This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Good morning, and welcome to Aviana's Healthcare Holdings fourth 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.
spk07: Thank you, operator. Good morning, everyone, and thank you for joining us today. Speaking on today's call are Rod Windley, Aviana's executive chairman, Tony Strange, Aviana's Chief Executive Officer and President, David Afshar, Aviana's Chief Financial Officer, and Jeff Shainer, Aviana's Chief Operating Officer. We issued our earnings press release and filed our 10-K yesterday. These documents are available on the Investor Relations section of our website at www.aviana.com, as well as on the SEC's website at www.sec.gov. A replay of this call will be available until April 5, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, March 29, 2022. Today's call may contain forward-looking statements which may be identified by the use of 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 beliefs and assumptions about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Except as required by federal securities laws, Aviana will not publicly update or revise any forward-looking statement subsequent to the date made as a result of new information, future events, or changing circumstances. Also, we supplement our financial results reported in accordance with GAAP and certain non-GAAP financial measures. 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 form 10-K, both of which are available on our website and the SEC website at www.sec.gov, or is otherwise available separately on our website. Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up so that we can accommodate as many callers as possible in the allotted time. With that, I will turn the call over to Aviana's Chief Executive Officer, Tony Strange. Tony?
spk06: Thank you, Shannon, and good morning, everyone. Thank you for joining Aviana's fourth quarter and 2021 year-end earnings call. On the call today, we will provide some insights into our Q4 results, update you on current operating and reimbursement environments, bring you up to speed on our most recent M&A activity, as well as lay out our expectations for the full year 2022. Before we get into these results and the details, I'd like to take a minute and thank the Aviana team. As you know, this is our first year-end reporting period for Aviana as a public company. Our legal, accounting, and finance teams have done an outstanding job in preparing us for today. We've successfully completed our audit, finalized the 10-K as well as the proxy, all within the required timelines, and have line of sight into accelerating our filings by a few weeks for next year. In addition, I'd like to thank all of our branch personnel and our caregivers for what you do each and every day. By putting our patients and our families first, you create the foundation on which these results are built. Thank you for your dedication and your hard work. Let's jump right into our results. As a reminder, at the end of Q3, we acknowledged that the pandemic was continuing to provide disruption to the labor markets. And as a result, we lowered our revenue expectations to a range of $1.675 billion to $1.680 billion. However, through a disciplined approach to managing gross margins, we felt confident that we could maintain our full year EBITDA guidance of $185 million. I'm pleased to report that for the year ending 12-31-21, We reported revenues of approximately $1.679 billion and adjusted EBITDA of approximately $184.2 million, or 11%. Given the ongoing headwinds of the pandemic, inclusive of the sudden onset of the Omicron variant, we're extremely proud of our year-end results. Congratulations to all of our operators for a job well done in a very difficult environment. In thinking through our year-over-year comparisons, I'd like to remind everyone that Aviana uses a 4-4-5 calendar for accounting purposes. As a result, every five years, the fourth quarter has an extra week, making it a 53-week year. Aviana's 2020 results include this 53rd week, making it a 14-week fourth quarter. Revenue for the quarter was $414 million, down 1.9 percent from Q4 of 2020. However, adjusted for the 53rd week for comparative purposes only, revenue would have been up 5.6 percent. Likewise, EBITDA for the quarter was $45.8 million, up 1.3 percent over Q4 of 2020. Again, adjusting for the 53rd week for comparison purposes, EBITDA would have been up by 9.1%. Jeff will provide further details of our segment results in his prepared comments. We believe that eventually the pandemic will be in our rearview mirror, and having displayed the discipline to protect our gross margins during these difficult times, we will be well positioned to accelerate growth once again. Along with the disciplined approach to managing expenses, we continue to experience rate wins across our diversified payer platform. As I mentioned on our last call, 24 of our 31 states have put through rate increases in the last 12 months. For the first time in my career, we have managed care plans, state Medicaid agencies, and even CMS reaching out and asking what can be done to increase access to home and community-based services. We continue to see benefit expansions in several of our key states and are already discussing further rate improvements in states that recently put through rate increases in 2021. And while growing, Medicare represents only 12 percent of our overall revenue, making it the largest single concentration of any one payment source. We have 31 unique payment systems across as many states. In addition, we have in excess of 250 individual Medicaid managed care contracts. And while Medicare is a very good partner in our home health and hospice business, Medicaid is an excellent payer partner in the states in which we operate. Payers fully understand the impact that COVID-19 has had on access to care and have been not only willing but eager to deploy more resources to manage the care of these individuals in their homes. And by way of example, we're in discussions with a couple of payers that are willing to explore new operating and payment models for private duty services that move away from an hourly fee for service model to a broader care management model, allowing for greater flexibility in staffing requirements. We believe that our payer diversity, along with our desire to drive innovation within the benefit provides us multiple opportunities in the expansion of home and community-based care. Let's turn our attention to our most recent M&A activity. As reported during Q4, both accredited and Comfort Care transactions closed in December. Both transactions are well into integration, and both are tracking at or ahead of schedule. As you may recall, we expect these two transactions to deliver approximately $200 million a year in annualized