Good morning, and welcome to Aveanna Healthcare Holdings' First Quarter 2024 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 Debbie Stewart, Aveanna's Chief Accounting Officer. Thank you. You may begin.

Good morning, and welcome to Aveanna's first quarter 2024 earnings call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeff Shaner, our Chief Executive Officer; and Matt Buckhalter, 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 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 when filed. With that, I will turn the call over to Aveanna's Chief Executive Officer, Jeff Shaner. Jeff?

Thank you, Debbie. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q1 2024 results and how we are moving Aveanna forward in 2024 and beyond. My initial comments will briefly highlight our first quarter along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payers to create additional capacity. I will then provide insight on how we are thinking about year two of our strategic transformation and our enhanced outlook for 2024 prior to turning the call over to Matt to provide further details in the quarter, and our refreshed outlook. In addition, I would like to take a moment and welcome Jerry Perchik, our new Chief Legal Officer to Aveanna. Jerry has spent the last two decades dedicated to high-quality healthcare in the home setting. Jerry brings a wealth of experience in regulatory and legal affairs, mergers and acquisitions and general corporate law. We feel blessed to have Jerry join our Aveanna team. Now moving to the highlights for the first quarter. Revenue for the first quarter was approximately $491 million, representing a 5.2% increase over the prior year period. First quarter adjusted EBITDA was $34.9 million, representing a 22.5% increase over the prior year period, primarily due to the improved payer rate environment as well as cost reduction efforts. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aveanna resume the growth trajectory that we believed our company could achieve. It is important to note that our industry does not have a demand problem. The demand for home and community-based care continues to be strong with both state and federal governments and managed…

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 2024. Starting with the top line. We saw revenues rise 5.2% over the prior year period to $491 million. We experienced revenue growth in two of our operating divisions, led by Private Duty Services and Medical Solutions segment, which grew by 5.9% and 9.9% compared to the prior year quarter. Consolidated gross margin was $145.9 million or approximately 30%, representing a 1% increase over the prior year period. Consolidated adjusted EBITDA was $34.9 million, a 22.5% increase as compared to the prior year reflecting the improved payer rating environment as well as cost reduction efforts taking hold. Now taking a deeper look into each of our segments. Starting with private duty services. Revenue for the quarter was approximately $395 million, a 5.9% increase and was driven by approximately 10.3 million hours of care, a volume increase of 4.9% 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 continuing to see signs of improvement in the labor markets. Q1 revenue per hour of $38.48 was up $0.36 or 1% as compared to the prior year quarter. 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 $100.1 million of gross margin or 25.4%, a 3.9% decrease from the prior year quarter, primarily driven by some timing-related items and overall strengthening of our PDS reserve. The cost of revenue rate of $28.73 in Q1 was influenced by payroll taxes. Despite…

[Operator Instructions] Our first question is from Ben Hendrix with RBC Capital Markets.

Thank you, guys. Congratulations on the quarter. I appreciate the new stats on your payer arrangements as a percentage of the overall managed care opportunity. I just wanted to get your thoughts on how you expect that to pace from the current 40% range. And then geographically, kind of how that's progressing and where the next opportunities are? I know you've made good progress in Texas. California is a little bit of a different environment. But kind of where is the low-hanging fruit? And how should we think about that pacing? Thanks.

Ben, good morning. Thanks for the question. Yes, I think, first of all, this indicator makes a lot more sense on the potential opportunity that we have out there with the states that have migrated away from pure Medicaid to Medicaid MCO states. And having 40% of our total volume, I think tells the reader that we're pretty far along in this process, right? We're a couple of years into this preferred payer strategy. Some of the largest payers in the larger states are in that -- in the first -- what we call the first 14 preferred payers at the end of last year. I think we've mentioned that before on calls. And I think 40 -- low 40s percentage points, we'll probably move quarter-by-quarter in very small increments from this point forward. It will take us landing numerous preferred payer agreements to kind of get the basis to move materially. If I looked out a year or two, Ben, do I think that this number could be over 50%. And I think the answer is yes, that we believe we'll get over 50% of our total volumes and continue to progress. But I wouldn't expect this to move by 5% or 10% per quarter. I would expect it to move in small increments of 1% or 2%. But I think if we use Q1 as an example, our team executed four additional preferred payer contracts in the first quarter. We're off to a nice start. Some of these are pretty small in volume, but are very important in the states that they're in. And I think we use California, to your point, as an example, the majority of California PDM patients are still on the traditional Medi-Cal fee for service, but we're able to partner with some of the whole child models and some of the MCOs that are in the state and as families move into those programs, we have preferred payer agreements with them. So that will help accelerate our volume in states like California that are still primarily a Medicaid product but I guess I'll close with, at the end of the day, you read it right, Ben, really nice continued momentum on the preferred payer strategy inside the PDS division. Really proud of how both the government affairs team and the preferred payer teams are working to execute our strategy and I think our momentum will continue in that as we think about '24 and '25.

