Good morning and welcome to Aveanna Healthcare Holdings' First Quarter 2022 Earnings Conference Call. Today's call is being recorded and we've allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Shannon Drake, Aveanna'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, Aveanna's Executive Chairman; Tony Strange, Aveanna's Chief Executive Officer and President; David Afshar, Aveanna's Chief Financial Officer; and Jeff Shaner, Aveanna'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.aveanna.com as well as on the SEC's website at www.sec.gov. A replay of this call will be available until May 19, 2022.

We want to remind anyone, who may be listening to a replay of this call that all statements made are as of today, May 12, 2022. Today's call may contain forward-looking statements, which may be identified by the use of words such as may, could, will and other similar words and expressions.

All forward-looking statements made today are based on management's current beliefs and assumptions about our business and the environment, in which we operate.

These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call, except as required by federal securities laws, Aveanna will not publicly update or revise any forward-looking statements subsequent to the date made, as a result of new information, future events or change in circumstances.

Also we supplement our financial results reported in accordance with GAAP and with certain non-GAAP financial measures, reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and Form 10-Q, both of which are available on our website and the SEC's website, whereas otherwise available separately on our website.

Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up, so that we can accommodate as many callers as possible in the allotted time. With that, I will turn the call over to Aveanna's Chief Executive Officer, Tony Strange.

Tony?.

Thank you, Shannon and good morning, everyone. Thank you for joining Aveanna's first quarter earnings call. This call marks the anniversary of our first full year of reporting as a public company. On our call today, we'll provide you an oversight of our Q1 results, provide a little insight into our M&A activity, pipeline and integration.

And finally, we'll provide some insight into the current trends both from a volume perspective as well as the reimbursement environment. Before we get into the details, I'd like to once again say thank you to all of the Aveanna employees. In today's environment, you can choose to work wherever you like.

However, you continue to put the needs of our patients and their families first and for that we're grateful. Let's turn toward our results. Revenues for the quarter were approximately $451 million, compared to $417 million a year ago, which is an increase of approximately 8%.

The increase was driven by the acquisitions of Accredited and Comfort Care later in the fourth quarter and partially offset by the reduction in volume related to the spike in Omicron.

As we outlined on our last call, we saw a spike in the number of employees that were out of work related to COVID that began in mid-December and ran through early March. Prior to December, we were averaging between 200 and 300 employees sidelined on any given day, that number spiked to just under 3,000 in January and February timeframe.

We estimate that this interruption cost us approximately $14 million to $15 million in lost revenue during the quarter. As of today, this disruption is back down to pre-Omicron levels and we expect revenues to rebound accordingly, notwithstanding any further disruptions due to additional COVID variants.

However, the labor markets for caregivers specifically for nursing continue to be distorted. Demand for services is at an all-time high, while capacity continues to be constrained. I'll provide some more color around some of our plans to mitigate these ongoing labor shortage in just a minute.

Moving on to gross margins for the quarter were 32.1%, an increase of 50 basis points from Q1 of ‘21. Given the increased payroll tax burden of the first quarter each year and the ongoing wage pressures, I'm especially proud of our operating teams disciplined around protecting our gross margins.

Adjusted EBITDA for the quarter was $38 million compared to $43.7 million a year ago. The impact of the reduced volumes associated with the Omicron variant is approximately $5 million in adjusted EBITDA.

Total SG&A increased quarter-over-quarter was driven by the acquisitions of Accredited and Comfort Care and once these synergies are realized, our SG&A expenses are right in line with our expectations.

While revenues were in line with what we forecasted on our call in March, the softness in volumes had a meaningful impact on Q1 results and we expect these revenues to normalize in Q2 and while gross margins remained strong and SG&A remains in line with expectations.

We anticipate ongoing labor constraints to continue to be a headwind for revenue in the near term. While we're on the topic of Accredited and Comfort Care, the integrations of these two acquisitions are going very well. They were on schedule and in many instances, we are actually ahead of schedule with all aspects of integration.

We expect to be largely complete with the integration and all of the synergies realized by mid-year 2022, neither business was immune from the impact of Omicron. However, both businesses are performing well and will be highly accretive to the Aveanna story.

A special thank you to the employees of Accredited and Comfort Care as well as our integration management office team for all the heavy lifting that you've done to complete these integrations. As far as future M&A is concerned, we stated on our last call that we've spent the first part of 2022 focused on integration, which we've done.

Our pipeline remains robust and there are plenty of transactions to consider. We will continue to remain disciplined in our approach to transactions, focusing only on those deals where price consideration and synergies produce accretion for our shareholders. Our liquidity remains strong.

We have access to approximately $400 million between cash on hand, the delayed draw term loan and available revolver. With very little covenant restrictions coupled with our various rate -- interest rate hedges, we are well protected from the downside risk associated with rising interest rates.

We're comfortable at our current leverage ratios; however, it's our desire to reduce leverage through accretive transactions and/or the use of free operating cash flow to reduce debt. Dave will provide some additional insight during his remarks.

I'd like to spend a few minutes on the overall reimbursement environment and its connectivity to the labor disruption and eventually to the creation of additional capacity.

Most of you have seen articles in the major news media outlets profiling the lack of capacity, mandating the patient stay in the hospital longer and even in some circumstances indefinitely.

Payers across the country recognize this trend and are also looking for solutions to facilitate safe discharge from the hospital into home or community-based care.

