Aveanna Healthcare Holdings Inc.

Good morning and welcome to Aviana Healthcare Holdings Second Quarter 2021 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 conference over to Shannon Drake, Aviana's Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining Aviana Healthcare's Second Quarter 2021 Earnings Call. Speaking on today's call are Tony Strange, Aviana's Chief Executive Officer and President, David Afshar, our Chief Financial Officer, and Jeff Shaner, Aviana's Chief Operating Officer. We issued our second quarter earnings press release and filed our related Form 8K and Form 10K yesterday with the SEC. These documents are available on the Investor Relations section of our website at www.aviana.com. We encourage you to read them. Also, a replay of this call will be available on our website until August 19, 2021. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, August 12, 2021, and these statements have not been nor will they be updated subsequent to today's call. Also, today's call may contain forward-looking statements which may be identified by words such as may, could, will, expect, intend, plan, and other similar words and expressions. All forward-looking statements made today are based on management's current expectations, assumptions, and beliefs 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. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. including those risks disclosed under the risk factor headings of our filings. Except as required by federal securities laws, Aviana does not undertake to publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events, changing circumstances, or for any other reason. Also, in addition to our financial results reported in accordance with GAAP, we supplement our GAAP results with certain non-GAAP financial measures. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business and operating results, but they should not be relied upon to the exclusion of our financial results reported in accordance with GAAP. In addition, a reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and 10-Q, both of which are available on our website and on the SEC's website at www.scc.gov. 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 Aviana's Chief Executive Officer and President, Tony Strange. Tony?

Thanks, Shannon, and good morning, everyone. Thank you for joining Aviana's second quarter earnings call. Before we get started, I'd like to welcome our new investors and say thank you for joining the Aviana story. For our new participants, Aviana is a highly diversified home care platform specializing in providing both skilled and unskilled care to pediatric adults and senior patients in the most cost-effective setting possible, their homes. We operate in 30 states across the U.S. through 263 locations. Our clinical team focuses on providing exceptional physician-directed care to each of the 46,000 patients that we serve. It's been a busy quarter. On the call today, in addition to our operating results, we'd like to provide an overview of the reimbursement environment, an update on our recent financing activities, and finally, the latest developments surrounding our M&A transactions and pipeline. So let's jump right into our results. Q2 marks another successful quarter for Aviana as we continue to build on the momentum that we reported in Q1. Revenues for the quarter were $436 million compared to $352 million in Q2 of 2020, representing a year-over-year increase of 24%, and up sequentially from 417 million in Q1. Our compounded aggregated growth rate over the last three years has been in excess of 17 percent, and we believe, as is supported by our current results, that maintaining growth rates in the mid to high teens continues to be sustainable. Moving on to gross margins, gross margins for the quarter were 33.6 percent compared to 30.3 percent in Q2 of 2020, and up sequentially from 31.6% in Q1 of 21. The improvements have been driven by rate improvements across our PDS segment, the mixed shift driven by the growth in our home health and hospice segment, and a disciplined approach to managing labor expenses. I'm very proud of our operating teams for not only preserving but improving margins during a very difficult environment. EBITDA for the quarter was $49 million compared to $37 million in Q2 of 2020, an increase of 31% year-over-year. Adjusted earnings per diluted share for the quarter was $0.10 compared to $0.08 in Q1. These results on top of very good cash collections give us confidence that we can and will sustain our growth rates while continuing to protect our margin and leveraging our infrastructure, therefore creating significant value for our shareholders, as well as our patients and our employees. Speaking of our employees, I'd like to thank all of our caregivers, administrative staff, and our leadership team for making these results a reality. It is your dedication to our mission that makes Aviana successful. I'd also like to welcome the employees of our most recent acquisition, Doctors' Choice, to the Aviana family. It's great to have you on our team. Moving on to the reimbursement environment, our government and payer relations teams have been working hand in hand with our different state legislators, state administrations, as well as our managed care partners to protect and create new avenues for patients to receive care in the home. The result is that over 50% of the states that we service will increase the reimbursement rate and or expand the covered benefit for the services that we provide. To be specific, we have or will receive rate increases in 16 of our covered states in 2021. Jeff will provide some additional color on these increases during his comments. But the net takeaway is that state Medicaid agencies and managed care plans alike are recognizing the important role that home care can play in reducing our overall health care spend. These investments into the home care benefit will allow providers to make additional investments into caregiver wages, which should accelerate growth for the industry. From a Medicare perspective, CMS has issued a proposed rule for home health and a final rule for hospice. On the home health front, we view the proposed rule as an overall positive for the industry. It appears that providers will experience approximately a 1.7 percent increase to reimbursement, but equally positive for us is the indication that CMS is moving forward with its commitment to evaluate value-based pricing. There are several legislative efforts underway, such as Choose Home, to elevate the impact that home care can play in helping post-acute care patients transition back to their homes and allowing them to age in place. We believe that the investments that we have made and are making into our clinical delivery model, as well as our clinical documentation system, we are well positioned to be on the right side of value-based reimbursement. And while hospice is currently a very small portion of our business, we believe that the final rule, which provides for an approximately 2% increase in reimbursement, is a good indication of the continued value placed on home care services for end-of-life care. Overall, we believe that the reimbursement environment continues to be positive and should create tailwinds for the industry in 2022 and beyond. This brings to mind what we believe is a significant advantage for Aviana. Across all payers, including Medicare, 36 unique state Medicaid systems, and hundreds of managed care plans, Aviana has no single payment source that represents more than approximately 11% of our overall revenues. This dynamic gives us great comfort in any downside scenario. But in the meantime, the horizon is clear and the home care industry appears to be solidifying its relevance in the health care continuum. Turning now to another significant event for the company, in July of this year, we completed the refinancing of our remaining debt of $860 million, which significantly reduces the cost of capital for the company going forward. In addition, we put in place a $200 million revolving credit facility, which remains undrawn. as well as a delayed draw term loan for another $200 million for future M&A. Dave will provide more details related to the refinancing during his comments. In summary, this refinancing has significantly reduced interest expense while providing access to capital to continue our aggressive acquisition strategy. Our Barclays team led the financing along with our full syndicate. We'd like to say a special thank you to all of our lender partners for your continued support. On the topic of M&A, I'd also like to spend a moment updating you on our M&A activity. As a reminder, we closed on the Doctor's Choice acquisition on April the 16th, 2021. As a result, our Q2 numbers reflect approximately 10 weeks of Doctor's Choice activity. Doctor's Choice is a traditional Medicare-certified home health business with 16 locations across the state of Florida. At the time of the acquisition, the company was producing revenues of approximately $70 million on an annualized basis. Doctors Choice has continued its successful growth trajectory since closing, and the integration of the business into our home health platform is tracking ahead of plan. Our integration management office continues to exceed expectations both on the quality of our diligence and transactions, as well as the timeliness of integration. which gives me great confidence in our ability to identify, close, and integrate acquisitions at a pace that is consistent with our model. So, where are we with our M&A pipeline? The deal flow remains robust, and as a result, we have several deals at various stages of our process. Earlier this year, we disclosed that our goal was to acquire between $150 and $200 million of revenue per year moving forward. with a heavier slant toward home health assets. With the closing of Doctors' Choice in April and the robust deal flow and the various deals that we are engaged with currently, we are confident that we will meet and exceed our M&A goals for 21 and beyond. This brings me to my final topic before I turn the call over to Jeff for a deeper dive into some of our operating metrics. Recall that our previous guidance of revenues not less than $1,745,000,000 and adjusted EBITDA of not less than $185,000,000 did not contain any future M&A. While we're highly confident in our guidance and given the likelihood that we'll have additional M&A activity to announce in the second half of 21, we'll hold off on updating our guidance until that time. I'd once again like to thank all of the employees for Aviana and the work that you do each and every day to provide great service and exceptional care to our patients. It's what you do that makes these results possible. With that, Jeff, why don't you provide some additional insight into our segment results?

