Aveanna Healthcare Holdings Inc.

Good morning and welcome to Aviana Healthcare's Holdings First Quarter 2022 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I'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 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-Q 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 May 19, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, May 12, 2022. Today's call may contain forward-looking statements, which may be identified by the use of words such as may, could, will, 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 statements subsequent to the date made as a result of new information, future events, or changing circumstances. Also, we supplement our financial results reported in accordance with GAAP and with certain non-GAAP financial measures. Reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release in Form 10-Q, both of which are available on our website and the SEC's website, whereas 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'll turn the call over to Aviana's Chief Executive Officer, Tony Strange. Tony?

Thank you, Shannon, and good morning, everyone. Thank you for joining Aviana's first quarter earnings call. This call marks the anniversary of our first full year of reporting as a public company. On our call today, we'll provide you an oversight of our Q1 results. We'll provide a little insight into our M&A activity, pipeline, and integration. And finally, we'll provide some insight into the current trends both from a volume perspective as well as a reimbursement environment. Before we get into the details, I'd like to once again say thank you to all of the Avion employees. In today's environment, you can choose to work wherever you like. However, you continue to put the needs of our patients and their families first, and for that, we're grateful. Let's turn toward our results. Revenues for the quarter were approximately $451 million compared to $417 million a year ago. which is an increase of approximately 8%. The increase was driven by the acquisitions of accredited and comfort care later in the fourth quarter and partially offset by the reduction in volume related to the spike in Omicron. As we outlined on our last call, we saw a spike in the number of employees that were out of work related to COVID that began in mid-December and ran through early March. Prior to December, we were averaging between 200 and 300 employees sidelined on any given day, That number spiked to just under 3,000 in January and February timeframe. We estimate that this interruption cost us approximately $14 to $15 million in lost revenue during the quarter. As of today, this disruption is back down to pre-Omicron levels, and we expect revenues to rebound accordingly, notwithstanding any further disruptions due to additional COVID variants. However, the labor markets for caregivers, specifically for nursing, continue to be disjointed. Demand for services is at an all-time high, while capacity continues to be constrained. I'll provide some more color around some of our plans to mitigate these ongoing labor shortages in just a minute. Moving on to gross margins for the quarter, we're at 32.1%, an increase of 50 basis points from Q1 of 21. Given the increased payroll tax burden of the first quarter each year and the ongoing wage pressures, I'm especially proud of our operating team's discipline around protecting our gross margins. Adjusted EBITDA for the quarter was $38 million compared to $43.7 million a year ago. The impact of the reduced volumes associated with the Omicron variant is approximately $5 million in adjusted EBITDA. Total SG&A increased quarter over quarter was driven by the acquisitions of accredited and comfort care. And once these synergies are realized, our SG&A expenses are right in line with our expectations. While revenues are in line with what we forecasted on our call in March, the softness in volumes had a meaningful impact on Q1 results. And we expect these revenues to normalize in Q2. And while gross margins remain strong and SG&A remains in line with expectations, we anticipate ongoing labor constraints to continue to be a headwind for revenue in the near term. While we're on the topic of accredited and comfort care, the integrations of these two acquisitions are going very well. We're on schedule, and in many instances, we're actually ahead of schedule with all aspects of integration. We expect to be largely complete with the integration and all of the synergies realized by mid-year 2022. Neither business was immune from the impact of Omicron. However, both businesses are performing well and will be highly accretive to the Aviana story. A special thank you to the employees of Accredited and Comfort Care as well as our Integration Management Office team for all the heavy lifting that you've done to complete these integrations. As far as future M&A is concerned, we stated on our last call that we'd spend the first part of 2022 focused on integration, which we've done. Our pipeline remains robust, and there are plenty of transactions to consider. We will continue to remain disciplined in our approach to transactions, focusing only on those deals where price consideration and synergies produce accretion for our shareholders. Our liquidity remains strong. We have access to approximately $400 million between cash on hand, the delayed draw term loan, and available revolver. With very little covenant restrictions, coupled with our various interest rate hedges, we are well protected from the downside risk associated with rising interest rates. We're comfortable at our current leverage ratios. However, it's our desire to reduce leverage through accretive transactions and or the use of free operating cash flow to reduce debt. Dave will provide some additional insight during his remarks. I'd like to spend a few minutes on the overall reimbursement environment and its connectivity to the labor disruption, and eventually, to the creation of additional capacity. Most of you have seen articles in the major news media outlets profiling the lack of capacity, mandating that patients stay in the hospital longer and even in some circumstances indefinitely. Payers across the country recognize this trend and are also looking for solutions to facilitate safe discharge from the hospital into home or community-based care. The state of Arizona recently announced the approval of a program that would allow Aviana to pay family members to provide unskilled care that could be supplemental to other skill needs in an effort to create additional capacity to provide care in the home. We're seeing this willingness to invest additional resources into keeping patients out of higher acuity settings and in the safety of their home environments across our platform. In addition, we continue to have productive discussions with our payer partners around the shortage of caregivers and the impact that inflation is having on our ability to meet the demand of their beneficiaries resulting in continued rate improvements across our business. In addition, there are several states that are in mid-legislative sessions that are pending legislation that would further enhance reimbursement in an effort to increase capacity. The overarching thesis is that home care is a value added in the healthcare equation and additional resources are needed to expand access to care. Before I turn the call over to Jeff for a deeper dive into our operating metrics, I'd like to spend a minute discussing our outlook for the full year 2022. On March the 29th, we provided full year 2022 guidance of revenues between $1,890,000,000 and $1,920,000,000 and adjusted EBITDA between $190,000,000 and $205,000,000. In the roughly 42 days since that guidance, we haven't fully closed an additional month. Other than the updates provided in my remarks, there's really no additional information that we can provide. We believe that the rationale behind our full year guidance remains sound. As you recall, we provided color around our forecast that indicated that the first half of 2022 would be difficult due to the headwinds of Omicron and ongoing labor constraints. We also provided our thoughts around ongoing rate improvements throughout the year that would allow us to continue to invest in wages, which will provide lift in the second half of the year. In summary, our results are in line with our expectations that we laid out in March. The immediate threat and the impact of the Omicron variant has subsided and volumes are returning to pre-Omicron levels. On the other hand, the labor markets are challenging and will continue to present headwinds to our volumes and overall growth for the near term. State Medicaid systems as well as Medicaid MCOs recognize this as an issue and are willing to come to the table in a partnership to address the capacity concern. Given the challenging environment, I'm proud of our results and the tenacity of our team to continue to fight on behalf of our patients and families, fellow employees, and ultimately our shareholders. I'm proud to be a part of the Aviana story. With that, I'm going to hand the call over to Jeff for further insights into our operating metrics. Jeff?

