Aveanna Healthcare Holdings Inc.

Good morning, and welcome to Aviana Healthcare Holdings' second 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 call over to Shannon Drake, Aviana's Chief Legal Officer and Corporate Secretary. Thank you. You may now 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 August 18, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, August 11, 2022. Today's call may contain forward-looking statements, which may be identified by the use of words such as may, could, expect, 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 applied 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 with certain non-GAAP financial measures. The 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, or is otherwise available separately on our website. Following today's prepared Marks, 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?

Thanks, Shannon. Good morning, and thank you for joining Aviana's second quarter 2022 earnings call. Before we begin our call, I'd like to say thank you to the 35,000 Aviana caregivers and employees who continue to provide exceptional service to the 87,000 patients under the company's care. These are unprecedented times, and it is only through your commitment to our families that we're able to meet the needs of the patients that we serve. Moving on to the quarter, on July the 19th, 2022, we issued a press release to pre-announce results for the second quarter and reduce our guidance for the full year, primarily driven by the COVID-induced disruption in the labor markets, further exacerbated by a record high inflation. Our results for the quarter are in line with those lowered expectations set forth in the July release. But before we get into those results, I'd like to spend a few minutes on the overall environment by providing some insight into ongoing pressures in the labor market, as well as positive momentum in reimbursement. The labor market related to our business continues to be challenging across all of our business segments, but particularly challenging in our private duty segment. While we don't break down private duty between skilled nursing services and unskilled personal care, the labor disruption is quite different. Approximately 60% of our PDS revenues are derived through skilled nursing services requiring one nurse, primarily LPNs, at one patient's bedside for 10 to 12 hour shifts. This skilled nursing business is where we're experiencing the greatest disruption in available caregivers. Historically, these nurses have been willing to work for hourly wages that might be slightly below where skilled nursing facilities and other healthcare providers could pay due to the desirability to take care of one patient at a time in the comfort of the patient's home. During the second quarter, we've seen a significant shift in this dynamic driven by two factors. One, inflation has driven our workforce to seek employment that can and will pay higher wages. And two, more and more health care providers are willing to hire LPNs in this environment to replace or avoid paying higher rates for travel and temporary agency RNs. Given that our reimbursement is fixed, we do not have the ability to raise wages without a corresponding increase in payment rate. On a positive note, while labor shortages exist everywhere, the challenges on the unskilled business are materially less difficult than those in the skilled care. As a result, our unskilled business continues to generate positive volume growth and continues to play an increasing role in the delivery of home and community-based care. Our home health and hospice business is also dependent on the ability to hire RNs and LPNs. And while we have similar constraints related to the competitive environment, we have greater flexibility to increase wages given the variable reimbursement models. The significant shortage of nurses in the U.S. will continue for the foreseeable future. Nursing schools are operating at capacity, and the timeline that it will take to increase that capacity will necessitate looking elsewhere to increase nursing capacity in the U.S. We're encouraging the current administration to reverse some of the immigration orders put into place by previous administrations that had the unintended consequence of making it more difficult for nurses from other countries to come to the U.S. for employment. In the meantime, our most effective lever is to push reimbursement rates Which brings me to our next topic, the reimbursement environment. As we mentioned in our press release in July, we continue to have positive momentum regarding rate increases with our Medicaid and Medicaid managed care payers. As is public information, the state of Virginia increased Medicaid reimbursement for private duty services by approximately 70% effective July 1st of this year, in an effort to expedite the discharge of medically fragile children from hospitals and to avoid costly readmissions. And while Virginia is not a particularly large state for us, we passed a meaningful portion of this rate increase into wages of existing and new caregivers and are experiencing positive growth in the state with Medicaid recipients, which is exactly the outcome that the state intended. In another of our larger states, Effective July the 1st, we implemented a rate increase of approximately 50%. Roughly half of the increase will be on an hourly basis as rate. The other half of the increase is tied to value-based pricing agreement. The agreement is based on two quality metrics, staffing goals and a measure for unplanned hospitalizations, both of which are largely in our control. This value-based contract provides us with flexibility to be more competitive with wages while protecting gross margins. In this one example, we immediately pass through a significant wage increases and are seeing early signs of growth within this payer around five to seven percent pre and post the increase. I provide these two