This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, and welcome to Aviana Healthcare Holdings third quarter 2023 earnings conference call. Today's call is being recorded. We've 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, Shannon, you may begin.
spk02: Good morning, and welcome to Aviana's third quarter 2023 earnings call. This is Shannon Drake, the company's chief legal officer and corporate secretary. With me today is Jeff Shainer, our Chief Executive Officer, Matt Buchhalter, our Interim Chief Financial Officer, and Debbie Stewart, our Chief Accounting Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and can 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 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 Securities and Exchange Commission. With that, I will turn the call over to Aviana's Chief Executive Officer, Jeff Shainer.
spk03: 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 third quarter results and how we are continuing to progress against our near and longer-term objectives for 2023 and beyond. My initial comments will briefly highlight our third quarter results along with the 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 Matt to provide further details into the quarter and full year guidance. Let's start with some highlights for the third quarter. Revenue was approximately $478 million, representing a 7.9 percent increase over the prior year period. Gross margin was $147.3 million, or 30.8 percent, representing a 9.4 percent increase over the prior year period. And finally, adjusted EBITDA was $36.2 million, representing a 46.2 percent increase over the prior year period primarily due to the improved payer rate environment as well as cost reduction efforts taking hold. As we have previously discussed, the labor environment represents the primary challenge that we continue to aggressively address to see Aviano 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 clinical capacity. As communicated in previous quarters, 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. However, 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 second quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and managed care payers, as well as early signs of improvement in the caregiver labor market. 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 across our various states with particular emphasis on California, Texas, and Oklahoma, which represent approximately 25% of our total PDS revenue. Year to date, 2023, We have successfully obtained double-digit PDS rate increases in eight key states, including Oklahoma. We have also achieved rate wins in an additional 11 states that were either in line or slightly better than our expectations. These combined 19 states represent approximately 55 percent of our PDS footprint, and we should continue to see positive progress throughout 2023 and into 2024 as we continue to focus on the remaining states. As a point of reference, the majority of the rate increases are effective in the second half of 2023, which will result in a full year benefit as we head into 2024. While we are pleased that our PDS legislative messaging is being well received by state legislatures, we still have much work to do. As an example of the work ahead, we received a modest increase in Texas effective September 1st and do not anticipate being included in the California budget until fiscal year 2025. We believe that we made significant strides with both the Texas and California legislature demonstrating the importance of rate increases and how they support an overall lower healthcare cost, improve patient satisfaction, and quality outcomes. However, it is clear that we need to further accelerate our preferred payer strategy and continue to focus on opportunities within our current infrastructure to allow us to pass meaningful wages through to our caregivers. This allows us to 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. Now, moving to our progress with preferred payers. Our goal for 2023 was to double our PDS preferred payer volumes from approximately 10 percent to 20 percent by year end. In the third quarter, we added two additional preferred payer agreements, raising our total to 12. Our preferred payer volumes increased to approximately 17 percent of total PDS volumes, and we are optimistic that we will continue to execute on this strategic initiative as we head into 2024. While we are taking a national approach to our PDS preferred strategy, we are placing particular focus on the state of Texas due to the moderate rate increase and intensifying our ability to shift caregiver capacity to our preferred payers. As of September 30th, we now have over 55 percent of our Texas PDN volumes with preferred payers. and believe we have an opportunity to further improve this trend to approximately 70% in 2024. Moving on to our preferred payer progress in home health. Our goal for 2023 was to improve our episodic payer mix by 10% from approximately 60% to above 70% by year end 2023. Year to date, we have signed six new episodic agreements and improved our episodic mix from 63% at the end of 2022 to 75% in Q3. We continue to remain focused on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis and are focused on improved clinical and financial outcomes. 