Thank you, Tony. I'll spend a few minutes talking through our recent labor and employment trends before I dive into our Q1 operating indicators. On the labor front, we have stabilized our core caregiver recruitment and retention trends. Omicron was very disruptive to our workforce in Q1, but I'm pleased to say it's now behind us. With a fully vaccinated rate approaching 99%, we are better prepared for future variants and our ability to work through them without the significant disruption that Omicron caused. Caregiver wages continue to be the number one driver of new and continued employment for our nurses. The increased competition from hospitals and travel agencies have targeted our pool of qualified nurses. Thankfully, our improved reimbursement rates in many states allow us to be competitive with the cost of hiring and retaining nurses. In some states, We are aggressively lobbying for improved reimbursement rates as the cost of nursing wages has outpaced the Medicaid private duty nursing rates. Our nurses tell us that they want to work in home care and love working with a one-on-one patient setting in the home. We are focused on ensuring our caregivers can continue to provide the skilled care and earn an appropriate wage and supplemental benefits at Aviano. Now on to the private duty services segment results for Q1. We produced $350.2 million of revenue during the quarter. Revenue was driven by approximately 9.6 million hours of care or a 6.3% sequential improvement over Q4 of 2021. The improvement in hours was driven by the accredited home care acquisition balanced against the impact of Omicron. Our Q1 revenue per hour of $36.43 was up $1.03 from Q1 of 2021 or 3%. We continue to experience rate improvements in 2022, and I'm proud to say we already have seven rate increases year-to-date in our PDS segment. As many of our state legislators are currently in session, we expect more rate increases and Medicaid benefit expansion throughout 2022. As recently announced, we applaud the Arizona Medicaid system for its licensed health aid LHA program expansion. The important program supports family caregivers with appropriate compensation for the unskilled care being provided to a loved one. The Arizona LHA program is in addition to the skilled nursing care being provided by an Aviana nurse. Working together, an Aviana nurse and a family caregiver create the appropriate environment for medically fragile children and adults to remain in the lowest cost setting, sorry, the lowest cost and preferred setting their home. We are identifying and actively lobbying additional states for LAH-like programs to support our families. We believe this additional level of unskilled care by a loved one can supplement the core skilled services that Aviana provides and buffer against the current difficult labor markets. I look forward to updating you on this continued progress in future calls. Turning to our cost of labor and gross margin metrics, we achieved $98.3 million of gross margin, or 28.1%. Our wage rate of $26.20 per hour reflects the commitment we've made to passing through our rate wins to our caregivers. As Q1 has our highest payroll taxes impact, I expect gross margins for PDS to settle in the 29% to 30% range. Our Q1 spread per hour was $10.23 in line with our expectations and within our ideal range of $10 to $10.50. As Tony mentioned, we have largely completed our accredited home care acquisition in California. I am very pleased with the business trends, and our IMO team has once again done a great job integrating the business into our Aviana family. Now moving on to our home health and hospice segment for Q1. And staying with the integration theme, I am pleased to share that we are largely complete with the integration of Comfort Care. We are proud of the density of home health and hospice services Comfort Care delivered to Aviana in both Alabama and Tennessee. The Comfort Care acquisition demonstrates our commitment to acquiring high-quality assets that complement our geographic expansion plans. During the quarter, we produced $66.6 million in revenue, a 37% increase over Q4 of 2021. The biggest driver of revenue growth was the impact of a full quarter of comfort care, offset by labor pressures associated with Omicron. Q1 revenue was driven by 14,300 total admissions, approximately 61% being episodic, and 13,800 total episodes of care. While our episodic admission mix was down slightly, we are focused on maintaining this rate in the 60 to 65% range. I am pleased with our admission volumes in both home health and hospice and our team's ability to fight through a difficult Q1 labor market. Revenue per episode for the quarter was $2,898, down 1.5% from Q4. This shift reflects the impact of our comfort care episodic patient base. From a cost and margin perspective, Q1 gross margins were 48.7%, up 280 basis points sequentially from Q4. Gross margin improvement was driven by less PTO utilization, better overtime controls, and less dependency on contract labor. Home health visits per episode and cost per visits are in line with our expectations and give us great confidence that we can manage the home health segment gross margins in the 48 to 50% range. Lastly, we are proud to announce that we have fully transitioned our home health and hospice business segment to the home care home base operating system. From day one at Aviana, we made the decision to invest in the best in class systems to support our mission. I am proud of the home health, the Aviana home health and hospice team, our IMO systems team, and our partners at home care home base that have made this key initiative a reality. I look forward to giving more insight into our home health and hospice business segment as we move forward. Now to our Aviana Medical Solutions segment results for Q1. During the quarter, we produced $33.7 million of revenue. Revenue was driven by approximately 78,000 unique patients served and revenue per UPS of $432.32. Revenue per UPS was down sequentially approximately $21, or 4.6 percent. The primary drivers of rate decline were the continued impact of the national contract we signed in September of 2021 and the Abbott recall impact on our intral supply chain. In February, the FDA shut down Abbott's Sturgis, Michigan plant, which is the main producer of the Elecare intral product. This event created a supply chain shortage with our suppliers and forced families to make urgent decisions on insulin nutrition. Our Arviana team has worked tirelessly to identify solutions and to get products to our patients. We view this disruption as temporary in nature and believe the insulin suppliers will rebound by mid-summer. Turning to our cost of goods and gross margin metrics, we achieved $14.1 million in gross margin dollars, or 41.7%. The decline in gross margin was primarily driven by the above mentioned items. I continue to expect gross margins to stabilize in the second half of 2022 in the 41 to 43% range. While these disruptions are unfortunate, I am confident in the approved efficiencies we have gained in the back office and our ability to grow the medical solutions business moving forward. We achieved record patient admissions and unique patient serve in March and April due to our team's focus on finding solutions for our families in need. We expect these growth trends to continue as the near-term supply chain issues begin to ease. In summary, we continue to fight through a difficult labor and supply chain environment while keeping our patients' care at the center of everything we do. We will continue to pass through wage improvements and other benefits to our caregivers in the ongoing effort to better improve core volumes. On the bright side, we continue to see incredible demand for our services, along with strong support from our state legislatures and payers in the form of rate improvements. I am proud of our Aviana team. Your resilience and tenacity to continue to care for our patients and their families is inspiring. Thank you. With that, I'd like to turn the call over today for additional call on Q1. Dave?

