Q4 2022 Aveanna Healthcare Holdings Inc Earnings Call
Speaker 1: Go.
Speaker 1: So thir thir say, thir the mo mo.
Speaker 1: I.
Speaker 2: Good morning, and welcome to Aviana's Healthcare Holdings' fourth quarter and full year 2022 Earnings Conference call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A.Q&A isn't it?
Speaker 2: At this time, I'd like to turn the call over to Shannon Drake.
Speaker 2: Aviana's Chief Legal Officer and Corporate Secretary. Thank you, you may begin.
Speaker 3: Thanks Camila. Good morning and welcome to Aviana's fourth quarter 2022 earnings call. My name is Shannon Drake, the company's chief legal officer and corporate secretary. With me today is Jeff Shainer, our chief executive officer and Dave Aschar, our chief financial officer. During this call we will make forward-looking statements.
Speaker 3: risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we filed with the SEC.
Speaker 3: The company does not undertake any duty to update such forward-looking statements.
Speaker 3: Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release.
Speaker 3: which is posted on our website avianna.com and in our most recent annual report on Form 10-K .
Speaker 3: With that, I will turn the call over to Aviana's Chief Executive Officer, Jeff Shainer. Jeff?
Speaker 3: Thank you, Shannon. Good morning and thank you for joining us today.
Speaker 3: We appreciate each of you investing your time this morning to better understand our Q4 and full year 2022 results.
Speaker 4: and how we are moving forward.
Speaker 3: My initial comments will briefly highlight our fourth quarter results.
Speaker 3: along with the steps we are taking to address the labor markets and our ongoing efforts with government and commercial payers to create additional capacity.
Speaker 3: I will then provide some thoughts regarding our outlook for 2023 prior to turning the call over today to provide further details into the quarter and our outlook.
Speaker 3: then provide some thoughts regarding our outlook for 2023 prior to turning the call over today to provide further details into the quarter and our outlook. Starting with some highlights for the quarter.
Speaker 3: Revenue was approximately $451 million, representing a 9% increase over the prior period.
Speaker 3: Gross margin was $128.8 million or 28.5%, a 3.5% increase over prior year period, and finally
Speaker 3: Adjusted EBITDA was $29.7 million, representing a 35% decrease when compared to the prior sector, primarily due to the costs associated with the current labor environment.
Speaker 3: As we have previously discussed, the labor environment represents the primary challenge that we need to address in 2023 to see Aviana begin to resume the growth trajectory that we believe our company can achieve.
Speaker 3: It is important to note that our industry does not have a demand problem.
Speaker 3: The demand for home and community-based care has never been higher.
Speaker 3: with both state and federal governments and managed care organizations asking for solutions that can create more capacity.
Speaker 3: To begin to capitalize on this demand and free up labor capacity, we are undertaking several initiatives.
Speaker 3: First and foremost, our ability to recruit and retain the best talent is a function of a rate.
Speaker 3: Our business model offers a preferred work setting that is mission-driven, providing a deep sense of purpose for our teammates.
Speaker 3: But, our caregivers need to be able to provide for themselves and their families in this inflationary environment and we must offer competitive wages.
Speaker 3: While we have several initiatives underway to improve the rate we are paid by government and managed care payers for the services we provide, there are three primary areas of focus.
Speaker 3: While we have several initiatives underway to improve the rate we are paid by government and managed care payers for the services we provide, there are three primary areas of focus.
Speaker 3: We need to execute on our private duty legislative strategy to increase rates by double digit percentages in three of our largest states.
Speaker 4: California, Texas, and Oklahoma.
Speaker 3: These three states represent approximately 25% of our total PDS revenue, and we have active legislative, media, and lobbying efforts in place to demonstrate the importance of these rate increases and how they support an overall lower healthcare cost.
Speaker 3: improved patient satisfaction, and quality outcomes.
Speaker 3: While we continually focus on legislative activities in all of our states...
Speaker 3: If we can directly impact these three states in 2023, we can accelerate our growth by increasing caregiver capacity and bringing more patients to the comfort of their own home.
Speaker 3: By passing meaningful wages through to our caregivers, we become a solution for overcrowded children's hospitals and distraught parents who want their children to be cared for in the comfort of their home. Second, we need to double the number of preferred payers in 2023. We define preferred payers as those payers that support
Speaker 3: value-based care by offering us an above-market reimbursement rate and value-based payments in exchange for proven savings.
