Good morning, and welcome to the Aveanna Healthcare Holdings First Quarter 2023 Earnings Conference Call. Today’s call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I’d like to turn the call over to Shannon Drake, Aveanna’s Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Thank you, Maria. Good morning, and welcome to Aveanna’s first quarter 2023 earnings call. I’m Shannon Drake, the company’s Chief Legal Officer and Corporate Secretary. With me today is Jeff Shaner, our Chief Executive Officer; and Dave Afshar, our Chief Financial Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning’s press release and the reports we file with the SEC. The company does not undertake any duty to update any such forward-looking statements. Additionally, during today’s call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning’s press release, which is posted on our website, aveanna.com, and in our most recent quarterly report on Form 10-Q filed with the SEC. With that, I will turn the call over to Aveanna’s 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 first quarter results and how we are progressing against our near- and longer-term objectives for 2023 and beyond. My initial comments will briefly highlight our first quarter results, along with the early 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 2023 prior to turning the call over to Dave to provide further details into the quarter and full year guidance. Starting with some highlights for the quarter. Revenue was approximately $466.4 million, representing a 3.5% increase over the prior year period. Gross margins was $144.5 million or 31%, which is essentially flat when compared to the comparable prior year period. And finally, adjusted EBITDA was $28.5 million, representing a 25% decrease when compared to the prior year period, primarily due to the costs associated with the current labor environment. As we have previously discussed, the labor environment represents the primary challenge that we are aggressively addressing in 2023 to see Aveanna 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 capacity. As communicated in our previous quarter, 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. But our caregivers need to…

Thanks, Jeff, and good morning. I’ll first talk about our first quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023. Starting with the top-line. We saw revenues rise 3.5% over the prior year period to $466.4 million. We experienced revenue growth in both our Private Duty Services and Medical Solutions segments, which grew by 6.5% and 10.7%, respectively, while our Home Health & Hospice segment declined by 15.8% as compared to the prior year quarter. Consolidated adjusted EBITDA was $28.5 million, a 25% 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 $373 million, a 6.5% increase and was driven by approximately 9.8 million hours of care, a volume increase of 1.8% over the prior year. While volumes improved over the prior year, we continue to be constrained in our top-line growth due to the shortage of available caregivers although we are beginning to see early signs of improvement in the labor markets. Q1 revenue per hour of $38.12 was up $1.69 or 4.7% as compared to the prior year quarter and is a $0.46 or 1.2% sequential improvement as compared to Q4 of 2022. We expect to see continued improvement in 2023 as we execute on our rate increase initiatives, and we continue to be encouraged with our ability to attract caregivers and address the market demand for our services when we obtain adequate reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $104.2 million of gross margin or 27.9%, a 0.2% decrease from the prior year quarter. Our cost of revenue rate, $27.47, which is 4.9% increase as compared to the prior year, represents the rate pressures we…

[Operator Instructions] Our first question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Hey good morning guys, I guess my first question, I know there’s that CMS proposal on personal care services. Just want to clarify, I mean, will that cover the services that you provide under your PDS segment? And just any thoughts on that rule proposal from CMS? Thanks,

Yes, Brian. Thanks. And yes, obviously, we’re acutely aware of the proposed rule. And it’s not material to Aveanna and our business, but we stand firm with our – with the industry. We stand firm with our peers, the National Association for Home Care, PMHC, other trade organizations and the fact that a lot of work is left to be done. We think the precedent that the proposal creates is concerning. And certainly the open comment period that we’re in right now is a very, very appropriate time for both us, the trade associations, state governments, all to give feedback to CMS. We applaud the intent of the rule, which is to open access to Medicaid beneficiaries and certainly improve quality measures and transparency in rate setting. But the idea that CMS would set an 80% threshold for direct care workers’ compensation is significantly concerning. And the precedent that, that would create we just don’t think is appropriate. We also think, Brian, that as our peers have talked already, that the proposed rules significantly underestimates the oversight training, onboarding as well as the EVV or electronic visit verification expectation requirements that CMS mandates. So in the end, we think this will play out in the next few months with a good open dialogue. And although not material to Aveanna’s results, we just want to make sure that we stand firm with our peers in the industry to make sure that we find a good landing place for this final rule with CMS.

