Aveanna Healthcare Holdings Inc.

Good morning and welcome to the Aviana Healthcare Holdings first quarter 2023 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 begin.

Thank you, Maria. Good morning and welcome to Aviana's first quarter 2023 earnings call. I'm Shannon Drake, the company's chief legal officer and corporate secretary. With me today is Jeff Shainer, our chief executive officer, and Dave Afshar, our chief financial officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we filed with the SEC. The company does not undertake any duty to update any such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release, which is posted on our website, Aviana.com, and in our most recent quarterly report on Form 10-Q filed with the SEC. With that, I will turn the call over to Aviana's Chief Executive Officer, Jeff Shainer.

Jeff? Thank you, Shannon. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our first quarter results and how we are progressing against our near and longer-term objectives for 2023 and beyond. My initial comments will briefly highlight our first quarter results, along with the early progress we are making in addressing the labor markets and our ongoing efforts with government and managed care payers to create additional capacity. I will then provide some thoughts regarding our liquidity and refreshed outlook for 2023 prior to turning the call over to Dave to provide further details into the quarter and full year guidance. Starting with some highlights for the quarter. Revenue was approximately $466.4 million, representing a 3.5% increase over the prior year period. Gross margins was 144.5 million, or 31%, which is essentially flat when compared to the comparable prior year period. And finally, adjusted EBITDA was $28.5 million, representing a 25% decrease when compared to the prior year period, primarily due to the cost associated with the current labor environment. As we have previously discussed, the labor environment represents the primary challenge that we are aggressively addressing in 2023 to see Aviana resume the growth trajectory that we believe our company can achieve. As a reminder, we do not have a demand problem. The demand for home and community-based care has never been higher, with both state and federal governments and managed care organizations asking for solutions that can create more capacity. As communicated in our previous quarter, our ability to recruit and retain the best talent is a function of rate. Our business model offers a preferred work setting that is mission driven, providing a deep sense of purpose for our teammates. But our caregivers need to be able to provide for themselves and their families in this inflationary environment, and we must offer a competitive wage. Since our year-end earnings call, I am pleased with the progress we have made on several of our rate improvement initiatives with both government and managed care payers. Specifically, as it relates to our private duty services business, our goal for 2023 was to execute a legislative strategy that would increase rates by double-digit percentages in three important states, California, Texas, and Oklahoma, which represent approximately 25% of our total private duty services revenue. In the first quarter, we were able to demonstrate the value we create for medically fragile patients in Oklahoma and have successfully secured a double digit rate increase, which was retroactive to January 1st of this year. Since the Oklahoma rate increase, we have doubled the number of caregivers hired per week in Oklahoma, demonstrating the impact rate increases have on our ability to attract caregivers at the right wage profile. We have also made significant strides with the Texas legislature that gives us increased optimism that we will achieve our targeted double digit rate increase for our Texas private duty nursing business beginning September 1st. While this rate increase isn't guaranteed at this stage, early indicators reinforce our optimism that our efforts are gaining meaningful traction. Finally, We have spent considerable time with the California legislature and the governor's office demonstrating the importance of these rate increases and how they support an overall lower healthcare cost, improve patient satisfaction, and quality outcomes. Based on our actions to date, we believe that we are taking the appropriate steps needed to support our requested increase in this upcoming California budget cycle that is effective July 