Good morning, and welcome to Aveanna Healthcare Holdings Third Quarter 2022 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 would like to turn the call over to Shannon Drake, Aveanna’s Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Speaking on today's call are Rod Windley, Aveanna’s Executive Chairman; Tony Strange, Aveanna’s Chief Executive Officer and President; David Afshar, Aveanna’s Chief Financial Officer; and Jeff Shaner, Aveanna’s Chief Operating Officer. We issued our earnings press release and filed our 10-Q yesterday. These documents are available on the Investor Relations section of our website at www.aveanna.com as well as on the SEC's website at www.sec.gov. A replay of this call will be available until November 17, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 10, 2022. Today's call may contain forward-looking statements, which may be identified by the use of words such as plan, could and other similar words and expressions. All forward-looking statements made today are based on management's current beliefs and assumptions about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Except as required by federal securities laws, Aveanna will not publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events or changing circumstances. Also, we supplement our financial results reported in accordance with GAAP with certain non-GAAP financial measures. The reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and Form 10-Q, both of which are available on our website at the SEC's website at www.sec.gov or is otherwise available separately on our website. Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up so that we can accommodate as many callers as possible in the allotted time. With that, I will turn the call over to Aveanna's Chief Executive Officer, Tony Strange. Tony?

Thank you, Shannon, and good morning, everyone. We appreciate you investing your time to better understanding our results as well as the factors that are affecting our industry. On the call today, we'll update you on our third quarter results, we'll provide some insight into the labor markets and our ongoing efforts with payers to create additional capacity. And finally, we'll provide some insight into our expectations for Q4 as well as a preliminary look at 2023. As you've seen in our press release last night, our Q3 results clearly fall below our expectations with net revenues of $443 million and adjusted EBITDA of approximately $25 million. Despite the ongoing disruptions in the labor market, we're seeing progress in staffing specifically as it relates to our preferred payer relationships within PDS. We now have seven preferred payer relationships, all showing signs of growth compared to the two that we discussed on our last call. Additionally, our medical solutions business is benefiting from the market consolidation after two providers left the market in late Q2. Finally, both our private duty services and our medical solutions produced sequential volume growth in Q3, which is typically the lower quarter of the year, both posting their best results of the year. As referenced in the release, our biggest issues in the quarter were driven by Home Health and Hospice. Earlier this year, we consolidated four separate and unique operating systems into Homecare Homebase. In addition, we implemented Metalogix to provide predictive data analytics. Both will play a significant role in our ability to position Aveanna as a leader in value-based care. And while we're confident that these decisions are the right long-term strategy for the company, we can see a short-term effect within Home Health and Hospice in Q3. Our results were driven primarily…

Thank you, Tony. Our Aveanna leaders remain focused on the task at hand, bringing medically fragile pediatric, adult and geriatric patients home and staffing their cases with highly skilled caregivers. We continue to develop our preferred payer strategy and are actively shifting caregiver capacity to those payers that value our services. Aveanna preferred payers are identified as those payers that are willing to partner with Aveanna at value-based rates in return for preferred staffing, enhanced clinical outcomes and reduced unplanned hospitalizations. In our Private Duty Services segment, we have seven preferred payer agreements, up from two at the end of 2021. We continue to work on our robust payer pipeline to shift payers from a fee-for-service rate to a market premium rate, including value-based payment for performance as the long-term effects of the pandemic inflation and the nursing shortage settle in, we have become steadfast in our commitment to partner with those payers who value our services and outcomes. I look forward to continuing to update you in subsequent quarters on our progress with our preferred payer strategy. Now on to our Q3 operating indicators, starting with our Private Duty Services segment. We produced $355.6 million of revenue during the quarter. Revenue was driven by approximately 9.65 million hours of care, which was up slightly from Q2. While volumes did improve, we continue to be constrained by the turbulent labor markets, primarily driven by the shortage of nurses. We experienced improvement in our preferred payer volumes with select payers year-to-date organic growth rates reaching the high single digits. Although still early, these positive growth trends show us a path forward for our private duty services business. Our Q3 revenue per hour of $36.84 was up $0.49 sequentially from Q2 or 1.4%. We continue to experience rate improvements in the back…