revenue. I'd like to welcome all of the employees from accredited and from Comfort Care to the Aviana family and to say thank you for all the hard work that's gone into integration thus far. We're excited to have you as part of the Aviana story. We had originally thought that we would pay for these transactions through cash on our balance sheet, with some additional debt while maintaining leverage around four and a half times, and then use equity to fill the gap. However, given that the stock was trading at $6 to $7 range, we decided that it would be in the best interest of our shareholders to fund the entirety of the transactions with cash and debt, taking leverage to the six times range. In doing so, we're able to reduce the overall cost of capital and are quite comfortable with the resulting leverage profile. Given the risk of rising interest rates, we have put in place two different forms of hedges across all of our outstanding debt. While we're comfortable with the current leverage, it's our long-term desire to reduce leverage through accretive acquisitions and or the use of operating cash flow to pay down debt. Dave's going to provide some additional detail on our operating cash flow, debt structure, and the hedges that I just talked about. As I mentioned on the last call, we will focus the first half of 2022 making sure that these businesses are fully integrated and look for further acquired growth in the second half of the year. As a reminder, we have a $200 million delayed draw term loan for which we are already servicing the spread associated with the debt. In addition, we have $182 million of availability under our revolving credit facility should additional financing be needed. We believe that we're well positioned to continue to grow through acquisitions as opportunities present themselves. That brings us to where we are now and how we're thinking about the full year 2022. Like most businesses, the Omicron variant has had a meaningful impact on our business. Through most of the pandemic, we had between 200 and 300 caregivers out or quarantined due to COVID at any one time. Beginning in December, we saw that number begin to climb, and it climbed to almost 3,000 caregivers for most of January and February. By mid-March, we saw that number begin to trend back down, and I'm pleased to say that as of today, we're back down to those pre-Omicron levels. In addition, during the same period, we experienced the great vaccine mandate debate. While the OSHA mandate was ultimately rejected, the CMS mandate has been upheld. While complying with vaccine mandates has been a struggle for most companies, including Aviana, I'm proud to report that 98% of all of our employees have either been vaccinated or have a qualifying exemption on file, and we are in compliance with all local, state, and federal mandates. All of these transitory disruptions have had an impact on our business, not only in Q4, but more specifically in Q1. While the impacts of Omicron have subsided, the labor markets continue to offer challenges in identifying and hiring enough caregivers to meet the demand. We anticipate these challenges to continue through the first half of 2022, with much of them being realized in the first quarter. Keep in mind that Q1 will reflect a full quarter of accredited and comfort care, but partially offset by the disruption of Omicron which could negatively affect revenues in the range of $30 million and EBITDA in the range of $10 to $12 million. As a result, we believe that revenues for the full year 2022 will be in the range of $1.890 billion to $1.920 billion, and adjusted EBITDA will be in the range of $190 to $205 million, or between 10 and 11%. Notwithstanding further disruptions from additional variants and assuming that the labor market stabilized, we would expect the second half of 2022 to return to a run rate of $215 to $225 million in EBITDA on an annualized run rate basis. In summary, Avion is a diversified home care company generating $1.9 billion in revenue with EBITDA margins between 10% and 11%. and we will consistently grow in the low to mid-teens year over year. We have an excellent track record clinically and a strong commitment to compliance. Like Medicare, Medicaid is an excellent payer for home and community-based care. The demand for our service has never been higher, and the sentiment from regulators and payers alike is that home care is a solution, not a problem. We believe that Avianna is positioned to continue its role as a leader in the provision of care and the innovation that will redefine home care as we know it today. With that, I'll turn the call over to Jeff for a little bit deeper dive into our segment results.
spk08: Thank you, Tony. Before I dive into Q4 and our 2021 year-end operating indicators and key metrics, I'd like to spend a few minutes on our COVID vaccination efforts, Omicron variant impact, and caregiver employment trends. As Tony mentioned, We are very pleased with our overall Aviana vaccination and approved exemption rate of 98%. Our collective efforts to fully vaccinate our staff has largely been achieved. And at this point, all new employees are documented with a vaccine or qualified exemption at their hire date. While this was a major push for 2021 and specifically Q4, we are in full compliance with local, state, and federal laws regarding vaccination status. Going forward, we see this process being a part of how we manage the business day to day. The Omicron variant had an impact on our December results as it picked up steam aggressively into the new year. We experienced the greatest disruption from Omicron in Q1 of 2022 as it affected almost 10 times the number of quarantined employee cases. Prior to December, we averaged 200 to 300 employees per week in quarantine status and therefore not working. By late December, that number had grown to over 1,000 employees per week, and at its peak in Q1, almost 3,000 employees per week in quarantine. Although short-lived, Omicron left a significant mark on our ability to staff open shifts, admit new patients, and complete even day-to-day branch tasks. Now on to caregiver employment trends. Without the benefit of knowing the impact of the upcoming Omicron variant, we made the strategic decision to invest in a one-time effort to reengage caregivers and provide them with a monetary incentive to stay engaged or return to Aviana. We refer to this program as the Return to Work Program. In short, the program began in December and ran through December 31st. During the program, caregivers were incentivized to do one of the following. Either A, join Aviana as a new nurse, B, rejoin Aviana if they previously worked for us but had left, C, work additional hours if they already worked for us, or lastly, commit to working exclusively for Aviana. Leading up to the onset of Omicron, we