Aveanna Healthcare Holdings Inc. (AVAH) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining us for our Home Care Conference, and this is our second day. And now it's my pleasure to host this session with Aveanna. And so we have an entire team here, as you can see. We have Jeff Shaner, the COO. And then in the room, we have Rod Windley, Chairman; Tony Strange, the CEO; Dave Afshar, CFO; and also Matt who runs IR, and I guess he's also the VP of Financial Planning. So the team was eager enough to go right into Q&A.

So I'll just make a note to the audience that please feel free to use the Ask Question section on the webcast -- website to pose any questions you might have for the team here. And I will be happy to relay the question here to the team. So yes, so we'll go right into the Q&A here. Just starting with, I guess -- and welcome to the team. Thanks for joining us.

Thanks for having us.

Pleasure. So I guess, labor shortages and labor costs have been obviously very palpable for all of us here during the conference and prior to this, for the last several months, I guess. So your third quarter results were impacted, but some of those shortages limiting the -- those -- meet the demand. So can you give us any update, if you can, what you've seen so far in Q4? Any metrics around hiring retention or anything you are willing to share in terms of how things have been tracking since we last spoke at the Q3 call.

Well, Joanna, first of all, I think you hit the nail on the head, and that's where we'll start, is the demand for our services is at an all-time high. If you think about the value proposition of home care in general and specifically, the services that are offered by Aveanna, the value proposition is driving demand. We need to get patients out of the hospital and get them home sooner. Now to your point, right now, we -- through labor pressures that have kind of been created through this COVID hangover, we don't have enough supply to take care of the demand. And so to your reference, in Q3, our volumes were impacted by this labor shortage. And I'll let Jeff chime in here in just a minute. But one of the things that we were so proud of in Q3 was that we have been able to hold on to our margins. And we can talk about the spread in Private Duty and gross margins in the Home Health side of the business. But we not only did we hold our margins, we've actually improved margins during a very disruptive labor market. On our call in Q3, we talked about some initiatives that we think that are -- that can be helpful in the short term, but we have not been willing to push the wage lever forward to the point where it really deteriorates margins because we can't ever get that back. We can't make that up. So I think that we've demonstrated that we've been very disciplined about managing the margins in this, what we think is a short-term disruption on the labor markets. But Jeff, with that as a backdrop, why don't you talk a little bit about the initiatives related to orientation, retention, those types of things that we talked about on our Q3 call?

Yes. Thanks, Tony. And as we said on our Q3 call, Joanna, we had 8 weeks of improved hiring metrics and payroll metrics, meaning caregivers on our payroll. That was after a pretty significant drop from really Q1, all the way through -- our low point was Labor Day week. And so it was nice to have 9, 8 weeks. We since have had 2 additional recently, so we have 10 weeks of incremental improvement in both nurse hires as well as nurses on payroll, which is really like a census for us, a nurse census. We had that all the way up to Thanksgiving week. Thanksgiving week is normally Thanksgiving, and the holidays are a little bit choppy from a hiring standpoint. So we expect that Thanksgiving week to back up, but 10 weeks of sequential improvement, as Tony mentioned, I will say, we worked harder, smarter, more innovative than we've ever done to get that improvement. And that improvement is -- it was small in nature. So normally, where we may have 150 net new hires, we were winning 10 to 12 to 15 to 20 a week, which is a lot of activity for us to bring that many -- that few net hires. So I think it shows how choppy the labor markets still are. We do expect the next 3 weeks, the 3 weeks leading up to Christmas and New Year's to be 3 good weeks for us. But as Tony said, the amount of effort and innovation, both technological innovation and clinical innovation we've had to deploy in our 25 years of doing this is more intense than we've ever done for small movements and small improvements. As we sit today, I think we believe this will play through the early parts of -- and probably well into 2022. So we're prepared to come to the holidays and to continue to battle day by day, week by week to really make Aveanna a good choice for both LPNs and RNs who are ready to get back into the workforce.

And you mentioned that the spread that you were able to achieve because of the rates are that much higher, and I guess that's the reason why you were able to keep your guidance for the year, right, for EBITDA. So I guess how should we think about the margins going forward? Because obviously, some of that is not sustainable. Kind of any framework we should be thinking about going into next year?