Thanks, Jeff. Tony and Jeff provided color around our consolidated and segment results, and I'm sure topics such as cash collections, cash flow, liquidity and credit-related items are top of mind with our equity holders and lenders. So I'll jump right in with these items. With respect to cash collections, we had a great cash collections quarter, particularly within our HHH business. We collected $470 million of cash and reduced our overall receivables from $246 million at the end of the second quarter to $219 million at the end of the third quarter, which is about where we began the year. In addition to strong HHH collections, we also saw strong collections in our PDS businesses, including a number of successes on particularly aged accounts. I want to thank all our revenue cycle team members and operators in the field who contributed to our great cash collections in Q3. And while it was a great cash collections quarter, we did have a number of revenue-related items that affected the HHH business. As we've transitioned our HHH businesses into the Homecare Homebase system, we've been working down accounts receivable and multiple legacy systems from four different acquisitions. As Jeff mentioned, during the third quarter, we turned our HHH team's focus fully towards the HCHB system and away from legacy systems. As a result, we took additional allowances against legacy system receivables during the quarter. The incremental legacy system allowances are not something I expect to recur in the future. In addition, as we've integrated our operations into the HCHB system, we've encountered implementation and configuration challenges, which have impacted not only volumes, but also resulted in higher allowances against our HCHB revenues. We believe the configuration issues are now, I think, in the past. And as we further align our operations…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hi, good morning and thank you for taking my question. This is Taji on for Brian. So my first question has to do with the labor environment. Can you kind of provide some insights on what nurse recruitment looks like?

Taji, good morning. This is Jeff. And thanks for your question. It's difficult as a year as 2022 has been for us. I think you'll hear optimism in our voice over the last few months related to our – primarily our nursing, hiring and retention in our PDS segment in our Home Health and Hospice segment. What's been a very difficult year and really following a difficult 2021. So almost six quarters in a row of a very, very choppy environment. Over the last 90 days, we have finally seen some positive both hiring and retention metrics in our core nursing trends, specifically in our Private Duty Services segment. I think as both Tony and I pointed out, we really see the positive momentum directly related to our preferred payers, those payers that are partnering with us to be able to offer higher market reimbursement rates to us and ultimately, higher wage rates to our employees. So I think through our seven preferred partnerships we talked about in our PDS segment, we're finally seeing some movement, albeit it's very small at this point because the preferred payer relations touch a very small percentage of our PDS business. But I think it truly shows us a path forward with our nursing hires and retention.

Great. And then just...

Go ahead, I’m sorry.

Sorry, go ahead.

No, I was just going to say that to follow on what Jeff said. That Jeff and Mike and the whole government relations and payer relations team have really done an outstanding job in moving this idea of preferred payer relationships down the field. And I like our plan that these guys have developed related to government relations. And what Jeff just talked about is, I think from a macro perspective, I think what we're feeling is that when we adjust rate in such a way that we can pay clinicians market wages that we can move the ball in volume. We can hire people. People like our job. They like our mission. They want to come to work. We've just got to position ourselves in a way that we can pay them competitive wages. And if we can do that, we can get the nurses. And I think that's what Jeff just said. I think I'd take it a step further and just really brag on our team a little bit. I think the government relations team and the payer relations team have just done an outstanding job. And I can see a runway from here where we can get those nurses engaged. One of the things that we may begin sharing in 2023 is a number of caregivers that we're hiring. And that is a leading indicator for us as to where volume is going to go.

Great. Thank for that, Tony and Jeff. Just one follow-up question. Just thinking about admissions for Home Health and Hospice, you had mentioned that they're lower year-over-year, quarter-over-quarter. And I'm just curious, can you break out what percentage of that was from HCHB rollout versus lower demand that you're seeing or any other factors that contributed to that decline?