The state of Arizona recently announced the approval of a program that would allow Aveanna to pay family members to provide unskilled care that could be supplemental to other skill needs in an effort to create additional capacity to provide care in the home.

We're seeing this willingness to invest additional resources into keeping patients out of higher acuity settings and in the safety of their home environments across our platform.

In addition, we continue to have productive discussions with our payer partners around the shortage of caregivers and the impact that inflation is having on our ability to meet the demand of their beneficiaries, resulting in continued rate improvements across our business.

In addition, there are several states that are in mid-legislative sessions that are pending legislation that would further enhance reimbursement in an effort to increase capacity. The overarching thesis is that home care is a value added in the healthcare equation and additional resources are needed to expand access to care.

Before I turn the call over to Jeff for a deeper dive into our operating metrics, I'd like to spend a minute discussing our outlook for the full year 2022. On March 29, we provided full year 2022 guidance of revenues between $1,890 million and $1,920 million and adjusted EBITDA between $190 million and $205 million.

In the roughly 42 days since that guidance, we haven't fully closed on additional month, other than the updates provided in my remarks, there's really no additional information that we can provide.

We believe that the rationale behind our full year guidance remains sound, as you recall, we provided color around our forecast that indicated that the first half of 2022 would be difficult due to the headwinds of Omicron and ongoing labor constraints.

We also provided our thoughts around ongoing rate improvements throughout the year that would allow us to continue to invest in wages, which will provide lift in the second half of the year. In summary, our results are in line with our expectations that we laid out in March.

The immediate threat and the impact of the Omicron variant has subsided and volumes are returning to pre-Omicron levels. On the other hand, the labor markets are challenging and will continue to present headwinds to our volumes and overall growth for the near term.

State Medicaid systems as well as Medicaid MCOs recognize this as an issue and are willing to come to the table in a partnership to address the capacity concern.

Given the challenging environment, I'm proud of our results and the tenacity of our team to continue to fight on behalf of our patients and families, fellow employees and ultimately our shareholders. I'm proud to be a part of the Aveanna story. With that, I'm going to hand the call over to Jeff for further insight into our operating metrics.

Jeff?.

Thank you, Tony. I'll spend a few minutes talking through our recent labor and employment trends before I dive into our Q1 operating indicators. On the labor front, we have stabilized our core caregiver recruitment and retention trends. Omicron was very disruptive to our workforce in Q1, but I'm pleased to say it's now behind us.

With a fully vaccinated rate approaching 99%, we are better prepared for future variants and our ability to work through them without the significant disruption that Omicron caused. Care giver wages continue to be the number one driver of new and continued employment for our nurses.

The increased competition from hospitals and travel agencies had targeted our pool of qualified nurses. Thankfully, our improved reimbursement rates in many states allow us to be competitive with the cost of hiring and retaining nurses.

In some states, we are aggressively lobbying for improved reimbursement rates, as the cost of nursing wages has outpaced the Medicaid private duty nursing rates. Our nurses tell us that they want to work in homecare and love working with the one-on-one patient setting in the home.

We are focused on ensuring our caregivers can continue to provide the skilled care and earn an appropriate wage and supplemental benefits at Aveanna. Now on to the Private Duty Services segment results for Q1.

We produced $350.2 million of revenue during the quarter, revenue was driven by approximately 9.6 million hours of care or a 6.3% sequential improvement over Q4 2021. The improvement in hours was driven by the Accredited Home Care acquisition balanced against the impact of Omicron.

Our Q1 revenue per hour of $36.43 was up a $1.03 from Q1 of 2021 or 3%. We continue to experience rate improvements in 2022 and I'm proud to say we already have seven rate increases year-to-date in our PDS segment. As many of our state legislators are currently in session, we expect more rate increases and Medicaid benefit expansion throughout 2022.

As recently announced, we applaud the Arizona Medicaid system for its Licensed Health Aide, LHA, program expansion. The important program supports family caregivers with appropriate compensation for the unskilled care being provided to a loved one. The Arizona LHA program is in addition to the skilled nursing care being provided by an Aveanna nurse.

Working together, an Aveanna nurse and a family caregiver create the appropriate environment for medically fragile children and adults to remain in the lowest cost setting -- sorry, the lowest cost and preferred setting, their home.

We're identifying -- we are identifying and actively lobbying additional states for LAH like programs to support our families. We believe this additional level of unskilled care by a loved one can supplement the core skilled services that Aveanna provides and buffer against the current difficult labor markets.

I look forward to updating you on continued progress in future calls. Turning to our cost of labor and gross margin metrics. We achieved $98.3 million of gross margin or 28.1%. Our wage rate of $26.20 per hour reflects the commitment we've made to passing through our rate wins to our caregivers.

As Q1 has our highest payroll taxes impact, I expect gross margins for PDS to settle in the 29% to 30% range. Our Q1 spread per hour was $10.23 in line with our expectations and within our ideal range of $10 to $10.50. As Tony mentioned, we have largely completed our Accredited Home Care acquisition in California.

I am very pleased with the business trends and our IMO team has once again done a great job integrating the business into our Aveanna family. Now, moving on to our Home Health and Hospice segment for Q1 and staying with the integration team, I am pleased to share that we are largely complete with the integration of Comfort Care.

We are proud of the density of home health and hospice services Comfort Care delivered to Aveanna in both Alabama and Tennessee. The Comfort Care acquisition demonstrates our commitment to acquiring high quality assets that complement our geographic expansion plans. During the quarter, we produced $66.6 million in revenue, a 37% increase over Q4 2021.

