Q3 2023 Aveanna Healthcare Holdings Inc Earnings Call
Good morning, and welcome to all of you on the Health Care Holdings third quarter 2023 earnings Conference call today's call's being recorded and we've allocated one hour for prepared remarks and Q&A at this time I'd like to turn the call over an extended Drake I'll be honest chief legal officer and corporate Secretary. Thank you Sir you may begin.
Good morning, and welcome to I'll be honest third quarter 2023 earnings call. This is Shannon Drake company's Chief legal officer, and corporate Secretary with me today is Jeff Shaner, Our Chief Executive Officer, Matt Buckhalter, Our interim Chief Financial Officer, and Debbie Stewart, our Chief Accounting Officer.
During this call we will make forward looking statements risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we filed with the SEC.
The company does not undertake any duty to update such forward looking statements. Additionally, during today's call. We will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
A reconciliation of these measures can be found in this morning's press release, which is posted on our website I'll be on the dot com and in our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission with that I will turn the call over to I'll be honest, Chief Executive Officer, Jeff Shaner, Jeff.
Thank you Shannon good morning, and thank you for joining us today.
We appreciate each of you investing your time this morning to better understand our third quarter results and how we are continuing to progress against our near and longer term objectives for 2023 and beyond.
My initial comments will briefly highlight our third quarter results along with the progress we are making in addressing the labor markets and our ongoing efforts with government and managed care payers to create additional capacity.
I will then provide some thoughts regarding our liquidity and refreshed outlook for 2020 three.
Turning the call over to Matt to provide further details into the quarter and full year guidance.
Let's start with some highlights for the third quarter.
Revenue was approximately $478 million, representing a seven 9% increase over the prior year period.
Gross margin was $147.3 million or 38%, representing a nine 4% increase over the prior year period.
And finally <unk>.
Adjusted EBITDA was $36 $2 million, representing a 46.2% increase over the prior year period, primarily due to the improved payor rate environment as well as cost reduction efforts taking hold.
As we have previously discussed the labor environment represents the primary challenge that we continue to aggressively address to see aviano resume the growth trajectory that we believe our company can achieve.
As a reminder, we do not have a demand problem the demand for home and community based care has never been higher with both state and federal governments and managed care organizations asking for solutions that can create more critical capacity.
As communicated in previous quarters, our ability to recruit and retain the best talent is a function of rate.
Our business model offers a preferred work setting that is mission driven providing a deep sense of purpose for our teammates however.
However, our caregivers need to be able to provide for themselves and their families. In this inflationary environment and we must offer a competitive wage.
Since our second quarter earnings call I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and managed care payers as well as early signs of improvement and the caregiver labor market specifically.
As it relates to our private duty services business.
Our goal for 2023 was to execute a legislative strategy that would increase rates by double digit percentages across our various states with particular emphasis on California, Texas, and Oklahoma, which represent approximately 25% of our total Pds revenue.
Year to date 2023, we have successfully obtained double digit P. D. S rate increases in eight key states, including Oklahoma.
We have also achieved rate wins and an additional 11 states that were either in line or slightly better than our expectations.
These COVID-19 states represent approximately 55% of our Pvs footprint.
And we should continue to see positive progress throughout 2023 and into 'twenty 'twenty four as we continue to focus on the remaining states.
As a point of reference the majority of the rate increases are effective in the second half of 2023, which will result in a full year benefit as we head into 2024.
While we are pleased that our Pds legislative messaging is being well received by state legislatures.
We still have much work to do.
As an example of the work ahead, we received a modest increase in Texas effective September 1st.
And do not anticipate being included in the California budget until fiscal year 2025.
We believe that we made significant strides with both the Texas, and California legislature, demonstrating the importance of rate increases and how they support and overall lower healthcare costs improve patient satisfaction and quality outcomes. However, it is clear that we need to further accelerate.
Alright, our preferred payer strategy and continue to focus on opportunities within our current infrastructure to allow us to pass meaningful wages through to our caregivers.
This allows us to become a solution for overcrowded children's hospitals, and distraught parents, who want their children to be cared for in the comfort of their home.
Now moving to our progress with preferred Payors.
Our goal for 'twenty twenty-three was to double our P. D S preferred payer volumes from approximately 10% to 20% by year end.
In the third quarter, we added two additional preferred payer agreements raising our total to 12.
Our preferred pay your volumes increased to approximately 17% of total P. D S volumes.
And we are optimistic that we will continue to execute on this strategic initiative as we head into 2024.