saw 10 straight weeks of increased caregiver engagement. On a one-time basis, we invested close to $11 million in cash to run the program with moderate success. The return to work program has ended, and at this time, we do not have plans to reinstitute similar programs for 2022. Now on to the private duty services segment. During Q4, we produced $330.5 million of revenue. Revenue was driven by approximately $9 million of care provided during the quarter, or a 7.7% decline in volume over Q4 2020. The 7.7% decline in PDS volume is adjusted for the comparable 13-week Q4 2020. Patient demand continues to be at all-time highs as we continue to partner with children hospitals and payers to find new solutions to get our pediatric patients home. The primary drivers of the decline in volume was the number of caregivers exposed to Omicron and the overall labor shortages. I do expect PDS hours to improve in Q1 2022 on a sequential basis, even with the impact of the Omicron variant. Our Q4 revenue per hour of $36.56 was up $1.85 from Q4 of 2020, or 4.6%. This was primarily driven by reimbursement rate improvements and Medicaid program enhancements. With 24 2021 PDS rate increases, we continue to actively pass through wage rate improvements to our caregivers. We are already experiencing rate wins into 2022 and expect this trend to continue as we progress throughout the new year. Turning to our cost of labor and gross margin metrics, we achieved $86.7 million of gross margin, or 26.2% in Q4. However, when adjusted for the approximately $11 million invested into the return to work caregiver program, our Q4 comparable gross margin would have been 29.6%. As this caregiver program was one-time investment in Q4, I expect PDS gross margins to remain in the 29 to 30 percent range moving forward. Our spread per hour of $9.59 was also impacted by the return to work program. On a comparable basis, Q4 spread per hour would have been $10.81, down from its peak of $11.18 in Q3 of 2021. As I mentioned during our Q3 call, we continue to pass through the rate increases in the form of strategic investments in caregiver wages to drive volume growth in our PDS segment. Long term, I still believe $10 to $10.50 is the ideal spread per hour target, balanced against a 3% to 4% year-over-year organic volume growth for our PDS segment. As Tony mentioned, we closed on the accredited home care acquisition in December. Our IMO team is working through the integration plans, and I am pleased with the progress we've made to date. We expect to wrap up the accredited integration and synergy capture by the end of Q2. California continues to be a very important state to our Aviana story, and the accredited business only further strengthens our position. Moving on to our home health and hospice segment for Q4, where we have continued to expand our geographic presence in Alabama and Tennessee with our acquisition of ComfortCare. I'm pleased to share that we are moving efficiently through integration, and the ComfortCare team has assimilated very well into our Aviana family. The business is performing in line with expectations, and we expect to finish integration and a majority of synergy capture in Q2. During the quarter, we produced $48.7 million in revenue, a 181% increase over Q4 2020. This growth was driven by 10,500 total admissions, approximately 67% being episodic, and 11,000 total episodes of care. These volumes are in line with the Q4 seasonality of the home health business and reflect the impact of the Omicron variant in December. Revenue per episode for Q4 was $2,942, up 1.7% from Q3. On a current run rate basis, our home health and hospice division is approaching $300 million in annualized revenue. I'm pleased with the organic growth rates of our home health and hospice business and believe it will remain a high single-digit admission growth segment for Aviano. From a cost and margin perspective, Q4 gross margins were 45.9%, primarily driven by higher seasonal PTO usage and the temporary impact of the Omicron variant in December. 2021 annual gross margins were 47.2%, and we believe there remains additional room for improvement. We see the home health and hospice business segments ideal gross margins landing in the 48 to 50% range. Lastly, we continue to ramp up our clinical innovation investments to support the value-based purchasing efforts in home health. We are well positioned for value-based purchasing and look to benefit from its nationwide expansion in 2023. Now, on to our Aviana Medical Solutions Sitement results for Q4. During the quarter, we produced $34.9 million of revenue. Revenue was driven by approximately 77,000 unique patients served, UPS, or revenue per UPS of $453.39. Revenue per UPS was down approximately $10 or 1.9%. The primary driver of rate decline was the impact of the national intro contract we signed effective September 1st, 2021. The longer-term impact on rate per UPS should normalize in the $440 to $460 per UPS range. Lastly, from a volume perspective, adjusted for the 13-week Q4 2020 impact, volumes for Q4 were flat year over year. We're experiencing intro product supply chain delays that have temporarily burdened our ability to fill orders. In some cases, we have patients needing specialty intral products and the supplier doesn't have inventory available. We see these supply chain issues as temporary in nature and are working with our distribution partners to immediately address them. Turning to our cost of goods and gross margin metrics, we continue to experience stability in gross margin with $15.4 million in Q4 or 44.1 percent. Medical Solutions' 2021 gross margin of 44.6 percent was in line with our expectations. Moving forward into 2022, we expect gross margins to remain in the 41 to 43 percent range as a result of the impact of the national payer contract mentioned above and pressures on supply chain product availability. Finally, The demand for our intranutrition product and services continue to be very robust. Our industry-leading clinical model and highly efficient distribution network will allow us to weather the short-term impact of the supply chain shortages. We remain upbeat about the long-term value that Medical Solutions provides and its positive growth impact to Avianna as a whole. In summary, all three of our business segments have proven to be very resilient in a challenging environment. I am proud of our disciplined approach to managing margins while investing in additional caregiver wages. The Avion team is dedicated to providing high-quality and cost-effective healthcare in our patients' homes. Regardless of the short-term market conditions, home care remains the number one choice of our patients, families, referral sources, and payers. With that, I'd like to turn the call over to Dave for additional call on 2021. Dave? Thanks, Jeff.