1st. While there is still much work to be done on the legislative front, we believe that we can accelerate our growth by increasing caregiver capacity and bringing more patients to the comfort of their home. By passing meaningful wages through to our caregivers, we become a solution for overcrowded children's hospitals and distraught parents who want their children to be cared for in the comfort of their home. We also discussed the need to double the number of preferred payers in 2023. We define preferred payers as those payers that support value-based care by offering an above-market reimbursement rate and value-based payments in exchange for proven savings. Our goal for 2023 was to double our volumes from private duty services preferred payers from approximately 10% of volumes to 20% by year-end 2023. In the first quarter, we've added two additional preferred payer agreements in key markets. Our preferred payer volumes increased to approximately 13% of PDS volumes. Also, we have a robust preferred payer pipeline and are very optimistic we will continue to execute on this strategic initiative throughout 2023. Finally, We discussed the need to shift our current labor capacity to those payers that value our services and appropriately reimburse us for the care provided. We have begun several initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates while minimizing days in an acute care facility. In the first quarter, our preferred payer relationships benefited from accelerated nurse hires of two to three times more than our other payers, and we continue to experience staffing rates 15 to 20 percent greater with significantly higher patient admissions. The value proposition is straightforward. Preferred payers reimburse us a fair rate. We pay market-competitive nurse wage rates while also earning value-based payments for achieving positive clinical outcomes and improved staff dollars. While we are encouraged by our early 2023 rate increases and subsequent recruiting results, we believe our business can rebound quickly as we achieve our rate goals previously discussed. Home and community-based care will continue to grow, and Aviana is a comprehensive platform with a diverse payer base, providing a cost-effective, high-quality alternative to higher-cost care settings, and most importantly, We provide this care in the most desirable setting, the comfort of a patient's home. Before I turn the call over to Dave, let me briefly comment on our liquidity and refreshed outlook for 2023. On the liquidity front, we continue to make progress on improving our cash flow by focusing on attaining adequate reimbursement rates and growing our volumes. We are also implementing initiatives to right-size our corporate cost structure while optimizing our cash collections. As Dave will discuss further, we have ample liquidity to operate our business while we work with government and payers to improve the reimbursement rates to reflect the current inflationary environment. As it relates to our refreshed outlook for the year, while we exceeded our original revenue and EBITDA goals in the first quarter, We have several rate initiatives that still need to come to fruition over the next few months with particular emphasis on Texas and California. That being said, on the strength of our first quarter results, we are comfortable reiterating our full year revenue in adjusted EBITDA guidance of greater than $1.84 billion in revenue and at least $130 million in adjusted EBITDA respectively. We believe it is important to continue to set expectations that acknowledge our environment we are operating in and the time it will take to transform our company and return to sustainable growth. We believe our outlook provides a prudent view considering the challenges we face with the current inflationary labor environment, and hopefully it proves to be conservative as we execute throughout the year. Finally, I am proud of our Aviana team. as we execute on our 2023 strategic objectives. The power and efficiency of the home as a healthcare setting remains critical to our patients, families, payers, referral sources, and government partners. The value of our clinical workforce continues to be recognized through the various rate increases across the country and through our expanding preferred payer relationships. I look forward to updating you on our results at the end of Q2. With that, let me turn the call over to Dave to provide further details on the quarter and our 2023 outlook. Dave?