Thank you, Tony. It brings me great pleasure to share our Q2 2021 operating indicators and key metrics with you. As a reminder, I will comment on our three operating segments, private duty services, home health and hospice, and medical solutions. Before I get into the operating segments, I'd like to focus on our COVID-19 update and payer and government relations efforts. Throughout the COVID-19 pandemic, I have been proud of our Aviana team's dedication to providing safe and efficient healthcare in our patients' homes. We have managed through the pandemic and had a well-disciplined approach to the acquisition of PPE, vaccinations of our staff, testing and tracking COVID positive cases with staff and patients, and effectively managing our business in a COVID environment. We continue to monitor the Delta variant and its impact on our communities, but feel we are well positioned to meet the growing needs of our patients, referral sources, and payers. On a government and payer relations front, we are very pleased with our efforts and those of our state legislative and government agencies. We believe that our home care message is resonating with our key payer and government constituents through reimbursement rate increases and the expansion of covered services. We also anticipate realizing additional benefits with the FMAP funds as states submit their plans to CMS for approval. We have further aligned our Aviana and home care industry efforts on return to work initiatives. A key component of our growth is focused on accelerating caregivers back into the workforce. We have found our state governments willing to partner with us to provide an appropriate transition from unemployment benefits back to meaningful employment. As most states are phasing down unemployment benefits this summer, we are experiencing a renewed interest from our caregivers to reenter the workforce and get back to providing high quality care in the home. In summary, Our payer and government relations teams have been instrumental in many rate wins, expansion of covered services, and supporting the return to work initiatives. Now, onto the private duty services segment results. During Q2, we produced $349.7 million of revenue, or 11.3% year-over-year growth. Revenue was driven by 9.92 million hours of care provided during the quarter, or 10.1% growth over Q2 of 2020. This growth rate is consistent with our strategy to grow PDS with both organic and M&A activity. We expect to continue to see solid PDS volume growth rates throughout 2021. Our revenue per hour of $35.25 was up 39 cents from Q2 of 2020. This was primarily driven by reimbursement rate improvements and a stabilization of our business mix between skilled and unskilled services. we continue to anticipate that this rate trend will improve in the second half of 2021 with the expected return of schools in the fall. Turning to our cost of labor and gross margin metrics, we continue to experience improvement in gross margin with $105.8 million in Q2 or 30.3%. This equates to a growth of 17.4% year-over-year in gross margin dollars. Gross margin improvement was driven by our PDS cost per hour of $24.59, down 27 cents per hour from Q2 of 2020. Private duty services cost per hour is benefiting from the unskilled mixed shift and strong labor oversight. Lastly, our spread per hour, an important metric balancing revenue and labor cost for the private duty services segment, improved to $10.66 per hour. Spread per hour will continue to improve as we balance the numerous rate increases against the strategic investments in caregiver wages in an effort to accelerate the growth of our PDS business. As we discussed in Q1, we expect our school private duty nursing business to return to an in-person setting this fall. Most of our school business typically returns by Labor Day and is a key component in higher acuity skilled nursing volumes. as well as providing the necessary childcare for our nurses to return to work full time. We are encouraged by the commitment of our school systems to provide a safe and rewarding environment for our patients and caregivers to thrive in. Lastly, our PDS teams have fought diligently through the pandemic to continue to bring families home from the PICU, NICU setting to the comforts of their homes, many for the first time ever. I am in awe of our Aviana team's commitment to our families to providing high-quality, cost-effective, and compassionate care. Now, moving on to our home health and hospice segment for Q2, where we continue to experience substantial growth. With the addition of Doctors' Choice Home Health, our home health and hospice division has expanded to 11.5% of our Q2 revenue. Home health and hospice continues to be a significant focus of our future growth and has been a point of emphasis for us as we work to expand our national home health presence. Home health derives approximately 95% of the revenues of the home health and hospice segment and is our key focus moving forward. With the five points and recover health integrations complete, we are efficiently moving through the doctor's choice integration. Our dedicated IMO office is leading the way as we methodically integrate doctors into the Aviana home health and hospice family. I believe doctors will be one of the best acquisitions we have completed to date and will act as a model we emulate as we move forward in our home health and hospice M&A strategy. Now on to home health and hospice segment indicators for Q2 2021. This is our second full quarter reporting home health and hospice metrics. Therefore, we plan to report sequential quarterly growth throughout the remainder of 2021. During the quarter, we produced $50.1 million in revenue, a 59% increase over Q1 2021. This was driven by 11,700 total admissions, approximately 61% being episodic admissions, and 10,300 total episodes of care. Episodic admissions grew 87%, while total episodes of care grew 81% over Q1 2021, primarily due to the impact of doctor's choice acquisition and a strong organic growth from the recover health and five points businesses. I am pleased with the organic growth rates of our home health business and believe we will remain a double digit admission growth segment for the remainder of 2021. Lastly, Revenue per episode for Q2 was $2,894 per episode and in line with our expectations. From a cost and margin perspective, gross margins were 48.5% for the quarter, up 350 basis points from Q1 2021. The primary driver of gross margin improvement was the doctor's choice business, along with a continued focus on payer mix. Our home health and hospice division team is complete, and actively implementing the best practices from all three acquired businesses. I have great confidence in our continued execution of the business and its overall growth impact on Aviana. Lastly, we are pleased with the recent home health and hospice proposed and final rules and rate improvements for fiscal year 2022. We believe that Aviana Home Health and Hospice is well positioned to capitalize on the ever-evolving home health landscape as we look forward to partnering with our payers, referral sources, and CMS on value-based strategies. Now to our Aviana Medical Solutions segment results for Q2. Our Medical Solutions business provides internal nutrition and other medical supplies directly to our patients' homes. During Q2, we produced $36.4 million of revenue, or 11.1% year-over-year growth. Revenue was driven by 78,000 unique patients served during the quarter, or 5.4% year-over-year volume growth. Although we had a very strong unique patient-served comparable from Q2 2020, I'm proud of the 6.8% sequential growth, UPS growth, over Q1 of 2021. This growth profile is consistent with our strategy to grow medical solutions with both strong organic and de novo activities. We are currently servicing over 26,000 patients per month in our medical solutions business with plenty of geography for continued growth. Our revenue per UPS was $466.17, up 5.7% from Q2 2020, primarily driven by product mix shift. I expect both volume growth and revenue to continue to benefit from the growth of our PDS and home health and hospice segments. On a payer front, we've had some recent medical solutions Medicaid rate wins tied to our overall payer strategy. We also recently renegotiated a national medical solutions contract that will allow us to expand to all states we serve and access a greater patient base, however, at a lower revenue per UPS. In concert with this change, we are leveraging improved cost of goods and reducing overhead to maintain margins in line with our medical solutions business model. Turning to cost of goods and gross margin metrics, we continue to experience great stability in gross margins with $16.5 million in Q2, or 45.4%. This equates to a year-over-year growth of 90 basis points in gross margin percentage. Gross margin improvement was driven by product mix shift and overall efficiencies in our delivery model. I expect gross margins to remain in the 44 to 45% range. I'm proud of our medical solutions team and their demonstrated ability to scale the entry nutrition business on a national basis. In summary, all three Aviana business segments have been performing at or above expectations. As we continue throughout 2021, we are well positioned for organic and acquired growth, efficient margin controls, and excellence in clinical outcomes, value-based reimbursement strategies, and customer satisfaction. I look forward to updating you again at the end of Q3 on our continued progress. With that, I'd like to turn the call over to David Ashfar, our CFO. Dave?