examples as evidence that significant changes in rate can drive volume. We are firm believers that Aviana can add value to payers. We have the data, the skill, and the willingness to accept risk in value-based pricing agreements. We currently have five of these types of agreement in place and expect this trend to continue. I'd like to thank our government and payer relations team. Mike Young and the entire team have done an outstanding job driving change not only through rate increases but by creating upside through value-based pricing. On the other side of the equation, we were not successful in getting a rate increase passed in California. The industry put forth a compelling argument and had support from the state's children's hospitals. However, in the final hours prior to finalizing the budget, the private duty rate increase was removed. We will mount an all-out effort and pressed for meaningful rate relief during the spring legislative session in 2023. And with continued support from the children's hospitals across the state and ongoing pressure to get patients out of higher-cost settings, we're confident that we can lead a successful effort. We're also continuing to receive interest from states who are exploring alternative caregiver models, such as Colorado and Arizona, whereby we are allowed to pay parents and or their designee to provide certain levels of care to those patients. We fully support these programs and have seen firsthand in Colorado and Arizona that they can be effective in getting patients home and avoiding rehospitalizations in a very efficient manner. We expect to see other states continue to follow in their footsteps. Turning to the Medicare environment, the final rule for hospice was published two weeks ago, and it was about 110 basis points better than anticipated. The industry pushed back on the proposed rules, citing that relying on cost report data from 2019 did not adequately account for the current rate of inflation. The industry still contends that the 3.8% increase is still not sufficient given the higher cost. However, I believe that CMS did understand that there was validity to the argument and adjusted the final rule accordingly. The home health proposed rule currently provides for a net reduction to reimbursement of 4.2%. Given the struggle to staff patients at current reimbursement rates, we find it difficult to imagine in any scenario where rates are lower for the industry to meet the needs of the fastest growing and most vulnerable segment of the population in the U.S. The industry is making the same arguments made during the hospice rulemaking process and we expect to get clarity on the final rule at some point in September. The hospice rule will be accretive to our results in 2022. However, the net of the hospice final rule and the proposed home health rule would result in a reduction of approximately $7 to $8 million on an annualized basis beginning in 2023 if the rule was implemented as proposed. The demand for home and community-based care has never been higher. Rod and I have been in this business for almost 35 years, and for the first time we have payers, both state governments and managed care organizations, reaching out and asking what can be done to create more capacity. We have a waiting list for new admissions in every branch. We have several examples of how value-based contracts can provide benefits to both payer and provider, But with all that said, we're still in a firefight today. I do believe that home and community-based care will solidify its role as a value-added provider in the healthcare continuum. Aviana is a comprehensive platform with a diverse payer base. We provide a cost-effective alternative to higher-cost care. We provide this care in the most desirable setting, the comfort of the patient's home. We believe that we are a long-term solution in the face of rising health care costs. And for this reason, I believe that current home care valuations driven by these transitory disruptions create an excellent opportunity to create value for all investors. So let's turn to our results. As I mentioned earlier, our results for Q2 were in line with the expectations that we laid out in July. Revenues for the quarter were $443 million, and adjusted EBITDA was $37 million, or 8.3 percent of revenue. The key takeaways from the quarter are volume, volume, and volume. As discussed, we need to increase caregiver wages on average 15 to 25 percent in certain markets that we serve. We will systematically go through state by state and contract by contract and adjust reimbursement rates in such a way that will allow us to be competitive on wage. In the meantime, gross margins continue to be stable at 32.7 percent for the quarter, which is up from Q1 of 2022 and the full year of 2021. Jeff will provide further granularity on our segment results in his remarks. From a liquidity standpoint, we have placed hedges on all of our debt in one form or another to protect the company against the rising interest rates. We expect cash flow to be negative for the year, driven by lower EBITDA expectations, as well as approximately $40 million of one-time cash uses. Even on lower volumes, we see our way to positive cash flow and have sufficient liquidity to get us there between our delayed draw term loan and mostly undrawn revolver. Dave will provide further detail around our cash flow and leverage in just a moment. In summary, while we do not like being in a position where we're forced to chase rate, we fully understand that in the short run, it is the most immediate solution. In the meantime, we will adjust costs where appropriate, protect our gross margins, and manage our cash flows. I am confident in our team to make the necessary adjustments to navigate this difficult environment. And as I said before, home care is a solution. and those that have the perseverance to weather this storm will be rewarded. With that, I'll turn the call over to Jeff.