Aveanna Healthcare Holdings Inc.

Good morning and welcome to Aviana Healthcare Holdings third 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 would like to turn the call 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 November 17, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 10, 2022. Today's call may contain forward-looking statements which may be identified by the use of words such as may, could, 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 recorded in accordance with GAAP 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 at the SEC's 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? Thank you, Shannon, and good morning, everyone. We appreciate you investing your time to better understanding our results as well as the factors that are affecting our industry. On the call today, we'll update you on our third quarter results. We'll provide some insight into the labor markets and our ongoing efforts with payers to create additional capacity. And finally, we'll provide some insight into our expectations for Q4, as well as a preliminary look at 2023. As you've seen in our press release last night, our Q3 results clearly fall below our expectations with net revenues of $443 million. and adjusted EBITDA of approximately 25 million. Despite the ongoing disruptions in the labor market, we're seeing progress in staffing, specifically as it relates to our preferred payer relationships within PDS. We now have seven preferred payer relationships, all showing signs of growth compared to the two that we discussed on our last call. Additionally, our medical solutions business is benefiting from the market consolidation after two providers left the market in late Q2. Finally, both our private duty services and our medical solutions produced sequential volume growth in Q3, which is typically the lower quarter of the year, both posting their best results of the year. As referenced in the release, our biggest issues in the quarter were driven by home health and hospice. Earlier this year, we consolidated four separate and unique operating systems into home care home base. In addition, we implemented metalogics to provide predictive data analytics. Both will play a significant role in our ability to position Aviana as the leader in value-based care. And while we're confident that these decisions are the right long-term strategy for the company, we can see a short-term effect within home health and hospice in Q3. Our results were driven primarily by the following three factors. Lower than expected volumes. As home care home base was rolled out to all 91 branches, we could feel the effect on volume during the integration phase. While we completed the install in Q2 with little disruption, as we began to implement the discipline policies associated with home care home base, we saw a decline both in new admissions and recertifications. And while this impact was across our platform, it was most acute in the state of Florida within our legacy doctor's choice acquisition. With the benefits of home care home base securely in place, we're experiencing an improvement in volumes across the board, and particularly in Florida going into Q4, notwithstanding the impact of Hurricane Ian in the first two weeks of October. Number two, higher than expected adjustments in revenue reserves. We took adjustments and additional reserves to revenue above our normal rate of about $6.5 million during the quarter. These adjustments include provisions for uncollectible AR on legacy systems, increased reserves for documentation issues that occurred during the system conversion, and additional adjustments for configuration issues that have since been addressed. Dave will provide additional details in his remarks. The fourth quarter will continue to have a slightly elevated reserve rate before returning to normal levels in Q1 of 23, with the rest of the adjustments that we discussed being more one time in nature. And number three, higher costs associated with lower revenues. As a result of the lower revenue, as well as the efficiencies gained through home care home base, the operating team has identified about $6.5 million of cost that we took out in late Q3, with the full benefit being realized in Q4. Jeff will provide some additional commentary on all of the home health and hospice results during his remarks. While we're on the topic of home health, on Monday of last week, CMS issued its final rule for home health payments for 2023. As you'll recall, CMS proposed a net reduction of approximately 4.2% for the 23 rule. CMS increased the market basket update as well as reduced the behavioral adjustment, resulting in a rate increase for 23 of 0.7%. In full disclosure, CMS indicated that while it would be implementing half of the behavioral adjustment in 2023, it would implement the remaining 50% at some point in the future. Clearly, this is a better outcome for the industry because it allows companies to continue to invest in caregivers and technology to better position themselves for what CMS views as the end game, where all providers are paid based on the value that they deliver. We believe that with the investment that we've made into home care home base and MediLogix, we are well positioned to be a winner in the value-based care system. With that said, we strongly urge CMS not to proceed with the additional behavioral adjustment in future years as it contradicts the shift in behavior that they're trying to encourage. In summary, we feel good about the future of our home health and