All right. Got it. That makes sense. And then I guess my follow-up, great to hear about Oklahoma, and you called out how you saw a very notable uptick in interest and applications for new employees. So how did that work? Like when you get an increase, is it as simple as we offer higher rates and we get more people coming in to apply? Or is there like an advertising strategy that has to come along with that as you try to drive recruitment and recruiting yields higher?

That’s a great question, Brian. I’ll be honest. It happens very quick. We’ve got a pipeline of inactive nurses, caregivers in every location, every market, the people who worked with us, enjoyed the home care setting like the one-on-one setting of being with a patient in their home. However, they left us over wage, just pure wage, $1, $2, $3 an hour. And so when you see a rate increase like Oklahoma, like what’s proposed for Texas and California, we are able to – we stay in touch with that nurse as she’s moved on or he’s moved on to their next jobs. The moment we can call them and say, "Hey, we got a rate increase effective yesterday. We can meet your needs of $3 more an hour, $2.50 more an hour, something meaningful," that nurse is excited to come back to us, and we see a strong movement of nurses back to us. But it’s great to stay in touch with them. It’s great to talk to them. But until we can meet their expectations, the conversation is a little bit mute. It’s just a relationship. And so I think Oklahoma, just like other examples in our preferred payers, where – the moment we’re able to negotiate a higher rate, we focus on about a 50-ish percent pass-through directly to the caregiver of direct wages, not other benefits, but direct wages. And the ability to do that, Brian – we were not surprised in Oklahoma, nor will we be surprised in California and Texas. As soon as we execute on those rate wins, California is effective July – would be effective July 1, Texas would be effective in September 1, we would expect meaningful improvement in hires. And then, Brian, one of the pieces that we don’t normally touch on, we have current nurses that are working for us that are also working other jobs. When we can call those nurses and say, "Hey, we can up your entire hourly wage by $3 or $4 an hour," not only do they fill the shifts they were filling, many times they fill incrementally more shifts and they’ll push off that second job for us. So we get a lift internally, too, of our organic already patients that are already in service with us. So it’s really a win-win. And I think Oklahoma recognized that opportunity and came through very strong with the rate increase. And our conversations in the Texas legislature and the California legislature are very similar to that of Oklahoma. It’s the same story, and it seems to be resonating very well.

Awesome. Thanks Jeff. Thanks Dave.

Thanks, Brian.

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Hi there. You’ve got Kieran Ryan on for Pito. Thanks for taking the question. So looking at PDS this quarter, I think volumes came in about where you expected them and then obviously some nice acceleration on rates. Looking at the gross margin there as the year progresses and you think about these other rate increases coming through, do you think 1Q is a fair kind of baseline to use for the rest of the year at this point? Or is it still a little too volatile out there to make that call this early?

Yes. First of all, it’s a very thoughtful question. And I think the thing that we’ve really kept focusing on is driving rate to then pass-through wage, just like Brian’s question. And so I think as you think about a 28% gross margin up in Q1, we’ll be in that range as we push forward. We make it a temporary point where we get more rate than wage pass-through, but that’s a timing issue. Our goal is to get these rates to the caregivers and move volumes and overall revenue. In the process, I think, Kieran, what you’ll see is us be in or around that 28%. Getting back to 30%, where we were a couple of years ago, is probably not in the game. Could we touch 28.5%? Absolutely. But I think it’s more of a timing thing that, as to your point, as the rate comes through, we may get a little bump. But we’re aggressively pushing that rate through to the caregiver with the intent to really drive more volume, more shifts and really more missions.

Got it. That’s helpful. Thank you. And then just a quick follow-up. Could you quantify or maybe just speak a little more to how much of the overall PDS rate performance in 1Q came from steering more of that business to the preferred payers? Thank you.