So Joanna, if you go back to the third quarter earnings calls, when we talked about margins, we basically pointed to a couple of things, not one of which is a spread in Private Duty. So we did have margin expansion in Private Duty. And as Jeff mentioned, in Q3, that number was $11.18. We believe we need to pull that back as we push some of those dollars into the hands of clinicians through wages to help accelerate growth. However, that's not the only reason that we continue to have margin expansion. One of the -- we talked about in our business mix shift as Home Health & Hospice grows at a faster rate, that's going to cause margins to continue to expand. And then in addition, when we go back to the rate increases that we were just talking about, all of those dollars aren't going to go through or be pushed through in the form of wages. And so we feel pretty good about being able to hold our gross margins. While we expect them to pull back a little bit in Private Duty, we feel pretty good about being able to hold margins to our historically pretty stable gross margin lines.

Great. And I guess thinking about -- or talking about your other part of the business, the faster growing Home Health & Hospice, which is to found out the commentary around labor, so how would you frame what are you seeing in those businesses around labor shortages and labor wage pressure?

Well, our field employees in Home Health & hospice are usually RNs and LPNs as well. And so we have the same RN and LPN retention -- recruitment and retention issues in Home Health as well. It's just not as pronounced as it is in Private Duty, but it is still there. I mean there are not enough nurses to go around today, and we need those nurses to come back into the labor market.

And Tony, I think -- agree with everything Tony just said, Joanna. And I think I'd add that the one thing that Home Health & Hospice does has is the ability to use technology. And so I do think we've seen technological advancements over the last few years in Home Health & Hospice to help the agency put the right skill level caregiver in the home at the right time; to make a visit in home health when our -- when an RN visit is not needed; and not use an unskilled worker when you need an unskilled workers. Technology today is helping us point to putting the right level of caregiver in the home at the right time. And I think that will be a small improvement as we offset. Tony said it right. There's not enough nurses. There's never going to be enough nurses. We're going to have to use technology. I'm proud to say that in Aveanna, we have the appropriate systems in place to be able to help our leaders, skilled leaders and location leaders at the right skill level and the right home at the right time. And I think that's an advantage that we'll make sure that, that business stays clinically sound and continues to have good gross margin management.

Right. And I guess to that end, when you think about finding those incremental nurses and keeping them, right? So obviously, wages is the one area in terms of where you can, I guess, fight for the labor, so to speak. But can you talk about other things that you do in terms of winning that incremental nurse to come over or stay with your organization?

Yes. I think it starts with our core strategy around density in markets. So one of the reasons that we believe so strongly in building density in markets, and I think you've seen with our recent acquisition of Doctor's Choice in Florida and now the most recent acquisition later this week with Comfort Care in Alabama and Tennessee is it is easier to recruit staff, all staff, nurses, therapists, [indiscernible] when you're able to keep them closer to their home and their community. And so the more locations and more referrals, the more employees that we're able to build around a dense market, the more we're able to keep people in a tighter geographic market. And I think that's just part of the strategy that plays out on being a reputable, clinically sound employer of choice is very important as well. And I think that's something we've always prided ourselves on and even had to heavily reintensify our efforts over the course of the last year, whether it be 401(k), health care benefits, training and development and opportunities for people to grow their professional career. Those have had to become more and more and more in the forefront to attract people. But having 1 location in a state, having nurses driving 100, 150 miles and 300 miles, that's not a good winning strategy. And so when you look at our map and when you look at our density, both on the PDS side and on the Home Health & Hospice side, we've been able to win because we offer people a very tight geography to work in. And we cut down the number of miles they're driving and really the amount of time that they're away from their home, away from their patients. And so I think it's part of the overarching strategy of building out a densified services and also being an employer of choice. And I think you'll see us from the whole suite of benefits that we are offering employees now, from enhanced PTO, to enhanced health care benefits, to onboarding, virtual onboarding education, continuing education, leadership development, all the pieces of this have just had to be intensified to not only recruit new staff, but really to retain the core staff that you have. I will say, it's made us be better, right? It has made us become a better company.

