Good morning, and welcome to the Aveanna Healthcare Holdings Third 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 third 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, aviana.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 Q3, 2024 results and how we are moving Aveanna forward in 2024 and beyond. My initial comments will briefly highlight our third quarter, along with 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 into the quarter and our outlook. Let's move to highlights for the third quarter. Revenue for the third quarter was approximately $509 million, representing a 6.5% increase over the prior year period. Third quarter adjusted EBITDA was $47.8 million, representing a 32.2% 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 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 care organizations asking for solutions that can create more capacity. Our Q3 results highlight that we continue to align our objectives with those of our preferred payers and government partners. By focusing our clinical capacity on our preferred payers, we achieved solid year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our…

Thank you, 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 2024. Starting with the top line, we saw revenues rise 6.5% over the prior year period to $509 million. We achieved year-over-year revenue growth in all three of our operating divisions led by our Private Duty Services, Medical Solutions, and Home Health & Hospice segments which grew by 6.4%, 12.6%, and 2.2% respectively compared to the prior year quarter. Consolidated gross margin was $159.7 million or 31.4%. Consolidated adjusted EBITDA was $47.8 million, a 32.2% 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 at each of our segments, starting with Private Duty Services. Revenue for the quarter was approximately $409 million, a 6.4% increase and was driven by approximately 10.5 million hours of care, a volume increase of 3.8% over the prior year. While core 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. Q3 revenue per hour of $39.10 was up $0.97 or 2.6% 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 $109.8 million of gross margin or 26.8%. The cost of revenue rate of $28.62 in Q3 was down slightly from Q2. Despite ongoing wage pressures in the labor markets, our Q3 spread per hour was $10.48. We expect spread per hour to…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Great. Thank you very much. Congratulations on the quarter, guys. Just a couple of questions on the home health side. Just wanted to know what inning we are in, in terms of your progress with your preferred payer relationships in that segment. And clearly, that's kind of garnering strong episodic volume recovery there. Just wanted to see what your outlook is for kind of long-term episodic growth as we move forward, given those relationships you've made? Thanks.

Awesome. Ben, great question. Yes, I think as Matt and I both said in the prepared remarks, especially as we start to focus on our Medical Solutions business, we believe really our preferred payer strategy in Home Health and Hospice and in PDS is really -- I'd say, is in the back half of those innings, seventh, eighth inning, but we feel it's fully baked into our business at this point, and now it's really growing those relationships. Specifically to your question on home health, we're really not trying to drive the business past the 75%, 76% episodic mix. We think that's probably running a little bit hot. We'd like to be, as we've said, kind of between that 70% and 75%. We were proud of our 1% organic year-over-year growth, as that was the first time we've had both organic growth in revenue and in volume growth in home health year-over-year on a comp basis. So it's been a long time coming. Yes, I think as we said before, we expect the Home Health business and Hospice business to kind of land in that 3%, 3-plus percent growth rate. And we think we're there now. We think we've got the right infrastructure. We've got the right clinical capacity. We are entering season as our Florida business kicks in. I will say, like our peers, we did have a disruption at the end of September, first two weeks of October with the double hurricanes that kind of -- we've got a decent amount of business up through Florida and through the Carolinas and Georgia. So, a little bit of disruption in that first month of the quarter, but back to business. The last few weeks have been great for both Home Health and PDS, and we're really just focused on our business. So landing in that kind of 3-plus percent growth rate for our Home Health and Hospice business organically, I think, is where we think we can land.

Great. Thank you very much. Just as a follow-up. Any observations, thoughts about the final Home Health rules? It feels like more of the same in terms of kicking the can on that budget neutrality assumption. Just wanted to get your take.

Yes. No, it's a great question. I'll comment on both Home Health and Hospice. Obviously, continued support of the hospice benefit, which we think makes a ton of sense. We, like our peers, are very disappointed in -- not surprised, but disappointed in CMS's continued failure to really address the temporary and long-term hang around or hangover if you will of the PGM off a clawback. With our model though Ben, I think we're uniquely different in the industry and that is we have found a way to be successful under the current reimbursement structure. So as disappointed as we are with CMS although not surprised that they didn't do anything in the election year. we have found a way to be successful in this business and we're going to continue to be successful at this rate. This rate was slightly positive to us. So it's above 0% between 0% and 1% which is -- it doesn't keep up with inflation, but our model we have found a way to be successful and we can thrive under this reimbursement model today for Home Health. Thanks, ben.