Yes. I think in our prepared remarks, we talked about going into the year, 10% of our PDS volume was driven by preferred payers. By the – we started the year with seven preferred payers. We signed two more preferred payers in the quarter. So we’re at nine within our PDS segment. We moved 10% volume to 13% volume, so we had a nice bump. We’re excited to talk about Q2’s performance. We’ve already signed more agreements already effective in Q2. So we have a strong pipeline for Q2. Some of the preferred payers are smaller. So some of them, they’re not all at the same amount of volume, the same amount of covered member lives. So some of the preferred payers that we’ll sign won’t be as big as some of the current preferred payers we have on service. But as we think about the year playing out, 20% was an aggressive goal to be at by the end of the year. But I think you should think about 10% to 13%, in line with 13% to maybe 15% in Q2 and the back half of the year, we would be driving that to the high teens and probably ending the year right at about 18%, 19%, 20% of our business is now in the preferred payer. And you asked the right question. Yes, our preferred payers and our government wins are what’s driving the rate, right? So the reimbursement rate is being driven by this strategy. I’ll also say, as a follow-up, if you look at our wage rate, our wage rate is growing almost the same rate as our reimbursement rate is in PDS. So it’s proof that we’re pushing that rate through to the caregiver every day, and that’s our intention.

Thanks so much.

Thank you.

Our next question comes from A.J. Rice with Credit Suisse. Please proceed with your question.

Thanks. Hi everybody. I appreciate the comments about Oklahoma, Texas and California. I just want to make sure I understand. So your guidance that you have now, does that embed those rate increases from Texas and California? Is that part of the step-up in the back half? And I know those are big states for you, but any comment on the other – the rest of the market and what you’re seeing in terms of rate updates?

Thanks, A.J. Good morning. I’ll start with kind of the other, and then we’ll back into guidance. Yes, I think we’re very pleased with where we sit at this point in the year. I’ll say the next 60 days are probably the most important 60 days of the year as most state governments are in their kind of their final six to eight weeks push to putting through their annual budgets or buying budgets. But the known rate increases we have today are equal to or slightly ahead of our expectations going into the year and what we included in guidance. We did not include our guidance Oklahoma coming out at the place. Oklahoma did. And so I think as you think about Texas and California, again, our second half of the year guidance assumes that we do get some rate lift in those two states but not the ask that we have on hand in both of the legislatures in Texas and California. But I think we expected this to be a good year, A.J., in all things PDS rate, non-Medicare oriented. I think as we ultimately sit here in May, we sit in a very good place. And I’ll emphasize, we need to finish Texas and California. So those are the two most important outcomes for us over the next really 30 to 40 days as they come to a conclusion, finishing that exercise. We’ve been engaged with both legislatures and governor’s office now for pushing almost a year. It’s important for us to finish those two, not just for us but the entire industry, to ensure that both in Texas and California, we can meaningfully impact the families and get them out of children’s hospitals. Dave, you have comments about guidance?

Yes, I’d say that’s a fair statement, Jeff. And A.J., when you think about it, I mean, we do – we are expecting rate increases in both states. And it does – our guidance does incorporate, call it, mid- to high single-digit rate increases. As Jeff said, we think we’re pretty well positioned to achieve those, and we’re working collaboratively with the states on it. But – and there’s a lot of moving parts. Obviously, the guidance – things can come up and down, but I think mid- to high single digits for those states.

Okay. All right. Maybe my follow-up to ask you about the labor situation. I understand if you get the rate increases, you can get incremental caregivers. I wondered sort of within the sort of steady-state environment, is it getting any easier to recruit caregivers with the volatility around the economy in certain parts of the country? Are you seeing your turnover rate improve? Any updates on sort of a steady-state environment and what you’re seeing?

Yes. A.J., I think as we said in March, we felt a little bit of a pop out of the first – out of the holidays coming into 2023, both in Indeed and some of our large, large recruitment platforms. We saw more applicants, more people engaged. That’s really settled. I think in our steady state, we’re still in a slugfest. And it’s why we’re so committed to this preferred payer strategy, because I think long term, we’re going to continue to struggle with just inflation and eating up any current rate we have or steady-state rates. So I’d love to sit here and tell you, yes, the nurses are coming back, and they’re just – but no, I think we saw a little pop first part of the year. Our growth in our caregivers paid, our growth in our volumes, our growth in our hours is really around preferred payers and the states in which rate has been passed through. And so that’s our strategy. We’re sticking to it. We’re not just waiting around for nurses to show up. And we’ve got great social media ads, recruitment strategies, but the number one strategy is move rate, move volume, pass-through wage. And so I think that’s where you’ll see us focused not only in 2023, but in 2024 as well. And A.J., I can tell you from talking to numerous of our larger Medicaid MCO partners, they feel the improvement. They feel faster discharges. Less hospitalizations, less hospitalized days. And that’s – it’s almost a $5 to $1 savings to them. For every dollar they spend in PDN, they save between $5 and $6 in total health care costs, specifically from the acute care center. So we’re hearing our payer partners telling us it’s working. But I think you’ll continue to see Aveanna shift our caregiver capacity to those partners that want to partner with us long-term.