Thanks, Jeff, and good morning. I'll first talk about our first quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023. Starting with the top line, we saw revenues rise 3.5 percent over the prior year period to $466.4 million. We experienced revenue growth in both our private duty services and medical solution segments, which grew by 6.5% and 10.7% respectively, while our home health and hospice segment declined by 15.8% as compared to the prior year quarter. Consolidated adjusted EBITDA was 28.5 million, a 25% decrease as compared to the prior year. Now taking a deeper look into each of our segments, starting with private duty services, revenue for the quarter was approximately 373 million, a 6.5% increase. and was driven by approximately 9.8 million hours of care, a volume increase of 1.8% over the prior year. While volumes improved over the prior year, we continued to be constrained in our top line growth due to the shortage of available caregivers, although we were beginning to see early signs of improvement in the labor markets. Q1 revenue per hour of 38.12 was up $1.69, or 4.7%, as compared to the prior year quarter, and is a 46 cent or 1.2 percent sequential improvement as compared to Q4 of 2022. We expect to see continued improvement in 2023 as we execute on our rate increase initiatives and we continue to be encouraged with our ability to attract caregivers and address the market demand for our services when we obtain adequate reimbursement rates. Turning to our cost of labor and gross margin metrics, we achieved $104.2 million of gross margin, or 27.9 percent, a 0.2% decrease from the prior year quarter. Our cost of revenue rate, 2747, which is 4.9% increased as compared to the prior year, represents the rate pressures we saw in the labor markets throughout 22. That being said, our cost of revenue rate improved in the first quarter by 61 cents or 2.1% on a sequential basis. Our Q1 spread per hour was 1065, representing a 4.2% year-over-year improvement, and an 11.2% sequential improvement as compared to Q4 of 22. Moving on to our home health and hospice segment, revenue for the quarter was approximately 56.1 million, a 15.8% decrease over the prior year, but a sequential improvement of 1.4 million over the previous quarter. We're pleased with the gross margin improvement from 41.9% in Q4 of 22 to 44.6% in the current quarter. as we continue to focus on additional direct and indirect cost initiatives necessary to achieve our targeted gross margins in the 45 to 46% range. We continue to see admission trends for the division return to a more normalized level. As a reminder, at our lowest point in mid-summer, our weekly home health admissions were in the low 800s. In Q4 of 22, we averaged approximately 850 home health admissions per week, with an episodic rate of 63%. These positive trends continued in Q1 of 23 where we experienced approximately 900 home health admissions per week while improving our episodic mix. Our first quarter revenue was driven by 11,700 total admissions with approximately 68% being episodic and 11,900 total episodes of care. Medicare revenue per episode for the quarter was $29.69, essentially flat with the prior year quarter and sequentially. And although 22 was a difficult year for our home health and hospice segment, we firmly believe in this business and its long-term value proposition. We have an established home health and hospice platform poised for growth, focused on delivering value through sound operational management and delivering excellence in patient care. We expect to see sequential improvement throughout 2023 as our direct and indirect cost initiatives take hold. Now to our medical solution segment results for Q1. During the quarter we produced revenue of $37.3 million, a 10.7% increase over the prior year. Revenue was driven by approximately 85,000 unique patients served and revenue per UPS of $439.29. Gross margins were $15.3 million, a $1.2 million or 8.5% improvement over the prior year quarter. Gross margins, which were 40.8% in the quarter, represented a 0.9% decline as compared to the prior quarter, but a 1.1% sequential improvement as compared to the fourth quarter of 22. We continue to evaluate ways to be more efficient and effective in our back office to leverage our overhead as we continue to grow. While other enteral providers decided to exit the market in 22, we see this as an opportunity to expand our national enteral presence and to further our payer partnerships. In summary, we continue to fight through a difficult labor and inflationary environment while keeping our patients' care at the center of everything we do. It is clear to us that shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Aviana. As Jeff stated, our primary challenge is reimbursement rates. With the positive momentum we saw in Q1, we're optimistic that such trends will continue into the second quarter with sequential improvement expected in all segments. As we make progress in 2023 with the rate environment, we will pass through wage improvements and other benefits to our caregivers in the ongoing effort to better improve our volumes. Now moving on to balance sheet and liquidity. At the end of the first quarter, we had liquidity in excess of $215 million, representing cash on hand of approximately $34.4 million, $20 million of availability under our securitization facility, and approximately $162 million of availability on our revolver, which was undrawn at the end of the quarter. Lastly, we had $38 million of outstanding letters of credit at the end of the quarter. As we look at the timing of earnings for 23 and the related cash flows, while we may draw on the revolver for short-term timing-related items throughout the year, our goals are for the revolver to be undrawn as of year-end and, more importantly, to drive positive operating cash flows in the second half of the year as we begin to realize the benefits of all the efforts that we're working so hard on. On the debt service front, We had approximately $1.48 billion of variable rate debt at the end of Q4. Of this amount, $520 million is hedged with fixed rate swaps, and $880 million is subject to an interest rate cap, which limits further exposure to increases in LIBOR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June of 2026, and our interest rate caps extend through February of 2027. One last item I will mention related to our debt is that we have no material term loan maturities until July 2028. Looking at cash flow, cash provided by operating activities was $7.5 million for the quarter as a result of certain one-time working capital items, and free cash flow was $2.9 million. We also expect to see cash flow benefits throughout 23 as our top line and cost management initiatives come to fruition. Before I hand the call over to the operator for Q&A, let me take a moment to address our refreshed outlook for 23. While we're pleased with our first quarter results, we believe it's prudent to maintain both our original revenue and adjusted EBITDA guidance of greater than $1.84 billion and at least $130 million respectively. The trends we saw in the first quarter continue and we're successful in obtaining the requisite rate increases needed in California and Texas. We would plan to update our guidance in the back half of the year. As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year and our volumes grow. We now expect approximately 45% of our full year guided adjusted EBITDA to be recognized in the first half of 23. As most of our annual rate increases typically become effective in the second half of the year, we expect our adjusted EBITDA to ramp as we use the increases to attract and retain more caregivers and drive volumes. Our EBITDA will also ramp as we realize the benefits of our cost savings initiatives. And finally, as we wrap up National Nurses Week tomorrow, we would like to take a moment to recognize our incredible caregivers and the impact they make on the lives of our patients and their families every day. And with that, I'll turn the call over to the operator.