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

Hey good morning guys. So I know that you aren't giving guidance at this point. But looking at 2025, can you help us go over the heads and tailwinds specifically on the pricing increases for next year for new increases that you guys know about as you comp out rate increases seen this year? And then views on the labor market for next year? You talked about how that's improving. And then also how the preferred payer networks can grow in all three business segments now and how that can potentially provide benefits for pricing for next year?

Got it. That was a lot Pito but thank you. All right. So I think I'd start with just a general comment of part of what was fueling Q3's Private Duty Services growth was really the rate increases specifically in Georgia and Massachusetts. But the other 10 rate increases that were included with that. Q3's growth rate I think we were very pleased with that. And I use that as a basis because as you know Pito when we get the rate wins we can solve the problem. We can get the kids out of the hospital, we can staff more cases i.e. California right? So I keep coming back to California that many states have now shown the success tracker that we want to implement in California or continue to implement in California. So I say that to just keep pushing California that they've got to do the right thing and we got to get them to do the right thing. With that said we have a nice momentum of rate just like we did coming out of '23 and '24. We have a really nice rate lift both through our Home Health & Hospice business, as well through our PDS business that will help continue to drive both rate momentum, but also help underpin our growth rates for both PDS and Home Health & Hospice. Both Matt and I took time to focus on Medical Solutions in this call. We are going to spend the next three or four quarters implementing the exact same preferred payer strategy that we've implemented in Home Health & Hospice and in Private Duty Services in our Medical Solutions business. The team is already working on it. So we expect a little bit of choppiness through the volume side of that business probably in Q4 Q1 Q2 as margins improve both at the gross margins and bottom line margins for the Med Solutions business. So I think I'd say without stamping 2025 there's no big negative issue staring us down in 2025. We were not expecting California in 2025. So good momentum going in and we're going to keep our heads down, keep operating the business and keep driving positive results. Matt would you add to that?

Yes. No I think you said it really well Jeff. The 12 state rate increases on top of our continued preferred payer execution has really driven our volume and driven our clinical care this year. I see that momentum continue into next year. There's still a lot of opportunity for us to move forward and move specific rates. California one of those that we keep talking about. But there's others out there where we really need to move the needle or move a specific area for our patients to allow us to get better care. Obviously Pito you know the economics. The research demonstrates that we save $5000 to $6000 per day compared to acute care stay. Addressing the labor markets itself we're continuing to see that softening. I'd say that little bit of softening in the market, I really attribute that to our hiring success to us being able to drive rates. Those preferred payers are seeing it. They understand the economic benefits. The states are seeing it as well. So as we continue to move rate that allows us to push caregiver wages up and improve volumes and improve our patient care.

There's a lot to unpack there Pito.

Yes. Sorry for that. Looking at your '24 guidance commentary on revenues and EBITDA, it implies a big sequential decrease of margins in 4Q. Historically, we don't see that. To Ben's question, can you quantify the impact of hurricanes or just something else that could lead to sequential decrease of margins from 3Q to 4Q? Or is this potentially just some more conservatism from you and your team? Thank you.

No, I think you've come to know us pretty well Pito on how we operate as an organization and we like to be really rock solid and leave opportunity for us to be in front of it a little bit. Q3 did benefit from a little bit of one-timing-related items in our Medical Solutions segment. You see that with that 45.6% gross margin. That should be in that 43% to 44%. So you get back into the math and say, all right, there's a dollar amount associated with that one. And then honestly, we're really proud about our year-to-date results. The teams continue to execute in all three of our operating divisions, all three of them being positive year-over-year revenue growth. Jeff did mention in his script or in the answer here that there's a little bit of impact from that hurricane that's going to go through and hit our Southeast business. The good news is that we rebound very quickly. Our patients need care. They're highly acute. So we do rebound quickly. But that couple of week interruption does have some impact to us. That's the reason you're seeing that tick down into Q4 but I think we'll rebound nicely into Q1 and continue that momentum into 2025.

And I think Pito, I think to Matt's point as well, Q3 was probably a little bit hotter than we – in a good way. Profitability is probably a little bit above what we thought and we were expecting. And Q4 will come in on a normalized basis. I think to your point we will continue to beat and raise as we think of Q4 and feel very confident for how we end the year and ramp into 2025.

Great. Thanks so much.

Thanks, Pito.

