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

Good morning and welcome to Aveanna’s Third Quarter 2023 Earnings Call. This is Shannon Drake, the Company’s Chief Legal Officer and Corporate Secretary. With me today is Jeffrey 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 can 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 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 Securities and Exchange Commission. 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 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 2023 prior to 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 7.9% increase over the prior year period. Gross margin was $147.3 million or 30.8%, representing a 9.4% increase over the prior year period. And finally, adjusted EBITDA was $36.2 million, representing a 46.2% increase over the prior year period, primarily due to the improved payer 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 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 clinical 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, our caregivers…

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 top line, we saw revenues rise 7.9% over the prior year period to $478 million. We experienced revenue growth in all 3 operating divisions led by our private duty services, Medical Solutions and home health and hospice segments, which grew by 8.2%, 7.3% and 6.3% 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 payer rating environment as well as cost reduction efforts taking hold. And I’ll take you a deeper look into each of our segments. Starting with private duty services. Revenue for the quarter was approximately $385 million, an 8.2% increase and was driven by approximately 10.1 million hours of care, a volume increase of 4.5% over the prior year. While volumes have 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 signs of improvement in the labor markets. Q3 revenue per hour of $38.13 was up $1.29 or 3.7% 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 or 27.2%, a 3.6% increase from the prior year quarter. Our cost of revenue rate of $27.78 which is a 5.5% increase as compared to the prior year, represents the rate pressures we…

Now I will be conducting our question-and-answer session. [Operator Instructions]. Our first question today is coming from Brian Tanquilut from Jefferies. Your line is now live.

You have Taji [Ph] on for Brian. So my first question is going to be on the final home health ruling. Obviously, we saw the 80 basis point bump, which is a positive revision. Just curious how the team is currently thinking about that and the impact of the business and then also to -- obviously, we still have the temporary adjuster on the table. But just curious how you’re thinking about that. And you’ve made a lot of great strides in improving the episodic mix in the business as referenced on the call. So I guess how that informs the outlook for 2024?

Good morning, this is Jeff. Yes Taji, I’m going to step up, and I’ll start with kind of where you ended that question is how we think of early thoughts on 24 guidance. And I’ll go back to kind of the corporate company, right? We talked about 19 PDS state rate improvements. That’s a great year for us. It 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 PDS segment into 2024. I’ll add that you probably saw we had about 4.5% 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, helping more families. So really nice momentum moving out of 23 and 24 for our PDS segment. And then as you said, although home health and hospice is a much, much smaller segment to us, we certainly were pleased with the Hospira 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’ unwillingness to address the labor and inflationary environment over the last 3 to 4 years. We obviously appreciate the fact that the final rule was better than the proposed rule. But at the same day, as our peers have said, as the National Association from Home Care has gone on record, the home health industry is still facing much, much, much greater raising wages and inflation and the lack of recognition from that from the rate is disappointing. So -- at the end of the day, that’s not going to slow us down, Taji. 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 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’re strong, financially were strong, and we are disciplined to grow this business to the payers who are going to pay us on an episodic basis. So we’re excited about 24%. And although the home health rule, we still feel falls far short. We’re excited about the momentum that we carried in 2024.

Great. Really appreciate the commentary. And then I know we always have a commentary around we don’t have a demand problem. It’s really like labor. So just curious, I mean, it’s encouraging to hear that it’s improving, and we’ve been seeing the same thing in our data checks. Just curious, how should we be thinking about directionally not asking for any guidance, but how like wages -- wage inflation for next year? What’s the right assumption? And then obviously, I see based off the guidance, margins will be slightly north of 7%. Is that still a proper launching point for next year? Is there anything else that we may be contemplating outside of just the rate increases and initiatives you’re making on the rate side and then also too, just like inflationary cost, hopefully moderating?