At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit your questions to one and a follow up so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Brian Tanklett with Jefferies. Please proceed with your question.

Hey, good morning, guys. I guess my first question, I know there's that CMS proposal on personal care services. I just want to clarify, I mean, will that cover the services that you provide under your PDS segment? And just any thoughts on that real proposal from CMS? Thanks.

Yeah, Brian, good morning, and thanks. And, yeah, obviously, we're acutely aware of the proposed rule, and, you know, it's not material to Aviana and our business, but we stand firm with the industry We stand firm with our peers, you know, the National Association for Home Care, PMHC, other trade organizations, and the fact that, you know, a lot of work is left to be done. You know, we think the precedent that the proposal creates is concerning, you know, and certainly the open comment period that we're in right now is a very, very appropriate time for both us, you know, the trade associations, state governments, all to give feedback to CMS. We applaud the intent of the rule, which is to open access to Medicaid beneficiaries and certainly improve quality measures and transparency in rate setting, but the idea that CMS would set an 80% threshold for direct care workers' compensation is significantly concerning, and the precedent that that would create we just don't think is appropriate. We also think, Brian, that as our peers have talked already, that the proposed rule significantly underestimates the oversight training, onboarding, as well as the EVV or electronic visit verification expectation requirements that CMS mandates. So in the end, we think this will play out for the next few months with a good open dialogue. And although not material to Aviana's results, we just want to make sure that we stand firm with our peers in the industry to make sure that we find a good landing place for, for this final rule with CMS.

I got it. That makes sense. And then I guess my follow up, you know, great to hear about Oklahoma and you called out how you saw a very notable uptick in, you know, interest and applications for, for new employees. So how does that work? Like, you know, when you get an increase, is it as simple as we offer higher rates and, we get more people coming in to apply or is there like a, you know, an advertising strategy that has to come along with that as you try to drive recruitment and recruitment yields higher?