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 continued several initiatives to shift caregiver capacity to our preferred payers to optimize staffing rates while minimizing days in an acute care facility. In the third quarter, our preferred payer relationships benefited from accelerated caregiver hires of approximately three times more than our other payers. and we continued to experience staffing rates approximately 20 to 25 percent greater with significantly higher patient admissions. These positive labor trends have continued into the fourth quarter and further validate our preferred payer strategy. Preferred payers reimburse us a fair rate and we pay market competitive wage rates while also earning value-based payments for achieving positive clinical outcomes and improve caregiver capacity. We are encouraged by our 2023 rate increases and subsequent recruiting results, and our business is beginning to demonstrate signs of recovery 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 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 the patient's home. Before I turn the call over to Matt, 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 flows by focusing on attaining adequate reimbursement rates and growing our volumes. We are also seeing the benefits from the cost efficiency efforts we implemented earlier this year to right-size our cost structure while optimizing our collections. As Matt will discuss further, we have ample liquidity to operate our business while we work with government and MCO payers to improve the reimbursement rates to reflect the inflationary environment. As it relates to our refreshed outlook for the year, based on the strength of our first nine months' results and the continued rate improvement, we are comfortably raising our full-year revenue guidance to a range of $1.87 to $1.88 billion and an adjusted EBITDA guidance range of $134 to $137 million, respectively. We believe our revised outlook provides a prudent view considering the challenges we still face with the current inflationary labor environment, and hopefully it proves to be conservative as we close out 2023. Finally, I am really proud of our Aviana team as they have continued to execute 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 various rate increases across the country and through our expanding preferred payer relationships. With that, I look forward to updating you on our results at the end of Q4. And let me turn the call over to Matt to provide further details on the quarter and our revised 2023 outlook. Matt?
spk04: Thanks, Jeff, and good morning. I'll first talk about our third quarter financial results and liquidity before providing additional details on our refreshed outlook for 2023. Starting with the top line, we saw revenues rise 7.9 percent over the prior year period to $478 million. We experienced revenue growth in all three operating divisions, led by our private duty services, medical solutions, and home health and hospice segments, which grew by 8.2%, 7.3%, and 6.3% compared to the prior year quarter. Consolidated adjusted EBITDA was $36.2 million, a 46.2% increase as compared to the prior year, reflecting the improved payer rating environment as well as cost reduction efforts taking hold. Now taking a deeper look into each of our segments, starting with private duty services, revenue for the quarter was approximately $385 million, an 8.2% increase, and was driven by approximately 10.1 million hours of care, a volume increase of 4.5% over the prior year. While volumes have improved over the prior year, We continue to be constrained in our top line growth due to the shortage of available caregivers, although we are beginning to see signs of improvement in the labor markets. Q3 revenue per hour of $38.13 was up $1.29, or 3.7% as compared to the prior year quarter. We expect to see continued improvement in 2023 as we execute on our rate increase initiatives. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics, we achieved $104.5 million of gross margin for 27.2 percent, a 3.6 percent increase from the prior year quarter. Our cost of revenue rate of $27.78 which is a 5.5 percent increase as compared to the prior year, represents the rate pressures we continue to experience in the labor markets. Our Q3 spread per hour was $10.35, representing a 0.9 percent decrease year over year. As a reminder, our Q2 spread did benefit from some timing-related items and did normalize in our expected $10 to $10.50 range for Q3. Moving on to our home health and hospice segment, revenue for the quarter was approximately $53 million, a 6.3% increase over the prior year. Revenue was driven by 9,300 total admissions, with approximately 75% being episodic, and 11,200 total episodes of care. Medicare revenue per episode for the quarter was $3,046, up 0.8% as compared to the prior year. we have intentionally focused on right-sizing our approach to growth in the near term by focusing on preferred payers that reimburse us on an episodic basis. This episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic admissions over 70%, we have achieved our goals of right-sizing our margin profile and enhancing our clinical offerings. As we think about Q4, we expect marginal growth in admissions and total episodes with additional improvement coming in early 2024. We are committed to a disciplined approach to growth while shifting our capacity to those payers who value our clinical resources. While we are pleased with our gross margin of 47.9% in Q3, demonstrating our continued focus on cost initiatives to achieve our targeted margin profile, We wrote off the majority of the remaining goodwill associated with the home health and hospice business, representing $105 million non-cash charge. This non-cash charge reflects our renewed focus on preferred payer relationships, while our cost management initiatives mature over the next several years. We believe this is the right long-term growth strategy, and we hold a strong belief in this business and its lasting value proposition. Our home health and hospice platform is dedicated to creating value through operational effectiveness and delivery of exceptional patient care. Now, to our medical solutions segment results for Q3. During the quarter, we produced revenue of $40.3 million, a 7.3% increase over the prior year. Revenue was driven by approximately 88,000 unique patients served an 8.6 percent increase over the prior year period, and revenue per UPS of $457.63. Gross margins, which were 43.2 percent for the quarter, were flat on a sequential basis from Q2 and in line with our target margin profile for medical solutions. We continue to implement initiatives to be more effective and efficient in our operations to leverage our overhead as we continue to grow. While other internal providers have decided to exit the market, we see this as an opportunity to expand our national internal presence and to further our payer partnerships. In summary, we continue to fight through 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 partnerships is the path forward at Aviano. As Jeff stated, our primary challenge continues to be reimbursement rates. With the positive momentum we saw in Q3, we're optimistic that such trends will continue into 2024. As we continue to make progress with the rate environment, we will pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now, moving to our balance sheet and liquidity. At the end of the third quarter, we had liquidity in excess of $236 million, representing cash on hand of approximately $48.3 million, $20 million of availability under our securitization facility, and approximately $168 million of availability on our revolver, which was undrawn as of the end of the quarter. Lastly, we had $32 million in outstanding letters of credit at the end of Q3. I'm proud of the progress we've made in enhancing our overall liquidity throughout the year. The debt service front, we have approximately $1.47 billion of variable rate debt at the end of Q3. 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 SOFR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026, and our interest rate caps extend through February 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 positive $25.7 million for the quarter. and free cash flow was approximately positive $16.9 million. While Q3 benefited from some timing related items, which we expect to be a moderate headwind to Q4 cash flows, we continue to believe we will end the year as a positive operating cash flow company. While we expect to see continued cash flow benefits as our top line and cost management initiatives come to fruition as we head into 2024. Before I hand the call over to the operator for Q&A, let me take a moment to address our refreshed outlook for 2023. As Jeff mentioned, we're comfortable raising our full-year revenue guidance to a range of $1.87 to $1.88 billion and adjusted EBITDA guidance range of $134 to $137 million, respectively. In closing, I'm proud of all of our Aviana team members and their hard work in achieving these results. I look forward to the continued execution of our 2023 strategic plans and updating you further at the end of Q4. With that, let me turn the call over to the operator.
spk01: Thank you, and I'll be conducting your question and answer session. We ask you to please ask one question and one follow-up, then return to the queue. If you'd like to be placed in the question queue, please press star 1 at this time. One moment, please, while we poll for questions. Our first question today is coming from Brian Tanquillit from Jeffries. Your line is now live.
spk00: You have Taji on for Brian. So my first question is going to be on the final home health ruling. Obviously, we saw the 80 basis point bump, which is a positive revision. Just curious how the team is currently thinking about that and the impact to the business. And then also, too, obviously, we still have the temporary adjuster on the table, but just curious how you're thinking about that. And you've made a lot of great strides in improving the episodic mix in the business as referenced on the call. So, you know, I guess how that informs the outlook for 2024.