The biggest driver of revenue growth was the impact of a full quarter of Comfort Care, offset by labor pressures associated with Omicron. Q1 revenue was driven by 14,300 total admissions, approximately 61% being episodic and 13,800 total episodes of care.

While our episodic admissions mix was down slightly, we are focused on maintaining this rate in the 60% to 65% range. I am pleased with our admission volumes in both home health and hospice and our team's ability to fight through a difficult Q1 labor market. Revenue per episode for the quarter was $2,898, down 1.5% from Q4.

This shift reflects the impact of our Comfort Care episodic patient base. From a cost and margin perspective, Q1 gross margins were 48.7%, up 280 basis points sequentially from Q4. Gross margin improvement was driven by less PTO utilization, better overtime controls and less dependency on contract labor.

Home health visits per episode and cost per visits are in line with our expectations and give us great confidence that we can manage the Home Health segment gross margins in the 48% to 50% range. Lastly, we are proud to announce that we have fully transitioned our home health and hospice business segment to the Homecare Homebase operating system.

From day one at Aveanna, we made the decision to invest in the best-in-class systems to support our mission. I am proud of the home health -- the Aveanna Home Health and Hospice team. Our IMO Systems team and our partners at Homecare Homebase that have made this key initiative a reality.

I look forward to giving more insight into our Home Health and Hospice business segment, as we move forward. Now to our Aveanna Medical Solutions segment results for Q1. During the quarter, we produced $33.7 million of revenue. Revenue was driven by approximately 78,000 unique patients served and revenue per UPS of $432.32.

Revenue per UPS was down sequentially, approximately $21 million or 4.6%. The primary drivers of rate decline were the continued impact of the national contract we signed in September of 2021 and the EBIT recall impact on our internal supply chain.

In February, the FDA shutdown Abbott's Sturgis, Michigan plant, which is the main producer of the EleCare infant product. This event triggered a supply chain shortage with our suppliers and forced families to make urgent decisions on infant nutrition. Our Aveanna team has worked tirelessly to identify solutions and to get products to our patients.

We view this disruption as temporary in nature and believe the initial suppliers will rebound by mid-summer. Turning to our cost of goods and gross margin metrics. We achieved $14.1 million in gross margin dollars or 41.7%. The decline in gross margin was primarily driven by the above mentioned items.

I continue to expect gross margins to stabilize in the second half of 2022 in the 41% to 43% range. While these disruptions are unfortunate, I am confident in the improved efficiencies we have gained in the back office and our ability to grow the Medical Solutions business moving forward.

We achieved record patient admissions and unique patients served in March and April due to our team's focus on finding solutions for our families in need. We expect these growth trends to continue as the near-term supply chain issues begin to ease.

In summary, we continue to fight through difficult labor and supply chain environment, while keeping our patients' care at the center of everything we do. We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve core volumes.

On the bright side, we continue to see incredible demand for our services, along with strong support from our state legislatures and payers in the form of rate improvements. I am proud of our Aveanna team. Your resilience and tenacity to continue to care for our patients and their families is inspiring. Thank you.

With that, I'd like to turn the call over Dave for additional color on Q1.

Dave?.

Thanks, Jeff. I'll go ahead and provide a summary of the first quarter results. First quarter 2022 revenue was $451 million, an increase of $33 million or 8% from the first quarter of ‘21. Our Q1 revenue was comprised of $350 million a PDS segment revenue or 78% of total revenue.

Home Health and Hospice segment revenue was $67 million or 15% of total revenue and our Medical Solutions segment contributed $34 million of revenue in the first quarter or 8% of total revenue.

Comfort Care and Accredited acquisitions in Q4 drove revenue growth in the first quarter of 2022 and combined with the Doctor's Choice acquisition in April 2021 drove our overall 8% revenue growth in Q1 ‘22 from the year ago quarter.

Home Health and Hospice segment revenue increased $35.1 million in the first quarter of 2022, compared to the first quarter of 2021 and PDS segment revenue was flat over the comparable periods.

While the acquisition of Accredited contributed incremental PDS revenue in the first quarter, the Omicron variant pressured our PDS clinical workforce constraining caregiver recruitment and retention and negatively impacting PDS patient volumes. Medical Solutions segment revenue was down slightly decreasing by 3% over the Q1 comparable quarters.

Now turning to gross margin. Our gross margin percentage increased 50 basis points to 32.1% in the first quarter of ‘22 from 31.6% in the year ago quarter.

This was attributable to the revenue growth in the Home Health and Hospice business, which has a higher gross margin percentage than our PDS business, net of decreases in gross margin percentages in our PDS and Medical Solutions segments. Field contribution margin decreased to 12.4% in the first quarter of ‘22 from 14.9% in the first quarter of ‘21.

Corporate expenses were 8.1% of revenue in the first quarter of 2022, as compared to 6.6% of revenue in the first quarter of 2021, primarily as a result of growth in our non-cash share-based compensation costs, as further discussed in footnote nine to our financial statements and in our MD&A.

In addition, we incurred incremental compensation and benefits cost necessary to support a public company infrastructure as well as to support the integration process for the companies we acquire and then also incremental professional services associated with those integration activities.

Adjusted corporate expenses were 5.2% of revenue for the first quarter of ‘22 as compared to 4.7% of revenue in the first quarter of ‘21. The principal adjustments from corporate expenses to adjusted corporate expenses and integration costs and non-cash share-based compensation and can be found in the corresponding table in our press release.

