Greetings. Welcome to the Aveanna Healthcare Holdings, Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to your host, Shannon Drake. You may begin.

Thanks, Shumali. Good morning, everyone, and welcome to Aveanna’s second quarter 2023 earnings call. My name is Shannon Drake. I'm the company's Chief Legal Officer and Corporate Secretary. With me today is Jeff Shaner, our Chief Executive Officer; Matt Buckhalter, our Interim Chief Financial Officer; and Debbie Stewart, our Chief Accounting Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we 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 at www.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 second 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 second 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. Starting with some highlights for the quarter. Revenue was approximately $471.9 million, representing a 6.5% increase over the prior year period and a 1.2% sequential improvement. Gross margins was $155.3 million or 32.9%, which is essentially flat when compared to the comparable prior year period, but a 7.5% sequential improvement. And finally, adjusted EBITDA was $35.8 million, representing a 3.2% decrease when compared to the prior year period, primarily due to the costs associated with the current labor environment. However, a 25.6% sequential improvement reflecting the improved payer rating environment as well as cost reduction efforts taking hold. As we have previously discussed, the labor environment remains the primary challenge that we are aggressively addressing in 2023 and to see Aveanna resume the growth trajectory that we believe our company can achieve. As a reminder, we do not have a demand problem. 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 our previous quarter, our ability to recruit and retain the best…

Thanks, Jeff, and good morning. I will first talk about our second quarter financial results and liquidity, before providing additional details on our refreshed outlook for 2023. Starting with the top line, we saw revenues rise 6.5% over the prior year period to $471.9 million. We experienced revenue growth in both our Private Duty Services and Medical Solutions segments, which grew by 8.5% and 15.9%, respectively, while our home health Home Health & Hospice segment declined by 9.7% as compared to the prior year quarter. Consolidated adjusted EBITDA was $35.8 million, a 3.2% decrease as compared to the prior year, but a 25.6% sequential improvement 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 $378 million, an 8.5% increase and was driven by approximately 9.9 million hours of care, a volume increase of 2.7% 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 signs of improvement in our labor markets. Q2 revenue per hour of $38.28 was up $2.04 or 5.8% as compared to the prior year quarter. We expect to see continued improvements in 2023, as we execute on our rate increase initiatives, and we continue to be encouraged with our ability to hire and attract caregivers and address the market demand for our services while we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $111.5 million of gross margin or 29.5%, a 0.4% increase from the prior year quarter. Our cost of revenue rate of $26.98, which is a…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] We also ask everyone in the Q&A queue to please limit themselves to one question and one follow-up question to allow everyone to ask questions. [Operator Instructions] Our first question comes from the line of Joanna Gajuk with Bank of America. Please proceed with your question.

Hi. Thanks for taking my question. This is [Indiscernible] on for Joanna Gajuk. The first question we had was just about operating cash flow being negative this quarter. So I just wanted to get a sense for what your outlook was for the year? And if you still expect it to be negative in the third quarter or positive in the fourth?

Yeah. Good morning and thanks for joining us. As we said last quarter, we expected our second quarter to be slightly negative in our operating cash flow, and it was a negative $3 million. Our goal all year has been to reach positive operating cash flow by the end of the year. And I think everything that we know today tells us we're still on that trend. We'll have some certain one timing things that will play through Q3 and Q4, but we still feel very optimistic on reaching that positive operating cash flow and ultimately, heading into 2024 as a positive operating cash flow and free cash flow company, as we really move through 2024. Matt, anything you'd add to?

No, I think you said it well, Jeff. A couple of one-time working capital items this quarter results in that negative $3 million that we saw. But given our outlook of what we're looking at with continued rate improvements as well as our continued cost initiatives that we will continue to take. I think improvements in the business will continue. And from there, we should see positive operating cash flow going forward.

Okay. Perfect. Thank you. I just have one follow-up question or a separate question. On PDS volumes and how, I guess, the 10-Q listed that it was primarily attributable to growth in demand for non-clinical services. So what was the volume change year-over-year and quarter-over-quarter for these clinical services? And where do you expect the volumes to be for the rest of the year? Thank you.