That's a great question, Brian. You know, it happens very quick. We've got a pipeline of inactive nurses, caregivers in every location, every market, people who worked with us, you know, enjoyed the home care setting, liked the one-on-one setting of being with a patient in their home. However, they left us over wage, just pure wage, $1, $2, $3 an hour. And so when you see a rate increase like Oklahoma, like what's proposed for Texas and California, we stay in touch with that nurse as she's moved on or he's moved on to their next jobs. The moment we can call them and say, hey, we got a rate increase effective yesterday. We can meet your needs of $3 more an hour, $2.50 more an hour. you know, something meaningful, that nurse is excited to come back to us, and we see a strong movement of nurses back to us. But, you know, it's great to stay in touch with them. It's great to talk to them. But until we can meet their expectations, you know, the conversation is a little bit mute. It's just a relationship. And so I think Oklahoma, just like, you know, other examples in our preferred payers where the moment we're able to negotiate a higher rate, We focus on about a 50-ish percent pass-through directly to the caregiver of direct wages, not other benefits, but direct wages. The ability to do that, Brian, we were not surprised in Oklahoma, nor will we be surprised in California and Texas. As soon as we execute on those rate wins, California would be effective July 1, Texas would be effective in September 1. We would expect meaningful improvement in hires there. And then, Brian, one of the pieces that we don't normally touch on, we have current nurses that are working for us that are also working other jobs. When we can call those nurses and say, hey, we can up your entire hourly wage by $3 or $4 an hour, not only do they feel the shifts they were feeling, many times they feel incrementally more shifts and they'll push off that second job for us. So we get a lift internally, too, of our organic, you know, already patients that are already in service with us. So it's really a win-win, and I think I think Oklahoma recognized that opportunity and came through very strong with the rate increase. And our conversations in the Texas legislature and the California legislature are very similar to that of Oklahoma. It's the same story. And it seems to be resonating very well. Awesome. Thanks, Jeff. Thanks, Brian.

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Hi there. You've got Kieran Ryan on for PDO. Thanks for taking the question. So looking at PDS this quarter, I think volumes came in about where you expected them and then obviously some nice acceleration on rates. Looking at the gross margin there as the year progresses and you think about these other rate increases coming through, do you think 1Q is a fair kind of baseline to use for the rest of the year at this point? Or is it still a little too volatile out there to make that call this early?

Yeah, first of all, it's a very thoughtful question. And I think the thing that we've really kept focusing on is driving rate to then pass through wage, just like Brian's question. And so I think as you think about a 28% gross margin, Q1, we'll be in that range as we push forward. You know, we may get a temporary point where we get more rate than wage pass-through, but that's a timing issue. You know, our goal is to get these rates, you know, to the caregivers and move volumes and overall revenue. In the process, you know, I think, Kieran, what you'll see is us be in or around that 28%. Getting back to 30 where we were a couple years ago is probably not in the game. Could we touch 28.5? And, you know, absolutely. But I think it's more of a timing thing that, to your point, as the rate comes through, We may get a little bump, but we're aggressively pushing that rate through to the caregiver with the intent to really drive more volume, more shifts, and really more emissions.

Got it. That's helpful. Thank you. And then just a quick follow-up. Could you quantify or maybe just speak a little more to how much of the overall PDS rate performance in 1Q came from steering more of that business to the preferred payers? Thank you.

Yeah, I think in our prepared remarks, we talked about going into the year, 10% of our PDS volume was driven by preferred payers. We started the year with seven preferred payers. We signed two more preferred payers in the quarter, so we're at nine within our PDS segment. We moved 10% volume to 13% volume, so we had a nice bump. We're excited to talk about Q2's performance. We've already We've already signed more agreements already effective in Q2. So we have a strong pipeline for Q2. Some of the preferred payers are smaller. So some of them, they're not all the same amount of volume, not the same amount of covered member lives. So some of the preferred payers that we'll sign won't be as big as some of the current preferred payers we have on service. But as we think about the year playing out, 20% was an aggressive goal to be at by the end of the year. But I think you should think about 10 to 13, in line with 13 to maybe 15 percent in Q2, in the back half of the year, we would be driving that to the high teens and probably ending the year right at about 18, 19, 20 percent of our business is now in the preferred payer. And you asked the rate question. Yes, our preferred payers and our government wins are what's driving the rate, right, so that the reimbursement rate is being driven by this strategy. I'll also say, as a follow-up, If you look at our wage rate, our wage rate is growing almost the same rate as our reimbursement rate is in PDS. So it's proof that we're pushing that rate through to the caregiver every day. And that's our intention. Thanks so much. Thank you.