While we are taking a national approach to our Pds preferred strategy. We are placing particular focus on the state of Texas due to the moderate rate increase and intensifying our ability to shift caregiver capacity to our preferred payors.
As of September 30th we now have over 55% of our Texas P D and volumes with with preferred Payors and believe we have an opportunity to further improve this trend to approximately 70% in 2024.
Moving on to our preferred payer progress in home health.
Our goal for 2023 was to improve our episodic payer mix by 10% from approximately 60% to above 70% by year end 2023.
Year to date, we have signed six new episodic agreements and improved our episodic mix from 63% at the end of 2020% to 275% in Q3.
We continue to remain focused on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis and are focused on improved clinical and financial outcomes.
Finally, we discussed the need to shift our current labor capacity to those payers that value our services and appropriately reimburse us for the care provided.
We continued several initiatives to shift caregivers capacity to our preferred payers to optimize staffing rates, while minimizing days in an acute care facility.
In the third quarter, our preferred payer relationships benefited from accelerated caregiver hires of approximately three times more than our other payors and we continued to experience staffing rates.
Proximately, 20% to 25% greater with significantly higher patient admissions.
Yes.
These positive labor trends have continued into the fourth quarter and further validate our preferred payer strategy.
Preferred payers reimburse us a fair rate and we pay market competitive wage rates, while also earning value based payments for achieving positive clinical outcomes and improve caregiver capacity.
We are encouraged by our 2023 rate increases and subsequent recruiting results and.
And our business is beginning to demonstrate signs of recovery as we achieve our rate goals previously discussed.
Home and community based care will continue to grow.
Avi honor as a comprehensive platform with a diverse pay your base, providing cost effective high quality alternative to higher cost care settings.
And most importantly, we provide this care in the most desirable setting the comfort of the patients' home.
Before I turn the call over to Matt, Let me briefly comment on our liquidity and refreshed outlook for 2023.
On the liquidity front, we continue to make progress on improving our cash flows by focusing on attaining adequate reimbursement rates and growing our volumes.
We are also seeing the benefits from the cost efficiency efforts, we implemented earlier this year to rightsize, our cost structure, while optimizing our collections.
As Matt will discuss further we have ample liquidity to operate our business, while we work with government and M. C O payers to improve the reimbursement rates to reflect the inflationary environment.
As it relates to a refreshed outlook for the year base.
Based on the strength of our first nine months results and the continued rate improvement.
We are comfortably raising our full year revenue guidance to a range of $1 87 to 188 billion.
And an adjusted EBITDA guidance range of $134 million to $137 million respectively.
We believe our revised outlook provides a prudent view considering the challenges we still face with the current inflationary labor environment and hopefully it proves to be conservative as we close out 2023.
Finally.
I am really proud of our Avianca team.
They have continued to execute our 2023 strategic objectives.
The power and efficiency of the home as a health care setting remains critical to our patients families payers referral sources and government partners.
The value of our clinical workforce continues to be recognized through various rate rate increases across the country and through our expanding preferred payer relationships.
With that I look forward to updating you on our results at the end of Q4.
And let me turn the call over to Matt to provide further details on the quarter and our revised 2023 outlook Matt.
Thanks, Jeff and good morning.
I'll first talk about our third quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023.
Starting with the topline.
We saw revenues rise seven 9% over the prior year period to $478 million.
We experienced revenue growth in all three operating divisions led by our private duty services.
Medical solutions at home health and hospice segments.
Which grew by eight 2% seven 3% and.
And six 3% compared to the prior year quarter.
Consolidated adjusted EBITDA was $36 $2 million, a 46, 2% increase as compared to the prior year.
Reflecting the improved payor rating environment as well as cost reduction efforts taking hold.
I'll take a deeper look into each of our segments.
Starting with private duty services revenue for the quarter was approximately $385 million and eight 2% increase and was driven by approximately $10 1 million hours of care.
A volume increase of four 5% over the prior year.
While volumes have improved over the prior year, we continue to be constrained in our topline growth due to the shortage of available caregivers.
Although we are beginning to see signs of improvement in the labor markets.
Q3 revenue per hour of $38 13 was up $1 29.
Our three 7% as compared to the prior year quarter.
We expect to see continued improvement in 2023, as we execute on our rate increase initiatives.
We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates.
Turning to our cost of labor and gross margin metrics, we achieved $104 $5 million of gross margin for 2000 or 27, 2%.
A three 6% increase from the prior year quarter.