Moving on to operating income, net income and adjusted EBITDA. Operating income was $13.8 million for the first quarter of 2022 as compared to $28.3 million in the first quarter of ‘21.

In addition to the $6.2 million decrease in fuel contribution, the $9.2 million increase in corporate expenses and the $1.7 million decrease in acquisition related costs, this drove the $14.5 million overall decrease in operating income over the comparable first quarter periods.

Net income was $25.3 million in the first quarter of ‘22, compared to $5.8 million in the first quarter of 2021.

The primary drivers of the increase were the $14.5 million decrease in operating income and a $38.3 million non-cash gain recorded in other income related to a material increase in valuation of our interest rate swap and cap during the first quarter of 2022.

The significant valuation gains resulted from accelerated market expectations of future increases in interest rates during the first quarter of 2022. Adjusted EBITDA was $38 million or 8.4% of revenue for the first quarter of 2022 as compared to $43.7 million or 10.5% of revenue for the first quarter of 2021.

Adjusted EBITDA benefited from $3.1 million of American Rescue Plan Act recovery funds received during the first quarter 2022. Turning to operating cash flow. Cash used by operating activities was $9.5 million for the first quarter of ‘22, a decrease of $23.4 million from net cash used of $32.9 million in the first quarter of 2021.

The decrease in net cash use was due to a number of items outlined in the liquidity and capital resources section of our 10-Q, the most significant of which was $21 million in relative higher payments against accounts payable and accrued liabilities in the first quarter of 2021, compared to the first quarter of 2022.

Net of a decrease in operating income in the first quarter of ‘22 compared to ‘21 and also net of changes in significant non-cash items that affect operating income and share-based comp.

When you think about our operating cash flow in relation to our adjusted EBITDA for the first quarter of 2022, the most significant drivers of variances between the two includes cash paid for interest, M&A related costs, which include acquisition related costs and integration costs, both of which you can find in our adjusted EBITDA reconciliation in MD&A, COVID related costs, which can also be found in our adjusted EBITDA reconciliation.

And a net usage of cash for working capital related items, which can be found in our statement of cash flows in the section titled changes in operating assets and liabilities. I'll now provide an update on liquidity, credit facilities and hedging.

As of April 2, 2022, we had cash of $17.4 million with the following liquidity available under our credit facilities, $182.4 million of available borrowing capacity under our revolving credit facility, $10 million of availability under our securitization facility and $200 million of availability under our delayed-draw term loan facility for future acquisitions.

With respect to our cash collections in DSO, we collected $428 million against our revenue of $451 million during the first quarter of 2022 and our DSO was 46.5 days. The primary driver of the sequential increase from 44.9 days in Q4 of 2021 was associated with our Home Health and Hospice business.

And one item, I'd like to congratulate our revenue cycle and field teams on is their work with the annual revalidation of third-party insurance in the PDS business, which typically occurs in the first quarter of each year and requires a significant amount of preparation and execution.

Each year, we continue to improve our processes in this area and our teams performed well on it in the first quarter of ‘22. Turning to our credit facilities. Our outstanding debt approximated $1.4 billion as of April 2, 2022, the components of which can be found in our indebtedness table and liquidity and capital resources section of the 10-Q.

Our interest rate exposure under our credit facilities was hedged with the following instruments, $520 million notional amount of interest rate swaps that convert variable rate debt to fixed rate and $880 million notional amount of interest rate caps that cap our exposure to LIBOR at 3%.

In summary and as I wrap up here, I'm proud of the resilience of the Aveanna team, as we work together to build this great company. Our people and culture are what makes us special. We're confident that the Aveanna platform and infrastructure is primed for growth once we navigate through the current labor market headwinds.

With respect to the interest rate environment, we've taken proactive steps to reduce our exposure to these pressures by implementing interest rate hedges that reduce our exposure to rising rates and we continue to benefit from a strong liquidity position, which is supportive of our strategic initiatives.

And with that, operator, I think we're ready to open it up for questions..

Thank you very much, sir. Ladies and gentlemen, we will now be conducting the question-and-answer session. Our first question is from Matt Borsch of BMO Capital Markets. Please go ahead..

Thank you.

Can you just give us a sense of where maybe the composition of your guidance, particularly on the revenue side may change just based on the trends that you've now seen in the first quarter and made coming into the second quarter as well, I mean in terms of the growth that you are seeing and expecting in Home Health and Hospice versus Private Duty..

So, Matt, that's a good question. I think when we think about our guidance, let me -- I'll make a couple of defensive comments. One, we don't provide segment guidance. And two, we don't really provide quarterly guidance.

But with that said, I think this most of the softness that we've talked about in the first half of the year is really more attributable to Private Duty and it's primarily driven by the constraint -- the labor constraints with the caregivers as well as the impact of Omicron.

I think our Home Health business while they're not immune from some of the labor constraints that we've been talking about, I believe that is less impacted by some of the labor issues that we have out there with the nurses.

So I would probably answer your question with more heavily weighted toward Private Duty from a labor constraint perspective, I think Omicron -- the impact of Omicron was across all of our businesses, both Home Health and Private Duty, but more of the labor constraints on the Private Duty side.

As it relates to color around our guidance and I think when we -- on March 29, I think we laid it out. We said that most of the Omicron variant impact would be Q1 with a little bit of residual in Q2. However, the labor constraint issue wasn't going to go away when Omicron went away, and I think that we still believe that that will play itself out.