Speaker 3: We began this journey in 2022 with strong success in our Texas and Pennsylvania markets and have ongoing discussions to further expand these relationships in 2023.
Speaker 3: based on positive results generated for these payers to date. Our PDS preferred payers represent approximately 10% of our of our PDS volumes to date, and we see this expansion accelerating towards 20% by year end 2023.
Speaker 3: Our dedicated Payer Relations team has a robust managed care payer pipeline, and I expect us to add additional preferred payer agreements in the first half of 2023.
Speaker 3: Finally, we will continue to shift our current labor capacity to those payers that value our services.
Speaker 3: and appropriately reimburse us for the care provided.
Speaker 3: We have begun a number of initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates while minimizing days in an acute care facility.
Speaker 3: Our preferred payer relationships are experiencing nurse hires approximately two to three times more than our other payers.
Speaker 3: We are experiencing staffing rates 15 to 20 percent greater with preferred payers and significantly higher patient admissions from children's hospitals.
Speaker 3: The value proposition is straightforward. Preferred payers reimburse us a fair rate, and we pay market competitive nursing wage rates while also earning value-based payments for achieving positive clinical outcomes and improve staff dollars.
Speaker 3: In addition to improving rates,
Speaker 3: We are also evaluating how we go to market to recruit and retain new talent.
Speaker 3: We are getting back to the basics, taking a data-driven approach to setting our expectations, and proactively monitoring our execution.
Speaker 3: We are encouraged by our early 2023 recruiting results and believe our business can rebound quickly if we can achieve our rate goals previously discussed.
Speaker 3: Home and community-based care will continue to grow, and Aviana is a comprehensive platform with a diverse payer base, providing cost-effective, high-quality alternative to higher cost care settings.
Speaker 3: And most importantly, we provide this care in the most desirable setting, the comfort of the patient's home.
Speaker 3: Before I turn the call over today, let me briefly comment on our initial outlook for 2023.
Speaker 3: As we start this next chapter, we believe it's important to set expectations that acknowledge the environment we are operating in and the time it will take to transform our company and return to sustainable growth.
Speaker 3: Accordingly, we currently expect full year 2023 revenue to be greater than $1.84 billion and an adjusted EBITDA of at least $130 million.
Speaker 3: We believe our outlook provides a prudent view considering the challenges we face with the current inflationary labor environment, and hopefully it proves to be conservative as we execute throughout the year.
Speaker 3: In closing, I am proud of our Avianna team.
Speaker 3: We offer a cost-effective, patient-preferred, and clinically sophisticated solution for our patients and families.
Speaker 3: Furthermore, we are the right solution for our payers, referral sources, and government partners.
Speaker 3: By partnering with preferred payers, we can and will move the rate and wage metrics in meaningful ways that support our growth.
Speaker 3: This will allow us to hire, retain, and engage more caregivers in providing the mission of Aviana every day. With that, let me turn the call over to Dave to provide further details on the quarter and our 2023 outlook. Dave?...
Speaker 3: This will allow us to hire, retain, and engage more caregivers in providing the mission of Aviana every day. With that, let me turn the call over to Dave to provide further details on the quarter and our 2023 outlook. Dave? Thanks Jeff, and good morning.
Speaker 5: First, I'll talk about our fourth quarter financial results in liquidity before providing detail on our outlook for 2023.
Speaker 5: Starting with the top line, we saw revenues rise 9% over last year to $451 million. We saw revenue growth across all three of our operating segments with private duty services, home health and hospice, and medical solutions growing by 9.3%, 12.4%, and 0.7% respectively.
Speaker 5: Consolidated adjusted EBITDA was $29.7 million, a 35% decrease as compared to the prior year. Now taking a deeper look into each of our segments, starting with private duty services, revenue for the quarter was approximately $361 million, a 9.3% increase, and was driven by approximately 9.6 million hours of care.
Speaker 5: a volume increase of 6.1% over the prior year. And while volumes improved over the prior year, we continued to be constrained in our top-line growth due to the shortage of available caregivers.
Speaker 5: Q4 revenue per hour of 3766 was up 82 cents sequentially from Q3 or 2.2 percent. We were pleased with the rate improvement we experienced throughout 2022.
Speaker 5: Turning to our cost of labor and gross margin metrics, we achieved $91.9 million of gross margin, or 25.4%.
Speaker 5: a 0.8% decrease from the prior year quarter.
Speaker 5: Our cost of revenue rate of 2808 reflects the commitment we've made to passing through our rate wins to our caregivers as well as continued rate pressures that we see in the labor market.