Thanks, Jeff. I'll go ahead and provide a summary of the first quarter results. First quarter 2022 revenue was $451 million, an increase of $33 million, or 8% from the first quarter of 21. Our Q1 revenue was comprised of $350 million of PDS segment revenue, or 78% of total revenue. Home health and hospice segment revenue was $67 million, or 15% of total revenue. And our medical solutions segment contributed $34 million of revenue in the first quarter, or 8% of total revenue. Comfort care and accredited acquisitions in Q4 drove revenue growth in the first quarter of 2022 and, combined with the doctor's choice acquisition in April 2021, drove our overall 8% revenue growth in Q1 2022 from the year-ago quarter. Home health and hospice segment revenue increased $35.1 million in the first quarter of 2022 compared to the first quarter of 2021, and PDS segment revenue was flat over the comparable periods. While the acquisition of accredited contributed incremental PDS revenue in the first quarter, the Omicron variant pressured our PDS clinical workforce, constraining caregiver recruitment and retention, and negatively impacting PDS patient volumes. Medical solution segment revenue was down slightly, decreasing by 3% over the Q1 comparable quarters. Now turning to gross margin, our gross margin percentage increased 50 basis points to 32.1% in the first quarter of 22, from 31.6% in the year-ago quarter. This was attributable to the revenue growth in the home health and hospice business, which has a higher gross margin percentage than our PDS business, net of decreases in gross margin percentages in our PDS and medical solution segments. Field contribution margin decreased to 12.4% in the first quarter of 22 from 14.9% in the first quarter of 21. Corporate expenses were 8.1% of revenue in the first quarter of 2022 as compared to 6.6% of revenue in the first quarter of 2021, primarily as a result of growth in our non-cash share-based compensation costs as further discussed in footnote nine to our financial statements and in our MD&A. In addition, we incurred incremental compensation and benefits costs necessary to support a public company infrastructure as well as to support the integration process for the companies we acquire and then also incremental professional services associated with those integration activities. Adjusted corporate expenses were 5.2% of revenue for the first quarter of 22 as compared to 4.7% of revenue in the first quarter of 21. The principal adjustments from corporate expenses to adjusted corporate expenses include integration costs and non-cash share-based compensation and can be found in the corresponding table in our press release. Moving on to operating income, net income, and adjusted EBITDA, Operating income was $13.8 million for the first quarter of 2022 as compared to $28.3 million in the first quarter of 21. In addition to the $6.2 million decrease in field contribution, the $9.2 million increase in corporate expenses, and the $1.7 million decrease in acquisition-related costs, this drove the $14.5 million overall decrease in operating income over the comparable first quarter periods. Net income was $25.3 million in the first quarter of 22. compared to $5.8 million in the first quarter of 2021. The primary drivers of the increase were the $14.5 million decrease in operating income and a $38.3 million non-cash gain recorded in other income related to a material increase in valuation of our interest rate swap and cap during the first quarter of 2022. The significant valuation gains resulted from accelerated market expectations of future increases in interest rates during the first quarter of 2022. Adjusted EBITDA was $38 million or 8.4% of revenue for the first quarter of 2022 as compared to $43.7 million or 10.5% of revenue for the first quarter of 2021. Adjusted EBITDA benefited from $3.1 million of American Rescue Plan Act recovery funds received during the first quarter of 2022. Turning to operating cash flow, cash used by operating activities was $9.5 million for the first quarter of 2022. a decrease of $23.4 million from net cash used of $32.9 million in the first quarter of 2021. The decrease in net cash used was due to a number of items outlined in the liquidity and capital resources section of our 10-Q, the most significant of which was $21 million in relative higher payments against accounts payable and accrued liabilities in the first quarter of 2021 compared to the first quarter of 2022. Net of a decrease in operating income in the first quarter of 2022 compared to 2021 and also net of changes in significant non-cash items that affect operating incomes at the share-based comp. When you think about our operating cash flow in relation to our adjusted EBITDA for the first quarter of 2022, the most significant drivers of variances between the two include cash paid for interest, M&A-related costs, which include acquisition-related costs and integration costs, both of which you can find in our adjusted EBITDA reconciliation and MD&A, COVID-related costs, which can also be found in our adjusted EBITDA reconciliation. and a net usage of cash for working capital-related items, which can be found in our statement of cash flows in the section titled Changes in Operating Assets and Liabilities. I'll now provide an update on liquidity, credit facilities, and hedging. As of April 2, 2022, we had cash of $17.4 million with the following liquidity available under our credit facilities. $182.4 million of available borrowing capacity under a revolving credit facility. $10 million of availability under our securitization facility, and $200 million of availability under our delayed draw term loan facility for future acquisitions. With respect to our cash collections and DSO, we collected $428 million against our revenue of $451 million during the first quarter of 2022, and our DSO was 46.5 days. The primary driver of the sequential increase from 44.9 days in Q4 of 2021 was associated with our home health and hospice business. And one item I'd like to congratulate our revenue cycle and field teams on is their work with the annual revalidation of third-party insurance in the PDS business, which typically occurs in the first quarter of each year and requires a significant amount of preparation and execution. Each year, we continue to improve our processes in this area, and our teams performed well on it in the first quarter of 22. Turning to our credit facilities, our outstanding debt approximated $1.4 billion as of April 2, 2022. the components of which can be found in our indebtedness table in liquidity and capital resources section of the 10Q. Our interest rate exposure under our credit facilities is hedged with the following instruments, $520 million notional amount of interest rate swaps that convert variable rate debt to fixed rate, and $880 million notional amount of interest rate caps that cap our exposure to LIBOR at 3%. In summary, and as I wrap up here, I'm proud of the resilience of the Oceana team as we work together to build this great company. People and culture are what makes us special. We're confident that the Aviana platform and infrastructure is primed for growth once we navigate through the current labor market headwinds. With respect to the interest rate environment, we've taken proactive steps to reduce our exposure to these pressures by implementing interest rate hedges that reduce our exposure to rising rates. And we continue to benefit from a strong liquidity position that is supportive of our strategic initiatives. And with that, operator, I think we're ready to open it up for questions.