Thank you, Jeff. I'll go ahead and provide some more details on results of operations, adjusted EBITDA, liquidity, recent events in Q2 and Q3, and 2021 guidance. As Tony said earlier, revenue is $436.1 million for Q2 of 2021 as compared to $351.6 million for Q2 of 2020, an increase of $84.5 million or 24%. This increase was driven by growth across our key segments including a $35.5 million or 11.3% increase in PDS revenue, a $45.4 million or 975% increase in home health and hospice revenue, and a 3.6 million or 11.1% increase in medical solutions revenue. We're pleased with our overall volume growth, particularly from the home health and hospice segment and our most recent acquisition, Doctors' Choice, which is a great acquisition for us. With respect to rate, our PDS revenue rate increased 1.2% on balance due to the rate increases mentioned earlier, net of the change in business mix between skilled and unskilled services. We view the PDS reimbursement rate environment as a tailwind for all the reasons we talked about earlier. Revenue rate in our medical solutions business also increased 5.7% from the year-ago quarter. Before turning to gross margin, I'd like to quickly highlight the revenue impact of the doctor's choice acquisition. Aviana revenues for the first six months of 2021 were $853.3 million, an increase of $146.5 million, or 20.7% from the first six months of 2020. including doctors' choice revenue of $22.9 million for the period in 2021 prior to when we acquired doctors, pro forma Aviana revenue for the first six months of 2021 would have been $876.2 million, which represents a 24% increase over the first six months of 2020. Now turning to gross margin, our gross margin was $146.6 million, or 33.6% of revenue for Q2 of 2021, as compared to $106.6 million, or 30.3 percent of revenue for Q2 of 2020. The 37.5 percent growth in our Q2 gross margin compares favorably to our revenue growth of 24 percent from the year-ago quarter. We are very happy with the consistency and stability of the gross margin percentages that our PDS segment has delivered over time, which have increased recently in our quarter-over-quarter and year-to-date comparable periods. I want to emphasize that on a consolidated basis, Our gross margin percentage increased 330 basis points in the current quarter as compared to the year-ago quarter as a result of a number of factors, including the higher gross margins delivered by our home health and hospice segment, the rate increases we've received in our PDS segment, and also a reduction in COVID-related compensation costs in the current quarter as compared to the year-ago quarter. Operating income was $30.3 million for the second quarter of 2021, or 6.9% of revenue. as compared to an operating loss of $52 million for Q2 of 2020, an increase of $82.3 million. Bear in mind that the driver of the operating loss last year was a $75.7 million goodwill impairment charge that we recorded in Q2 of 2020. Operating income for Q2 of 2021 was positively impacted by an increase of $17.4 million, or 33.7%, in field contribution as compared to Q2 of 2020. The $17.4 million increase in field contribution was delivered by our $84.5 million, or 24% increase in consolidated revenue, combined with a 110 basis point improvement in our field contribution margin to 15.8% for Q2 of 2021 from 14.7% in the year-ago quarter, which also represents sequential improvement from Q1 of 2021. Field contribution and field contribution margin are important metrics because they help us assess and make decisions about the operating performance of our core field operations prior to corporate and other costs not directly related to our field operations. Offsetting some of the Q2 improvement in our field contribution margin over the prior year quarter was an increase in our corporate expenses as a percentage of revenue, growing to 7.4 percent of revenue from 6.5 percent of revenue in Q2 of 2020. The primary reason for the 90 basis point increase was the 3.4 million corporate portion of 4.2 million in share-based compensation charges that we recorded in Q2 related to performance vesting options. It's further discussed in the footnotes to our financial statements and our MD&A. Note, however, that adjusted corporate expenses as a percentage of revenue decreased to 5% in Q2 of 2021 compared to 5.2% in Q2 of 2020. Wrapping up with operating income, Operating income as a percentage of revenue improved to 6.9% in Q2 of 21 from a loss of 14.8% of revenue in the year-ago quarter. Moving on to net income, net income was 1.3 million for Q2 of 2021, an increase of 78.8 million from Q2 of 2020, with the primary driver of the increase, again, being the 75.7 million goodwill impairment charge that we recorded in Q2 of 2020, as I mentioned earlier. Adjusted EBITDA was $48.8 million for Q2 of 2021, which represents $5.1 million of sequential growth from Q1 of 2021 and an $11.4 million increase from Q2 of 2020. We're pleased to see expansion in our adjusted EBITDA