Speaker 5: Our cost of revenue rate of 2808 reflects the commitment we've made to passing through our rate wins to our caregivers, as well as continued rate pressures that we see in the labor market. Our Q4 spread per hour was 958.
Speaker 5: We experienced improvement in our preferred payer volumes with select payers year-to-date organic growth rates reaching the low double digits. We continue to be encouraged with our ability to attract caregivers and address the market demand for our services when we obtain adequate rates. Moving on to our home health.
Speaker 5: and hospice segment, revenue for the quarter was approximately $54.7 million, a 12.4% increase over the prior year and a sequential improvement of $4.9 million over the previous quarter.
Speaker 5: We're also pleased with our gross margin improvement from 33.9% in Q3 to 41.9% in Q4 as we continue to focus on additional direct labor cost initiatives necessary to achieve our targeted gross margins in the 45 to 46% range. We discussed in the third quarter
Speaker 5: We're excited to be fully converted to the Home Care Home Base operating system.
Speaker 5: We're beginning to see admission trends for the division return to a more normalized level. As a point of reference at our lowest point in mid-summer our weekly home health admissions were in the low 800s. In Q4 we averaged approximately 850 home health admissions per week with an episodic rate of 63%. We believe we will return to more than 900 home health admissions per week in the first quarter of 20.
Speaker 5: Although 2022 is a difficult year for our Triple H segment, we firmly believe in this business and its long-term value proposition.
Speaker 5: We now have an established platform that is poised for growth, focused on delivering value through sound operational management and delivering excellence in patient care.
Speaker 5: And now moving on to our medical solution segment results for Q4. During the quarter we produced revenue of $35.2 million, a 0.7% increase over the prior quarter.
Speaker 5: Revenue was driven by approximately 80,000, 83,000 unique patients served in revenue per UPS of $423.51. Volumes were up 2.4% from Q3, however revenue per UPS was $39.90 lower than Q3, which resulted in margins declining to 39.7%.
Speaker 5: As a result, our gross margins were 13.9 million, a 1.4 million decline over the prior year quarter. However, we expect revenue per UPS and gross margins to rebound in the first quarter of 2003 to our typical margin profile.
Speaker 5: We continue to evaluate ways to be more efficient and effective in our medical solutions back office to leverage our overhead as we continue to grow. While other enteral providers decided to exit the market in 2022, we see this as an opportunity to expand our national enteral presence and to further our payer partnerships. In summary, we continue to fight through a difficult labor and inflationary...
Speaker 5: with the rate environment, we'll pass through those wage improvements and other benefits to our caregivers in the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity.
Speaker 5: At the end of the fourth quarter, we had liquidity in excess of $230 million, representing cash on hand of approximately $19.2 million, $35 million of availability under our securitization facility, and $180 million of availability on our revolver, which was undrawn as of December 31. Last, we had $20 million of outstanding letters of credit as of December 31.
Speaker 5: As we look at the timing of earnings for 2023 and the related cash flows, while we may draw on the revolver for short-term timing-related items throughout the year, our goals are for the revolver to be undrawn as of year-end and, more importantly, to drive positive operating cash flows in the second half of the year as we begin to realize all the benefits of the efforts Jeff and I have talked about today.
Speaker 5: As a reminder regarding revolver availability, the leverage covenants under a revolver become applicable if more than 30% of the total revolver
Speaker 5: facility availability under the credit facility has been utilized subject to a 15 million carve-out for letters of credit.
Speaker 5: Should the leverage covenant become applicable, maximum allowable first lien leverage would be 7.6. On the debt service front, we had approximately 1.46 billion of variable rate debt at the end of Q4. Of this amount, 520 million is hedged with fixed rate swaps and 880 million is subject to an interest rate cap, which limits further exposure to increases in LIBOR above 3%.
Speaker 5: Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026 and our interest rate caps extend through February 2027. One last item I would mention related to our debt is that we have no material term loan material until July 2028. Leave me believe.
Speaker 5: Looking at cash flow, 2022 cash used in operating activities was $48.4 million and free cash flow was negative 81.5 million.
Speaker 5: Bear in mind, though, that 2022 cash flows were impacted by certain CARES Act items, including the final $25 million repayment of deferred payroll taxes to the IRS in December and the repayment of $3.5 million of CMS advances over the course of 2022.