spk05: Tony and Jeff have provided some details on the fourth quarter, and I'll go ahead and provide an overview of fiscal year 2021, as well as provide some cash flow, debt, and hedging details. Starting out with revenue, 2021 revenue was $1.68 billion, an increase of $184 million, or 12.3%, from 2020. Our 2021 revenue growth was primarily attributable to $146 million of growth in our home health and hospice segment, as our 2020 Triple H M&A contributed a full year of revenue in 2021. as well as incremental partial year revenue provided by our 2021 Triple H M&A. Our PDS and medical solutions segments also contributed to incremental revenue of $28 million and $9 million, respectively, to our 2021 revenue growth. And as Tony and Jeff both mentioned, fiscal year 2020 contained 53 weeks as compared to 52 weeks in 2021, which affects the comparability of our 2021 key performance measures to 2020. Now turning to gross margin, Our gross margin percentage increased at 32.3 percent in 2021 from 30.4 percent in 2020. This was attributable to the significant growth in our Triple H business, which has a higher gross margin percentage than our PDS business, as well as a 50 basis point increase in our PDS gross margin percentage. Field contribution margin also increased 30 basis points to 14.6 percent in 2021 from 14.3 percent in 2020. As we think about field contribution, Recall that while Triple H has higher gross margins relative to PDS, it also has higher branch and regional administrative expenses. As a result, we would not expect to see the full amount of the increases in gross margin percentage flow through to field contribution margin. Corporate expenses were 7.8 percent of revenue in 2021 as compared to 7.6 percent of revenue in 2020, primarily as a result of growth in our non-cash, share-based compensation costs, as further discussed in footnote 13 to our financial statements and in our MD&A. Adjusted corporate expenses, however, decreased from 5.5% of revenue in 2020 to 5% in 2021. The principal adjustments from corporate expenses to adjusted corporate expenses in 2021 include integration costs and non-cash share-based compensation. It can be found in the corresponding table in our press release. I'd like to provide a little color on the goodwill impairment charge we reported in Q4. deserved a significant decline in our market capitalization over the course of 2021. The continuing impact of COVID-19 on our business has pressured our clinical workforce and caregiver availability in our core PDS businesses, thereby constraining PDS volume growth and expectations. As a result, we recorded 117.7 million impairment charge in our PDS segment in the fourth quarter. Moving on to net operating loss, net loss, and adjusted EBITDA, Operating loss was $36.1 million for fiscal year 2021 as compared to $3.5 million in 2020. While operating loss was positively impacted by a $31.5 million increase in field contribution in 2021, the primary driver of the increase in operating loss was $42 million of incremental goodwill impairment charges that we took in 21 versus 20. Net loss was $117 million in 2021 compared to $57.1 million in 2020. There are a number of moving parts driving the increase in net loss, which you can see in our income statements, with the primary drivers being the increase in operating loss I mentioned earlier, as well as the absence of a 50 million legal settlement that we received in 2020. As Tony mentioned earlier, we were pleased to report adjusted EBITDA of 184.2 million for fiscal year 2021, a 31.8 million, or 21 percent, increase from 2020. And this represents an 11 percent adjusted EBITDA margin for 2021. Turning to operating cash flow, net cash used by operations was $11.4 million in 2021. Bear in mind, though, that this included $38.1 million of cash repaid to government agencies in 2021 related to certain CARES Act items, including $25.9 million paid to the IRS for payroll taxes that we deferred in 2020, and $12.2 million paid to CMS for advances received in 2020 by certain of the companies we acquired. Over time, some of our analysts and investors have asked questions about how to think about GAAP operating cash flow in relation to adjusted EBITDA, and I wanted to provide some color on that here. When you think about our operating cash flow in relation to our adjusted EBITDA, there are a couple significant drivers of variances between the two, with the largest being cash paid for interest. In 2021, cash paid for interest was $59 million. As a result of rising forward-looking market expectations for interest rates in 22, based on current leverage, we expect the cash paid for interest will increase in 22 and be more significant in relation to our adjusted EBITDA. Our M&A-related costs also create a variance between adjusted EBITDA and operating cash flow. M&A-related costs include acquisition-related costs and integration costs, both of which you can find in our adjusted EBITDA reconciliation in MD&A, and which approximated 30 million in 2021. COVID-related costs were 19 million in 2021, which can also be found in our adjusted EBITDA reconciliation. And one last item is the $38.1 million of cash repaid to government agencies in 21 related to the CARES Act items that I mentioned a moment ago. This caused, in part, working capital to drive a significant variance between adjusted EBITDA and operating cash flow in 21. To finish up on this topic, and overall, hopefully this provides some useful color on some of the larger drivers of variances between adjusted EBITDA and operating cash flow. I would also encourage you to review our statements of cash flows included in our audited financial statements, as well as our adjusted EBITDA reconciliation and MD&A, because the examples I've provided here are not all inclusive, but again, intended to provide useful reference points in color. I'll now provide a credit facility and hedging update. As a refresher, after our IPO last April, we used $407 million of the proceeds to fully repay our second lean term loan at the time and pay $100 million down against our first lean term loans. Then in August 2021, we refinanced our first lien term loans into a single $860 million first lien term loan bearing interest at LIBOR plus 3.75% with a 50 basis point floor. Then in Q4, we entered into a new $415 million second lien term loan to finance our Q4 M&A for the reasons that Tony mentioned earlier. The new second lien term loan bears interest at LIBOR plus 7%, also with a 50 basis point LIBOR floor. In Q4, we also entered into $150 million accounts receivable securitization facility. In aggregate, we had $1.39 billion of outstanding variable rate debt as of year end. We do have two hedges in place against our debt. The first is a $520 million notional interest rate swap that converts $520 million of variable rate debt to fixed rate debt. The swap expires in June 2026. We also have an $880 million notional interest rate cap which caps our exposure to LIBOR increasing over 3%. The interest rate cap expires in February 2027. In summary, and as I wrap up here, our 2021 operating results underscore the resilience of the Aviana team amidst a challenging operating environment. Our IPO and subsequent capital structure improvements have prepared us to take advantage of the opportunities ahead of us with liquidity that is supportive of our 2022 acquisition goals. In addition, I'd like to say a big thank you to the entire Aviana team for supporting the timely completion of our audit and filing of our first 10K as a public company. In particular, our accounting, revenue cycle, finance, and legal teams have moved mountains to make it all happen. And our professional services providers, including Ernst & Young and Greenberg Truerig, have provided exceptional service to Aviana in the process. And with that, operator, I think we're ready to open it up for questions.