Great. Thank you very much.

Thanks Ben.

Our next question is from Scott Fidel with Stephens.

Hi, thanks. Good morning. First question, just a two-parter just on the PDS in terms of some of the modeling. First, on the revenue rate. So it looks like that's been up around 1% year-over-year in each of the last two quarters. Just wondering whether that's a good run rate now for the balance of the year on the revenue rate or whether you do expect that to move higher at all and then just the second part would be on the gross margin in PDS. Matt had talked about some timing items, I guess, affecting in the first quarter as well as adding to the reserve, if you could maybe elaborate on that and then just talk about how you see gross margins for PDS tracking over the balance of the year.

Absolutely, Scott. Thank you. Yes, I think as you think about PDS rate, we did over 10 million hours per quarter at this point. So it takes a lot of new rate to lift the basis, I think Matt used the growth rate of PDS kind of in that 3% to 5%, both between volume and rate the last few quarters. Obviously, we're in the high end of that in the last, I don't know, last two, three quarters, which we're really proud of. I mean to talk about 5% volume and rate lift for our -- for $10 million a quarter is a huge accomplishment to our team. But, yes. I think you think of it generally correct that we'll be in the higher end of that 3% to 5% range volume is 3% to 4% of it, rate is 1% to 1.5% of it as we move forward. And ultimately, we think that will moderate back to more like more like 3% volume, 2% rate or 3.5% volume. But in the environment we're in today, we're kind of in that 4% volume, 1% rate, and that's probably the right way to think of it. Then on the cost side, Matt and I will give you kind of thoughts about our spread and how we think of Q2 and the rest of the year.

Yes, Scott. Q1 is a temporary headwind always with just higher payroll taxes that significantly impact us being a labor company. So that right off the bat. Had a little bit of headwind temporarily in nature with some of our reserves. And we did the right thing of increasing reserves to make sure that we're in a solid position kind of moving forward as well. Expect us to be in that $10 to $10.50 spread range in Q2 and Q3 and Q4, we're pretty confident and comfortable with where that's currently sitting in and probably will land there for the entire year as well.

I think it's fair to say, Scott, to Matt's comment, we'll -- our Q1 gross margin will be probably -- will most likely be the low for the quarter -- sorry, for the year, not the quarter, but for the year, and I think it's fair to expect us to be above 26% moving forward. I think Matt said it well. We'll be in that $10 million to $10.50 range even in Q2 as we move forward.

26%, 28% range as our go-forward range for PDS, good business. We're able to drive volume growth with that spread or with that gross margin as well. And so as we continue to win the preferred payer contracts have government affairs wins that come in. We'll continue to pass through those wage improvements to our caregivers. So you won't see expansion there from those rate increases necessarily, but more solidifying in it in a solid spot.

Okay. Got it. Then just my follow-up question. I just wanted to ask around operating cash flow and was negative in the first quarter, but you had guided for that. Maybe if you can help us walk through your thoughts on operating cash flow for the second quarter. And then I know you expect to be positive for the full year. Could you put a number around that in terms of a range and then last part on the operating cash flow will be. I'm not sure about necessarily this year, but if you continue to sort of normalize margins, how you guys are thinking about let's call it, over the next year or 2, maybe sort of settling out on what you think your EBITDA to cash flow conversion can look like. Thanks.

All right, Scott, I'm going to unpack this one. So let me stumble through and you come back and catch me up or...

I'll help you Matt if you need any of the pieces of that, I'm happy to help.