Speaker 5: In looking forward to 23, we expect to make progress on improving our cash flow by focusing on improving reimbursement rates and growing our volumes, reducing costs, and optimizing our collections. In a more limited M&A environment, integration and system transition costs should be significantly lower than 2022. And our 2023 cash flow will also not be impacted by the CARES Act items just discussed.
Speaker 5: Before I hand the call over to the operator for Q&A, let me take a moment to address 2023 guidance.
Speaker 5: As Jeff outlined, we currently expect full year 2023 revenue to be greater than $1.84 billion and adjusted EBITDA of at least $130 million.
Speaker 5: As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year and our volumes grow. Accordingly, we expect approximately 18 to 19 percent of our full year adjusted EBITDA guidance to be recognized in the first quarter and approximately 43 percent of our full year guided adjusted EBITDA to be recognized in the first half of 23.
Speaker 5: As most of our annual rate increases typically become effective in the second half of the year, we expect our adjusted EBITDA to ramp as we use the increases to attract and retain more caregivers and drive volumes. Our EBITDA will also ramp as we realize the benefits of our cost savings initiatives.
Speaker 5: And with that, let me turn the call over to the operator. Operator.
Speaker 2: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
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Speaker 2: We also ask that you please limit to one question and one follow-up.
Speaker 2: One moment please while we pull for questions. Thank you and our first question is from Brian Tranquil with Jeffries. Please proceed with your question.
Speaker 6: Hi, good morning. You have Tajian for Brian and thank you for taking my questions.
Speaker 6: So Jeff, as I think about the three priorities that you laid out for the year, I just want to dive deeper into the preferred payer strategy. As it relates to your guidance, I want to give you a quick overview of the different
Speaker 6: Is the 10% improvement that you're expecting by the end of the year already embedded in the guidance? And if not, can you kind of just quantify what that flow through would look like to the bottom line?
Speaker 3: Yeah, good morning. Thanks for joining us this morning. I'm going to go back to our prepared remarks for a minute and just say, as we think of our guidance, we recognize our guidance is likely conservative, yet as we sit at this point, very, very prudent. I think as Dave and I have thought about the year, we felt like it was important to.
Speaker 3: Q3 and the meaning of Q4. So if you listen to Dave's comments, our guidance would suggest that second half of the year is significantly greater than first half of the year. I think they've talked about 43% of the guidance in the first half of the year and implies 57% of the guidance second half of the year. And really the driver of that is two things. It's the rate we just talked about the.
Speaker 3: the improvement in rate driving the second half of the year. But also, one of our key initiatives this year was to identify and reduce costs where appropriate, both in corporate and field. And so, as some of those cost reductions play out through the year, we see a greater profitability in the second half of the year. But,
Speaker 3: Those are the two primary drivers of that. We don't comment on any specific state in the actual revenue or percentage growth in any specific state, but those are the two biggest drivers, Taja, of our guidance. And yes, they are baked into our at least $130 million, but I think we also recognize that.
Speaker 6: that it's prudent for us to be conservative at this point. Great, thanks for that color. And just one more follow-up just on the labor front. Just curious, I guess, how your metrics that you've seen in Q4 have trended in relation to...
Speaker 6: the beginning of the year right and you know.
Speaker 6: essentially how does the outlook look currently, right? Like are you seeing an uptick in applications, you know, as your retention improving, you know, throughout the year, just love to see how that's been trending.
Speaker 6: How does the outlook look currently? Are you seeing an uptick in applications as your retention improving throughout the year? Some 76% news of this trend as your fall report is in the sun this week?
Speaker 3: Absolutely, absolutely. And it's a great question, Taj. You know, like many of our peers, we experienced positive recruitment applications and hiring trends right out of the new year. So coming out of the holidays, we saw more applications, we saw more people interested in coming back to work new, and these were new applicants, applicants who had not worked with us before.
Speaker 3: laid out as we talked about today, we're seeing caregiver hires pushing three times greater than our non preferred payers. So you know our preferred payers value our value proposition that they believe in our value proposition. They're paying us an appropriate rate that allows us to pay at least a market level wage if not
Speaker 3: slightly above the market level wage. And because of that, we're seeing in that 10% of our of our PDS volumes, really the ability to to be hiring out in front of the market. And everyone's winning what we're staffing as we talked about 15 to 20% greater staffing rates with our preferred payers.
Speaker 3: We're bringing children home at a pace of almost five or six times greater than a non-preferred payer. So I think we highlight that to say even though the trends out of the first of the year were positive, our strategy is not to expect the wage market to settle or nurses just to come back in droves. Our strategy is to drive.