margins from 10.6% in Q2 of 2020 to 11.2% in Q2 of 2021 as the quality of our adjusted EBITDA continues to improve. On a year-to-date basis, suggested EBITDA increased to $92.6 million for the six months ended Q2, which represents a 10.9 percent margin from $67.2 million in the first six months of 2020, or a 9.5 percent margin. On the liquidity front, we had very strong liquidity as of July 3rd, 2021, with cash on the balance sheet of $107 million and available borrowing capacity under a revolving credit facility of $180 million. resulting in total liquidity of $287 million at the end of the quarter. And this is after returning $29.4 million of provider relief and stimulus funds to federal and state agencies in Q1 of 2021. With respect to our cash collections and DSO, our DSO is 41.6 days for Q2 of 2021 as compared to 39.8 days for Q2 of 2020. We expect our DSO to increase over time as we grow our home health and hospice business as those businesses generally have longer collection cycles. With that said, our revenue cycle and operations team work tirelessly to collect every dollar we're entitled to receive, and we continue to make improvements every day to what we do. Excellence in cash collections is one of our five Cs, and we work hard at it every day. One of the results of that hard work is an improvement in revenue realization that we've seen across our comparable year-to-date periods. I can't say how pleased I am with the collaborative nature and all the hard work that our revenue cycle and operations teams put into collections every day. Capital expenditures for the first six months of 2021 were 0.7% of revenue as compared to 1.5% of revenue in the first six months of 2020. We typically view our CapEx in a range of 1 to 1.2% of revenue. Our CapEx in the first six months of 2020 was lower than normal due to the deferral of various projects which we expect to occur in the future and was higher than normal in the first half of 2020 due to a data center project we completed during that time. And before we finish with our liquidity discussion, I also want to cover our recent amendment to our credit facility that Tony mentioned earlier, in which significantly reduced our debt service costs and provides for incremental acquisition financing capacity. As you recall, in May we repaid $307 million of second lien debt, which allowed us to terminate our second lien facility and also repaid $100 million of first lien debt, all with proceeds from the IPO. Then on July 15th, we refinanced our remaining outstanding first lien term loans, combining them into a new seven-year first lien term loan. You will see this described in our documents as the 2021 extended term loan. Combining the three former first lien loans, all of which had different interest rates, into one new term loan simplifies our loan structure And we also reduced our interest rate under the new term loan to LIBOR plus 3.75%, with a LIBOR floor of a half a percent. You'll see a table in our press release that provides these calculations. And holding all other factors the same, based on current interest rates, we expect to save $13 million of annual cash interest on our outstanding $860 million first lien term loan as a result of this refinancing. I want to emphasize that that doesn't include the cash interest savings we'll realize as a result of our debt pay down with IPO proceeds, which will drive further cash interest savings as compared to the cash interest paid that you see in the first six months of 2021. If you look at our cash interest trend, our cash paid for interest in Q1 of this year was $20 million, which decreased to $16 million in Q2 and which will continue to decrease in Q3. On July 15th, we also added a $200 million delayed draw term loan to provide for future acquisition financing. We incur no interest on undrawn amounts of the delayed draw term loan for 45 days after the July 15th amendment date. Then for the next 45 days, we pay interest at 50% of our LIBOR margin rate, and then we incur the full LIBOR margin beginning at 90 days, which would be on or about October 15th. And turning to our full year 2021 guidance, we're affirming our expectation that revenue will be at least $1.745 billion. We're also affirming our expectation that adjusted EBITDA will be at least $185 million. And for the reasons outlined in the press release, we are not providing guidance at this time on net income. To summarize and wrap up here, we're pleased to have continued our positive earnings momentum in Q2. With the capital structure improvement we've achieved through pay down of debt with IPO proceeds, and the subsequent refinancing of our credit facility in July to reduce cash interest costs, we expect to drive improved operating cash flow in the future. We're well positioned from a liquidity and credit perspective to execute on future M&A and look forward to all the bright opportunities in front of Aviana. And with that, operator, we're ready to open up the call for questions.