Appreciate it. So first off, great 2023 cash flow year. First year over $12 million of free cash flow for Aveanna, really proud of our teams and then being able to achieve it. We did have a little benefit of some timing items in 2023 that were a little bit of a headwind in 2024, specifically in Q1. Q1 was actually a pretty darn good quarter for us. We're expecting a more significant headwind there, but through some cash management through great operations, and through our adjustments are getting so much cleaner as well, we've been able to drop some of that cash flow through. Q2 will probably be a similar concept to Q1 as well just as we have some of our timing items come through, specifically related to when revenue is -- or when cash comes in from revenue. TPL season is always a headwind for us at the very beginning of the year that starts to subside in the back half of Q2 and really jumps up into Q3. So I would think about it sequentially, roughly the same in Q2, and this is all ballpark that we're talking about, but really starting to compound and get there in Q3, getting us back to being a positive free cash flow, operating cash flow company in 2024. As you think about the out years, our team has done such a great job, one with cash collections, two with operations but even just our EBITDA is such a healthier, cleaner EBITDA as well. I think a lot of that is starting to drop through. And you're seeing that play out through our cash flow, and we'll continue to see that. We do have some costs coming out this year. We are doing some items to remove cost out. So I'm not saying those are going to be zero going forward, but we're doing the things right now to be benefit in the long run for organization and will benefit us in 2024 and 2025.

And Scott, it's a great springboard to Matt's point, from operating cash flow to really your last point of question on really profitability and I think Matt laid out the last four, five quarters that we were committed to taking thoughtful cost out of the company as we scale the company. And I think you see that and you saw it at the end of '23, you see it in our Q1 results, you'll see it again in Q2 and moving forward. I may have gotten ahead of myself last earnings call when I said 10% by the end of the year, that was probably a bit aggressive. But I think you think of us on a march back to $200 million a year in EBITDA. And our goals are set on doing the right things to get there. And I think we've been in the 7% EBITDA -- adjusted EBITDA margins, we're approaching 8% as we speak. But the most -- I think the exciting part for us is we see that clear path over '24, '25 and '26 and really marching the company back to being a double-digit EBITDA company. And none of it's easy, it's all hard work and it's thoughtful work. I think Matt said it well. Our teams have embraced this idea being efficient and effective as we grow the company and we've moved, last year was Home Health & Hospice. This year, we're focused on our PDS division, continue to focus on corporate, both last year and this year. But we're -- we've taken a meaningful cost out of the company in '23. We're taking additional meaningful cost of the company in '24 and already thinking about 25%. So we're really excited about how that relates to both improved adjusted EBITDA margin, but also to your point, being a cash-generating company moving forward and kudos to our teams for all the work that they've done to get us there.

Thanks. Helpful to get those intermediate term of bogeys you just added in, so appreciate that.

Thank you.

Our next question is from Pito Chickering with Deutsche Bank.

Hi, good morning, guys, and thanks for taking my questions. On the preferred payer strategy, I guess what percent of all PDS volume today is handled by managed Medicaid versus Medicaid fee-for-service.

Pito, we don't necessarily give that metric on the volume standpoint. We do obviously give a breakout on the revenues. So you can kind of back into it a little bit on Matt's standpoint from it. Going back to that 40%, we're really proud of our teams for achieving that and I'll say our operations teams for providing that care and reaching out to our clinical teams for leaning into those patients. But obviously, our payer relations team is on top of it as well. You'll see that continue to grow, as Jeff stated earlier, organically, just as patients are coming out of the hospital and bringing into it, but also as we continue to sign new preferred payer agreements, we've got to go out there for '22 this year. We saw a nice jump up in Q1, and we'll continue to see that throughout the year. So that will add to it. I guess the only negative headwind to it wouldn't be on a volume standpoint. It'll actually be a positive because it would give us more opportunity if that states continue to migrate on a Medicaid system over to an MCO. We'll work our best to see if we can get out in front of some of those conversations on those MCO payers, but I guess that could actually bring it down temporarily in nature, but open up the population for us to even drive that and have meaningful conversations as well.

Yes. And Pito, I guess, think of the 40 -- so separate the two, government affairs, primarily still focused on moving Medicaid fee-for-service rates, take Oklahoma last year. Obviously, we shifted our focus this year to specifically Georgia, Massachusetts and California. Think of those three primarily still government affairs oriented and then go back to that 40% indicator, that's our preferred payer strategy team, right? That is 40% of the total opportunity for us to execute on MCO payer partners and national commercial partners on the Medicaid space. So think of us almost halfway there from a total opportunity standpoint on a preferred payer strategy. But I don't -- Matt said, I don't want to take away from in Georgia, we still have a government affairs strategy in Massachusetts. We sold a government affairs strategy. We talked about last year, Oklahoma and other states like that. So we're doing both. And I'm proud to say we're winning more than we're losing on both sides of that equation. Our work is never done. California is a perfect example to remind us all our work is never done. We need to move the PDN right in California long term, just to help the families be able to get their children home and keep their children's homes.