Speaker 3: rate and reinvest rate into wage and outpace the market, specifically in our PDS business. I would say in our home health and hospice business, we're certainly competing with our peer group in that space. And I will say that at least wages have seemed to be a problem.
Speaker 3: in the last three to four months to have settled. I think settled is probably the best word I can use. They don't seem to continue to be going up, and so we're focused just on retaining, engaging and retaining the core caregiving staff we have in the home, health and hospice side. Hoping that was helpful. Very helpful, thank you. Thanks, Roger.
Speaker 2: Thank you. Our next question is from Joanna Gadjic with Bank of America. Please proceed with your question. Good morning. Thanks for taking the questions here. So can I use this as a follow-up to the prior question?
Speaker 2: I didn't feel like I got the answer here. In terms of the preferred payer strategy and the increasing, I guess, growth from that, is that actually specifically included in the guidance or not? Because I guess you made it sound like you had seen the rate increases and the cost cutting, but you didn't highlight. zzzz zzz zzzz $3.ê$
Speaker 3: the preferred strategy and whether it's actually included in the guidance. Yeah, hey, good morning, Joanne. Thanks for your question. Yes, in our 130 guidance, it does include the idea of rate increases. I think, as we said in my prepared remarks, we're highly focused on these three states in this year because we feel like these three states are not currently competitive with the...
Speaker 3: the market wages for nurses in those states. And we think it's highly, highly important for California, Texas, and Oklahoma to move those rates so that we can attract nurses and help solve the value proposition, which is getting patients home. And yes, we did bake the idea of overall rates into our guidance. now
Speaker 3: In our prepared remarks, we talked about we are asking in all of those states for double digit rate increases and our fully year guide does not fully bake in the idea of these three states giving us double digit rate increases. It's overall rate increases, but
Speaker 3: If you think of California, the last rate increase they gave us was July of 2018. And that rate is no longer market. And we talked about that in the last couple earnings calls. And so we are aggressively lobbying, using media campaigns, meeting with the governor's office, meeting with legislatures in California. And we're really looking forward to seeing what happens in the next few months. And we're really looking forward to seeing what happens in the next few months.
Speaker 3: And we fully expect California to give us a sizable rate increase, not because of any other reason than the value proposition says. If you pay a nurse a fair wage in California, we can staff the cases and we can bring these children home. saying,
Speaker 3: We've got research in California that shows us that we save around $6,000 a day. So bringing a child home one day faster in the state of California saves California Medicaid system $6,000 a day. That value proposition is landing very well in the legislature as well as the governor's office and Medi-Cal itself. They understand.
Speaker 3: investing in our services truly saves total health care costs for states like California. And although $6,000 sounds like a lot in California, it's not materially different than any other state we operate in. We save the system between $4,000 and $6,000 a day by bringing a patient home one day faster.
Speaker 3: I hope that addresses the guidance question, but we have a strong level of conviction on continuing to move both legislative rates and at the same time moving our managed care and commercial payers from being a payer to a preferred partner. And as we defined a preferred partner,
Speaker 3: is both above market rate as well as value-based incentive payments.
Speaker 2: I guess it's an important part to understand, you know, what are you including the guidance of this. So now we know for the rates, I guess it's a little bit lower than maybe what you're asking for, which is prudent. And my question is, you know, 10K, you disclosed 12 million higher general professional liability expense associated with the accrued legal settlements.
Speaker 2: to what sounds like lower COVID-related costs. So I just want to clarify how we should think about the gross margin in the PDS segment for this quarter, you know, adjusting for these items. Thank you.
Speaker 5: Sure, Joanna. So, yeah, there's a legal matter that we've been defending that originally rose back in 2019, and in connection with those, with the legal matters, we accrued additional legal settlement costs in the end of Q4. Those matters are currently under appeal.
Speaker 5: and we intend to avail ourselves of all appellate options as we disclosed in the 10K. And so we continue to work through that matter as we go. You're right, that was an additional approximate $12 million in the current quarter. A year ago, quarter, what you saw was just that we had
Speaker 5: we did not have the 12 million of incremental COVID-related costs from a year ago. But I think just to answer what I think your question might be is that we see our PDS spread in the 10 to 1050 range, and I think that's what you could probably expect in Q1. And Joanna, we felt it was prudent to kind of put that.