And at this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We also ask that each participant limit themselves to only one question and one follow-up question due to the high volume of questions in the queue. One moment, please, while we poll for questions. And our first question is from Matt Borch with VMO Capital Markets. Please proceed with your question.

Yeah, I was hoping maybe you could talk a little bit more about the environment for labor recruitment and retention, staff recruitment and retention in the various areas of the business. Some other companies have struggled with that. Just wondering, you know, the extent to which you might see pressures in any area on that front and, you know, potential wage pressures in particular.

Well, first of all, thank you for the question, Matt. I'll start and then Jeff, why don't you jump in? I guess what I'd like to do is go back prior to the pandemic. You know, we are in the business of recruiting nurses and recruiting nurses has always been difficult. So there are not enough nurses to meet the demand of our growing seniors, the medically fragile children population, and so we live in an environment where this is the reality that we have. Now, with that said, the pandemic has made it harder, but I'll give our team credit. You know, we have some innovative ideas that Jeff and the operating team have been working on, which I think are industry-leading. But, Jeff, why don't you give them a little bit of color about some of the initiatives that we have and the success we've been having.

Yeah, thanks, Tony. Hey, Matt, good morning. Yeah, as Tony mentioned, Matt, we just had to become more creative, innovative, and flexible in our recruiting patterns. I'll give it to the head of our recruitment and our PDS clinical operations teams. They've introduced a virtual-based orientation hiring process all the way up to the day before we put a nurse into a home, being a branch. And so we've just had to flex and become more innovative in this environment. I think we fully understand the labor pressures, and we see it. There are certainly less nurses applying for more jobs on the front end, but it's just made us have to become better, more innovative, more flexible, honestly more flexible in nature. And I think as we talked about, We turned our payer and government relations teams really focused on getting the rate wins that we can strategically invest back into the caregivers. As Tony mentioned, 16 state rate wins, and we are strategically investing that money back into both the recruitment of new nurses but also the retention of our current nurses. And so we expect that to continue as we play throughout the rest of 2021 and into 2022. Okay.

And if I could ask a follow-up on that, just as you look out over the next few years, how do you see the supply and availability trending? Is it just going to get a bit tougher here, given some of the demographics and retirements?

Yeah. So, Matt, I don't think there's any kind of silver bullet in front of us that says the nursing shortage is going to be resolved. I think... Now granted, as the pandemic subsides, as nurses go back into the work, matter of fact, not just nurses, but everybody goes back into the workforce, I think things will level out a little bit. But if you go back for the last, you know, 15 years, there's not been enough nurses to take care of the patients. There's 10,000 people turning 65 every day. The demand for our services is going to continue to increase. So I think companies are going to have to learn how to be creative, innovative with how we approach people and how we pay people and how we recruit and onboard them. I'll tell you, Jeff mentioned it. These guys, I think, have done a great job with some of the creative solutions about being able to recruit and onboard nurses conveniently from the comfort of their homes and You know, Jeff, you talk about how we pay people a daily pay. You know, 10 years ago, we would have never thought about paying people on a daily basis. And I think companies, including Aviana, are going to have to continue to be creative and innovative in how we solve this problem because the problem's not going to go away. Okay, great.

Thank you.

Thanks, Matt. And our next question is from Lisa Gill with JP Morgan. Please proceed with your question.

Thanks very much, and thank you for taking my question. Just to go back to your comment around home health, around value-based care, I agree with everything that you're saying from that perspective. Do you have contracts in place today around value-based care? And, you know, what's the outlook for that, number one? And number two, how do you think the reimbursement would work there? Would you think about taking some element of risk in those contracts?