Thank you very much, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. We ask that you keep to one question and one follow-up. One moment, please, while we poll for questions. Our first question is from Matt Borsch of BMO Capital Markets. Please go ahead.

Oh, thank you. Can you just give us a sense of where maybe the composition of your guidance, particularly on the revenue side, may have changed just based on the trends that you've now seen in the first quarter and maybe coming into the second quarter as well? I mean, in terms of the growth that you are seeing and expecting in home health and hospice versus private duty?

So, Matt, that's a good question. I think, you know, when we think about our guidance, let me, I'll make a couple of defensive comments. One, we don't provide segment guidance. And two, we don't, you know, really provide quarterly guidance. But with that said, I think most of the softness that we've talked about in the first half of the year is really more attributable to private duty than And it's primarily driven by the labor constraints with the caregivers as well as the impact of Omicron. You know, I think our home health business, while they're not immune from some of the labor constraints, you know, that we've been talking about, I believe that it is less impacted by some of the labor issues that we have out there, you know, with the nurses. So I would probably answer your question with more heavily weighted toward private duty from a labor constraint perspective. I think Omicron, the impact of Omicron was across all of our businesses, both home health and private duty, but more the labor constraints on the private duty side. As it relates to color around our guidance, and I think on March the 29th, I think we laid it out, You know, we said that most of the Omicron variant impact would be Q1 with a little bit of residual in Q2. However, you know, the labor constraint issue wasn't going to go away when Omicron went away. And I think that we still believe that that will play itself out. But in my remarks as well as in Jeff's remarks, you know, one of the things that we're seeing, Jeff made a comment about the seven rate increases that we've seen so far. and the ongoing discussions with different MCOs and payers and then legislative sessions that are contemplating rate increases, that we continue to see a very positive rate environment for the foreseeable future. And while we can't, you know, while we can't talk about the timing of what rate comes in when, you know, with the remainder of 2022, I believe, will be a positive rate environment with rate changes happening each and every quarter. And as those rate changes happen, we will immediately be able to take those dollars and reinvest it into wages. And when we invest those dollars into wages, we then know that volume will improve. Matter of fact, what I'm about to say is all public information. The state of Pennsylvania put through a rate increase for these services that was effective in January of 2022. And it was a meaningful rate increase. I think if you go and read their press releases, it's 10%, 11% rate increases. And as we see that flow through, we actually saw volumes hold their own during the quarter, even when the rest of the world was going down with Omicron. So we do know that volume will follow rate, and that's what gives us confidence in the remainder of 2022 that that we'll continue to be able to improve volume based on as we push through these rate increases. Hopefully, in all of that, I answered your question, Matt.

Well, you certainly did. Thank you for all that detail. I'll let you go to the next analyst. Thanks, Matt.

Thank you, sir. The next question is from Joanna Gerdruk of Bank of America. Please go ahead.

Good morning. Thanks for taking the question. So first, I guess in the press release, you mentioned 3.1 million funding you received this quarter under the American Rescue Plan Act. That was, I guess, signed into law in March. So the question is, was this included in the guidance? Did you contemplate this funding coming through? Yeah.