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

Hey, good morning, guys. Congrats on the quarter. Maybe just first question free cash flow generation was strong in Q3. So just curious how you're thinking about the sustainability of that or if there's anything that we need to be thinking about in terms of what went into that cash flow strength.

Great question, Brian. Really proud of it as well. We're pleased with our current year-to-date free cash flow and its performance and where it's currently sitting through Q3. Q3 is our seasonally high period. If you go back and look at last year you can see where it upticks into Q3 as well. So a lot of that DSO and the delayed billing comes through in Q3. So a little bit of net working capital changes. I will say that our teams over-performed as well and that's throughout our RCM operations payer relations teams did a phenomenal job of bringing in cash in Q3 as well. We will continue to be a positive free cash flow company for all of 2024. I think Q4 last year was slightly negative at $45 million. That's probably not unreasonable to think how our Q4 lands plus or minus a few million dollars. But overall pleased with our performance, pleased with the team coming out on top of it and really happy to be a positive 2024 free cash flow generating company.

That makes sense. And then as I think about maybe asking Pito's question a little differently. On PDS gross margins at 26.8% in Q3 is that the right way to be modeling 2025 at this point? Or how should we be thinking about that number?

Yes. And let me start with the top and then we'll bring it back – Matt will bring it back Brian to really ask the question. I think the key thesis here is every time we win rate our commitment to both the governor, the legislature or the payer is we're pushing the rate through to drive to fill more shifts to get more kids home and ultimately to hire more nurses and engage more nurses. So we are taking an absolute focus to not just winning the rate but to pushing it through. And I use Georgia as a great example. Governor Kemp, really stood firm and made his words "A historic investment into home-based nursing" and what he meant was private duty nursing for the state of Georgia this year. And it's crucial for us to be able to go back to him and the rest of the legislature and show him that we have passed the majority of that through to the nurses. We can feel that volume. You can see that volume in Q3. You'll see it in Q4. It's lifting our volume because of the historic nature of the investment they made. Matt, as we think about the actual margin profile how do you think about that?

Yes Brian, and I always go back to the spread per hour being the end all be all there for us. That $10.00 to $10.50 range obviously, we know Q1 has some seasonality to it so it's going to be significantly below that but play catchup for the full year on how we view it. And it goes back to you might continue to see some margin compression that happens. But if we continue to stay in that $10.00 to $10.50 spread per hour range that's right where we want to be. And that's doing exactly what Jeff just talked about winning rate investing into our caregivers, investing into our clinical outcomes and providing better care to our patients. And in tail that drives our volume and gets more kids from home from the hospital.

And it's a winning -- as you know Brian, especially in Medicaid, 30-ish, sub-30-ish, the legislature understands that gross margin. So being in that 27% range, we can be proud of what that means, proud of the investment we're making and as you know, it does matter when you go back to these payers and legislators that you can show them that you have invested these dollars that they gave you into incremental nursing wages and incremental nurses, which again, we will continue to tell that story in California, because it's the same outcome in California. We just got to get the legislature and the Governor to validate that.

Yes. 100%. Thank you and congrats team.

Thanks Brian.

Our next question comes from David MacDonald with Truist Securities. Please proceed with your question.

Yes. Hey, guys. This is actually Grayson McAlister on for Dave. Congrats on the quarter. First question for me just obviously margins came in quite a bit better than we were thinking and better than last year. Could you just talk a little bit about the cost savings initiatives in place what inning you're in? And just any low-hanging fruit or obvious opportunities at this point? Thanks.

Hi Grayson. Good morning. Well, we certainly said in Q2, we were not a 9% company moving forward and Q3 we validated we are a 9% business two quarters in a row. I think as Matt said in his prepared remarks, there were a couple of things that were timing related, specifically in our AMS business, we had some revenue-related adjustments. But I do think that the takeaway -- and Matt will answer the detail of your question, but the takeaway is the cost reduction efforts that we've been talking about now for almost seven quarters really have taken hold. And I think for the most part we can tell you we're really done with Home Health & Hospice. We're done with our PDS business. We're pretty much done with our corporate office and corporate support and we're really just heightened focus on Medical Solutions as we roll into 2025. So I think the majority of the work is done. I will tell you that we never stop. We're always looking for efficiencies and always looking for areas where we can find ways to be more efficient in our RCM and other areas of the business. But the majority of our work in our businesses with the exception of Med Solutions is really done at this point.