Okay. Thanks a lot.

Thank you, A.J.

[Operator Instructions] Our next question comes from Joanna Gajuk with Bank of America. Please proceed with your question.

Good morning. Thank you so much for the taking the question. So the first question, I think, in your 10-Q you talked about $6.6 million settlement money, I guess, you actually received in the quarter. So did that benefit your cash flow and adjusted EBITDA?

Joanna, can you clarify on the $6.6 million settlement?

Yes. It looks like it was a positive, like you received that money in the quarter, if I’m reading it correctly.

Overall, what I could tell you, Joanna, is that in the first quarter, we talked about a legal matter where we had some cash that was garnished from accounts in connection with a legal matter, and we posted in the pellet [ph] bond, and we were able to recover that cash of approximately $18 million before the end of the quarter, and then we substituted cash for letters of credit for about $18 million. So we had a positive outcome there while we pursue the appeal on that case. There was another case that we funded about $7 million to an escrow account subsequent to quarter end in connection with the sellers of the Epic transaction. But overall, from a legal perspective, we’re pleased with where we sit right now.

Yes. And Joanna, although it did have a positive impact to our cash flow in Q1, it had nothing – no impact on adjusted EBITDA. It did help our Q1 cash flow but not our adjusted EBITDA.

Okay. Because yes, that was my follow-up. I was just trying to clarify because cash flow was actually positive, right? And previously, you talked about positive cash flow, I guess, in second half. How should we think about the full year? Any kind of color you might give us how the cash flow will actually turn out for the full year?

Yes. I mean, Joanna, like we’ve disclosed, we had positive cash flow in Q1 related to a couple of onetime working capital items that were benefits to us. Our goals remain the same, which is to be – which is to drive positive operating cash flows in the second half of the year, whether it’s Q3 or Q4. That’s our goal, is to drive the business, execute on all the initiatives that we’ve been talking about and drive positive operating cash flow in the second half.

And Joanna, I think we would not be surprised if Q2 is slightly negative and even potentially Q3 is about slightly negative or breakeven, right? So some of those one-timers drove the Q1 positive cash flow that Dave talked about. But again, I think Dave said it well, our goal is to end this year as a positive cash flow company and start 2024 on that footing.

Our next question comes from Scott Fidel with Stephens Inc. Please proceed with your question.

Hi, thanks. Good morning. First question, I actually just was hoping to get just a little more of a clarification just on the first question on the proposed rule in the gross margin cap. I guess, Jeff, just to be specific here, is it more that you’re concerned about a precedent that could potentially lead to private duty nursing also having gross margin cap? Or is there – is the gross margin cap actually attributable to PDN? Just trying to sort of understand whether you think that if this rule did go into effect, whether that 28% gross margin would be secure longer term or whether there would be risk to that.

I think you’re reading it the right way, that as we read it and as our legal lawyers and lobbyists have read it, it does not pertain to private duty nursing, but it does create a precedent that would be unfounded in Medicaid today. And as we talked to many of our state governors, Medicaid offices, they don’t like the idea of this precedent, right, because they have a lot of their own oversight of the Medicaid program and a lot of oversight of the workforce in their state. So we’ve long been a supporter of driving minimum wage, encouraging minimum wage lifts. Many of our states have minimum wage movements in them already that we operate with. But it’s really the first part of your answer, Scott, is the precedent that it would set for all of health care services and all of health care is just – we think it’s just a dangerous precedent to be set. And again, I think our state legislatures and our partners in the industry all agree on that, especially when you disclude so many of the things that we have to do that are mandated by law like EVV and compliance and oversight. So yes, it is – as it’s written today, as we have viewed it and our lawyers have viewed it, it is not material to Aveanna and its co-propose, but we do think it’s a dangerous precedent to set in the industry.