Okay. So just as for half way there if we take a 5-year plus view here. If you move 100% of your managed Medicaid into a preferred, that would be about 80% of our volumes are handled by managed Medicaid and 20% are handled by Medicare fee-for-services. Is that a ballpark number?

That's probably a bit strong. There's still some large states that are still -- I'll use two examples. California and Colorado are still primarily fee-for-service states and both are very different. But I think Matt said it well. Over time, Pito, most states are -- as you already know, most states are moving to an MCO strategy. So I think in our lifetime here, the last seven years and the next five years, the majority of the states through the PDM product, will move to a Medicaid MCO. Now as we've learned with states like Texas, it takes three or four years. I mean it's a very thoughtful process. So it's not a fast flip. It's a very thoughtful process because of the fragility of our patient population. But think of us having great opportunity on both sides, different customers that we're selling to and talking to, but both the government affairs and the preferred payer strategy, both can work depending on what the state is.

Okay. Fair enough. And then just looking at that sort of 40% number, I mean, that's extraordinary and what an accomplishment for you guys. I guess, as you look at your hourly growth is pretty strong in the quarter, and obviously, you just comped to the year, but still pretty strong hourly growth rate. Any color on actually how much you're growing organically in the provider in the preferred provider networks versus everyone else? Is there a -- is there a structurally different ROE growth rate between those two?

There really is, Pito. And I'll relate it back to like hiring the actual nurse. It is still the haves and have nots, right? So the good news is over the last two years, we've eliminated a number of -- we've reduced the number of states and payers that we work with who don't have acceptable rates to higher nurses, right? So we've either stopped working with those payers and shifted our capacity and time attention to the payers who are willing to engage with us, or we've taken the states who had very low rates, and we've eliminated that by increasing the rate significantly. Again, primary focus this year, Georgia, Massachusetts and California because we need to move those rates. Those are still Medicaid rates that really are not attractive from a reimbursement to be able to hire RNs or LPNs but yes, if you saw within the business or if you said to one of our operators, non-preferred payers, how much volume are you generating? In most cases, the answer would be negative. That in a non-preferred payer, we're not even flat, we're moving backwards and it's not on accident. It is we are shifting our caregiver capacity. We're putting all of our recruitment efforts in said market like Texas to our payer partners. And honestly, Pito, it's what they're paying us to do. I mean, they're giving us accelerated rates and value-based agreements with the intent that we're going to live through with that and give them our nurses and give them our capacity. So it's your opportunity. Pito, I can't believe you didn't touch on Home Health and Home Health gross margins and how proud you are of our team.

Just to throw it out well, there's so much to unpack here I guess. I guess going forward, just because sticking to PDS for one second. So because it's such a huge strategy for you guys. Can you guys begin disclosing what the organic growth rate is on preferred just so as we look at our excel models, we actually help sort of model this as team is going forward. And then to point on Home Health, obviously, we saw strong episodic growth. Obviously, we commission as you're sort of shifting away. I guess, is this the right gross margin level that you should think about going forward? Or -- and as you roll into the back half of the year as we move past payroll taxes, are we actually expanding gross margins from these levels of 53%?

So I think as Matt laid it out, 53% was a little hot for us and was helped by some onetime items. We think of it more in the 49% to 51%. I think based on where we are and the strength we've had with our episodic percentage being well north of 70%, we're probably a 50% plus gross margin business in Home Health & Hospice for the majority of this year. And as you know, that's 18 months of work by our Home Health & Hospice leadership team to get there. I think the thing that we're most proud of in that is now we have finally overlapped our comps to where we're actually generating positive -- generating a positive year-over-year and sequential growth. Now Q1 is our season. We have a decent Florida business. So Q1 is a better season for us in our Florida business. But being at that 1.7% positive growth, it's the first time we had positive episodic year-over-year comps in almost three years. And I think our team is really set on the fact that they can generate somewhere between 1% and 3% organic growth moving forward at a roughly 50% gross margin. You know the industry well. It's tough days in home health right now. The fact that we're able to do this is just an incredible amount of diligence by our team. So we're excited about that. And honestly, as we look forward, we think the AMS business will start to show similar trends as the Home Health & Hospice division has been as we continue to implement our preferred payer strategy throughout Medical Solutions. But yes, we'll be in that 49% to 51% gross margin and I believe will be a positive year-over-year growth of total episodes from this point forward for the rest of the year.