Joni, this is Jeff. I think I'll start with You know, we receive funds from the federal government and state Medicaid programs that we consider ARPA-related funds throughout 2021. You're correct, we received ARPA funds in Q1. We expect to receive ARPA funds in Q2, Q3, and Q4. It is contemplated in how we think about the year. But I'll tell you, Joanna, we receive ARPA funds in numerous different ways. We receive them in temporary rate increases, permanent rate increases, like the one Tony just talked about, in Pennsylvania, as well as we do receive temporary lump sum amounts that are meant and intended to pass right through to the caregiver. So I think as we think of that, all things rate are certainly being supported and driven by the federal support of the Medicaid programs. And I think as Tony said it well, whether it's a permanent rate in Pennsylvania, or it's a temporary rate in North Carolina, or it's a one-time pass-through amount, in one of our states, all of which is intended to support the realignment of caregivers to wages. And I think that's what you saw in Q1, and I think we'll continue to see that in Q2 and beyond.

So, Jeff, would you agree with this? So, like, in Pennsylvania, the rate increase we just talked about, more than likely, those funds are also derived through ARPA funds. They're just coming through the state of Pennsylvania in the form of rate change. So, I agree with the way Jeff laid it out, Joanna, that when we think about ARPA funds, those are just additional rate. I'm reminded of another rate increase in 20, I think it was 2021 or late 2020, we had a rate increase in North Carolina that was a quote-unquote temporary rate increase that is now just a permanent rate increase as well. So, we have rate movement all the time, both in ARPA funds through temporary rate increases, permit rate increases, it is, at least in our mind, it's all built into our guidance as it relates to positive rate change.

And to Tony's point, and the intention of that rate is that they be passed through to the caregivers in some form or fashion to help realign caregivers, and that is what we have done and continue to do.

No, that totally makes sense. So, okay, so I guess you've been contemplating this funding, and I guess you've been talking about the expectation for better rates throughout the year, you know, when we spoke last time at the end of March. So then when I think of the follow-up question, so when I was thinking about the rate, the PDN segment, you know, average rate per hour rate, we should use that Q1 rate as a starting point because initially I was like, okay, I guess we have to exclude that $3 million, but sounds like there's going to be additional funding coming through in the following quarters anyway. So I guess is that a way to think about it, that $36, $40-something in the quarter as a kind of starting point and grow from there? Thank you.

That's a great question, Joanne. I think the one thing that we would point out in the quarter is it does now have the impact of the accredited acquisition. And as we've said, the accredited business was primarily a lesser skill or unskilled type business mix, or primarily that business mix. So I think the 3630 is more driven on that accredited volume now being a part of our story. But I think the answer is yes, we will continue to see reimbursement rate increase throughout the rest of 2020. We also expect to see wage rate increases throughout the rest of 2022. And the net of all of that is we expect our spread per hour for the PDS segment to remain in that $10.25, $10.50 range as we move throughout the rest of the quarters. But, yeah, I think you're thinking about that correctly.

Thank you.

Thank you very much. The next question is from Peter. Go ahead.

Hey, good morning, guys. Thanks for taking my questions. Just sort of back to the labor markets question, can you give us an update in terms of what you're seeing in terms of active nurses and recruitment in both home health and PDS in April and May?

Yeah, Peter, I think Tony said it well. I'm going to use that Pennsylvania example is where we can continue to move the reimbursement rate to remain competitive we have found that we are able to both retain and re-engage or hire new nurses. And as we think of the efforts that are going on in April, May, June, leading up to July 1st is a pretty big date for most state legislatures. We're really focused on the states where we think the reimbursement rate has kind of fallen behind the current market for for nurses in the private duty services segment. And I think as we talk in August, we'll be reporting very positive news on additional rate increases in those states that were necessary to really reengage nurses at the level that we expect. I think we've been able to demonstrate that our lobbying efforts, both individually and collectively as an industry, has been able to move states that may have fallen behind kind of the current wage environment for caregivers. As I said in my prepared remarks, wage is the absolute number one driving decision. You know, culture's great, engagement's great, but wage is the decision. And so for us to be able to get the wage rate at the necessary level to engage caregivers, we've got to continue to engage the legislatures and payers. And I think, as Tony mentioned, We have found that audience to be continually receptive to this conversation.

And, Peto, my comments are going to be more color around that, and this is just my opinion. I think a year or two years ago, I think mission was equally important. I think nurses migrated to the places where they felt connected to a mission, and I think that was always on our side. You know, I think the job that we have to offer is a very compelling job with a compelling mission, and it's a desirable job for nurses. However, I think with this new inflation trend we have, I think mission has taken more of a backseat and folks are chasing wage. And until we can be in the same place with wage as hospitals and surgery centers and skilled nursing facilities, I think we're going to be operating at a disadvantage. But for all the reasons Jeff just laid out, I think we're well on our way to, you know, we'll be able to compete in those environments as well. And then when we do, then I believe Mission will climb back in the front seat, and I think we're going to be just fine from that perspective. And all of that gives us confidence in my comments about we think that as the year progresses, we'll be in a better and better spot from a wage perspective.

So just to sort of go back into there, I understand that if there's rate increases, they're positive. Pennsylvania is a good example, and that wage rate is critical to this. But as you look at your portfolio as a whole today, how is the active nurse percentage right now in recruitment going, or are you just completely dependent upon July 1st rate increases to get things back to normal levels?

No, I don't think that's – I use July 1st as only the example of, Many of our state legislatures' effective date is June 30th and July 1st. No, Pete, I think, let me step back and just say, in our home health and hospice business segment where we are employing full-time benefited caregivers, we weathered the Omicron storm much better. Our turnover rates and our retention rates are right in line with what we expect. Our reliance on contract labor and overtime has subsided appropriately. So I think I think where we can employ a full-time benefited caregiver, you know, and with the addition of technology, like we mentioned, home care, home base, full rollout, and the use of metallogics and MUSE as better predictive index indicators, we're better able to allocate our staff in the home health and hospice segment. As it relates to our PDS segment and, you know, week-to-week fighting in this business, to Tony and my comments, we are held based on the rate that we're able to negotiate with our state legislatures and our payers. And again, I think I would tell you, and we've been talking sequentially the last three or four quarters, we continue to have a very, very positive rate discussions with our payers and with our legislatures. We are held to the times at which that they make their decisions and they make their decisions through their annual budgeting process. And so I expect Q2 to be a great outcome for us as it relates to rate. And as we've done, you know, consistently, we will continue to pass that incremental rate through to our caregivers to recruit and retain more.