spk03: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may 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 would 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. In the interest of time, please limit yourself to one question and one follow-up so we may get to everyone's questions. Our first question comes from the line of Peter checkering with Deutsche bank. Please proceed with your question.
spk09: Hey, good morning guys. Um, so a lot to unpack here, I guess on the PDF segment, uh, what happens during the first quarter when the patients were unable to sort of be staffed in the first quarter? Did they go back to the hospital? Did they live without care or did they go to another provider? And how should we think about sort of that rebounding back when your staff is available?
spk06: So first of all, thank you for your question, Peter. And let me tell you what doesn't happen. They didn't leave and go to another provider. Outside of that, all of the above is probably true. Some patients might have had to seek care in a hospital if they're a ventilator or trach dependent. The most common answer is the family has to pick up that additional care. So mom and dad or grandmother or brothers and sisters all have to chip in and pick that care up. And, you know, I thought where your question was headed, though, that once those hours are lost, there's really no way to go back and make up those hours. And so to your point, as the caregivers reengage or come back out of quarantine, then we can begin staffing those hours. I think, you know, we talked about in the prepared remarks that we really kind of saw that bottom January and February were pretty significant were pretty dire months in terms of the impact of Omicron. And then in March, we began seeing those caregivers reengage. But, Jeff, anything you want to add to that?
spk08: Just the fact that, Peter, like, as Tony said, with this variant, it was really a 7- to 10-day quarantine period. It was a rolling period because it was exposing and positive confirmations on so many different states and different communities. But to Tony's point, We paid those caregivers as if they had worked in that period of time that they were gone, which was our policy all along, which did allow those caregivers to stay with us. This is a very transient group of PRN employees. We felt it was necessary to pay them to keep them whole through that process. And so as abrupt as it was, the positive side of it was those nurses and caregivers did come back after their quarantine. And I echo Tony's comments. It's a tremendous burden placed on the parents, on the family. They have to be up with these pediatric children sometimes 24 hours a day, stay with them while they're sleeping. And so you can imagine a family and the pressure it puts on them. But we are pleased to be able to reengage the caregivers after the quarantine period was over.
spk09: Okay. And then one quick guidance question. I've seen that there'll be a lot of questions around guidance today. But sort of two parts. The first one, can you sort of help me bridge What fourth quarter EBITDA would have been if all the deals had closed at the beginning of the quarter, just behind the launch pad in the first quarter? I was estimating around $53 million is in the ballpark. And the second one, with the first quarter effectively closed, you have guidance on the first half of the year. But can you be more specific about what range of first quarter EBITDA has now given us sort of the cadence in the rest of the year?
spk06: All right. Well, let me see if I can take that kind of one piece at the time. So if you think about Q4 with a full quarter impact of both accredited and comfort care, however, let me caution you because we won't have realized all of the synergies that quickly in the comfort care and accredited deals. So remember, the synergies will roll on as we move throughout really the first half of 2022. And, Pito, I want to be careful because we don't really provide quarterly guidance. But if you were to take our fourth quarter numbers and think that there's probably another, you know, call it $6 million, you know, $6 to $7 million of additional EBITDA associated with having the full year of – I mean a full quarter of accredited and comfort care in place, and then offset that by the impacts of Omicron. So that's kind of how to think about fourth quarter moving into first quarter. However, for all the reasons we've already talked about, the Omicron – variant really impacted our business January and February. And you can really see it across all three segments. However, the most significant was private duty because that's where we got one nurse, one patient. And if that nurse is not working, revenue is not being generated. So we think the impact of that in Q1 is going to be pretty significant. I think in my prepared remarks, I painted a picture where we could see revenues being off in total you know, in the range of $30 million in Q1 and, you know, impacting EBITDA, which is really a gross margin number kind of in that 10 to 12. But for those reasons, you know, our full year outlook is reduced by the impact of what we're going to experience in Q1 and maybe bleeding into Q2 a little bit. But that's the picture that we're trying to paint. And, you know, We're actually giving more color than we would be accustomed to because when you're thinking about Aviana being, you know, I think the numbers we use, $215 million to $225 million even a run rate company, I think that's still the right way to think about our business. It's just we're going to have a different starting point because of the impact that Omicron had in Q1.