But in my remarks, as well as in Jeff remarks, one of the things that we're seeing and Jeff made a comment about the seven rate increases that we've seen so far and the ongoing discussions with different MCOs and payers and then legislative sessions that are contemplating rate increases that we continue to see a very positive rate environment for the foreseeable future and while we can't -- while we can talk about the timing of what rate comes in when, with the remainder of 2022, I believe will be a positive rate environment with rate changes happening each and every quarter.

And as those rate changes happen, we will immediately be able to take those dollars and reinvested into the wages.

And when we invest those dollars into wages, one of the thing -- we then know that volume will improve, as a matter of fact, what I'm about to say is all public information, the State of Pennsylvania put through a rate increase for these services that was effective in January of 2022 and there was a meaningful rate increase, I think if you go and read their press releases 10% or 11% rate increases and as we see that flow through, we actually saw volumes hold their own during the quarter, even when the rest of the world was going down with Omicron.

So we do know that volume will follow rate and that's what gives us confidence in the remainder of 2022 that we will continue to be able to improve volume based on, as we push through this rate increases. Hopefully, in all of that, I answered your question, Matt..

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

Thanks, Matt..

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

Good morning. Thanks for taking the question. So first, I guess in the press release, I'm sorry, you mentioned $3.1 million funding you received this quarter, under the American Rescue Plan Act, there was, I guess, signed in early March. So the question is, was this included in the guidance that you contemplated funding coming through? Yeah..

Hey, Joanna. This is Jeff, and I think I'll start with, we received funds from the federal government, state mega programs that we consider ARPA related funds throughout 2021. You're correct, we received, we received ARPA funds in Q1, we expect to receive ARPA funds in Q2, Q3 and Q4. It is contemplated in how we think about the year.

But I'll tell you, Joanna, we receive ARPA funds in numerous different ways. We receive them in temporary rate increases, permanent rate increases, like the one Tony just talked about in Pennsylvania as well as we do receive temporary lumpsum amounts that are meant and intended to pass right through to the caregiver.

So I think as we think of that, all things rates are certainly being supported and driven by the federal support of the Medicaid programs and I think as Tony said it well and whether it's a -- whether it's a permanent rate in Pennsylvania or it's a temporary rate in North Carolina or it's a one-time pass-through amount in one of our states, all of which is intended to support the realignment of caregivers to wages and I think that's -- that's what you saw in Q1 and I think we'll continue to see that in Q2 and beyond..

So, Jeff, would you agree with this. So like, in Pennsylvania, the rate increase we just talked about, more than likely those funds are also derived through ARPA funds.

They are just coming through the State of Pennsylvania in the form of rate change, so I agree with the way Jeff laid it out, Joanna, that when we think about ARPA funds, those are just additional rate, I'm reminded of another rate increase in -- I think it was 2021 or late 2020, we had a rate increase in North Carolina that was a "temporary rate increase" that is now just is a permanent rate increase as well.

So we have rate movement all the time, both in ARPA funds through temporary rate increases, permit rate increases, it is -- it is at least in our mind, it's all built into our guidance, as it relates to positive rate change..

Go ahead, sir..

No, just add to Tony's point and the intention of that rate is that may be passed through to the caregivers in some form or fashion to help realign caregivers and that is what we have done and continue to do..

No, that's probably makes sense. So okay, so I guess you have been contemplating that's funding and I guess you've been talking about the expectation for better rates throughout the year, when we spoke last time at the end of March.

So then when I think, so the follow-up question, so when I'm thinking about the rate, the PDS segment average rate per hour.

We should use that Q1 rate as a starting focus in the shale is like okay, I guess we have to exclude that $3 million, but it sounds like there is going to be additional funding coming through the following quarters anyway, so I guess is that the way to think about it that $36.40 something in the quarter as our kind of starting point and grow from there.

Thank you..

It's a great question, Joanna. I think the one thing that we would point out in the quarter is that it does not have the impact of the Accredited acquisition.

And as we've said the Accredited business was primarily lesser skill or unskilled type business mix or primarily that business mix, so I think the $36.30 is more driven on that Accredited volume now being a part of our story. But I think the answer is yes, we will continue to see reimbursement rate increase throughout the rest of 2022.

We also expect to see wage rate increases for the rest of 2022 and the net of all of that is, we expect our spread per hour for the PDS segment to remain in that $20 -- sorry that $10.25, $10.50 range as we move throughout the rest of the quarters. But yes, I think you're thinking about that correct..

Thank you..

Thank you very much. The next question is from Pito Chickering of Deutsche Bank. Please go ahead..

Hey. Good morning, guys. Thanks for taking my questions. Just back to the labor markets question.

Can you give us an update in terms of what you're seeing, in terms of active nurses in recruitment in both Home Health and PDS in April and May?.

Yeah, Pito. I think Tony said it well.

I'm going to use that Pennsylvania example is where -- where we can continue to move the reimbursement rates remain competitive, we have found that we are able to both retain and reengage or hire new nurses and as we think of the efforts that are going on in April, May, June, leading up to, July 1st is a pretty big date for most state legislatures.

We're really focused on the states where we think the rate has -- the reimbursement rate has kind of fallen behind the current market for nurses in the Private Duty Services segment and I think as we talk in August, we'll be reporting very positive news on additional rate increases in those states that were necessary to really reengage nurses at the level that we expect.