Yes Jeff, I'd just pile on to your statements, which I believe are 100% accurate in here. Really, we're just proud of the teams and the hard work they've done to address costs on the direct and obviously, mostly indirect side of things. Home, Health & Hospice, last year you're seeing the full benefit of that come through this year. PDN in this year and you continue to see the benefit of that in the back half of 2024 and you'll see that to 2025. Medical Solutions to Jeff's point is the last area of focus for us to go take out significant savings. But Grayson, as we always talk about, it's just not take it away but reinvesting back into the organization, reinvesting back into technology into automation, so that we're able to leverage that going forward as well. So our goal is to continue to hold that relatively I'll say flat. There's a lot of takes but then reinvestments into that and you'll see that throughout 2025 adding on to our growth where we're currently been performing. That's where we get that leverage profile and increase that margin on the bottom line.

Got it. Okay. And then just a quick follow-up for me. Just want to follow-up on hiring trends in Georgia and Massachusetts. Just any color you could provide around the number of hires there or how quickly you're able to see that labor begin to come online when you do get those rate increases passed through. Thanks.

And Grayson, I'll just use Georgia, because I think Georgia is one -- last year we would have used Oklahoma in 2023. This year Georgia will end up being the story we highlight. We're actually building a case study with a third party around Georgia to be able to show to other state governors. But we started -- I think we told in Q2, we started passing the wage rate through in our Georgia nursing community back in -- starting mid to late-April as soon as we knew the governor's budget was signed. So we had a ramp of about 75 days and we hit July 1 when the rate became effective already running. And we can see significant, significant improvement in actual percentage of fill rate number of cases we're actually filling compared to the authorized hours, the number of new cases the cases, we're able to get children out of the hospital. And we ran into a great phenomenon in Georgia. And Matt and I have been here nine years. This has never happened in our nine years and that is some point mid-August, we didn't have any pending discharges in the children's hospitals in Georgia. That's the first time in a decade that that has happened. Now, flu season comes in infection season. So that will recreate itself. But we had a point in Georgia where we didn't have any pending patients to admit. And again, our pending list in any state could be 30, 40, 50 families or it could be a few hundred. So the fact that we were able to push through that many pending cases -- and our peers, our peers did as well, just shows how powerful a rate investment can be in a state like Georgia or like any of our state. So, it will settle in over the course of Q4, Q1, Q2. But we've seen material changes in hiring nurses. Even the nurses that we had working for us are working more hours, and filling more shifts. So we are solving the exact issue that we put forth in the state of Georgia. Massachusetts similarly, but I think Georgia is the best example. And again, as Matt would say, we're almost two full years into the story in PDS and I think it continues to just hammer home, how important investing in private duty nursing really is. And the overall, savings and the outcomes for these families are just tremendous. Thank you, Grayson.

Our next question comes from A.J. Rice with UBS. Please proceed with your question. Q – Unidentified Analyst: Hi. This is James [ph] on for A.J. I just had one question for you all. You've previously talked about expanding geographies, and possibly doing this through acquisitions of smaller assets. Just wanted to get your updated thoughts on this geographic expansion, to build your base in the Southeast and Midwest. And just yes, any color there would be helpful.

No, it's a great question and very well-timed. I think as we sit today, we feel like we're putting year two of our strategic transformation to bed here in Q4. We feel like we have not only stabilized the company, but put the company back on the rightful path for growth and success. And we believe, it's time for us to reenter the M&A market. As we go into 2025, I don't think we'll close anything in Q4, at this point. But as we go into 2025, both organic and inorganic growth becomes really priority number one for the company. And we do expect to close transactions within our capital structure -- to your point James, within our capital structure both in Private Duty nursing, Private Duty Services business as well as Home Health & Hospice. Those are the two businesses, we'll focus on and are focused on. So we've already started ramping up the M&A engine. We are looking at transactions, as we speak with the intent that as we move into 2025, we would move back into the M&A market. And again, we'll stay focused on the PDS and Home Health & Hospice businesses for most of our M&A activity. Great question. Thank you. Q – Unidentified Analyst: Great. Thank you

There are no further questions at this time. I would now like to turn the floor back over to Jeff Shaner for closing comments.

Thank you. I just want to say thank you everyone, for your continued interest in our Aveanna story and thank you to our Aveanna teammates, caregivers and leaders for making these results possible. We will look forward to talking to you after the first of the year, and updating you on our 2025 guidance and our full year 2024 results. Thank you.

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