Speaker 3: on the books, put it behind us, at least from a GAAP accounting standpoint. We thought that that was very prudent to do, to kind of clean that up at the end of the year. Outside of that, our Q4 spread would have been in the 1050, 1060 range. I think as Dave said, you know, we have a payroll tax in Q1, so we think that'll be in the...
Speaker 2: 1030 to 1050 range for Q1. Okay, thank you. And if I might sneak in on the home health segment, so you said that, you know, you're seeing some improvement there, I guess, for some disruption in Q3, and you're still, you know, excited about that.
Speaker 2: business, can you talk about the reimbursement of 23, we know the rates and I guess we're waiting for the 24 proposal to come out. So what do you expect? What do you what do you expect to see in this proposal to expect a second half of the behavioral adjustment to be included for 24? And I guess if you do, can you talk about you know, how you trying to offset that, you know, the the rate
our peers by saying that is a devastating temporary rate impact to the business. It's unnecessary. Certainly inflation, the last three years of inflation, have far outpaced the basically flat to slightly negative rate in home health. So
Let me go on record by saying Aviana supports the industry and saying that that's not a good outcome. With that said, we are expecting rate to be...
continue to be a headwind or choppy for the next few years in home health. And because of that, we're focused on now, as they mentioned, we're fully operational, fully implemented home care, home base. We're focused on operating the business, doing the things that we can do to provide the best care with the best outcomes and also provide an appropriate
gross margin and margin profile. Part of that is we are committed to being an episodic, reimbursed home health business. And, you know, in our comments, we commented that we're 63% episodic business. We're slightly ahead of that in the first quarter of 2020.
And I think we're ahead of the industry in that, that we stay committed to being an episodic reimbursed primary, primary reimbursed focus. The flip side of that is we're not going to give away our limited home health and hospice clinical resources for discounted payers and discounted prices. And so we would rather take our resources and put them with the payers that value our services.
And because of that, I think that we can stay and achieve and stay in that 45 to 46, maybe 47% gross margin range here in 2023 and truly continue to grow the home health and hospice segment, but also maintain profitability at the gross margin and contribution line.
Thanks, Joanna. Thank you. Our next question is from Raj Kumar with Stevens Inc.
Please proceed with your question. Hi, yeah, this is Raj on for Scott Fidell. So, yeah, you just called out what you expect, home house and hospital.
this gross margins to land in 2023. So could you kind of maybe provide more insight into where you expect that to be for PDS and medical solutions business as well? Yeah, yeah, Raj. I think Dave put it in some of his prepared remarks. You know, AMS, we fully expect to stay in that 42% to 43% range.
As you look at Q4, you'll see we had a little bit of a reserve adjustment in the quarter that brought it down just below 40%. But strong, strong expectations for medical solutions this year will be right in that 42 to 43, maybe 43.5% gross margin range. And then,
if you normalize PDS for that legal reserve that we took, you know, we're still in that 28.5, just shy of 29% gross margin, I think we would tell you that's probably where we'll land, you know, in 2023, even though we're shifting volume away from lower-paying payers towards more appropriate-paying payers, would I prefer payer strategy?
we will continue to pass on that incremental portion to our nurses and our caregivers to drive our volume growth. So I think you'll see us stay in that, Dave, I would say, you know, 28 to 29%, maybe slightly above 29% from a gross margin in PDS.
Thank you for the call. And then as a follow-up, what do you expect expectations for operating cash flow and CapEx in 2023? And then what do you expect leverage to come to in 2023, at the end of 2023?
Thanks, Raj. I'll put Dave here in a second. I think it's just important. Dave and I are both very confident in our overall liquidity position. And I give Dave credit. A couple of years ago, he hedged all of our debt. Virtually all of our debt is hedged. And Argonne Understanding regionally because what happened in whether or not one of our little
We have a great lending group, we have great equity partners that are fully committed to Aviana. So as we think of overall liquidity, I think, you know, Dave and I both feel very confident. I do want to give Dave and his collection teams credit. Yeah, they've done an unbelievable job in collecting our cash. You know, we've just ended 2022. We basically did 99.99% of our revenue for the year. So 100%.
of our revenue was collected in cash in 22, which is a phenomenal outcome in this business. And then Dave just does a really nice job managing our cash position, making sure that we've got ample room for borrowing capacity so that we can manage our business, invest in the business. So as I told you Dave, I just want to say, as a new guy, as a new CEO , I am very confident in our...