Our cost of revenue rate of $27 78.
Which is a five 5% increase as compared to the prior year.
Represents the rate pressures, we continue to experience in the labor markets.
Our Q3 spread per hour with $10 35 reps.
Representing a 9% decrease year over year.
As a reminder, our Q2 spread did benefit from some timing related items and did normalize and our expected $10 to $10.50 range for Q3.
Moving on to our home health and Hospice segment.
Revenue for the quarter was approximately $53 million, a six 3% increase over the prior year.
Revenue was driven by 9300 total emissions with approximately 75% being episodic and 11200 total episodes of care.
Medicare revenue per episode for the quarter was $3046 up 8% as compared to the prior year.
We haven't intentionally focus on right sizing our approach to growth in the near term by focusing on preferred payors reimburse us on an episodic basis.
Episodic focus as accelerated our margin expansion and improved clinical outcomes.
With episodic admissions over 70%, we have achieved our goals of right sizing our margin profile and enhancing our clinical offerings.
As we think about Q4, we expect marginal growth in emissions and total episodes with additional improvement coming in early 2024.
We are committed to a disciplined approach to growth, while shifting our capacity to those payors, who value our clinical resources.
While we are pleased with our gross margin of 47, 9% in Q3 demonstrating.
Demonstrating our continued focus on cost initiatives to achieve our targeted margin profile.
We wrote off the majority of the remaining goodwill associated with our home health and hospice business.
Representing a $105 million noncash charge.
This noncash charge.
Reflects our renewed focus on preferred payer relationships.
Our cost management initiatives mature over the next several years.
We believe this is the right long term growth strategy and we hate to hold a strong belief in this business and its lasting value proposition.
Our home health and hospice platform is dedicated to creating value through operational effectiveness.
And then delivery of exceptional patient care.
Now sure Medical solutions segment results for Q3.
During the quarter, we produced revenue of $40 3 million, a seven 3% increase over the prior year.
Revenue was driven by approximately 88000 unique patients served and eight 6% increase over the prior year period.
And revenue per UBS, a $457 and 63.
Gross margins, which were 43, 2% for the quarter.
On a sequential basis from Q2.
And in line with our target margin profile for medical solutions.
We continue to implement initiatives to be more effective and efficient in our operation to leverage our overhead as we continue to grow.
While other providers have decided to exit the market we.
We see this as an opportunity to expand our national presence and to further our payer partnerships.
In summary, we continue to fight through difficult labor and 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 payors, we value our partnerships is the path forward at Aviano.
As Jeff stated.
Our primary challenge continues to be reimbursement rates.
But the positive momentum we saw in Q3, we're optimistic as such trends will continue into 2024.
As we continue to make progress with the rate environment, we will pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes.
Now moving to our balance sheet and liquidity.
At the end of the third quarter, we have liquidity in excess of $236 million, representing cash on hand of approximately $48 3 million.
$20 million of availability under our securitization facility.
And approximately $168 million of availability on our revolver.
Which was undrawn as of the end of the quarter.
Lastly, we had $32 million and outstanding letters of credit at the end of Q3.
I'm proud of the progress we've made in enhancing our overall liquidity throughout the year.
Yes.
The debt service front, we have approximately $1 $47 billion of variable rate debt at the end of Q3.
Of this amount $520 million is hedge with fixed rate swaps and $880 million is subject to an interest rate cap.
Which limits further exposure to increases in sofa above 3%.
Accordingly substantially all of our variable rate debt is hedged.
Our interest rate swaps extend through June 2026, and our interest rate caps extend your February 2027.
One last item I will mention related to our debt is that we have no material term loan maturities until July 2028.
Looking at cash flow cash provided by operating activities was positive $25 $7 million for the quarter.
And free cash flow was approximately positive $16 $9 million.
While Q3 benefited from some timing related items, which we expect to be a moderate headwind to Q4 cash flows.
We continue to believe we will end the year as a positive operating cash flow company.
So I would expect to see continued cash flow benefits as our top line and cost management initiatives come to fruition as we head into 'twenty 'twenty four.
Before I hand, the call over to the operator for Q&A, Let me take a moment to our dress or a fresh outlook for 2023.
As Jeff mentioned, we're comfortable raising our full year revenue guidance to a range of $1 87 to $1 88 billion and.
And adjusted EBITDA guidance range of $134 million to $137 million respectively.
In closing.
I am proud of all of our Avianca team members and their hard work in achieving these results I look forward to the continued execution of our 2023 strategic plan and updating you further at the end of Q4 with that let me turn the call over to the operator.