Yeah. No, that's a great question. And yes, we saw a nice up-tick in some of our lower skills and some of our less nurse-driven businesses. I would tell you that, as we -- first of all, positive 2.7% year-over-year growth for us is a good thing, because it's been a couple of years since we've had positive growth in our PDS business. I'll take us back to our preferred payers, that at the end of the day, we see our preferred payer strategy working both in rate and beginning to work in volume. Obviously, we've made a strong commitment to shifting caregiver capacity to those payers that are leaning into us. Both in our PDS and I think you heard it in our Home Health & Hospice line of business as well that we're committing to those payers that are paying us, either on an episodic basis or an aligned preferred payer. But I think as we think of the back half of the year, we see continued progress in our PDS business, both in rate and volume. And we're just really proud of our PDS team that they have recovered well in 2023 from the COVID hang around. And I think we just see a clear path forward with our preferred payers to really driving the business forward. So we're really pleased with where we're sitting today. Thank you.

Thank you.

Our next question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Hi. Good morning. You've got Taji on for Brian. Thank you for taking my question. So my first one relates to the raised guidance, right? So just looking at revenue first, if we're looking at first half or second half, that implies a ramp down in the back half, but at the same time, we're hearing some strong momentum in PDS and your other segments. So maybe if you can just kind of talk through the moving pieces and what's informing the, I guess, ramp down in the back half? And then, on EBITDA as well, I know that you guys have kind of called out a couple of cost savings. But as we reconcile this with like the different margin profiles for PDS, HHH, and MS. Just curious if you can talk about the areas where you have more leverage to improve the margin profile across the three different segments, especially in PDS, I know that you guys said you expect that to normalize. But I think if I factor that into my model, I'm still getting to the lower end of the margin you guys had kind of loosely commented on. So, just we'll start there.

Awesome. Good morning Taji. That's a lot to unpack there, but we'll do our best. So, let's start with Q3. So, from a seasonality standpoint, and I would say from the first time since COVID hit, we see a seasonal impact of our Q3 business. So, pre-COVID Q3 for us was when schools are out, and both our PDN, our PDS business, schools being out is a little bit less volume for us. And we're experiencing that in Q3. So, we expect Q3 to be seasonally a little bit light on revenue, And ultimately, probably relatively in line with earnings as we think of Q2, maybe a little bit softer. And I think Matt in his prepared remarks kind of led you to what we think Q3 EBITDA will ultimately be. I think to the second half of your question, the back half of the year, the rate increases, majority of our rate increases were either effective July 1st or September or October 1st, both on the PDS as well as, obviously, the hospice rate increase coming. So, we will see a lift in -- I'll call it the back four months of the year, so I'll call it September, kind of through December, we'll see a nice volume lift in all three of our businesses as well as continued rate lift. So, I think where we sit today, Taji, it's still early in our transformation story. I think we use words like prudent, conservative on purpose that we understand that this guidance revision is prudent in nature. I think Matt ended his comments by saying if things play out the way we think they will, that we would plan to readdress guidance in our November earnings call as well. So, I would tell you you're not missing anything other than just keep in mind, Q3 is our seasonally low period. And I think everything we know today tells us that it will play out to be that way, both in our PDS business as well as our Home Health & Hospice business. It's our seasonal low point. Matt, anything you want to address on the cost side or the margin side?

No, I think Taji, it’s a great question altogether. I think there's improvements throughout all three business segments in there, and I'm going to say that's above gross margin and below that we're focusing on. And so I think as we continue to kind of dig into it and be transformational in nature and lean into technology in certain segments, but then also make sure that we're delivering the appropriate amount of care, the right amount of care with the right amount of overhead supporting it as well. We'll continue to be prudent in that one and all portions of our business. And I think that will lead to your a little bit of margin expansion as well.

Anything else Taji.

Yes. Just one more question for me, and I appreciate the detail on my first question. And then kind of getting to this conversation around labor, maybe you can provide a couple of KPIs as to how your labor force stands today in terms of recruitment, retention, turnover, things like that and how that's trended over the past year? And then one follow-up to that. I know you mentioned, Jeff, that if you -- it's not a demand issue, it's really capacity. So, if you had sufficient labor, how much more volume percentage-wise do you think you can field?