Yes. Maybe I'll answer it a little bit differently than you ask me. But at the end of the day, I think we saw – it's not a demand is. I'll start with that. It's not a demand issue. I think it's really just a focus issue. And by the way, I don't blame our lack of admissions on the summer on Homecare Homebase. It was just a distraction of moving four companies to one. And as you know, we've been heads down on the Homecare Homebase invitation for almost a year. It's been – this will be almost a year at the end of Q3. But the big movement was the last, I'll call it, the last five months ending really in September. And I think it's just a distraction both for the clinicians, for the branch teams, the sales teams, as you ultimately sunset the practices of four different companies and now have the operating standards and practices of Aveanna. Clearly, Homecare Homebase is an important support of that as is Metalogix as SHP and different tools we use, I think most importantly, our Home Health and Hospice division President Rob would tell you, we now have one company. We have one operating division, one focus. And it's just been two years, barely two years since we acquired our first company five points in Q4 of 2020. And so getting that team to now be on one set of – one focus, one strategy, one set of systems has been a big deal to us. And so I think at the end of day, we feel confident we've had great trends going into Q4. Obviously, Hurricane Ian hit us right in Southwest Florida. That was a pretty big part of our Florida business. But really proud of that Florida team. They bounce, Taji back from that event faster than we ever would have thought. They were back blown to go and within about three weeks. All employees accounted for all patients accounted for and really seeing that. I think as you're hearing from us, we're looking into Q1 to really get back to about 1,000 emissions a week. And to us, maintaining that episodic mix at north of 60% is a big deal, not lowering that and staying committed to that and getting back to 1,000 missions a week really gets us back to growing that business, and that's what our focus is. But thanks for your question.

Thank you.

Next question, Joanna Gajuk with Bank of America. Please go ahead.

Good morning. Thanks so much for taking the question. Maybe just first a follow-up on the Home Health and Hospice segment disruption. So the comment around rebounding to 54%, 56% revenue range. That was a comment about Q4. Is that correct?

That is correct, Joanna. That getting back just to our normalized quarter, we see that $54 million to $56 million, just getting back to normal business. We have a pretty clear lot of sight at this point into what Q4 will be in both that revenue run rate as well as gross margins normalizing back in that 45%, 46%, 47% is where we see Q4 directionally heading.

Because I guess when I was looking at Q2 revenue for that segment, it was closer to 60%. So it doesn't mean that there's something else that I guess. No, I think being low in the Q3, so it's like a lower, I guess, run rate? Or is there some more ramp-up, I guess, you expect asset before into Q1 of next year?

Yes. No. I think, Joanna, we talked about a little bit of the bleed over into Q4 from some of the additional reserve noise. And we see that tailing off in the quarter. Sequestration is fully baked into our run rate now, certainly from July forward. But no, I think we see this stabilizing back in that mid- to high 50s. If I jumped into 2023, our budget process is still working out, I'd be disappointed if our Q1 wasn't north of $60 million for Home Health and Hospice out of the gate. And so I think we can see ourselves back to being in the 60s and growing from there. But I think as some of these reserves bleeds off into Q4, we feel like we'll be in the high 50s.

And so Jeff, you said it well. Joanna the sequestration comment. If you recall, sequestration was phased in overtime in the last phase of sequestration being put back in or taken back out rather, is July 1. So we had the full impact of sequestration in Q3, and then we'll still be there in Q4.

Exactly. Thank you for the clarification there. And I guess a question here on the PDN segment, but which are the done relative to you well. So you're still talking about some labor shortages and whatnot, but at the same time, rate, I guess, you're still saying that even for next year, your comment around the EBITDA in the $140 million rate, does not assume any meaningful rate updates for these states. So can you give us any flavor for anything new in terms of progress of getting additional updates? Have there been specific have you received any rate increases in Q3? Or can you tell us the magnitude of things, how you're tracking? And also with that $140 million EBITDA, what PDN bill rate or average pricing you assume for next year?

Well, so that was a lot. And first of all, thank you for pointing that out. So you are correct. In the numbers that we've said for preliminary look at 2023, that number in the mid-140s of EBITDA did not include any material rate changes in any of our large states. What it does include is just the normalized cost of living updates that we have in many of our operating states. But it doesn't include any material change from a large state like maybe like the change we saw in Virginia this past year. As it relates to your question about Q3, from a legislative perspective, and Jeff made this in his comments that all of our states have put through whatever rate increases we're going to see in 2023, I mean, in 2022, those are all done. Now many states go through a legislative process every year to address rates some every other year. Obviously, we've talked about our large states being California, Florida, Texas, Colorado, Pennsylvania, and we'll be paying a lot of attention to all of those states during the legislative process to make sure that people understand what's going on within private duty and as well as the negative impact that's having on their overall Medicaid budget because these patients are sitting in hospitals in higher cost settings waiting to come home. And so we're going to – some of the – I talked about our government relations team, we were actually making additional investments into government relations in 2023 to go out and tell those stories. Now we will provide updates for that as we go through the year. We'll provide updates as they become public information as to what the process. Keep in mind that different states have different legislative cycles. Some cycles…

That's right. Thanks, Joanna.