Our next question comes from AJ Rice with Credit Suisse. Please proceed with your question.

Thanks. Hi, everybody. I appreciate the comments about Oklahoma, Texas, and California. I just want to make sure I understand, so your guidance that you have now, does that embed those rate increases from Texas and California? Is that part of the step up in the back half? And I know those are big states for you, but any comment on the other, the rest of the market and what you're seeing in terms of rate updates?

Thanks, AJ. Good morning. I'll start with kind of the other and then we'll back into guidance. Yeah, I think we're very pleased with where we sit, you know, at this point in the year. I'll say the next 60 days are probably the most important 60 days of the year as most state governments are in their kind of their final, you know, six to eight weeks push to putting through their annual budgets or buying their budgets. But the known rate increases we have today are equal to or slightly ahead of our expectations going into the year and what we included in guidance. You know, we did not include our guidance, Oklahoma coming out at the place Oklahoma did. And so I think as you think about Texas and California, again, our second half of the year guidance assumes that we do get some rate lift in those two states, but not the ask that we have on hand in both of the legislatures in Texas and California. But I think we expected this to be a good year, AJ, in all things PDS rate, you know, non-Medicare oriented. I think as we ultimately sit here in May, we sit in a very good place. I'll emphasize, we need to finish Texas and California. So those are the two most important outcomes for us over the next really 30 to 40 days as they come to a conclusion, finishing that exercise. We've been engaged with both legislatures and governor's office now for pushing almost a year. It's important for us to finish those two, not just for us, but the entire industry and to ensure that both in Texas and California, you know, we can meaningfully impact the families and get them out of the children's hospitals.

Dave, any comments about guidance? Yeah, I'd say that's a fair statement, Jeff. And, you know, AJ, when you think about it, I mean, we do, we are expecting rate increases in both states, and it does, our guidance does incorporate, you know, call it, you know, mid to high single digit rate increases. As Jeff said, we think we're pretty well positioned to achieve those, and we're working collaboratively with the states on it. But, you know, and there's a lot of moving parts, obviously, to guidance. Things can come up and down, but I think, you know, mid to high single digits for those states.

Okay. All right. Maybe my follow-up to ask you about the labor situation. I understand if you get the rate increases, you can get incremental caregivers. I wonder sort of within the sort of steady-state environment, is it getting any easier to recruit caregivers? with the volatility around the economy in certain parts of the country? Are you seeing your turnover rate improve? Any updates on sort of steady state environment and what you're seeing?

AJ, I think as we said in March, you know, we felt a little bit of a pop out of the first, you know, out of the holidays coming into 2023. You know, both Indeed and some of our large, large recruitment platforms, we saw more applicants, you know, more people engaged. That's really settled. You know, I think in our steady state, we're still in a slugfest. It's why we're so committed to this preferred payer strategy, because I think long-term, we're going to continue to struggle with just inflation and, you know, eating up any current rate we have or steady state rate. So I'd love to sit here and tell you, yes, the nurses are coming back, but no, I think we saw a little pop first part of the year. Our growth in our caregivers paid, our growth in our volumes, our growth in our hours is really around preferred payers and the states in which rate has been passed through. That's our strategy. We're sticking to it. We're not just waiting around for nurses to show up. We've got great social media ads, recruitment strategies, but the number one strategy is move rate, move volume, pass through wage. And so I think that's where you'll see us focused, you know, not only in 23, but in 24 as well. And I, AJ, I can tell you from talking to numerous of our larger Medicaid MCO partners, they feel the improvement. They feel faster discharges, you know, less hospitalizations, less hospitalized days. And that's a, you know, it's almost a five to one savings to them. For every dollar they spend in PDN, they save between $5 and $6 in total healthcare costs, specifically from the acute care center. So we're hearing our payer partners telling us it's working, but I think you'll continue to see Aviana shift our caregiver capacity to those partners that want to partner with us long term.

Okay. Thanks a lot.