Thank you, we'll now be conducting a question and answer session. We ask you. Please ask one question and one follow up then return to the queue.
She likes to be placed in the question queue. Please press star one at this time one moment. Please while we poll for questions. Our first question today is coming from Brian <unk> from Jefferies. Your line is now live.
You have Porsche on for Brian. So my first question is going to be on the the final home health ruling obviously, we saw the.
80 basis point bump, let's just pause risk provision just curious how the team is currently thinking about that and the impact to the business and then also to you. Obviously, we still have the temporary a gesture on the table, but just curious how youre thinking about that and.
<unk> made a lot of great strides in improving the episodic mixing the business has referenced on the call. So.
Yes.
How that informs the outlook for 2024.
Hey, good morning. This is.
Jeff.
I'm a step up in I'll start with kind of where you ended that question is is how we think of early thoughts on 'twenty for guidance.
I'll go back to kind of the core of our company that we talked about 19 Pds state rate improvements.
Yes.
That's a great year for us was slightly better than we expected, even though we didn't achieve the full Texas and California rate increase in 2023.
It was in line to better than we expected. So we've got nice momentum rolling from our entire Pts segment into 24, I'll add that you probably saw we had about four 5% year over year growth in Q3, that's the strongest year over year growth we've had.
Since Covid. So continued momentum the rate increases are working we're deploying more caregivers to more homes have been more families. So really nice momentum moving out of $23 24 for our Pts segment and then you know as you said, although home health and hospice is a much much smaller segment to us.
We certainly were pleased with the hospice final rule and I think you'll find us to be directly in line with our peers on the home health rule that we continue to be disappointed in CMS is on <unk>.
Willingness to address the labor and inflationary environment of the last three to four years, we obviously.
The fact that the final rule was better than the proposed rule, but at the same day.
Our peers have said as the National Association of home care is at a record the home health industry is still facing much much much greater higher raising wages and inflation and the lack of recognition from that from the rate is disappointing so.
At the end of day, that's not going to slow us down to <unk>. We've got a great business model. We were very pleased with our 75% episodic mix in Q3, we expect that to be above 70% as we end the year and I think I think as you've heard Matt and I talked about now for a couple of quarters.
Our home health and hospice business has been fixed internally clinically we are strong financially we're strong and we're disciplined to grow this business and the payers are going to pay us on an episodic basis. So we're excited about 'twenty four and although the home health rule, we still feel false falls far short we're excited about the momentum that we carried in 'twenty four.
Great really appreciate the commentary and then I know we all.
We think that commentary around you know we don't have a demand problem, it's really like labor. So just curious I mean.
Encouraging to hear that it's improving and we've been saying the same thing in our data checks just curious how should we be thinking about directionally not asking for any guidance, but.
Halleck wages wage inflation for next year, what is the right assumption and then obviously I see based off the guidance you know margins will be slightly.
Slightly north of 7% is that still the proper.
Launching point for next year is there anything else that we need to be contemplating.
Outside of just the rate increases.
Initiatives, you are making on the rate side, and then also too just like inflation desktop hopefully moderating.
No that's a great point and I think we will.
Our comments in the script, where we're early but yes, we like our peers, we're starting to see improvement in the overall labor markets and I would tell you <unk> for the first time since Covid hit Q3 acted like Q3 had acted for the last 20 years pre COVID-19, meaning meaning we felt we felt SKU.
All of us being out in the summer, we felt a little summer seasonality low and then come Labor day, which typically was always.
Kids going back to school and our business bumps because of that we saw the bump both in both in demand hours, but also in and supply of caregivers looking for work and so I'll call. It. The last eight to 10 weeks for us have been really nice both of them are coming from.
Recruitment from a hiring perspective, but also just people are current workers specifically in the Pts segment wanting to work more hours and we've had a really nice kind of eight to 10 week run we expect that to continue through the end of the year up until the holidays. So nice to see the business beginning to get back to what it was.
<unk> 2020.
As we think about 2020 for Taj unit relates to that.
Matt talked about we still we still gauge inflation wage rate by our spread per hour in yes. It.
It was $10 35 in Q3, it will land somewhere in that 10 to $10 50 range in Q4, and we we still feel like that's the right measurement for how we should think about.
Margins in the Pts segment.
We will probably be chasing home health, a little bit right. So I think our disciplined approach to home health is fundamentally rooted in the fact that we understand we cannot chase low margin business and try to make it up with volume in home health that we absolutely are staying disciplined to the fact that episodic business is the most important business too.