Okay. Got it. So more of the concern around a slippery slope as compared to a direct impact. Okay. And then on – I appreciate that clarification. Then just a follow-up, yes, I don’t know if you guys are comfortable doing it, but just to the extent that 25% that’s from the three key states, would you be willing to break out what Texas and California are either independently or in aggregate just so we could ring-fence that? So I guess that’s sort of part one. And then part two would just be on the preferred providers as it relates to moving over to those partners, do we think about the financial benefits be more that you drive better volume there and you sort of are able to achieve that 28% plus gross margin? Or do you actually see a higher gross margin potential with those preferred partners? Thanks.

Great. Great question, Scott. Thank you. We’ll start with the preferred payers and kind of work backwards. The intent of the preferred payer relationship is not to drive more margin percentage, although temporarily, it does happen as we get incremental rate and are passing it through to the caregivers. We’ll temporarily get a bump in the margin percentage. What we’re really, really engaged in is more volume, both more patients because we’re getting more patients home from the hospitals, and we’ve seen that in our current nine preferred payers, but also just more hour staff. And that’s what the preferred payer wants. The payer wants us to staff all of the hours that are authorized, not most of them or some of them but all of them. And then the second part of it, Scott, is many of our preferred payers then have value-based bonus payments on a quarterly basis. And so we’re three quarters in now to earning value-based bonuses for reducing hospitalization both in days and cost as well as staffing more hours. And eventually, we think some of our payers will move us to really and admitting more patients. More volume of new patients will be in that as well. So three quarters in, we’re now comfortable and confident with what we can do to earn those bonuses. We’re earning bonuses. Those are in our results, both in Q4 and Q1. And it’s – to us, it’s getting more comfortable earning those bonuses and beginning to pass some of those through to the caregivers as well. So again, the long game here is being a partner, not a provider but being a partner, with the nation’s largest Medicaid MCOs and truly helping them bend the cost curve and improve patient satisfaction. To us long term, that aligns us with the best payers in America and ultimately drives more volume for Aveanna. Anything else on the preferred payer, Scott, before we switch back to your questions on California and Texas?

No, that was great, Jeff. Appreciate that. So yes, just back, I guess, on California and Texas. Thanks.

So we don’t disclose specifically the amount of volume or the amount of rate. But I think we’ve been clear. These are two of our three largest states that we operate in from a Medicaid standpoint. And so we are – we Aveanna are leading the charge in both states. We have – I think we mentioned on the last call, we have engaged a research group out of Washington, D.C. We did studies in both California and Texas on the value of what private duty nursing means to the overall health care spend. In California, it showed that we saved $6,000 a day for every day we can get a child out of a hospital. We save $6,000 by getting them home. In Texas, it showed a similar outcome, but it was $5,000 a day just because of the difference in rate economics in those two states. But both studies were crystal clear. The more a state invests in PDN, the more they save total net health care savings. And it’s material. It’s hundreds of millions of dollars. In some cases, in California, Texas, it’s pushing $1 billion a year in savings. And so that has resonated really, really, really well in both Austin and Sacramento with both Governor’s offices, Medicaid directors. And again, we’re partnering with our peer group. We’re partnering with the state associations. But it’s so meaningful to Aveanna that we’ve taken the leadership role in both states, and we believe we’re in a very good position today as that relates to our guidance. And I think we’ve been appropriately vague [ph] to say that we expect to get something in both states, but our back half of the year guidance does not include us getting double digit or certainly, I’ll use 20% or greater rate increases in either of both states. And so we see that as a great opportunity. And our next call is in August, and we see – obviously, we’ll know both outcomes by then. We see it’s a great opportunity in August to really readdress the back half of the year and also how we’re trending going in 2024 at that point.

Okay. Thank you.

Thanks, Scott.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Jeff Shaner for closing comments.

Thank you, Maria, and thank you, everyone, for joining our Q1 earnings call today. And again, thank you for your interest in our Aveanna story. We look forward to updating you on our progress at the end of Q2 in August. Thanks, and have a great day.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.