Thanks, AJ.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Joanna Kajuk with Bank of America. Please proceed with your question.

Good morning. Thank you so much for taking the questions. So the first question, I think, excuse me, in your thank you, you talk about 6.6 million settlement money, I guess, you actually received in the quarter. So did that benefit your cash flow and adjusted EBITDA?

Joanne, can you clarify on the $6.6 million settlement?

Yes. It looks like it was a positive, like you received that money in the quarter, if I'm reading it correctly.

Overall, what I can tell you, Joanne, is that in the first quarter, we talked about a legal matter where we had some cash that was garnished from accounts in connection with a legal matter, and we posted an appellate bond, and we were able to recover that cash of approximately $18 million before the end of the quarter and then we substituted cash for letters of credit for about $18 million. So we had a positive outcome there while we pursued the appeal on that case. There was another case that we funded about $7 million to an escrow account subsequent to quarter end in connection with the sellers of the Epic transaction. But, you know, overall, from the legal perspective, we're pleased with where we sit right now.

Yeah, and Joni, although it did have a positive impact to our cash flow in Q1, it had no impact on adjusted EBITDA. So it did help our Q1 cash flow, but not our adjusted EBITDA.

Okay, because, yeah, that was my follow-up. I was just trying to clarify. Because cash flow is was actually positive, right? And previously, you talk about positive cash flow, I guess, in second half. How should we think about the full year? Any kind of color you might give us how the cash flow will actually, you know, turn out for the full year?

Yeah, I mean, you know, Joanna, like, you know, we've disclosed You know, we had positive cash flow in Q1 related to a couple one-time working capital items that were benefits to us. Our goals remain the same, which is to drive positive operating cash flows in the second half of the year, whether it's Q3 or Q4. You know, that's our goal is to drive the business, execute on all the initiatives that we've been talking about, and, you know, drive positive operating cash flow in the second half.

And, Joanne, I think, you know, we would not be surprised if Q2 is slightly negative and even potentially Q3 is about slightly negative break even. Right, so some of those one-timers drove the Q1 positive cash flow Dave talked about. But again, I think Dave said it well. Our goal is to end this year as a positive cash flow company and start 24 on that footing.

Our next question comes from Scott Fidel with Steven Zink. Please proceed with your question.

Hi, thanks. Good morning. First question, I actually just was hoping to get just a little more of a clarification just on the first question on the proposed rule and the gross margin cap. I guess, Jeff, just to be specific here, is it more that you're concerned about a precedent that could potentially lead to private duty nursing also having a gross margin cap or Is the gross margin cap actually attributable to PDN? Just trying to sort of understand whether you think that if this rule did go into effect, whether that 28% gross margin would be secure longer term or whether there would be risk to that.

I think you're reading it the right way. As we read it and as our legal lawyers and lobbyists have read it, it does not pertain to private duty nursing requirements. But it does create a precedent that would be, you know, unfounded in Medicaid today. And as we talked to many of our state, you know, governors, Medicaid offices, they don't like the idea of this precedent, right? Because they have a lot of their own oversight of the Medicaid program and a lot of oversight of the workforce in their state. So, you know, we've long been a supporter of driving minimum wage, you know, encouraging minimum wage lifts. Many of our states have minimum wage movements. you know, in them already that we operate with. But it's really the first part of your answer, Scott, is the precedent that it would set for all of healthcare services and all of healthcare is just, we think it's just a dangerous precedent to be set. And again, I think our state legislatures and our partners in the industry all agree on that, especially when you disclude so many of the things that we have to do that are mandated by law, like EVV and compliance and oversight. So, yes, it is, as it's written today, as we have viewed it and our lawyers have viewed it, it is not material to Aviana and it's current proposed, but we do think it's a dangerous precedent to set in the industry.

Okay, got it. So more of the concern around the slippery slope as compared to direct impact. Okay.