overall liquidity position and just that we've got a great team with a lot of tenure managing the important parts like collections, like cash management. So, you know, I think we're in a great position as we start the year and we've got opportunity to invest in our company as needed. Thanks, Jeff. And just to add on with regarding the question on CapEx, you know, we're in a great position as we start the year.
year. So you know we're working towards that and we think you know we'll make significant improvements from where we landed last year both on operating cash and free cash flow. One thing I will call out as we look at our cash flows as we go across 2023 is based on how we account for our derivatives since we don't use hedge accounting, the benefits of our interest rate caps will come through operating cash flows.
the benefits of our interest rate swaps will come through financing cash flows. And that's one of the reasons why we focus on free cash flow to incorporate the benefits of our interest rate swaps in 2023.
interest rate swaps will come through financing cash flows and that's one of the reasons why we focus on free cash flow to incorporate the benefits of our interest rate swaps in 2023.
All right, thank you very much. Thanks, Raj. Appreciate you. Thank you. Our next question is from Peter Chickering with Deutsche Bank. Please proceed with your question. Hey guys, you got Benjamin Shaver on for...
Peter, thanks for taking the question. So when you're looking at the leadership at the central level and also at the divisional level, do you guys believe you have the right team in place or do you think there needs to be some adjustments in 2023? Thank you.
Hey, Ben, good morning. Great question. And, you know, Ben, I think as you think about our organization, I made the comment about the experience and maturity we've got at our cash collections, RCM. As I look out in the business, and actually all three of our business divisions,
Our division presidents or our region presidents, you know, they average between a low of 20 years of experience and the high of 30 to 35 years of experience.
regulations, government affairs, sales, clinical oversight.
operating side of the business, you know, all the way down through the business, down to the actual branch locations. We've got a tremendous amount of tenure, both on the Medicaid side, the private duty side, on the home health and hospice side, as well as our medical solutions teams. And so we are blessed in the fact that we've got a deep bench of...
the quality of our leadership team at any level in our organization. I will say, and you've heard us say this before, in the last two years,
I'll also mention that we've made significant investments in our clinical outcomes, our data analysis, and the ability to prove our value-based story through clinical outcomes. So our clinical team has grown as well. And that's part of why we talked about cost reductions, and we've invested significant dollars in these core areas. At the same time, we're going to go back through the business and just find areas where we can be more efficient and more effective so that we can truly get our profitability back up towards that 10% goal we've had all along. Thanks. Appreciate the question. We have one more.
One more follow-up real quick. I appreciate the color you gave on free cash flow conversion, but do you guys have any leverage ratio that you're shooting for coming out of 23?
We don't typically provide guidance on leverage. I mean, obviously, we'd all like it to be lower. And so as we drive our operating cash and drive our free cash, the ultimate goal of that is to ultimately build cash on the balance sheet and lower our net debt and leverage. So I just say that we're very focused on
operating the business and driving all the benefits that Jeff and I have talked about. And, you know, like we said, getting to positive free cash, I'm sorry, positive operating cash in the second half and, you know, just, you know, driving on all fronts there.
operating the business and driving all the benefits that Jeff and I have talked about and you know, like we said getting to positive free cash, I'm sorry, positive operating cash in the second half and you know, just you know, driving on all fronts there. I appreciate it. Thank you.
Thank you. Our next question is from Ben Hendricks with RBC Capital Markets. Please proceed with your question. Hey, Ben. Good morning. Good morning. Thank you very much. Just a quick follow-up on those executive, or I'm sorry, on the PD legislation efforts in California, Texas, and Oklahoma. Just wondering if you could kind of handicap each of those and kind of let us know what your thoughts are on kind of the probability of actually getting those at a double-digit level that you're expecting. Where is the biggest headwinds? Where is the most likelihood and kind of how you're handicapping that increase overall? Thanks. Great question, Ben. I think I'll state the obvious, and that is the value proposition is the same conversation in every one of our 33 states.
I believe firmly that California, Texas, and Oklahoma will all pass through PDN rate increases. I'm hopeful that that will be in this legislative session 2023. And I think they, the legislatures that we have talked to in the states, we've spoken with the governor's offices in all three states.