I think we've been able to demonstrate that our lobbying efforts, both individually and collectively as an industry has been able to move states that may have fallen behind, kind of the current wage environment for caregivers.

As I said in my prepared remarks, wage is the absolute number one driving decision, it's culture is great, engagement is great, but wage is the decision and so for us to be able to get the wage rate at the necessary level to engage caregivers, we've got to continue to engage the legislatures and payers, and I think as Tony mentioned, we have found that audience to be continually receptive to this conversation..

So and Pito, my comments are going to be more color around that. And this is just my opinion. I think a year or two years ago, I think mission was equally important, I think nurses migrated to the places where they felt connected to a mission. And I think that was always on our side.

I think the job that we have to offer is a very compelling job with a compelling mission and it's a desirable job for nurses.

However, I think with this new inflation trend we have, I think mission has taken more of a backseat and folks are chasing wage and until we are -- until we can be in the same place with wages, hospitals, and surgery centers, and skilled nursing facilities, I think we're going to be operating at a disadvantage.

But for all the reasons, Jeff just laid out, I think we're -- I think we're well on our way to -- we'll be able to compete in those environments as well.

And then when we do, then I believe mission will climb back in the front seat and I think we're going to be just fine from that perspective, and that -- all of that gives us confidence in my comments about we think that as the year progresses, we'll be in a better, better spot from a wage perspective..

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

I use July 1 as only be -- as an example of many of our state legislatures effective date is June 30 and July 1.

No, Pito, I think -- let me step back and just say in our Home Health and Hospice business segment, where we are employing full-time benefited caregivers, we whether the Omicron storm much better, our turnover rates and our retention rates are right in line with what we expect, our reliance on contract labor and over time has subsided appropriately.

So I think where we can employ a full-time benefited caregiver and with the addition of technology like we mentioned Homecare Homebase, full rollout and the use of Medalogix and Muse as better predictive indicators were better able to allocate our staff in the Home Health and Hospice segment.

As it relates to our PDS segment and week-to-week fighting in this business, to Tony and my comments, we are held based on the rate that we're able to negotiate with our -- with our state legislatures and our payers, and again I think I would tell you and we've been talking sequentially the last three or four quarters, we continue to have a very, very positive rate discussions with our payers and with our legislatures.

We are held to the times, at which that they make their decisions and they make their decisions through their annual budgeting process and so, I expect Q2 to be a great outcome for us, as it relates to rate and as we've done consistently, we will continue to pass that incremental right through to our caregivers to recruit and retain more..

And Pito, you didn't ask the question this way, but I'm going to use this as an opportunity to answer. We were asked the other day about why wouldn't you just go ahead and pass the wage through now and then let the rate catch up and that way you can go ahead and fuel your growth.

The problem that in our Private Duty business is that once that wage goes in, it's never coming back out and so in the event that we were to push a significant amount of wage through bring our gross margins down significantly, we may -- and then the rate is different than we anticipated. We will never be able to pull that back.

So I give our operating team a lot of kudos for being disciplined and passing that wage through, as rate materializes and I think that served us well in the past. It certainly has slowed growth down, but on the other hand has protected margins in the meantime, so that'll be the way we'll proceed..

All right. Thanks so much..

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

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

Sure. Well, so Brian, I'll try. I'm going to stop short of we don't provide, we don't provide quarterly guidance. Our guidance, while we did try to provide color between first half and second half, we really don't provide quarterly guidance per se.

I think the way that the Street is thinking about it today is not, all of that off, I think, we will continue to have headwinds related to wage pressure in the second quarter. We've seen the impact that that's had on volume and I think that will continue now.

Jeff made the point, while we don't want to -- we're not talking about any one payer or any one state, a lot of our state agencies have a June 30 fiscal year end and so fortunately or unfortunately, a lot of those rate changes will end up happening at the end of June, which won't benefit Q2.

So I would tell you that I don't -- I think that Q2 will continue to be a challenge, no different than we said to you on March 29. We said that Q1 and Q2 would be more challenging than the second half of the year, but in terms of giving you a number that we think that for Q2, I don't think we're ready to do that..

No. I appreciate that. I totally understand. I guess my second question, as I think about the P&L and where the shortfall was versus the Street, it looks more in the Home Health side, so and also regional expenses came in a decent bit higher.

So maybe just anything you can share with us in terms of what happened in the Home Health side of the business and just any thoughts on how much you can bring or if you can bring regional expenses down on a dollar basis going forward..

Yeah. Brian, it's a great question. It's Jeff. I think part of the reason we announced the completion of the Homecare Homebase rollout today is because that has been a distraction for that team and a headwind for that team for like the last seven months. We started that implementation in September of last year.

We've rolled four companies, four acquired companies on to that platform. You've been around long enough and covered enough of us that is a major, major, major lift.

We're going to continue to get some of the synergy realization from that system between Q2 and Q4 of this year, but really getting our Home Health and Hospice division to one platform, one set of systems, be able to report data at a much, much deeper level and to be able to respond accordingly.

We knew what we wanted to achieve in our Home Health and Hospice business today. We acquired five points almost two years ago and part of this was the realization of that.

So we do think we'll continue to see gross margin improvement, as I mentioned in my comments, but we also believe we'll see continued field contribution even though we don't report that segment of individually, we expect to see continued profitability improvements in that business, due to all the things I just mentioned and I think we're well positioned for that at this point..

Got it. Thank you..

Thanks, Brian..