spk03: Tasha, good morning. This is Jeff. Tasha, I'm going to step up and I'll start with kind of where you ended that question is how we think of early thoughts on 2024 guidance. And I'll go back to kind of the core of our company, right? We talked about 19 PDS state rate improvements. You know, that's a great year for us. It was slightly better than we expected, even though we didn't achieve the full Texas and California rate increase in 2023. You know, it was in line to better than we expected. So we've got nice momentum rolling from our entire PDS segment into 2024. I'll add that you probably saw we had about 4.5% year-over-year growth in Q3. That's the strongest year-over-year growth we've had, you know, since COVID. So continued momentum. The rate increases are working. We're deploying more caregivers to more homes, helping more families. So really nice momentum moving out of 23 and 24 for our PDS segment. And then, you know, as you said, although home health and hospice is a much, much smaller segment to us, You know, we certainly were pleased with the hospice final rule, and I think you'll find us to be directly in line with our peers on the home health rule that, you know, we continue to be disappointed in CMS's unwillingness to address, you know, the labor and inflationary environment over the last three to four years. We obviously, you know, appreciate the fact that the final rule was better than the proposed rule, but at the same day, As our peers have said, as the National Association for Home Care has gone on record, the home health industry is still facing much, much, much greater, you know, raising wages and inflation. And the lack of recognition from that, from the rate, is disappointing. So at the end of the day, that's not going to slow us down, Taji. You know, we've got a great business model. We were very pleased with our 75% episodic mix in Q3 2020. We expect that to be above 70% as we end the year. And I think as you've heard Matt and I talk about now for a couple of quarters, our home health and hospice business has been fixed internally. Clinically, we're strong. Financially, we're strong. And we are disciplined to grow this business to the payers who are going to pay us on an episodic basis. So we're excited about 24. And although the home health rule, we still feel falls far short, we're excited about the momentum that we carried in 24.
spk00: Great. Really appreciate the commentary. And then I know we always hear the commentary around, you know, we don't have a demand problem. It's really like labor. So just curious, I mean, it's encouraging to hear that it's improving and we've been seeing the same thing in our data checks. Just curious, how should we be thinking about, you know, directionally not asking for any guidance, but how like wages, wage inflation for next year, what's the right assumption? And then, you know, obviously I see based off the guidance, you know, margins will be you know, slightly north of 7%, you know, is that still a proper launching point for next year? Is there anything else that we need to be contemplating outside of just the rate increases and initiatives you're making on the rate side and then also to just like inflationary costs, hopefully moderating?
spk03: No, that's a great point. And I think we'll Our comments in the script were early, but yes, we, like our peers, we're starting to see improvement in the overall labor markets. And I would tell you, Taji, for the first time since COVID hit, Q3 acted like Q3 had acted for the last 20 years pre-COVID, meaning meaning we felt schools being out in the summer, we felt our little summer seasonality low, and then come Labor Day, which typically was always kids going back to school and our business bumps because of that, we saw the bump both in demand hours but also in supply of caregivers looking for work. And so I'll call it the last eight to ten weeks for us have been really nice, both from a recruitment, from a hiring perspective, but also just people, our current workers, specifically in the PDS segment, wanting to work more hours. And we've had a really nice kind of eight to 10 week run. We expect that to continue through the end of the year up until the holidays. So nice to see the business beginning to get back to what it was, you know, pre-2020. As we think about 2024, Taji, and it relates to that, you know, Matt talked about we still gauge inflation, wage, and rate by our spread per hour. And, you know, it was 1035 in Q3. It'll land somewhere in that 10 to 1050 range in Q4. And we still feel like that's the right measurement for how we should think about, you know, margins in the PDS segment. we'll probably be chasing home health a little bit, right? So I think our disciplined approach to home health is fundamentally rooted in the fact that we understand we cannot chase low-margin business and try to make it up with volume and home health. We absolutely are staying disciplined to the fact that episodic business is the most important business to us on the home health side of the business. And although 75% may be a bit strong to carry into 24% Certainly our goal is to be at or above 70%. I think the last part of that question, Matt, was about margin, potential margin expansion.
spk04: Yeah, Jeff, I think, you know, on the rate side, you said it really well with, you know, 19 rate increases so far in 2023. And so it just shows how much value that we're providing to our payers and our patients as well. You know, there are some states that have done a great job of being out in front of it and some that still have to play catch up to this as well. As we do get those rate increases, Taj, you know we'll pass those, you know, wage benefits through and other benefits to our caregivers. And that's to drive volumes and increase patient care most importantly as well. On kind of the SG&A front, you know, our team has done a phenomenal job. and addressing direct and indirect cost and looking for opportunities to just be more effective and more efficient. I mean, they've really done a phenomenal piece of that. We'll continue to look at our corporate infrastructure. We'll continue to look at field infrastructure and invest where it's important so that we can drive our business, drive volumes, drive growth, but also provide great clinical and quality care to our patients. Thanks, Taj. We appreciate you.