Great, Taji. I think we think of labor as a function of rate. And a lot of people try to drive us towards what's the inflation rate of caregivers on both the PDS as well as Home Health & Hospice. We just refused to think of it that way because we don't control inflation. We do control reimbursement rate. And we do control where -- what partners we ultimately put our lay our capacity with. And so it just brings us back to our preferred payer and government affairs strategy, which is, as we've been crystal clear with the last two quarters, our job is to drive appropriate reimbursement rates, both on the government affairs side and the and a preferred payer strategy, and in turn, invest those caregiver wages. And in those relationships, we're demonstrating we can grow the business and be a good business partner. The flip side though, that is true Taji -- in markets or payers who are not paying us above-market preferred rates, we're not seeing incremental hires. We're not seeing better staffing rates. And so it just drives us and I'll use Texas as the example we used in this call. It just drives us to align our capacity both current and the future with those payers that want to be long-term business partners of ours. And we talked in Texas 50% of our PDN volumes in Texas are now aligned with a preferred payer. We are aggressively driving that towards the end of the year to be 70% of our Texas PDN business to be aligned with a preferred payer because the only way we can truly live out -- the story that we tell, which is to improve clinical outcomes, lower total cost of care and just staff more hours, which our…

Thank you

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

HI, good morning, guys. So looking at guidance, can you help us quantify the headwinds and tailwinds on the rate increases versus your prior guidance. I believe that you're looking for mid- to high single-digit rate increases in California and Texas. It sounds like that's a headwind. They also got rate increases from others. So can you just help us, I guess, model sort of -- these moving parts between what was better versus worse versus your last guidance. And on Texas, do you assume that about 70% of those payers will be in the preferred network within guidance in Texas? Thanks. A – Jeff Shaner: Thanks, Pito. Good morning. I think -- let me start with clearly, we're disappointed that we were not included in the fiscal year 2023 California budget, because that was a big deal for us. I'm going to flip that to a positive though, Pito. We're the largest provider of PDN in the State of California. We've been in California for over a decade. We're going to be in California a decade from now. So we are committed to the long-term success of California. And we're going to get a rate increase for PDN in California. It's the right thing to do. We've made really nice inroads with both the legislature and the governor staff and we're going to continue to lead in to the governor and his key leadership as we move into 2024. I think as you think about the timing of California, which as we talked about going in the year, is a big mover for Aveanna. I think of it now in the back half of 2024 and potentially as late as January 1, 2025, that rate improvement. How it plays out in our 2023 guidance compared to the rate increases…

Yes. No, perfect. And then for sticking, I guess, on the same topic. And you get that every contract is different here. But because preferred networks are becoming an increasingly important sort of four-year growth engine, can you help quantify for us how much a preferred partner pace versus sort of a standard contract? And sticking with Texas, again, just because you brought up earlier, like you said in the script, that demand remains very high. And if you -- if these patients are not being treated, are they just being stuck in acute hospitals or what's happened with patients specifically in Texas today?

Yes. That's a fantastic question. And it goes back to -- we got studies to prove it, both in California and in Texas, and we've presented those studies to both the governor's offices as well as Medicaid department and many legislatures. PDN stays between $5,000 and $6,000 a day compared to acute care setting, right, holistic cost-to-cost. It takes time to kind of get that messaging through legislatures. It doesn't take time to get that through to MCOs. They absolutely understand that. And I'll use Texas to your question. Our MCO partners in Texas understand that they have to get these kids out of the hospitals and that some studies are suggesting that medical federal children are remaining in hospitals up to 54 days on average longer than they need to be there. So you just do the math, it's $200,000 or $300,000 per stay greater or slightly more. So yes, we feel our MCO partners understand that in the markets like Texas, where we have scale and size and true sophistication, we really are the market mover, right? So you need Aviana to partner with you from a nursing standpoint. And so again, we've gone into this wanting to be good long-term business partners with our payer partners. We don't want to flip partners, payer partners every quarter. Our goal was to align with partners over a multiyear period to really build sustainable relationships. The fact that we already had 50% of our volume in Texas with the MCO preferred payer, I think, demonstrates that we were already well aligned there. The fact that we only got a 2% rate increase effective September 1, was almost embarrassing from the taxes. So it just highlighted that, that pay preferred payer strategy was the path forward. And our MCO partners have graciously aligned. We talked about signing additional preferred payer. It was in Texas in July. And I think we'll sign one or two more by the end of the year and ultimately be somewhere around 70%. Lastly, Peter, you asked kind of what's the market difference? When we're earning our value-based payments, most of those are established on a quarterly basis, when we're earning not only the rate the higher market rate, but also the value-based payment. It's material in nature compared to the Medicaid right. So it's in the range of 25% to 30% greater than the Medicaid market rate. So it's important for us not only to have the preferred rate. It's also important for us to have value-based components so that the preferred payer sees that we're aligned with them long term. Hopefully, that was helpful.