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

Thank you. So it sounds like you guys are reiterating guide, but maybe there could be some movement within it.

I just want to make sure if I'm understanding this right, last quarter you talked about they’re potentially being up to $30 million of COVID impact in 1Q and it sounds like today, you're talking more about $14 million to $15 million and then last quarter you talked about the rate increases coming into play in 1Q and 2Q and it sounded like today, it's more 2Q.

So I guess, do I have the changes right and does that imply some movement within the range?.

So gosh, I'm going to try to pull that apart. Going back to the guidance, I don't think our thoughts around our full year guidance has changed at all. And so, we talked about the guidance being $1.89 billion to a $1.920 billion in revenue and I don't think we've changed our thoughts around that at all.

Specifically about your comments or the comments we made in March, about the impact of COVID and Omicron, I think and I'd have to go back and look at my notes from that call, but I think the reference was the overall impact, which would have been some in Q4 and some in Q1 and then a smaller portion of COVID in Q2.

So I think the overall impact across all of that would have been kind of that $30 million. You're right. What we talked about in Q1 was kind of being in that $14 million to $15 million revenue number for Q1, but notwithstanding any of that, I don't think any of that changes the way we're looking about the whole year based on what we know today..

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

No, I mean I think they're going to come in throughout the year.

I mean, Jeff made the comment about mid-year and my comment earlier about the, a lot of states are on the June 30 fiscal year end, so by definition a lot of them come in mid-year, but no Jeff made the comment throughout the year, we've had seven different rate increases and we don't -- we anticipate that trend to continue throughout the year..

Yeah. And Sarah, I think by the time we're getting into, well into Q3, I mean I think we'll be in the mid-teens to high-teens again talking about another year and last year we had 24 rate increases, that was a record and that was certainly driven by COVID and some of the federal funds that were in play in 2021.

But I think we'll be in that same $15 million to $17 million, $18 million range by time we get to September and October.

We do have some states that are also a September and October fiscal year-to-date, so I think we're very pleased with the seven year-to-date through the end of April, and I think we'll be in great shape midyear and very well by the time we end Q3..

Great.

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

What you said work day, do you mean work day or Homecare Homebase?.

The work day that allows you to pay your employees or.

No. It's going great Sarah, it's almost like an ATM machine that people get to walk by, I mean the caregivers have taking it and groves and run with it. I came out of the exact count, but we have thousands, thousands of caregivers, somewhere in the tune of 3,000 to 4,000 caregivers that utilize it on any given week.

And as you know, we pay all of our PDS caregivers weekly and the caregivers have loved it, they've enjoyed it, those who need it and want it to have access to it.

Those who don't are fine, but no, it's been a great value-added and pretty quickly, it went from being something new and shiny to just being something that was being utilized every week by thousands of caregivers. So it's been a nice addition to our toolbox if you will, of recruitment retention tools, but other than that, it's going great.

Thanks for asking..

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

Hi, everybody. Maybe just going back to this program that's rolling out in Arizona and obviously, you said it could be something that could be a template for other states.

It sounds like -- I understand a little bit about how -- help me on the Private Duty side, but it sounds like you also think it helps on the adult side, is it somehow allow you to leverage -- when a nurse -- you're getting reimbursed for the Medicare level can do, does it just allow patients that might otherwise have to be institutionalized to stay home, I guess, how does it help you on the adult side?.

Yeah. A.J. I would think of it in the Private Duty Services segment, 100% of this is in the Private Duty Services segment, some of the age of the patients will be adult age, but think of it not as -- not as Home Health and Hospice intermittent, but think of it as Private Duty Services.

But as you said, it is new hours, it is the same patients that we're already caring for on the nursing side -- on Private Duty nursing side that are receiving skilled either LPN or RN hour and now they're being, now new hours are being granted, obviously cared for by either their parents of their loved ones or their immediate neighbors in support of the nurses activities and the template A.J.

came out of Colorado and we've been doing this program in Colorado for over five years now, it's been very, very successful and we think that, that template not only will be adopted by Arizona, but numerous states. We are in conversations with numerous states to adopt a similar model, which again is additive to in nature.

It's not -- it's not subtracting from, it's additive to, but it certainly is unskilled in nature and in the PDS realm..

Okay. And my follow-up question was going to be to ask you about the competitive landscape.

I think in your prepared remarks, you said your deal pipeline remained robust, are mom-and-pop regional providers, are they dealing with the labor challenges that you're describing in pretty much the same way, is there any reason to think you're doing better and therefore, they might be looking to partner, have you seen any one drop out of the market, because they just can't get the staff at a reasonable rate to continue to serve patients..

So it's an insightful question A.J. and I'm going to divide your question between that of Home Health and Hospice versus that of Private Duty and I think in the Home Health and Hospice space, I think the answer is no.

However, they are not immune from the nursing shortage specifically and we see Home Health and Hospice companies that are struggling for staffing, but it's certainly not to the level of throwing in the but they have reduced volumes and such.

Matter of fact, many of the deals that we look at -- Rod will come back and report that they've got this COVID adjustment in there that, where they're adjusting saying well, if it weren't for COVID, this would be my normal run rate and so I think they're suffering in the same way.

Now on the Private Duty side, the staffing issues and the labor pressures are meaningful and so companies that don't have size and scale to do things that Jeff and Sarah were just talking about daily pay and that being just one of the tools, but companies that don't have the ability to try to do those things to attract caregivers, it is a difficult, difficult environment.