[Operator Instructions] Your next question comes from Pito Chickering with Deutsche Bank. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. Just back on PDS labor sort of, I guess, rates are high note versus other parts of the business. What was the third quarter turn rate? How has that changed looking at 1Q versus 2Q? And then as you're hiring new nurses, what are the wages of new hires? And as they compare versus legacy people that they work for you?

Yes, Pito. I'm going to stick with the same theme of preferred payers. Because the momentum we're feeling in new nurse hires, also the slowdown of turnover of same-store nurses are really tying around our seven preferred payers, MCO payers and the states that have passed through material rate increases over the last, I'll call it, the last 18 months. That's where we – when we look market by market, state by state, we see the greatest improvement in both nurse hires and nurse retention and overall nurse employment. We – so that's the good news. The flip side of that is we still have markets that have not passed through, states have not passed through market increases that have kept up with the cost of living change over the last two years. Those are the states that Tony just talked about that were dialed in on 2023. So in one way or another, it's the haves and have-nots are starting to play through the business on the PDS side. And I think what makes us feel the optimism you're hearing is our MCO payers absolutely understand this. They understand the pressure. They understand the issue of children being backed up in the hospital. They understand the issue of low fill rates, and that's a problem for them, and they're wanting to partner with us. And I think that, that conversation we've been talking now for 18 months, it's playing better and better and better at the state legislative process as well. So we had a – what we can see – consider to be a very good legislative year in 2022. We're expecting 2023 to be even a better year. And probably more important, we're expecting to move the states in 2023 that didn't move in 2021 or 2022 on a material basis. And again, that gives us confidence in those markets where today we still can't be competitive in nurse wages in those specific markets on being able to raise wages and retain those nurses and hire new ones.

And Pito, we've talked about this openly in the past. If you look back a year ago, going back to your question about how we're paying nurses, if you look back a year ago, on average across different states, we were probably paying LPNs $22 to $24 an hour. In today's market, you've got to be in the high 20s to even upwards to $30 an hour to be competitive for that LPN because that LPN can now go to get a job at a hospital that they couldn't have gotten a year ago. So with that, that's the magnitude that we've got to move rates in order to be competitive and pay LPNs in that high 20s to $30 an hour. And in markets where Jeff and the team have negotiated great rates for people that recognize the value that we provide, we have been able to move those wages into those high 20s, and that's where we're seeing the growth come from. To Jeff's point, in states or payers that are lagging behind, until those rate changes that we're not going to be able to move that metric. Now I will point out in Jeff's comments, he made, I think you referenced $10.49 spread, which is right in the wheelhouse of where we expect them to be. If Jeff wanted to move volume in a hurry, he could take that spread number down to $8 or $9 an hour, and we could hire nurses at $28 an hour, and we can grow the business. However, we just give it all the way in margin. And once we give it away in margin, we'll never get it back. So sequentially, we've got to drive rate and then follow that with wage.

Okay. Fair enough. Because of all these really good rate caps you guys did, – just curious how we should think about interest costs for 2023? Should we just take the third quarter to annualize that? Like any color that you can give us there?

Yes, Pito, I think you'd see it bump up a little bit in Q4 as LIBOR rates continue to increase, but now that they're over 3% were essentially capped. So we'll see incremental interest costs in 2023 as compared to the Q3 run rate. But bear in mind that our – the payments that we receive under our swaps and caps will also increase. So you could – as you think about interest expense, think about the margin that we pay on our first and second lien and then think about the LIBOR component being capped at 3% if you wanted to forecast the net, call it, interest expense in 2023.

So is this the one when all said together, is this more the 130, 140 range? Is that the right level?

That's probably a fair estimate.

Okay. Fair enough. And then which leads to the next question from a free cash flow breakeven standpoint, what EBITDA do you -think that you have to achieve in order to get to free cash flow breakeven?

I think we'll make a lot of progress towards that in 2023. We expect our EBITDA to grow from where we are in 2022. I can't give you a specific estimate on what that would be because there's a lot of moving parts. But what I can say is that without $40 million in one-time usages of cash this year, including the social deferred social security payments. The growth in EBITDA, as I mentioned, in a lower M&A environment, we're going to have lower integration and systems-related costs. So we'll make significant progress in 2023 towards breakeven.