Awesome. And then one last super quick question, just a follow-up on Scott's question on cash flow from ops. You said 2Q be negative, back half, you'd be positive, getting positive cash flow from ops. Should we be modeling $24 million cash flow from ops in the same range as last year. Is that a good ballpark range? Or just any color on how we should be modeling that? Thanks so much.

Yes, Pito. I think I would I would hinder that a little bit. I would say, take it back a little bit. We had a really good year last year, but as I mentioned, we benefited from some timing-related items that came through. So I would just say, hey, positive is a good year for us on top of this one, if we're a little bit north of that, awesome. But really in 2025 is when you see the big jump up. It's really to the diligence of our teams of just good clean operations and growing our business organically.

Thanks guys.

Thanks Pito.

Our next question is from Brian Tanquilut with Jefferies.

Good morning. You've got Taji on for Brian. Thanks for taking my question. So looking at the margins, I know that you guys have provided some really great detail on the gross margin. But thinking about the OpEx in the business, obviously, even with gross margin stepping down sequentially, you were able to extract a good amount of cost out of the P&L. Just curious, is that the right jumping point that we should be thinking about for this year? How much more juice is there to squeeze within that line item?

Yes. I'm going to start with kind of the sequential part of it. As we talked Taji, the last three or four quarters, this was an absolute focus of ours knowing that gross margin is very hard to move in this business, that being effective and efficient was key to us. I think the best part of the story is we talked -- we really focused the last 15 months on Home Health & Hospice and corporate. We've pivoted this year to focusing on our largest business unit, which is Private Duty Services. We're being thoughtful about it, right, because we have a very large PDS business. But I think as you think probably more importantly about '25, million, we see the opportunity to continue to be efficient and effective in our business. Matt, do you want to touch just on the quarterly run rate?

Yes. And just on gross margin stuff, Q1 is a compressed gross margins as being that labor business, Taji, that we talked about, and state taxes are significant for us. We see a sequential jump up just immediately as those roll off into Q2. And then as well as we continue to focus on this and take meaningful cost out of OpEx, but also do the right thing on the gross margin line and making sure that we're paying people the appropriate amount of money and being very diligent in there. I think you'll see it expand throughout the year. Q1 historically, as I said, our lowest quarter out of the entire year on a GM basis. But Q2, Q3 and Q4, I think you'll see minimal sequential step-up.

Great. That's really helpful. And then just back to the commentary on California. I know you guys had expressed disappointment by not being included in the rate budget. But obviously, you're still taking this enhanced effort towards driving rate increases, the two-pronged rate increases. But thinking about the state budget itself, right, and your continued efforts to try and get rate increases. Maybe can you just talk about your learnings from prior efforts and how you're incorporating this into your continued efforts towards getting included in state budget? And I know there's some moving pieces that are out of your control, right, like deficit, et cetera. But just curious to hear your learnings and how you're going to take this revitalized approach to portraying your value prop and the need for rate increases within your business essentially.

Yes. It's a very thoughtful question, Taji, and thank you. We're 2-plus years straight of working on California and needing -- knowing that we needed to lift the rate and again, we represent the families of the complex medical children in the state. So it's less about Aveanna. It's more about how do we help the families. And I think we've learned in California that even a great story and a difficult budget time is difficult to get through, right? And so the governor has been very open to understanding our plight and the plight of our families. Dr. Vale, who runs HHS has been very open. But they've also been very open for the fact that they're in a significant deficit situation, and it's difficult to optically pass through a meaningful rate increase while you're cutting many, many, many other programs. And I think we just got caught up in that kind of prop wash. I know this for us, it's not an if, it's a win, meaning as the largest provider of PDN services in state of California, we have to just keep fighting the good fight. And to your point, learned from what worked and what maybe didn't work and refine our efforts. We continue to partner with both the current governor's team, Dr. [Ghaly] and many legislatures with our peers and the families we're not expecting to be in this year's budget. The May revised budget is due out any time now probably in the next two weeks. We're not expecting PDN to be in that. I think it's highly unlikely we'll be in the final budget. There's just not the appetite for rate improvements. We asked for a 40%. We were not asking for 2% or 3% rate increase, we're asking for 40%. And 40%…

Great. Thank you.

Thank you, Taji.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jeff Shaner for closing remarks.

Thank you, David, and thank you, everyone, for your interest in our Aveanna story. We look forward to updating you on our continued progress at the end of Q2. With that, have a great day.

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