spk03: Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.
spk01: Thank you. I'm going to stick on the guidance topic here for a little bit. You guys mentioned a couple other moving pieces. You've got really strong rate increases coming through, which generally tend to affect PDS hours. Can you talk about the cadence of rolling those out? Should we think about them being fully put into your hourly rates for the full year, starting in 1Q? And then the supply chain issues that you flagged, are those included in guidance? And do you think about it just being a 1Q issue?
spk06: So, Jeff, in a minute, why don't you answer the question about how we're thinking about the rate increases flowing through in 2022? You know, Sarah, because you were kind of pulling at that Q1 number, let me remind everybody that in Q1, especially in private duty where everything is so labor intensive, we typically see a higher payroll tax impact during the first quarter. That really kind of writes itself in March and April. So that's another thing that's going to pull on that first quarter a little bit. I think some of our most recent increases you've actually seen in a portion or some of Q4. We'll get to experience that in the full quarter. But as both Jeff and I mentioned in our prepared remarks, we're already seeing in some cases some of the same payers that put through rate increases in 2021 back at the table in discussions with 2022. With that, Jeff, why don't you comment about how we think about those playing throughout the course of the year?
spk08: Yeah, hey, Sarah. Yeah, I think Tony said it well. You know, we already have four rate increases that are in the books for this year. Those have effective dates, you know, in Q1 and Q2. We're already engaged with dozens of other states as they trend towards their usually July 1st and September and October 1st fiscal year and in year beginning dates. So you know, I think we'll see ourselves, you know, back in the mid, probably mid-teens, high-teens from rate wins. And then I think, you know, we've continued to evolve our strategy around increasing the benefit opportunities through home and community-based services. And we see a real opportunity to continue to do that this year. I think, as Tony mentioned, you know, a lot of the burden has fallen on the families, the parents that are with these children every day. And I think that we see We have a couple of states that embrace the parent being a lesser-skilled worker, and we are continuing to lobby for that acceptance in more states. And we had one state adopt that this year, 2022. So I think we'll see more states adopt that family member becoming a full-time caregiver of ours on the lesser-skill or unskilled piece. The second part of that was the supply chain for AMS. You know, Sarah, that really kind of built up over the last four months of last year as the supply chains, as we saw the ships out in L.A. port. You know, some of those ships have our intro specialty products, and they're coming from Europe. And we just saw that our distribution partners were starting to run thin on inventory, especially on the specialty products, not as much the generics, but the specialty products. You know, many of our young, young kids, kids, you know, kind of, you know, zero to five age really are on specialty formulas that are very specific to their disease state. And so getting those products and getting them back in the shelves so we can distribute them is a big deal. I do see light at the end of the tunnel in that. I think as we look forward, certainly Q1 continued to be pressure on the supply chain as it related to AMS supply. And I think as we look out, we see some of them, some of the issues being solved in Q2 and then certainly by summer, much of that inventory being resupplied so that we can ship every and any medical solution into a product that is needed at the time the patient's needed.
spk01: Great. And just one follow-up here on rates. Can you help us understand, are there any states where the rate enhancements have been part of a multi-year budget so you have some go-forward clarity? And as we come to the end of the public health emergency and the enhanced FMAP is rolled back. Are you guys having any discussions with states on their view of program funding?
spk08: Tim Stenzel- Yeah, that's a great question, Sarah. I think I'd answer both or maybe see all of the above. We've got permanent rate. Looking backwards at the 24 of those, we have permanent rate. We have Temporary rates that have continued to be temporary and moved into the future around the public health emergency. And then lastly, I would say we're also seeing one-time payments. So states that are using the home and community-based services federal rewards as one-time payment updates. And so the thing that we're most focused on is long-term rate. So we're most focused on moving the rate long-term to continue to attract nurses. And I would say secondary to what I said before, we are very focused at moving the benefit, you know, additional services, both of skilled and unskilled services. But also, as Tony mentioned, we now have audiences with the largest Medicaid managed care providers in America talking about a different payment model. And I think that's what excites us the most is they have come to us and said, let's come up with a different solution to where we can keep these kids out of the hospitals, keep them safe at home, and truly reduce the total cost of care, and that to us is the exciting part of the future.
spk06: And Sarah, I'll answer the other side of your question, though, and maybe I interpreted it wrong. If your question related to what is the risk of downside in the event that rate were to pull back, I can tell you that in our view today, we don't have any rates that are pulling back. Our rate is only going to be where it is or positive from here for the foreseeable future. Thank you, sir.
spk03: Our next question comes from the line of AJ Rice with Credit Suisse. Please proceed with your question.