Well, so, first of all, thanks for the question, Lisa. And today, you know, if you think back to 2021, CMS was working with value-based reimbursement in roughly seven states. We were participating in two of those. So we are very comfortable with the process. We have had success in the two states that we're operating in. And we applaud CMS for moving forward with value-based pricing. We believe that companies should be rewarded for the clinical care that we deliver. And we're going to continue to focus on making sure that our care is delivered at the highest standard. And we believe that the recognition that you're willing to pay more for great outcomes is something that we think is good for the industry. So we are very supportive. of moving forward and taking risks where appropriate.

Tony, when I think of that and actually paying for better outcomes, is it more of just upside opportunities for you and less downside? And then secondly, when you think about those two states, how are they measuring the outcomes? And I know that it was more of a pilot kind of program. Do you think that they'll roll it out more holistically as we get into 2022?

So I think there was three or four different questions there. I think the answer is yes. We are equally excited about the opportunity for upside in reimbursement, but we also are accepting of the risk of downside. And so I think that companies are going to have to get comfortable with taking that risk that unless they perform well, reimbursement can go down. Now, we look at it, you know, where the glass is half full, saying we have the opportunity to be paid for the extra effort that we do, and I think we'll enjoy some success under that program.

Okay, great. Thank you.

Thanks, Lisa. And our next question is from A.J. Rice with Credit Suisse. Please proceed with your questions.

Thanks. Hi, everybody. First of all, just to follow up on your comments about pricing the 16 coverage states where you get rate increases, I wondered, A, are there any big states that still remain open? And can you give us sort of a sense of the blended average rate increase you think you'll see in the PDS business heading into next year and maybe what timeframe those rate increases roll through the numbers?

So, Jeff, I'll start, and then why don't you jump in and give them a little color around the FMAP program. AJ, as you know, we don't disclose any state-specific information, so we'll tread lightly here. If you think about our top seven states where we have a lot of volume in the top seven states, we've experienced either rate increases and or expansion of benefits in roughly five of our top seven states. So it's not the rate increases that I referenced are not only related to states where we have small pieces of business, but really across the board. We have small states, large states, medium states. Everybody has participated. And I'll tell you, I go back and give Jeff and the team, our government and payer relations team, they've done an exceptional job during a pretty difficult environment of getting out in front of our constituents and showing that we can be a part of the solution, not a part of the problem. And I think, I feel like our states are looking toward us to help them solve this issue and getting these patients out of the hospital. So with that, Jeff, why don't you give a little bit of color around some of this specific program?

Yeah, and A.J., I think, as Tony said, normally by now we would really be done for the year. All of our states have finished their annual or biannual legislative processes, and so normally we would be starting to focus on 2022. This year is uniquely different in the fact that most states have yet to submit their FMAP plans to the to CMS and are doing so over the next few months. So we've already pivoted from the normal annual, biannual legislative process that we talked about with the 16 wins, and now we're immediately going back and meeting with our states as they're going back and many of them are going back into session to figure out how they will spend their FMAP money, what their proposals will be. And so I think we feel very, you know, very bullish that we're going to go win some additional rates through the FMAP process, and I think as Tony talked about, it's not just winning rates. It's really strategically helping the states invest that money back into caregivers, retention, development, clinical orientation systems. So I think we'll see additional rate wins throughout the second half of 2021 going into 2022 that were never contemplated.

And, Jeff, you said it in your – for AJ's benefit, you said it in your prepared remarks – You know, one of the things that I think is so important, when we look at these rate wins state by state, we're not seeing this as improved profitability. What we're seeing is the ability to take those resources and reinvest those strategically back into the caregivers. And by doing that, we'll be able to bring more caregivers back to the workforce and And I think ultimately the industry wins, and I think it will accelerate growth in our industry. What I believe our industry is experiencing today is a little bit of a slowdown because we've got to get people back to work. And I think the states recognize that through the state Medicaid systems, and fortunately they can actually move a little bit quicker than some of our federal programs can, and they can put dollars back into the program system. to bring workers back and ultimately will cause our growth rates to accelerate.

Okay, maybe just my follow-up then would be, you mentioned the Choose Home and we're hearing others comment about what that could mean and other legislation around the infrastructure package perhaps helping, the bigger infrastructure package if that goes anywhere, perhaps helping on the personal care side. How are you thinking about these, and would you pivot on your strategy in any way if any of this gets passed?

You know, I'll take your last question first. I don't think we pivot at all. I think all the activity you're seeing in D.C. right now is consistent with our strategy, so I think we just move forward. But, you know, A.J., you asked about how do we feel about it and what's the likelihood of it passing, and look, You know, your guess of what's going to happen in D.C. is as good as mine. You know, things are in the Senate, got to go to the House, got to get approval. You know, I don't know what the outcome is going to be. And quite frankly, what's most important to me where I do see a lot of value is that people in D.C. are talking about home care and home care being a part of the solution. So whether this bill is passed or that bill is passed or it has this amendment or it doesn't have this amendment, I think what is most positive for the industry is that our leaders on a federal level as well as on a state level in the Medicaid system are recognizing the value that home care can play and are seeing that home care is a value add to the overall health care spend. That's what I find so positive.

Okay, great. Thanks a lot. Thanks, A.J.

Our next question is from Sarah James with Barclays. Please proceed with your question.

Thank you, and congrats on a strong quarter. Recruitment and retention has been an area of strength driving above industry average growth rates for you guys, and now you have this strong rate environment, maybe some funding expansions. I was hoping you can give us some insight into how sensitive recruitment is and retention to wage increases. So do you have any examples in markets where you've seen a correlation between hourly wages and what's going on on the recruitment side? And then if you can walk us through any non-wage related items that you're working on for either recruitment or labor efficiency.