We have seen a couple of Private Duty companies come to the table and say we just can't do this anymore. So I think it creates opportunity, but as I said in my comment, we're being very disciplined about that. We understand where we're trading and what it takes for a deal to be accretive to us and our shareholders.

So we're being very disciplined about the approach to M&A, but we're going to continue to grow at the same time..

Okay.

Just maybe clarify that is, so if someone says that we can do this anymore on the Private Duty side, do you have to buy them out or can you just assume their patients or if they can't make it, you're probably not going be able to cover those patients, how do we think about that?.

I wouldn't think about they're just closing the door and when I said that maybe I'll clarify that, it's just getting harder and harder to get nurses and to be able to run this business in an effective way and size and scale really does matter and especially density and when you have -- when you're trying to staff 10 patients in a market and the 10 patients are 20 miles apart versus staffing 100 patients in a market, where there are 4 and 5 miles apart, that makes it easier on the Private Duty side.

But the Private Duty business is a difficult business right now and we've done some internal work understanding our caregiver population of what they like and don't like and why they leave, why they're not working as much and quite frankly, we're getting some really meaningful information back.

The nurses that like the Private Duty business really like the work. They like the mission. They like the work. I'm very proud, they like our orientation. They like how easy it is to work with us. They like the leadership.

It really is about wage with them paying $4 and $5 a gallon for gas and groceries are what they are, they have to go where they can make more money and as a matter of fact, the most and I'm going to go out on a limb here, the most encouraging thing I've heard from the work that we've done with our caregivers is that they would really right to come back to work, it's just they can't do it for less money.

So we know how -- we know how to go get the caregiver. We see a clear line of sight of what it's going to take to get the caregivers to reengage in Private Duty and it's more money..

Right. Okay. Thanks a lot..

Thanks, A.J..

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

Thanks guys.

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

Thanks..

Yeah. It's a great question and I think in my prepared remarks, we said that we still see some room for gross margin improvement. We're running right in that 48.5%, pushing 49%. We still think there is about another point, point-and-a-half left there for improvement.

And then I'll just say Homecare Homebase takes a little bit of time to get fully digested and I think it's the reason why we really haven't spent a lot of time talking about it over the last few quarters, as we were digesting it. We've just added Medalogix and Muse to both our Home Health and our Hospice business.

We've enjoyed the partnerships getting to know those guys.

And I think as Homecare Homebase settles in, as we're able to get one set of reports for all of our Home Health and Hospice businesses, one thing is that we all love about Homecare Homebase is just, they've got the best data, they've got the best reporting and the best action -- actionable items.

I think all of us believe that we can continue to get more cost efficiencies out of the Home Health and Hospice side of the business, now that we're on that platform.

So and just get a better insight as you said, whether it's cost per visit, whether it's visits per episode, whether it's case mix, whether it's just putting the right nurse in the right home at the right time.

I think the thing that I'm most excited about is the ability for Rob and I to manage the business on a go-forward basis, knowing that we've got the best data. And so I think obviously you hear excitement in our voices, it's been almost 10 months, as we sign a contract and started the implementation process with Homecare Homebase.

So we're glad to be on the other side of it and glad to be focusing now just on driving the efficiencies..

Great. Thanks guys..

Thanks, Ben..

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

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

A range of the -- well, I think John, the best way I can answer that question is, if you go back to March 29, we said on that call that we would expect EBITDA on the second half of the year to be on a run rate kind of back in that. I think the number we used was $215 million to $220 million -- in the $220 million range or so on a run rate basis.

In order for that to happen, we have to have nurses reengage. I don't think we've talked specifically about what that number might look like, but we've got to get more nurses in the workforce in order for those numbers to come true..

What I mean by that is, let's say, you're going to pay $100 on average for all your state, do you think a 5% rate increase is in the card, so it goes to $105, you said you have seven updates, I'm just trying to think about your pricing, kind of how to baseline your pricing expectations, as we sit today realizing we don't have all the details..

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

But why don't you give some color around that, Jeff?.

Yeah. John, a couple of our biggest states, two of our biggest five states are in their final legislative process and have a July 1 effective date.

So in those two states, we have meaningful, talking a north 15% to 20% movement in the reimbursement rate on the table in the legislative process and with the full intention that we would move wage rates in the $5 or $6 an hour type range in those markets, so that's the kind of movement we're talking about negotiating..

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

All right. So if we were to think about this, so let's just use dollar, so it might be less confusing.

So let's say you got $6 an hour increase in a state, are you just having to turnaround right around and pay $6 back to the nurse, there's really no more earnings to total pass through or do we think about that that you keep your kind of historical margin and there is a little bit for the company that goes back to the caregiver..

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

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

A 10% increase in gross profit dollars, I'll do the math, but something like that. So there is no -- Okay. I got you. Yeah. And then my follow-up..

John, I'm sorry -- the connection is a little tough, but John, I just want to be clear. We're not thinking of rate increase as it relates to we're going to drive margins north. Gross margins, Jeff made the comment kind of when they settle out, there'll be that 29% to 30% in the Private Duty business.

We're not thinking of rate increases, taking that number to 31% or 32%. We will take all everything, but the margin and push it back down to the caregiver..

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

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

Yeah. All right.

My other question is obviously the numbers have been what we all wanted, do we have any debt covenant step up in the next year or two that you would care to flag?.

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

Okay. That's it for me. Thank you..

Thanks, John..

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

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

Thank you..

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