They understand the issue. They are supportive of the issue. I think what it comes down to sometimes, Ben, is sometimes there's just other macro stuff going on. If you take California's example, sometimes there's just macro stuff going on in the state that has nothing to do with nursing, children.
home services that just takes the attention of a governor or a legislature away from an important issue like ours. And so, you know, end of the day, as Tony and I talked about in the last couple of calls,
These states are going to pass through rate increases. It's just a matter of when and how much I'm confident that we're going to come out of this summer with a very good outcome in all three of these states It may not be exactly I think as Joanna mentioned
We've asked for more in each state than we've assumed we're going to get in our guidance, right? And that's just us being prudent. But we're not asking for a dollar an hour rate increase. I mean, we're asking for 20, 25, 30, 35, 40% rate increases in these states because that's what it takes to ultimately materially move the needle in the home nursing. So again, you're hearing me be positive. California has a July 1st effective date....
Texas is a September 1st effective date, Oklahoma an October 1st effective date. We'll know the answer to all three of these by early June , some cases, you know, late May. So we're heads down for the next 90 days driving this legislative agenda, not only in these three states, but every single one of our 33 states, and I think we feel very confident we're going to have a great year related to government affairs right in PDS.
Thanks for squeezing me in. I had a question about, I know demand trends are not an issue. You got more demand than can be handled for yourself in the industry. How do you see that evolving on the PDF side for maybe in the near term and longer term? It's more clear we can see that the accelerators of demand.
on the adult home health side. Can you just talk to that? Yeah, Matt, and good morning. Thanks for the question.
There are more children who need more home care services in America than there are home care companies to take them home or the appropriate rate. So we don't lose sleep at night on, is our demand 18 months, 24 months, 36 months in the future going to be less, more, equal to, on the PDS side of the business.
I think as the federal government has leaned into home and community-based services, which is now a defined term in CMS and in the federal government, that's good for us. That is a broader group of families who can receive both highly acute skills at home, moderate acute skills at home, and even lesser acute skills at home. And I think...
As we think of the long-term macro 10-year outlook, we think PDS has got great tailwinds from a long-term demand standpoint. It truly will come down to the supply of caregivers, both family caregivers in the home and...
skilled acute nurses that are coming to the home. So again, it's a great question. To us, the long-term demand metrics for PDS still make a ton of sense, and it continues to be a supply issue for as far as we can see. In the next three to five years, it truly continues to be the ability to attract and retain.
both skilled and lesser skilled caregivers. Maybe just a follow up on a different topic. I know you've talked a lot about the the rate side of the business. I gather that on the rate side a lot of the problem is organizational.
attention and initiative, whether you're talking about a state agency or managed care commercial payer. Is that about right or do you have some of these, because you can say a higher rate is going to save you money.
whether you're talking about a state agency or managed care commercial payer. Is that about right or do you have some of these? You know, because you can say, you know, a higher rate is going to save you money.
And, you know, do you find that you have real opposition to that argument or people with a different theory? No. But by the way, your question is very thoughtful, Matt, and that is, do you have a real opposition to that argument or people with a different theory?
lot of times it's just getting the attention, right? It's getting the attention of the legislature of Texas or the governor and getting their attention the matter. As I think of MCO payer partners...
It's a similar conversation. It's just that the MCO partners figure it out faster. That they see, hey, I can save $5,000 a day. You know, even if they start giving us what's called single case agreements, which means that they approve one family at a time at a new rate, we see the MCO partners moving in a matter of hours and days versus months and years from our state partners.
The MCO partners are just able to move faster than their legislative counterparts. I will say over the first, we're about 18 months into this strategy. We now have markets where we have a preferred payer in a specific market, and then we have non-preferred payers. The non-preferred payers, it took them about nine months to call us and say, why can't I get any of your nurses? Our answer was, because unfortunately, you're not paying us a preferred payer.
and you're not a partner of ours in this market. And so we've seen MCO payers go from not interested now, not now, to oh, my God, what do I have to do to get what the other payer in this market has gotten from Aviana, which to us shows the power of the partnership. And I think, again, I'll go back to the legislative comment. I think you read into it right. It's just getting the attention of the right people in a legislative process like in California for an answer they get when their firstathiellerology expert says that Life wasoshi The X powder
to understand the issue. They all get the issue. It's not hard to sell the issue. It's just getting their attention from floods and snow and you know, and gas prices and all the other stuff that's on their desk to deal with and making this a priority. And that's really our job, and our lobbyist job is to just drive this home.
Great. Thank you. I'm good enough. Thank you, Matt. There are no further questions at this time. I would like to turn the floor back over to CEO Jeff Schoener for closing comments.
Well, thank you, operator, and to everyone, thank you for joining our earnings call today, and most importantly, thank you for your interest in our Avianna story. We look forward to updating you on our progress at the end of Q1 in mid-May. Have a great day, and operator, thanks so much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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