Well, Sarah, thanks for the question. And, you know, while the example I'm going to throw out to you is a little bit dated, you know, we had a relatively large rate increase in the state of California in 2018. And immediately after the rate increase went into place, we saw an acceleration of our growth rate because clinicians came back to work. We were able to pass on a fair amount of that rate. We reinvested that back into our wages for our clinicians, and the result is which we saw an increase in staffed hours and also an increase in admissions, which means I think California was pretty smart about it. It had the desired impact. It caused patients to get out of the hospital sooner. And I think we'll see that play through all of these states that have made the decision to reinvest back into the business. So with rate comes growth, and we've demonstrated that time and time again. Now, with that said, you know, one of the things that really, if you think about where we are in our business today, you know, the summertime tends to be our slowest season of the year. We have nurses on vacation. We have schools out of service. And so one of the things, you know, that we've talked about is that we anticipate schools being back in session in full swing this year, and that will help lift our rates as well. But, Jeff, why don't you provide some color for Sarah as to how the school systems swing our business?

Thanks, Tony. Good morning, Sarah. I think Tony said it well, Sarah. You know, this is we're on the eve of our schools going back in to in-person, and we are monitoring it very closely with the Delta variant. Proud to say every school and every school district that we currently service is planning to be either in person, has either gone back or is going back over the next three weeks. We're monitoring that every week to make sure that that continues in a safe and effective manner. But as Tony talked about, it's an important recruitment tool for us. It's an important step for us as many of our caregivers are also parents. And if their kids are home, they've got to have some kind of childcare, daycare. And so the in-person school setting is a big step for us to get back in the fall and to get that workforce back to work. And I think as Tony talked about, we've now got some incremental dollars to go strategically back and invest in those and make the wage rates more appealing to those nurses to come back in the workforce. And I think as we said earlier, we have found our state legislators to be incredibly understanding and focused on getting people back to work. And I think we have found that to be very refreshing that they're not fighting against the idea of getting their constituents back to work. They really do want unemployment to ramp back down and to help people get back into meaningful employment. And I think we're a great market and a great opportunity for that to happen.

Thank you. And just to follow up, I know this is in the weeds, so happy to follow up offline, but back in that California example in 2018, do you have any numbers that can help us frame up what the result in recruitment or volume was?

Yeah, Sarah, we'd be happy to take that offline and walk you back through that.

But I think, as Tony said, it's a great example of how we strategically invest. At a 30,000 foot, we didn't keep that money and just increase margins. We strategically invested that into the caregivers over a multi-year period to really effectively do what the California legislator wanted, which was to go staff more cases. Thanks, Sarah.

Thank you.

Our next question is from Joanna Gadget with Bank of America. Please proceed with your question.

Hi, guys. Thanks for taking the question. This is actually Courtney Fondufay on for Joanna. So I guess just one on the deal pipeline. I mean, you guys called out that, you know, the pipeline remains robust, and you reiterated that you'd be able to hit your required revenue target for the year, which is great. But just curious, you know, are you seeing multiples increase for home health and hospice assets? Because you mentioned, you know, the M&A is really going to skew in that direction. I'm just wondering, you know, are you seeing increased competition for these assets?

Well, thank you for the question. And, you know, going back to our pipeline, you know, on any given day, we have over $600 million of transactions in a pipeline. And I'll remind you that we have a very disciplined process. We pass on more, certainly on a lot more deals than we do And so we're very selective as to the deals that we do. And from a competitive perspective, yes, some of our deals we've been able to do kind of as a one-off transaction, and others are highly competitive. But going back to the size of the pipeline compared to the number of deals we do, when we identify a transaction, and it is a good fit for our company, and it's a well-run company, and we know that integration is going to be straightforward, and we know that we're going to be able to realize the synergies. Even in a competitive environment, when we decide that this is a transaction we're going to do, we're going to close that transaction. And I think if you go back, Rod, our chairman, leads that effort, and he's got close to 40 years experience in the home care space and doing transactions. And I'll use doctor's choice as our most recent example. Doctor's choice, as Jeff said, I think it's going to go down as one of the best transactions that we've done. And that was a highly competitive process. But, you know, we bring synergies to the table, and we have a very disciplined approach of how we get to those synergies. So because of that, When we need to increase what we pay, we'll do that because over the long run, that will end up being a very cost-effective transaction. So, yes, it's a competitive process. However, I think we've got the capital, the infrastructure, the IMO team that I think we can, whenever we need to, we can be successful.

Okay, thanks. That's super helpful. And then I think that was a good segue into my follow up on doctor's choice. You know, you guys mentioned it's tracking ahead of expectation in terms of timeliness and that, you know, it's one of the best acquisitions to date for the team. Could you just give a little bit more color on the integration and like the specific synergies you're seeing that are making you feel that way?

Well, I'll go back and make a comment. I think it is going to be one of the better transactions. The premier health transaction that we did in 2018 was a very good transaction. It was more on the private duty side. This is doctor's choices all on the home health side. I think they're all equally good, and we've found that they deliver a quality product within the company that They've got good market penetration across the state of Florida, which is a highly desirable state related to seniors. And so I think it's going to be a great transaction for us. Now, with the synergies, we haven't disclosed specifically what the synergies of that transaction is going to be. But when you think about the comment that I had made earlier, we have a highly leverageable infrastructure. When I think about our corporate spend, which includes HR and payroll and accounting and finance and tax and recruitment infrastructure and some billing and collecting, those are all highly leverageable services. So when we look at doing an acquisition where there is duplicative payroll and accounting and finance and executives, we're able to get very aggressive, and doctors is no exception to that. So we won't have any concern at all achieving all the synergies related to doctors.