And, Peter, you didn't ask the question this way, but I'm going to use it as an opportunity to answer. We were asked the other day about, well, why wouldn't you just go ahead and pass the wage through now and then let the rate catch up? And that way you can go ahead and fuel your growth. The problem that in our private duty business is that once that wage goes in, it's never coming back out. and so in the event that we were to push a significant amount of wage through, bring our gross margins down significantly, and then the rate is different than we anticipated, we will never be able to pull that back. So I give our operating team a lot of kudos for being disciplined and passing that wage through as rate materializes, and I think that served us well in the past. It certainly has slowed growth down, But on the other hand, it's protected margins in the meantime. So that'll be the way we'll proceed. All right, thanks so much.

Thank you. The next question is from Brian Tancriman of Jefferies. Please go ahead.

Hey, good morning, guys. I guess my first question, Tony, since you mentioned that, you know, Q1 was essentially in line with what you guys were expecting internally. Maybe if you can share with us any color on how we should be thinking about the second quarter just so, you know, we can avoid kind of like missing versus street.

Well, so, Brian, I'll try. You know, I'm going to stop short of we don't provide quarterly guidance. Our guidance, while we did try to provide color between first half and second half, we really don't provide, you know, quarterly guidance per se. I think the way that the street is thinking about it today is not all that off. I think we will continue to have headwinds related to wage pressure in the second quarter. You know, we've seen the impact that that's had on volume, and I think that will continue. Now, you know, Jeff made the point, while we don't want to – or any one state, a lot of our state agencies have a June 30 fiscal year end. And so, unfortunately or unfortunately, a lot of those rate changes will end up happening at the end of June, which won't benefit Q2. So, you know, I would tell you that I don't, I think that Q2 will continue to be a challenge, no different than we said to you on March the 29th. You know, we said that Q1 and Q2 would be more challenging than the second half of the year. But, you know, in terms of giving you a number that we think that, you know, for Q2, I don't think we're ready to do that.

No, I appreciate that. I totally understand. I guess my second question, as I think about the P&L and where the shortfall was versus the street, it looks more in the home health side. And also regional expenses came in, you know, a decent bit higher. So maybe just anything you can share with us in terms of what happened in the home health side of the business and just any thoughts on how much you can bring or if you can bring regional expenses down on a dollar basis going forward.

Yeah, that's a great question, Steph. Yeah, I think, you know, part of the reason we announced the completion of the home care home base rollout, you know, today was because that has been a, you know, a distraction for that team and a headwind for that team really for the last seven months. You know, we started that implementation in September of last year. We've We've rolled four companies, you know, four acquired companies onto that platform. You know, you've been around long enough and covered enough of us, you know, that is a major, major, major lift. You know, we're going to continue to get some of the synergy realization from that system, you know, between Q2 and Q4 this year. But really getting our home health and hospice division to be on one platform, one set of systems, you know, be able to report that at a much, much deeper level and to be able to respond accordingly. You know, we knew what we wanted to achieve in our home health and hospice business the day we acquired Five Points almost two years ago, and part of this was the realization of that. So, we do think we'll continue to see gross margin improvement, as I mentioned in my comments, but we also believe we'll see continued field contribution, even though we don't report that segment individually. we expect to see continued profitability improvements in that business due to all the things I just mentioned, and I think we're well positioned for that at this point.

Got it. Thank you.

Thanks, Brian.

Thank you. The next question is from Sarah James of Barclays. Please go ahead.

Thank you. So it sounds like you guys are reiterating guides, maybe there could be some movement within it. I just want to make sure if I'm understanding this right. Last quarter you talked about there potentially being up to 30 million of COVID impact in 1Q, and it sounds like today you're talking more about 14 to 15. And then last quarter you talked about the rate increases coming into play in 1Q and 2Q, and it sounded like today it's more 2Q. So I guess do I – Do I have those changes right, and does that imply some movement within the range?

So, gosh, I'm going to try to pull that apart. Going back to the guidance, I don't think our thoughts around our full-year guidance has changed at all. And so, you know, we talked about the guidance being $1.89 billion to $1.9 billion in revenue. And I don't think we've changed our thoughts around that at all. Specifically about your comments or the comments we made in March about the impact of COVID and Omicron, I think, and I'd have to go back and look at my notes from that call, but I think the reference was the overall impact, which would have been some in Q4 and some in Q1 and then a smaller portion of COVID in Q2. So I think the overall impact across all of that would have been kind of that 30. You're right. What we talked about in Q1 was kind of being in that $14 million to $15 million revenue number for Q1. But notwithstanding any of that, I don't think any of that changes the way we're looking about the whole year based on what we know today.

And on the rate side, are they coming in – slower or being implemented slower, or was your expectation always that this was more of a 2Q event?

No, I mean, I think they're going to come in throughout the year. I mean, Jeff made the comment about mid-year and my comment earlier about a lot of states are on the June 30 fiscal year end, so by definition a lot of them come in mid-year. But no, Jeff made the comment throughout the year we've had seven different rate increases, and we anticipate that trend to continue throughout the year.