hospice business. There are 10,000 Americans turning 65 every day. Home Health and Hospice provides a cost-effective alternative to rising health care costs, and most importantly, it's preferred by the patient. We expect this business to grow in the high single digits year after year and continue to produce gross margins in the high 40s to 50%. On our last call, we spent a fair amount of time talking about the preferred payer relationships as well as value-based pricing. While it still represents a small portion of our overall revenue, we have continued to see momentum in moving our capacity toward payers that value the role that home care can play in reducing overall health care costs. Within these preferred payer agreements, we can see early signs of success with PDS growth rates in the mid to high single digits, as well as the potential for gross margin expansion. The indicators demonstrate that an all-in commitment to this strategy in states where value-based pricing is currently a possibility is a clear path forward for Aviana. Before we get into Q4 in 2023, I'd like to make a few comments about cash flow and liquidity. First and foremost, despite the discussion related to the adjustments that we took in home health and hospice, the revenue cycle teams have produced extraordinary results in Q3. Our collections were $470 million against a goal of $445 million, or 106% to plan. DSOs for the quarter dropped to 48 days. These results give us confidence that our revenues are collectible and that we will be able to convert revenue and growth into improved cash flow. In the meantime, we have flexible covenants within our loan agreements, in addition to substantially all of our debt being hedged in one form or another. At the end of Q3, we had nearly $280 million in liquidity. This represents more than enough access to capital to operate the business and to continue to make the necessary investments into clinical systems, payer, and government relations to further enhance our efforts related to the value-based pricing and preferred payer relationships. Dave will provide some additional detail in his remarks related to liquidity and cash flow. Let's turn our focus toward Q4 and an early look into our expectations for 2023. We expect Q4 revenues of 445 to 450 million and adjusted EBITDA of approximately 28 to 30 million. These estimates include the benefit of a hospice rate increase effective October the 1st, the ongoing benefit of the 2022 rate improvements, and improved volumes in PDS partially offset by continued reserve pressure in home health during the quarter, as well as the impact that we experienced during Hurricane Ian across our private duty and home health segments. Looking forward to 2023, we will issue specific guidance early next year once the 2023 budget has been finalized and approved by our board of directors. We're targeting revenues greater than $1.8 billion in adjusted EBITDA in the mid $140 million range. These estimates include ongoing labor market disruption and shortage of skilled caregivers, the full impact of the CMS rule that we discussed earlier. It includes home health and hospice returning to mid to high single-digit growth with gross margins in the high 40 to 50 percent, and normalized base rate improvements it will receive through private duty services. as well as ongoing improvements from value-based pricing and preferred relationship. What those estimates do not include is any material rate improvements from one or more significant states within our service area. It doesn't include provisions for further disruptions from COVID-19 or other pandemics or provisions for catastrophic weather-related events or fires. Again, we'll provide precise guidance once the 2023 budget has been finalized but we believe that this provides a broad framework to begin thinking about the full year 2023 and beyond. Before I turn the call over to Jeff, I wanted to summarize my thoughts on Aviana and the home care industry. In the eyes of our patients, payers, state and federal governments, as well as our physician and hospital partners, home and community-based care is a solution, not a problem. With higher demand for services and fewer available resources, We must be innovative and nimble in our response. Companies that have size and scale and breadth and service levels are positioned to be successful. We are not satisfied with our results in Q3, and for that we take full responsibility. We will not be defined by a single moment in time. We expect Q4 to be better than Q3, and we expect 2023 to be better than 2022. We have seen progress in both medical solutions and private duty services. We've seen preferred payer models drive growth in skilled nursing care. We've seen innovation related to alternative caregiver models produce increased capacity. We recognize that we have work to do in order to bring our home health and hospice business back to our level of expectation. We anticipate having all this work finalized by the end of Q1 of 23. I am confident that Aviana can and will position itself as a leader in the industry through these trying times. In today's environment, our employees can work wherever they choose. Our employees have continually demonstrated a willingness to work hard, even when times are tough. It's this same resiliency and our culture that will define our success. I thank each of our employees and caregivers for what you do and for calling Aviana your home. With that, Jeff will provide you with some additional insight into our segment results. Jeff?