And then on – I appreciate that clarification. Then on just the follow-up – I don't know if you guys are comfortable doing it, but just to the extent, you know, that 25% that's from the three key states, would you be willing to break out what Texas and California are either independently or in aggregate just so we could ring fence that? So I guess that's sort of part one. And then part two would just be, you know, on the preferred providers, you know, as it relates to moving over to those partners. Do we think about the financial benefits being more that you drive better volume there and you sort of are able to achieve that 28% plus gross margin? Or do you actually see a higher gross margin potential with those preferred partners? Thanks.

Great, great question, Scott. Thank you. We'll start with the preferred payers and kind of work backwards. The intent of the preferred payer relationship is not to drive more margin percentage, although temporarily it does happen as we get incremental rate and are passing it through to the caregivers. We'll temporarily get a bump in the margin percentage. What we're really, really engaged in is more volume, both more patients, because we're getting more patients home from the hospitals, and we've seen that in our current nine preferred payers, but also just more hours staffed. And that's what the preferred payer wants. The payer wants us to staff all of the hours that are authorized, not most of them or some of them, but all of them, And then the second part of it, Scott, is many of our preferred payers then have value-based bonus payments on a quarterly basis. And so we're three-quarters in now to earning value-based bonuses for reducing hospitalization both in days and cost as well as staffing more hours. And eventually we think some of our payers will move us to to really a, and admitting more patients, you know, more volume of new patients will be in that as well. So, you know, three quarters in, we're now comfortable and confident with what we can do to earn those bonuses. We're earning bonuses. Those are in our results, both in Q4 and Q1. And it's, to us, it's getting more comfortable earning those bonuses and beginning to pass some of those through to the caregivers as well. So, again, The long game here is being a partner, not a provider, but being a partner with the nation's largest Medicaid MCOs and truly helping them bend the cost curve and improve patient satisfaction to us long term. That aligns us with the best payers in America and ultimately drives more volume for Aviana. Anything else on the preferred payer, Scott, before we switch back to your questions on California and Texas?

No, that was great, Jeff. Appreciate that. So, yeah, just back, I guess, on California, Texas. Thanks.

So, we don't disclose specifically the amount of volume or the amount of rate, but I think we've been clear these are two of our three largest states that we operate in from a Medicaid standpoint. And so, we are, we, Aviana, are leading the charge in both states. We have, I think we mentioned on the last call, We had engaged a research group out of Washington, D.C. We did studies in both California and Texas on the value of what private duty nursing means to the overall healthcare spend. In California, it showed that we saved $6,000 a day for every day we can get a child out of the hospital. We saved $6,000 by getting them home. In Texas, it showed a similar outcome, but it was $5,000 a day just because of the difference in rate economics in those two states. But both studies were crystal clear The more a state invests in PDN, the more they save total net healthcare savings. And it's material. It's hundreds of millions of dollars in some cases. In California and Texas, it's pushing a billion dollars a year in savings. And so, that has resonated really, really, really well in both Austin and in Sacramento with both governor's offices, Medicaid directors. And again, we're partnering with our peer group. We're partnering with the state associations. But it's so meaningful to Aviana that we've taken the leadership role in both states, and we believe we're in a very good position today. As that relates to our guidance, I think we've been appropriately vague to say that, you know, we expect to get something in both states, but our back half of the year guidance does not include us getting double-digit or certainly I'll use 20 percent or greater rate increases in either or both states. And so, we see that as a great opportunity, and, you know, our next call is in August, we see is obviously we'll know both outcomes by then. We see it as a great opportunity in August to, you know, to really readdress the back half of the year and also how we're trending going in 2024 at that point.

Okay, thank you.

Thanks, Scott.

We have reached the end of our question and answer session. I would now like to turn the floor back over to Jeff Sheener for closing comments.

Thank you, Maria. And thank you, everyone, for joining our Q&A call today. And again, thank you for your interest in our Aviana story. We look forward to updating you on our progress at the end of Q2 in August. Thanks, and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.