spk01: Thank you. Next question today is coming from Pito Chickering from Deutsche Bank. Your line is now live.
spk05: Hey, you've got Benjamin Shaver on for Pito today. So just a quick question on the cash flows. I heard you got into positive CFO for the full year, and it's currently $26 million year-to-date. Is that correct? So where do you guys see it going in 4Q? Thanks.
spk03: Hey, Ben. Good morning. Yeah, so I think in Matt's prepared remarks, he talked about we had some one-time benefits. That did help us in Q3. Q3 would have been cash flow positive even without the one-time benefits. But some things like just how our biweekly payroll closes, it fell into an October date versus a September date, which was unusual. So there'll be a little bit of a swing from quarter to quarter here. I think the most important part you're hearing from us, and we've been talking about it for a couple quarters now, is we've been very close to breaking through and becoming a positive operating and ultimately a positive free cash flow company. And although Q4 will be a little bit of a headwind in that, I think we feel confident that you'll see that from us for the year. And more importantly, or equally important, transitioning in 2024, Aviana is now a positive generating cash flow company, which was an important milestone for us as a company. So we're certainly, Matt talked about it, it's a total team effort. It takes growing the volume, it takes growing rates, it takes managing margin, also takes taking costs out of the company, and lastly, and really important, collecting our cash. And I think It's a total team effort of Aviana to get where we are and to continue to drive through. So I think you'll find us to be pretty excited, you know, less about how Q4 impacts, but more about how we think of the full year.
spk04: Yeah, Jeff, I think that's really, really well said there. I mean, the team's success in driving our top-line growth, as well as being very disciplined on any type of spend, has really allowed some of those dollars to drop down to the bottom line for us on an operating cash flow and free cash flow basis. one-time items in Q3 that are a very moderate headwind in Q4 as well, but just wanted to be upfront about that to provide realistic expectations. But more importantly, we're on the run rate for consistency of this and creating an organization that will be a positive operating cash flow company. I will lay shells on the beach. There's a little bit of headwinds in Q1 with some of our TPL seasons that evolved and just some of our payroll taxes and normal spend. So we don't expect it during Q1, but You know, therefore, our goal is to continue to be a positive operating cash flow business.
spk05: Awesome. That's super helpful. And then one more quick one. We really like to see the leverage take down a little bit this quarter. Can you give any color on maybe targets you have or where you see it going over the next few quarters? Thank you.
spk04: Yeah, Ben, I mean, we're really pleased. I mean, dropping off Q3 last year was a really tough quarter for us. And, you know, the industry was going through a mighty shift during that time period. So being able to drop off that one and then add a strong $36.2 million, 46.2% increase year over year really helps that leverage profile. We're very cognizant of it around here every single day. I think you can hear that in our tone and our voice about cost and spend and getting back to where we know this organization can be. And by doing so, we'll provide a whole lot more patient care as well. So we're going to continue to work that down through some good old-fashioned organic growth, cost-reduction efforts to decrease our leverage profile. Don't want to get ahead of our skis as well and throw out a number that might take us a little bit of time to get to, but that's something we'll work down over time.
spk05: Thanks. Appreciate it, guys. Congrats on the nice quarter. Thanks, Ben.
spk01: Appreciate you. Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to Jeff for any further or closing comments.
spk03: Thanks, Kevin, and thank you for joining us for our Q3 earnest call, and thank you for your continued interest in our Aviana story. We look forward to updating you on our continued progress and further insights into our plans in 2024. Thanks, and have a great day.
spk01: Thank you. That does conclude today's teleconference, and we disconnect or line out this time, and have a wonderful day. We thank you for your participation today.
Disclaimer