spk10: Hi, everybody. I just want to make sure I understand. I know there's a lot in the first quarter going on for 22, but when you look at the rest of the year, and I understand there may be a little spillover into the second quarter, Your revenue growth assumption for the back half of the year, if you take out the contribution from acquisitions, have you changed your thinking about what the organic growth was? I think we talked about this year because of labor originally not being the 8% to 10% organic growth, but maybe being more in the mid single digits. But it almost looks like, unless I'm doing the math wrong, which is possible, you're now looking at something in the low single digits. Is that right? Can you give us a little more flavor on what's baked in, acquisition versus organic, as you come out of the Q1 noise?
spk06: Yeah, AJ, nothing has changed in our thought process. Matter of fact, and I'll even unpack it a little bit further, we still think of that private duty business, that core private duty business as, In the skilled side of that, we're growing in that 3% to 4% range. In the unskilled side of private duty, that business, to all the reasons Jeff talked about, we expect it to grow in the high single digits. Our Medicare home health and hospice business is going to grow in the high single digits. Our AMS business is going to grow in the high single digits. And, you know, overall, I think our growth rate we still believe will be in that, you know, five to six percent year over year organically. And I think as you see us get through the end of 22, we're assuming that those kind of growth rates are, you know, will come back. So I don't think our thoughts have changed at all. I think maybe what you might be seeing is kind of the ramping back of the big dip that we're taking here in the first half of the year. I think you're seeing some of the impact of ramping that back. You know, we have a little bit of seasonality that we have to contend with for Q3. So in general, Q3 is usually one of our lower quarters. So you may be seeing that built in. But I don't think our sentiment on the overall business has changed at all. If anything, I think we see that there's opportunity for upside on that. Our home health and hospice business is growing. You know, some of the creative and innovative things that Jeff talked about with some of our payers where we're now able to hire family members to provide care and have greater flexibility with staffing. I think all of those things will go into accelerating growth rates.
spk10: Okay. And then maybe a similar question on the labor front. I know a lot of moving parts in the fourth quarter and the first quarter. But again, as you move into the second and then definitely the second half, what is your assumption about year-to-year labor costs on whatever metric you're looking at it for both the PDS business and the adult home business? What kind of increase are you assuming baked into that guidance?
spk06: Well, again, You know, I think the best way to think about that, A.J., is in Jeff's prepared remarks, he referenced spread again. And so instead of focusing on the margin, we will kind of focus on that spread. And in states where we see rate increases, we will take those rate increases and in a very disciplined manner pass some of those rate increases along in wages to our caregivers and and that in and of itself will help facilitate growth. But as it relates to the spread, we're going to be very disciplined about passing these rate increases through to caregivers in the form of wages because we have to manage the gross margin in this business. Once you give up the gross margin, you will never get it back. And so it takes that 30% gross margin for us to run that business, and we'll be disciplined about it. I guess what I'm trying to paint a picture for you, when we get a rate increase in a state, and I'll let Jeff, you comment on this, we just don't say, okay, well, let's just give everybody an increase across the state. You know, it's market by market and sometimes patient by patient.
spk08: Yeah, and, AJ, as Tony said, you know, the rate increase is effective on one specific date for all patients that fit a certain reimbursement model. And then to Tony's point, it takes us weeks, in many cases months, to spread that wage rate out. And that's why I think our spread, we feel confident, will still be in that probably north of 1050 range in PDS and in Q1 and probably closer to 1050 in Q2. On the adult side, I think as we said in our prepared remarks, we still see room for a gross margin improvement. I think we're still growing our systems and our our KPIs for our home health and now our hospice business. And, you know, I think we were in the 47% range at the end of last year for the full year. And we see that probably growing into the, you know, 48 to 49% range in 2020, 2022. So I think there's still room for improvement on the HHH side.
spk06: So, Jeff, I think the best demonstration of that, and guys, I'm doing this all from memory, but if you go back to Q1 of 2020, I believe the spread was right at 1050. In Q2, it went to $10.80. And then in Q3, it jumped all the way to $11.18. And both on our Q2 call and on our Q3 call, Jeff, we talked about having to pull that number back a little bit because at $11.18, that's actually running a little bit hot. So what you're seeing play through 2021 is exactly what we said would happen is that as these rate increases come through, there is somewhat of a lag time between that and when you start passing those down through wages. And I think, you know, the spread Jeff talked about today was just over $10.80 I think is a good demonstration of that, you know, putting some of those dollars back to work. and we'll continue to do that in a stair-step function as these rates continue to improve throughout 2022.
spk03: Our next question comes from the line of Brian Tanquillit with Jefferies. Please proceed with your question.
spk07: Hey, good morning, guys. Just shifting gears a little bit, I know there's been a lot of discussion on gross margins, but as I look at your regional and corporate expenses down sequentially and even down over year over year in corporate, it just trying to figure out the durability of these levels and how you're thinking about kind of like G&A growth going forward?
spk06: Well, you know, when we go through acquisitions, those are the areas where we'll get the most synergies. And so, as I made a comment a while ago, you know, we will begin to see the synergies associated with, you know, a $200 million increase associated with accredited and comfort care. We'll begin to see those synergies flow through in the first half of the year. So, So in terms of durability, we think we will be able to continue to control those expenses and leverage those expenses as the company grows. Now, some of that is attributable to some insurance premiums and other things like managing through – accrued incentives. Every single quarter, we true up incentives to where the business is operating that day. So all of those things will continue to play through. But we think the leverage is quite sustainable at the SG&A line for corporate, regional, and area expenses.
