarding people for their outcomes and and.
That's why we don't think the behavioral adjustment is the right.
The thing to be doing.
And we will continue these pressures.
Years to come to make sure that we get the outcome we need.
Thank you.
Thanks Pat.
We've come to the end of the Q&A session I would like to turn the floor over to Tony Strange for closing remarks.
Well I just wanted to say thank you again for your interest in our business and joining our call. We'll look forward to updating you on our progress at the end of the year and look forward to catching up with everybody. Soon thank you. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.