And sorry, go ahead.

Thank you.

And then last question for me here. Just you talked about a lot of volatility within Doctor’s choice because the rollout of Homecare Homebase and Metalogix. Just curious if you can give more details on what you saw specifically in Doctor’s choice. Thanks so much.

I just think at the end of the day, it was 4. So I'm going to step up a second and just say all four companies we acquired had four different operating practices. They were on three different systems or three different versions of systems. They all had different standards. They were different markets. The Florida market is very different than Minnesota, Iowa recover and Alabama. I think at the end of the day, each company had its own path inside of Aveanna and through Homecare Homebase. And for whatever reason, the Florida business was a little bit choppier in the process. We had a little bit more turnover and maybe just was a little bit slower to come around to be a part of the Aveanna family. And so we had a decent amount of leadership turnover there. And I think at the end of the day, I would tell you fast forwarding, Hurricane Ian showed us how great the Florida team is as part of Aveanna – they not only handle the hurricane event, but how they treated each other, how they got back to business, got back to treating their patients, I think, really showed us – they're part of the Aveanna family now. And so each integration takes on a different life of its own. That's the nature of the beast in M&A. And I would tell you sitting here today, all of us are on the table. Not one of us wouldn't have done the doctor storage integration. We should be in Florida. These are great markets, great Medicare markets. And long term, we're still very excited about being in that business in that state.

That's well said, Jeff. And I'll echo what you said about our employees down there. Those guys did an unbelievable job in responding and recovering from Hurricane Ian, and I'll echo what Jeff said as well, the Doctor’s Choice acquisition will be a great acquisition for us. And one of the things that we will benefit from the implementation of Homecare Homebase is – and I'm going to say this in a positive way, Homecare Homebase is a rigid system. And it forces you to do things right the first time every time. And I'll use an example, if you don't have the face-to-face requirement for a patient or you don't do the notification of admission process with them, there is a hard stop in the system and says, you've got to go do this right in order to move forward. And I think over – while it's been a little bit painful in Q3, I think over the long term, Homecare Homebase will make us a better company, giving us a disciplined infrastructure to build that business around. So I'm pretty excited about it going forward.

Thanks Pito.

Next question, Ben Hendrix with RBC. Please go ahead.

Thanks guys. I just want to follow up on your comments around the home health final rule and your comments about how the behavioral assumptions kind of negate the value-based efforts more broadly. I just wanted to know if your government relations folks have had conversations with CMS around this – and we're able to gauge the receptivity discussion argument. And then secondly, how the better-than-proposed rule impact momentum in the year-end with trying to stay some of these behavioral cuts over the intermediate term? Thanks.

I think the first questions were yes and then no. So yes, our folks, our teams are well engaged. Rod sits on the board of NOC as well. NOC is extremely engaged in this process. And I think share – we share the same position that NOC has that while we are very appreciative and we think CMS did the right thing in the short term, we're going to continue with the pressure going forward that we don't believe that the behavioral adjustment is warranted. As a matter of fact, to your question about my comment, CMS is actually trying to incentivize behavior through value-based pricing, they're incentivizing companies to do the right thing for the patient to help the patient get better, stay out of the hospital, get rehabilitated, return to activities of data living – and at the same time, when they cut those behavioral adjustments, they're basically taking away the incentive of the behavior they're trying to create. And so for those reasons, we believe that they really want to move the industry to a value-based pricing arrangement that they've got to leave enough dollars in there to incentivize companies to want to do the right things and provide more care if necessary. And that's the piece that we don't think the behavioral adjustment takes into account is that CMS is really trying to encourage doing more for patients, keeping them out of the hospital and then rewarding people for their outcomes. And that's why we don't think the behavioral adjustment is the right thing to be doing. And we'll continue these pressures in the years to come to make sure that we get the outcome we need.

Thank you.

Thanks Ben.

We've come to the end of the Q&A session. I would like to turn the floor over to Tony Strange for closing remarks.

Well, I just want to say thank you again for your interest in our business and joining our call. We look forward to updating you on our progress at the end of the year, and I look forward to catching up with everybody soon. Thank you.

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