spk07: Got it. And then, Tony, since we're on the topic of home nursing, I know you said that the two acquisitions are performing at or above plan. So Just any comments you can make in terms of what you're seeing in terms of nurse recruitment and the referral patterns that you're seeing coming out of the hospitals as you've started digesting those two assets?
spk06: Well, as it relates specifically, I'm going to broaden your question. As it relates specifically to those two assets, their businesses are doing well. We've not seen any slowdown or pullback from referral volumes or admissions or hours staff And so those two businesses specifically are doing great. You know, matter of fact, I'll tell you, the folks out at the accredited deal in California, that's been a pleasant surprise. Their volumes have not only held but improved. And so we're really excited about both those transactions. I'm going to expand your question a little bit, and I think both Jeff made a comment about it and so did I. The demand for our services has never been higher. We have, especially on the private duty side, we have patients in hospitals waiting to come home. As a matter of fact, we referenced this at our most recent healthcare conference. There's a Los Angeles Times article. There's a Philadelphia Inquirer article. There's a Washington article all around patients waiting to come home and the lack of access to care. for home and community-based care. And we think this just creates a tremendous tailwind going forward that people have to recognize and investments need to be made into expanding home and community-based care through some of the innovative things that Jeff talked about. Let's pay caregivers, let's pay family members to keep these patients at home. And I think we're well-positioned to lead that innovation, and we're pretty excited about it.
spk03: Our next question comes from the line of Matt Borsch with BMO Capital Markets. Please proceed with your question.
spk02: Sorry about that.
spk11: How you expect markets to shake out as we get to the second? I would agree with your assumption that let's all hope. How do you within that estimate that you're going to constraints going around.
spk03: Mr. Boris, your line is cutting in and out.
spk06: Matt, I'm sorry. You were cutting in and out. We couldn't hear your question. Operator, I'm sorry. Matt, we'll be glad to, if you can hear us, we'll be glad to catch up with you in a little bit. Operator, maybe we'll go to the next question while Matt sorts out his audio.
spk03: Our next question comes from the line of Joanne Gojek with Bank of America. Please proceed with your question.
spk04: Yes, good morning. How are you? Thanks so much for taking the question. So I guess the one question and one follow-up. So the one question in terms of the cash flow. So obviously you highlighted a couple of these different things that impacted last year. So how should we think about the cash outlook for this year going forward?
spk05: Joanna, thanks for your question. I think we have a good cash flow generation opportunity. You know, when you look at the net cash used of $11 million in 21, you know, just recall that $38 million that I mentioned that we repaid related to CARES Act items on the deferred payroll taxes, as well as the CMS advances. So that $38 million, you know, weighed down, you know, our cash used for operations in 2021. And then, you know, I'd say, you know, when you think about the overall flux and cash flow year over year, that change might jump out at you. But again, consider some of the non-recurring items that bring the change into perspective. The biggest driver of the year-over-year change in cash flow was $47 million of cash provided in 2020 related to those Social Security taxes that we deferred as permitted by the CARES Act. And then in 2021, we repaid $26 million of this to the IRS in the fourth quarter. So that's a comparative usage of $73 million in operating cash year-over-year. And the other significant item driving the flux was a $50 million legal settlement we received last year. As we look out into 2022, we expect to generate positive operating cash flow. Bear in mind that we will pay another $25 million or so to the IRS in the fourth quarter of 2022. Those are some of the larger moving parts in cash flow. I also direct you to our Liquidity and Capital Resources section in the 10-K for some more insight on that.
spk04: Right, because I guess now with additional debt for the two deals that you're closing, that's what I was getting at, whether you expect to be positive operating cash flow, considering the incremental interest expense. It sounds like you think it's going to be positive for the year. That's right, Joanne.
spk05: That's right. I mean, we think we've got a good opportunity in front of us. As Tony mentioned earlier, we're already servicing the spread. on our delayed draw term loans. So any M&A that we drive or that we secure with that delayed draw will be very accretive to operating cash flow.
spk04: Okay, and if I may, just a follow-up on the discussion previously in terms of the two acquired assets. Because I guess previously where you talk about combined, I guess they were kind of running at a $40 million annualized EBITDA. But, you know, it seems like, you know, maybe there was some impact there, too. So can you kind of frame for us whether this is still kind of the run rate for these two assets or, you know, how much lower, I guess, you know, they're running at because of, you know, what's happening in Q1? Thank you.
spk06: So, yes, I think the answer to your question is yes. We have not changed our thought process or outlook about these acquisitions at all. We still believe that they're going to perform at or better than the model we discussed before. Now, with that said, neither accredited nor Comfort Care are immune to the impacts of Omicron in Q1. They're experiencing the same kind of staffing issues that we've described for the rest of our business. With that said, all of the impact inclusive of accredited and Omicron were in the numbers that I talked about where we felt like it was going to impact revenues by, you know, $30 million and EBITDA by 10 to 12. That's inclusive of the impact that it would have with accredited and with comfort care. Hopefully that answers your question.
spk03: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
spk06: Thank you, Operator. And, again, thank you guys for investing your time in learning about Aviana and being interested in our story. As always, we've tried to be as transparent as possible, and we'll also make ourselves available to anybody that needs to do some additional follow-up. Please give us a call and let us know. Hope you have a great day, and thanks for your time.
spk03: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
Disclaimer