That’s a great point. And I think we’ll -- our comments in the script were early. But yes, we like our peers, we’re starting to see improvement in the overall labor markets. And I would tell you, Taji, for the first time since COVID hit, Q3 acted like Q3 had acted for the last 20 years, pre-Covid, meaning we felt schools being out in the summer, we felt that our low 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 supply of caregivers looking for work. And so I’ll call it the last 8 to 10 weeks for us have been really nice both from a recruitment from a hiring perspective, but also just people, our current workers, specifically in the PDS segment wanting to work more hours, and we’ve had a really nice kind of 8 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 pre-2020. As we think about 2024, Taji, it relates to that, Matt talked about, we still gauge inflation, wage and rate by our spread per hour. And it was 10 35 and Q3. It will land somewhere in that 10 to 10 50 range in Q4. And we still feel like that’s the right measurement for how we should think about margins in the PDS segment -- we’ll 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 to us in the home health side of the business. And although 75% may be a bit strong to carry into ‘24, certainly, our goal is to be at or above 70% in the last part of that question, Matt, was about margin -- potential margin expansion.

Yes, Jeff. I think on the rate side, you said it really well with 2019 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 him. So that still have to play catch up to this as well. As we do get those rate increases, Taji, we will pass those wage benefits through and other benefits to our caregivers. And that’s to drive volumes and increase patient care most importantly as well. On kind of the SG&A front, our team has done a phenomenal job in 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. We’ll continue to look at our corporate infrastructure. We’ll continue to look at field infrastructure. and invest where it’s important so that we can drive our business, drive volumes, drive growth, but also provide great clinical and quality care to our patients. Thanks, Taji. Appreciate it.

Thank your next question today is coming from Peter Stringer from Deutsche Bank. Your line is now live.

You’ve got Benjamin Schaefer [Ph] on for Peter today. So just a quick question on the cash flows. I heard you guided to positive CFO for the full year, and it’s currently $26 million year-to-date got that correct. So where do you guys see it going in Q4? Thanks.

Hey Benjamin, good morning. Yes, so I think in Matt’s prepared remarks, he talked about we had some onetime benefits that did help us in Q3. Q3 would have been cash flow positive even without the onetime benefits. But some things like just how our biweekly payroll closes, it fell into an October date versus the September day, which was unusual. So, there’ll be a little bit of a swing from quarter-to-quarter. I think the most important part you’re 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 you’ll see that from us for the year. And more importantly or equity important, transitioning in 2024, Aveanna is now a positive generating cash flow company, which was an important milestone for us as a company. So we’re certainly, Matt talked about it. It’s a total team effort it takes growing the volume, the growing rates, it takes managing margin, also takes taking costs out of the company. And lastly, and really important collecting our cash. And I think it’s a total team effort of Aveanna to get where we are and to continue to drive through. So, I think you’ll find us to be pretty excited less about how Q4 impacts but more about how we think of the full year.

Yes, Jeff. I think that’s really, really what was said there. I mean the team’s success in driving our top line growth as well as being very disciplined on any type of spend as it really allowed some of those dollars to drop down to the bottom line for us on operating cash flow and free cash flow basis. Onetime items in Q3 that are a very moderate headwind in Q4 as well. But just wanted to be upfront about that to provide realistic expectations. But more importantly, we’re on the run rate for consistency of this and creating an organization that will be a positive operating cash flow company. I will lay shells on the beach. There’s a little bit of headwinds in Q1 with some of our TPL seasons that evolved and just some of our payroll taxes and 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.

That’s super helpful. And then one more quick one. We really like to see the leverage tick down a little bit this quarter. Can you give any color on maybe targets you have or where you see it going over the next few quarters? Thank you.

Yes, Ben, I mean, we’re really pleased. I mean dropping off Q3 last year was a really tough quarter for us and 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, a 46.2% increase year-over-year really helps that leverage profile. We -- we’re very cognizant of it around here every single day. I think you can hear that in our tone and our voice about cost and spend and getting back to where we know this organization can be. And by doing so, we’ll provide a whole lot more patient care as well. So we’re going to continue to work that down through some good old-fashioned organic growth, cost reduction efforts to decrease our leverage profile. Don’t want to get ahead of our skis 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 appreciate it guys. Congrats on the nice quarter. Thanks Ben. Appreciate you.

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Jeff for any further closing comments.

Thanks, Kevin, and thank you for joining us for our Q3 earnings call, and thank you for your continued interest in our Aveanna story. We look forward to updating you on our continued progress and 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 lines at this time, and have a wonderful day. We thank you for your participation today.