Yeah, and, Sarah, I think by the time we're getting into, you know, well into Q3, I mean, I think we'll be in the mid-teens to high-teens again, talking about, you know, in another year. Last year we had 24 rate increases. That was a record, and that was certainly driven by COVID and some of the federal funds that were in play in 2021. But I think we'll be in that same, you range by the time we get to September and October. We do have some states that are also a September and October fiscal year date. So I think we'll – we're very pleased with the seven year-to-date through the end of April, and I think we'll be in great shape mid-year and very well by the time we end Q3.

Great. And last question, could you just update us on how the Workday rollout is going?

You said workday. Do you mean workday or home care home base?

The workday that allows you to pay your employees, your PBS employees. Oh, daily pay.

Yeah, daily pay. No, it's gone great, sir. It's almost like an ATM machine that people get to walk by. I mean, the caregivers have taken it in groves and run with it. I can't remember the exact count, but we have thousands of caregivers, somewhere in the tune of 3,000 to 4,000 caregivers that utilize it on any given week. As you know, we pay all of our PDS caregivers weekly, and the caregivers have loved it. They've enjoyed it. Those who need it and want it have access to it. Those who don't are fine. But, no, it's been a great value added, and pretty quickly it went from being – being something new and shiny to just being something that was being utilized every week by thousands of caregivers. So it's been a nice addition to our toolbox, if you will, of recruitment retention tools. But other than that, it's gone great. Thanks for asking.

Thank you. The next question is from AJ Rice from Credit Suisse. Please go ahead.

Hi, everybody. Maybe just going back to this program that's rolling out in Arizona, and obviously you said it could be something that could be a template for other states. It sounds like I understand a little bit about how it would help you on the private duty side, but it sounds like you also think it helps on the adult side. Does it somehow allow you to leverage what a nurse you're getting reimbursed for at the Medicare level can do? Does it just allow patients that might otherwise have to be institutionalized to stay home? I guess, how does it help you on the adult side?

AJ, I would think of it in the private duty services segment. 100% of this is in the private duty services segment. Some of the age of the patients will be adult age, but think of it not as not as home health and hospice intermittent, but think of it as private duty services. But as you said, it is new hours. It is the same patients that we're already caring for on the nursing side, the private nursing side, that are receiving skilled either LPN or RN hours. And now they're being, now new hours are being granted, obviously cared for by either their parents or their loved one or their immediate neighbors. in support of the nurses' activities. And the template, AJ, came out of Colorado, and we've been doing this program in Colorado for over five years now. It's been very, very successful. And we think that that template, you know, not only will be adopted by Arizona, but numerous states. We're in conversations with numerous states to adopt a similar model, which, again, is additive to, in nature... It's not subtracting from, but it's additive to, but it certainly is unskilled in nature and in the PDS realm.

Okay. Then my follow-up question was going to be to ask you about the competitive landscape. I think in your prepared remarks, you said your deal pipeline will remain robust. Are mom-and-pop regional providers, are they dealing with... the labor challenges that you're describing in pretty much the same way. Is there any reason to think you're doing better and therefore they might be looking to partner? Have you seen anyone drop out of the market because they just can't get the staff at a reasonable rate to continue to serve patients?

So it's an insightful question, A.J., and I'm going to divide your question between that of home health and hospice versus that of private duty. And I think in the home health and hospice space, I think the answer is no. However, they're not immune from the nursing shortage specifically. And we see home health and hospice companies that are struggling for staffing and but it's certainly not to the level of throwing in the towel. But they have reduced volumes and such. As a matter of fact, in many of the deals that we look at, Rod will come back and report that they've got this COVID adjustment in there where they're adjusting, saying, well, if it weren't for COVID, this would be my normal run rate. And so I think they're suffering in the same way. Now, on the private duty side, the staffing issues and the labor pressures are meaningful. And so companies that don't have size and scale to do things that, you know, Jeff and Sarah were just talking about daily pay and, you know, that being, you know, just one of the tools, but companies that don't have the ability to try to do those things to attract caregivers, it is a difficult, difficult environment. We have seen a couple of private duty companies come to the table and say, we just can't do this anymore. So I think it creates opportunity, but as I said in my comment, we're being very disciplined about that. We understand where we're trading and what it takes for a deal to be accretive to us and our shareholders, so we're being very disciplined about the approach to M&A, but we're going to continue to grow at the same time.

Okay. Just to maybe clarify that, so someone says that we can't do this anymore on the private duty side. Do you have to buy them out, or can you just assume they're patients, or if they can't make it, you're probably not going to be able to cover those patients.

How do we think about that? I wouldn't think about they're just closing the door. And when I said that, maybe I'll clarify that. It's just getting harder and harder to get nurses and to be able to run this business in an effective way. And size and scale really does matter, and especially density matters. When you're trying to staff 10 patients in a market and the 10 patients are 20 miles apart versus staffing 100 patients in a market where they're 4 and 5 miles apart, that makes it easier on the private duty side. The private duty business is a difficult business right now and And we've done some internal work understanding our caregiver population, what they like and don't like, and why they're not working as much. And quite frankly, we're getting some really meaningful information back. The nurses that like the private duty business really like the work. They like the mission. They like the work. I'm very proud. They like our orientation. They like how easy it is. to work with us. They like the leadership. It really is about wage. With them paying, you know, $4 and $5 a gallon for gas and groceries are what they are, they have to go where they can make more money. And as a matter of fact, the most, and I'm going to go out on a limb here, the most encouraging thing I've heard from the work that we've done with our caregiver is that they would really like to come back to work. It's just they can't do it for less money. So we know how to go get the caregiver. We see a clear line of sight of what it's going to take to get the caregivers to reengage in private duty, and it's more money. Right.

Okay, thanks a lot.

Thanks, AJ.

Thank you. The next question is from Ben Hendricks of RBC Capital Markets. Please go ahead.