All right, great. Thanks, Tony.

Thanks, Courtney. Our next question is from Peter Chickering with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. A couple quick questions here. For home health, can you give us any color on what their pro forma organic growth rate was? Obviously, almost all the growth in the quarter is due to M&A from a year-over-year perspective, but it would be helpful to track what the organic growth rate was from those acquisitions and assuming no more deals closed except for a little more from revenue from doctor's choice, some color on how home health revenues attract throughout the back of the year.

Yeah, Peter, this is Jeff. Good morning. You know, I think in our prepared remarks, even though we did not own, obviously, both Recover and Five Points this time last year, using their systems year over year, we're really pleased. I mean, we're in line with the industry in that double-digit growth rate, specifically the admission growth rate, continue to be a primary episodic growth-focused business, and I'm just really pleased with both of those businesses' As we've taken them through integration, you know, from Q4 of 2020, wrapping up integration in Q2 of 2020, 2021, this year, those businesses are both growing, you know, in excess of 10% and certainly double digit. And Tony just said it in Courtney's last question. One of the things we love about Doctors is it's growing through the integration. So it's got great density. It's got a great market presence in Florida. And it's growing double digits as well. And so I think You know, we're pleased with our business development effort. We have labor pressures in the home health business. You know, they're not as intense as the PDS segment, but, you know, our number one focus in home health right now is just recruiting and retaining more nurses. So it's a similar focus. But to answer your question, you know, double-digit organic mission growth, pretty consistent throughout all three of the former companies.

All right, perfect. And then, actually, a follow-up to Courtney's question. I have two quick modeling questions after that one, but We've seen the public company home health multiples compress pretty substantially this year. Just curious, how does that impact the private markets? Do sellers adjust expectations or the deals pause a bit as we have this disconnect between lower public company valuations and maybe some high private company expectations?

I don't think the market has paused. We're seeing as much deal flow today as we saw a year ago. And in some circumstances, I think it's even higher. And now you and I can pontificate about why do we think that is. I mean, there's a lot of rattling about changing of capital gains, taxes, and such that may cause someone who might have been a seller before to maybe take a stronger look at it today. So, you know, the pipeline is robust, and I think we'll continue to be that way. I think over time, I think the lower valuations for some of the public peers, you know, will find its way into deals down the road, and sellers may have to adjust their expectations. But, you know, for the time being, I'm not seeing – we're not seeing any compression at all.

Okay. And then, David, just super quick about all the questions. What is the pro forma quarterly run rate of interest costs going forward? And then on SG&A margins, it sounds like the uptake in this quarter is due to options. As we think about SG&As, percent of revenues, the back half of the year, just any color and where that should track. Thanks so much.

Thanks, Peter, for the question. So, I mean, what we've disclosed in our press release, you can see, is that we're going to save $13 million annually, holding all other factors constant between what we were incurring on our term debt you know, immediately prior to the transaction to immediately after. If you think about, you know, the annual 36, 37 million interest that we'll incur on our extended term loan, there's a couple other things that would roll into that related to unused, undrawn fees on our revolver, you know, fees that we incur on our LCs and some other things, in addition to amortization of deferred financing costs. So, if you roll all that up, you might see gap interest expense in the 41 to 42 million range. But that also does not include any interest on the delayed draw term loan that we talked about. And we'll just see where that goes with respect to our M&A activity.

Thanks, Peter. And our final question comes from Brian with Jefferies. Please proceed with your question.

Hey, good morning, guys. Just one question for you. So as we think about COVID and the resurgence that we're seeing, Maybe if you can share with us kind of like what your experience was last year. How did that impact your business and your patients in terms of your ability to or their willingness to let you in the door? And just curious, you know, just so that we can figure out how to think about COVID and how it impacts you going forward. Thanks.

So, Jeff, I'll start and then you just jump in because I think some color around what patients are saying matters. Brian, at the lowest point last year, our volumes were off about 10%. And so that was called it April, May of last year. We've seen an improvement throughout the rest of 2020. We're seeing that volumes decline again now related to the Delta variant and the experience there. But I think maybe unlike a year ago where maybe some of our families kind of pull back a little bit. I think our families have grown accustomed to living and taking care of children in the home with COVID. But Jeff, why don't you provide some color for Brian about what we're hearing from families?

Yeah, that's well said, Brian. In the home environment where we put one nurse with one patient in the home, I think we're still very well protected. As Tony said, none of our patients haven't heard with and dealt with COVID now for over a year. The Delta variant has our attention, has all of our health providers' attentions, and we're monitoring it appropriately. I don't think it's going to have a long-term impact or significant impact on how our families feel about having the nurse in their home. I think the nurse likes that one-on-one setting. The family understands it's one or two nurses. I think our families are really focused on keeping them out of the hospital so that families don't want to go back into the hospital for an emergent revisit. They never do, but they certainly don't right now. And I think, as we said, a pivot to schools. We're really partnering. I give our schools credit, our school leaders credit. They're really trying to be thoughtful on how they can do in-person. They know how important that is for the kids, and it just rolls downhill to us. It's really an important aspect of maintaining that through the Delta variant, and I think our school systems have been very thoughtful about how they're planning on doing it this fall.

Awesome. Thank you, guys.

Thanks, Brian. Appreciate it.

And we have reached the end of the question and answer session. I'll now turn the call over to Tony Strange for closing remarks.

Thanks, Operator. And again, thank you for your interest in the Aviana story. We look forward to updating you on our continued progress as we go. And, Operator, that concludes our call.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.