On the home health side of the business and although 75% maybe a bit strong to carry into 'twenty for certainly our goal is to be at or above 70%.
Last part of that question, Matt was about margin potential margin expansion, yeah, Jeff I think on the rate side, you said, it really well with 19 rate increases so far in 2023, and so it just shows how much value that we're providing to our payers and our patients as well.
There are some states that have done a great job of being out in front of it and some that still have to play catch up to this as well as we do get those rate increases Staci you know we will pass those.
<unk> benefits through and other benefits to our caregivers and that's to drive volumes and increased patient care, most importantly, as well.
On kind of the SG&A front, our team has done a phenomenal job and addressing direct and indirect cost and looking for opportunities to just be more effective and more efficient I mean, they've really done a phenomenal piece of that will continue to look at our corporate infrastructure will continue to look at field infrastructure and invest where it is important so that we can drive.
Business drive volumes drive growth, but also provide great clinical and quality care to our patients.
Thanks, Tom I appreciate it Jay.
Thank you next question today is coming from Peter Chickering from Deutsche Bank. Your line is now live.
Hey, you've got Benjamin Shaver on for <unk>.
Today.
A quick question on the cash flows.
I heard you guided to positive CFO for the full year and it currently 26 million year to date got that correct. So.
Where do you guys see.
In <unk>.
Yeah, Ben Good morning, Yeah. So I think in Matt's prepared remarks, he talked about we had some one time benefits that did help us in Q3 Q3 would have been cash flow positive even without the one time benefits, but but some things like just how our biweekly payroll closes it fell into an October day versus the September day, which was.
Which was unusual so there'll be there'll be a little bit of a swing from quarter to quarter I think the most important part you are hearing from us and we've been talking about it for a couple of quarters. Now is we've been very close to breaking through and becoming a positive operating and ultimately a positive free cash flow company and although Q4 will be a little bit of a headwind in that.
I think we feel confident that youll see that from us for the year and more importantly, or equally important transitioning in 2020 for Avianca is now a positive.
Generating cash flow company, which was an important milestone for us as a as a company. So we're certainly Matt talked about it. It's a total team effort. It takes growing volume is growing rates takes managing margin also takes taking cost out of the company and lastly, neely collecting our cash and I think.
It's a total team effort of Avianca to get where we are and to continue to drive through so I think you'll find us to be pretty excited less about less about how Q4 impacts but more about how we think of the full year.
Yes, Jeff I think that's really really what well set there I mean, the team's success in driving our topline growth as well as being very disciplined on any type of spend as it really allowed some of those dollars to dropdown to the bottom line for us on the operating cash flow and free cash flow basis.
One time items in Q3 that are very moderate headwind in Q4, as well, but just wanted to be upfront about that to provide realistic expectations.
But more importantly, we are on the run rate for consistency of debts and creating an organization that will be a positive operating cash flow company.
I will lay shelves on the beach, there is a little bit of headwinds in Q1 with some of our GPL seasons that evolved and just some of our payroll taxes and a normal spend.
So we don't expect it during Q1, but.
Therefore, our goal is to continue to be a positive operating cash flow business.
Okay.
That's super helpful. And then one more quick one we really like to see the leverage ticked down a little bit this quarter could.
Could you give any color on maybe targets you have or where do you see it going.
Over the next few quarters.
Thank you.
Yeah, Ben I mean, we're really pleased to be dropping off Q3 last year was a really tough quarter for us and you know that the industry was going through a mighty shift during that time period, so being able to drop off that one and then add a strong $36 2 million $36 $2 million 46, 2% increase year over year really helps that leverage profile.
We're gonna be cop, we're very cognizant of it around here every single day.
You can hear that in our tone in our voice about cost and spend and getting back to where we know this organization can be and by doing so we will provide a whole lot more patient care as well. So we're going to continue to work that down through some good old fashion organic growth cost reduction efforts.
The decrease our leverage profile don't want to get ahead of our skus as well and throw out a number that might take us a little bit of time to get to but that's something we'll work down over time.
Thanks, I appreciate it guys congrats on the nice quarter.
Thanks, Ben I appreciate you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Jeff for any further or closing comments.
Thanks, Kevin and thank you for joining us for our Q3 earnings call and thank you for your continued interest in our RV on a story, we look forward to updating you on our continued progress in further insights into our plans in 2024, thanks and have a great day.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.