Perfect. And just one super fast cash flow question. Just a follow-up to the previous question. You're negative in 3Q or positive in 4Q. Is the difference there simply this rate increases flowing through in the last four months of the year, or is there something else that we should be thinking about as you shift from cash flow negative into cash flow positive?

No. It's just a little bit of the volume. As you think about the business itself, Pete, we're a little bit light in volumes in Q3, primarily in the core businesses of home health and PDN. That ramps kind of back up September through the end of the year. And so if you file the revenue there in earnings, it's just -- it -- we expect Q4 to be a very, very strong quarter for us, and we expect to end the year on a great trajectory. But Q3 is just a little bit lighter for us. And that's how we've laid out the cash flow for Q3 and Q4.

Great. Thanks so much.

Thanks, Peter.

Our next question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Hey, thanks. I definitely appreciate the commentary about your preferred payer mix in Texas. I think for overall, you had noted that you were expecting preferred payers to account for 18% to 20% of nursing hours for the year. I'm wondering if this July contract in Texas gets you there? Are there still kind of wood to chop on that front? That's my first question.

Yeah. No, Ben. It's -- as we think of the year, right, we started the year at 10%. We were about 13% by the end of Q1. I think our actual number was 16.5% by the end of Q2. Yes, that one agreement we signed in both Q2 and the one we signed July is helpful. But no, we still have wood to chop. We will sign another three or four between now and the end of the year. I believe Matt may hedge on me a little bit, but I believe we'll comfortably be at that 20% by the end of the year. And then we'll reset -- will we set that goal for 2024 to continue to push that story. So we're not done. We're not stopping at 20%. And we want to continue to drive that to be the more and more meaningful part of our business. Matt, anything you add to it?

No, I think that's well said, Jeff. I mean, preferred payers are the answer for Aveanna, to answer for our caregivers and if they answers for our patients. Moving that to 20% and above is what we're focused on as an organization because it allows us to pay that higher wage rate to our caregivers, which allows us to drive more volume and provide more clinical care for them. So as we kind of check the box on that 18% to 20% in the back half of the year and say that's where we're going to be, we'll set a new goal for 2024 as well and continue to push forward.

Thank you. And just a follow-up on one of your prepared comments. You mentioned for Texas and California that they plan to include you in state budget next year. How much visibility does that realistically give you? Is that something that, kind of, the negotiation process just starts all over, or is there kind of a real indication that those double-digit -- that those double-digit increases will be realistically considered next year?

That's a right question, Matt. Let me separate the two. Texas is a biannual, let's say, process. So Texas is done for the next two years. And our strategy in Texas is what we just talked about, working with the MCO. So we're not waiting on any rate increase in Texas. We're driving our own destiny. California, we are in active conversations continuing every day. We will spend time this fall with the governor and the governor's key leadership team as we continue to move forward the story. California is in every single year, right? So January reset another legislative process for us. And we're 15, 16 months in California now focused on this. You know, there's still plenty of wooden chopping using your words, plenty of wooden chopping in California. But Ben, I don't think of it as if, I just think of it as when and how long it will have taken us to tell our full story. We are an absolute total healthcare cost saver to California, and our studies show that. And I think that's resonated really well. We've gotten good feedback from the governor staff. And I think partnering with them this fall as they go into the 2024 legislative cycle is the best thing that we could do as both a company and an industry in California. It is the right thing to do. We need to be on the governor's key legislative initiatives to really see this rate increase through. As I said to Taj [ph] and Pito, that would be a late 2024. So as you think about when would that come to fruition the earliest would be July of 24, the more likely outcome would be probably one more of 25 as most rate initiatives or rate investments in California start on the first day of the following fiscal year. But you step back, Ben, as we talked in our prepared remarks, we've had a great year from a government affairs advocacy standpoint, 17 state rate increases, we got 33 states total. So 17 states, slightly better than we expected, certainly would have loved California to be on that list. But I think it sets up well for us as we -- as most of those rate increases will flow into 2024. And really, I'm kind of excited that California is kind of on that horizon, right? Because it gives us the next step. And as Matt reminded us, you know, at the end of the day, the only way we can pay the caregiver is the fair rate and to truly take patients home and fulfill our mission is to have an appropriate rate. And I feel confident that we'll see that through with California here over the next six months.

Anything else, Ben?

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Jeff Shaner for closing remarks.

Awesome. Thank you so much for joining our earnings call. And more probably, thank you for your interest in Aveanna story. We certainly look forward to updating you on our continued progress at the end of Q3 in November. Thank you, and have a great day.

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