Thanks, guys. Just a really quick follow-up on the home health side, kind of with Comfort Care almost nearly integrated with the home care, home-based rollout done. I just wanted to get an idea of what kind of efficiencies you can expect to gain from a margin perspective in that segment. Maybe color on visits per episode and how that's trended and kind of where that can go now that you've got home care, home-based, MediLogix and Muse up and running. Thanks.

Yeah, Ben, it's a great question. And I think in my prepared marks, we said that we still see some room for gross margin improvement. You know, we're running right in that 48.5, pushing 49%. We still think there's about another point, point and a half left there for improvement. And then I'll just say, you know, home care, home-based, it takes a little bit of time to get fully digested. And I think, you know, it's the reason why we really haven't spent a lot of time talking about it over the last few quarters as we were digesting it. You know, we've just added Medilogix and Muse to both our home health and our hospice business. We've enjoyed the partnership, getting to know those guys. And I think as HomeCare HomeBase settles in, as we're able to get one set of reports for all of our home health and hospice businesses, you know, one of the things that we all love about HomeCare HomeBase is just they've got the best data, they've got the best reporting, And the best actionable items, I think all of us believe that we can continue to get more cost efficiencies out of the home health and hospice side of the business now that we're on that platform. And just get a better insight, as you said, whether it's cost per visit, whether it's visit per episode, whether it's case mix, whether it's just putting the right nurse in the right home at the right time. I think the thing that I'm most excited about is the ability for for Rob and I to manage the business on a go-forward basis, knowing that we've got the best data. And so I think obviously you hear excitement in our voices. It's been almost 10 months since we signed the contract and started the implementation process with Home Care Home Base. So we're glad to be on the other side of it and glad to be focused now just on driving the efficiencies.

Great. Thanks, guys.

Thanks, Ben.

Thank you. Our last question is from John Ransom of Raymond James. Please go ahead.

Hey, just to kind of tag on to the, you know, labor and how money solves things. So first question, do you have just sort of a range of updates you expect to get in the second half of the year in percentage terms?

A range of the – well, I think John – the best way I can answer that question is if you go back to March the 29th, we said on that call that we would expect EBITDA on the second half of the year to be on a run rate, you know, kind of back in that, you know, I think the number we used was 215 to 220 in the 220 range or so on a run rate basis. You know, in order for that to happen, We have to have nurses re-engage. I don't think we've talked specifically about what that number might look like, but we've got to get more nurses in the workforce in order for those numbers to come true.

What I mean by that is let's say you're getting paid $100 on average from all your states. Do you think a 5% rate increase is in the cards, so it goes to 105? You said you have seven updates. I'm just trying to think about your pricing, kind of how to baseline your pricing expectations. as we sit today realizing we don't have all the details.

Yeah, I understand your question better now. And, Jeff, why don't you chime in? But the answer to your question, no, John, it's not 1% or 2% market basket update kind of pricing. It is meaningful price change. But why don't you give some color around that, Jeff?

Yeah, John, a couple of our biggest states, two of our biggest five states, are in their final legislative process and have a July 1st effective date. So in those two states, we have meaningful, meaningful, I'm talking north of 15%, 20% movement in the reimbursement rate on the table in the legislative process. And with the full intention that we would move we would move wage rates, you know, in the $5 or $6 an hour type range in those markets. So that's the kind of movement we're talking about negotiating.

Well, and Pennsylvania would be a great example. And Pennsylvania just raised their rates 11% at the beginning of this year. So that's a great data point that shows you the kind of magnitude we're talking about.

All right, so if we were to think about this, so let's just use dollar because that might be less confusing. So let's say you've got a, you know, $6 an hour increase in a state, are you just having to turn around, ride around, and pay $6 back to the nurse? There's really no more earnings to the total pass-through? Or can we think about that, that you keep your kind of historical margin and there is a little bit for the company, but most of it goes back to the caregivers?

I think the way you're thinking about it is correct. I think our margins actually hold or even, you know, we could even expand a little bit But most of the rate increase outside the margin would go directly to the caregiver.

And I will say, John, it's going faster.

10% increase in gross profit dollars. I'll do the math, but something like that. There's no... Okay, I got you. And then my follow-up... John, and I'm sorry.

Yes. The connection is a little tough. But, John, I just want to be clear. We're not thinking of rate increase as it relates to we're going to drive margins north. You know, gross margins, you know, Jeff made the comment kind of, you know, when they settle out, there will be that 29 to 30 percent in the private duty business. We're not thinking of rate increases taking that number to 31 or 32 percent. We will take everything but the margin and push it back down to the caregivers.

Yeah. Yeah. So the margin stays the same. The dollars are higher and you get some G&A leverage. That's the way to think about it.

And growth. We get growth and G&A leverage.

Yeah. All right. My other question is, obviously, the numbers haven't been what we all wanted. Do we have any debt covenant step up in the next year or two that you would care to flag?

No. You know, from a maintenance covenant perspective, we just have a first lien leverage covenant. at 7.6 turns of credit adjusted EBITDA, so we have a fair amount of room there. And that would only be if we're in a compliance period where we have roughly, you know, a third or more drawn on our revolver. But, you know, just based on that ratio, we've got a fair amount of room.

Okay.

That's it for me.

Thank you.

Thanks, John.

Thank you very much. There are no further questions at this time, and I would like you to fall back to Mr. Tony Strange for some comments and comments.

Thank you, Operator, and we really do appreciate all of your time this morning and appreciate your interest in Aviana. As always, we'll make ourselves available to the extent that anybody needs to do some additional follow-up. We'd be glad to spend time with you individually. With that, we look forward to updating you after Q2, and have a great day. Thank you.

Thank you very much sir. Ladies and gentlemen, that concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.