Right. As you mentioned before, the rates in your PD business, obviously, you're running much better. So some of it obviously is stimulus money for the state and then specifically the 10% FMAP, sorry, matching increased -- so any update there in terms of any incremental states that are start to use or access these funds? And I guess, can you remind us how many more specs are still left that did not access the funding yet?

Well, so Joanna, I'm going to start with bringing even the question up higher. I think on our third quarter call, we talked about it now, 24 of the 31 states that we operate in have either increased their rate and/or expanded their benefit. On top of that, the CMS issued their final rule a few weeks back. And the final rule was actually better than was anticipated. And Jeff talked about on our call, we now have some of our managed care -- Medicaid managed care providers are coming to us and asking us what can they do in order to help create more capacity to get their patients out of the hospital sooner. So I think broadly, it's worth noting that the overall rate environment has recognized: a, the value that home community and home-based care can play; and two, specifically the role that they can play in the overall cost reductions, and they're willing to put resources to work to help solve the problem. And I think Aveanna is on the right spot. I think all of Home Care is on the right side of that equation. And so because of that, I think we're living in a positive rate environment that we haven't seen probably for 4 or 5 years, where we find the people that are paying the bills trying to put more money to work in Home Care. And so because of that, we're seeing rate increases across our spectrum that are really unprecedented, certainly in the last 4 or 5 years. So while we don't comment on any 1 specific state or any 1 specific payer, I believe that we think that trend -- that macro trend is going to continue at least in the near term, especially while the labor markets are as disrupted as they are. But Jeff, anything you'd add to that?

Maybe one point is, as Tony talked, Joanna, you mentioned not only the FMAP but the current bill that's pending in the Senate today, the $1.2 trillion bill, has $147 billion in it earmarked for home and community-based services. And so I think as Tony talks about those tailwinds, we look at those tailwinds not being a onetime 2021 event. Those tailwinds have years into the future, certainly '22 and '23. So I think we think of the environment being a positive rate environment for the next foreseeable future, certainly in the next 2 or 3 years. And certainly, we are very pleased with the federal government's support of not at home care, but specifically home and community-based care. And we think it's a pretty strong endorsement of the services that we provide and the Medicaid systems.

Because this is a nice segue. That's what I was also getting at in terms of what else is coming on top of all these stimulus funding and whatnot that already took place. You have the Build Back Better proposal already, if that was to actually be put into law would bring a significant amount still, right? I mean, obviously, the Biden administration initiative was hoping for a much bigger number, but even the [ 1 50 ] rounded up would be a pretty significant number. So how do you envision this play out for your organization? In particular, I guess how fast you can grow it, like how much faster the volumes could grow if there's this money being put into the marketplace?

Well, I'd tell you, let's maybe step up for a second, just say, we have a dedicated government payer relations team that works with each 1 of our 22 Medicaid states that we're in and our CMS business partners. And so we're actively engaging with state legislatures, the Medicaid directors about not only this year's budget, next year's budget, but also oftentimes, they -- the Medicaid directors will come to us as providers and say, "Help us. We have this coming in. How can we utilize it?" And we're able to share services that are either unmet or needs that are unmet in the home that families have that are potential benefit expansion opportunities. And so I think as we think of the -- certainly, the current bill that's pending, and there's opportunities for states to really expand the benefit, offer more services to these Medicaid families in their home. Some of those services will ultimately benefit Aveanna. Some of those services will -- are services that we don't provide today. So it's not just rate. Rate certainly, I think, to our last couple of minutes conversations will benefit. But I think we think of it equally as potentially the expansion of Medicaid benefits in the home. And again, we want what's best for our Medicaid family. Some of that's a bit for Aveanna, some of that's just good for the families. And I think our partnership is focused on trying to help the states utilize those services in the most efficient way possible to help the families that both we serve and that are served in our communities.

[ It's opportunity ].

Okay. So I guess how optimistic are you that this actually becomes a law? Do you have -- based on your discussions in D.C., how would you kind of handicap the chances?

Well, I can -- I've learned over a long period of time, we can't bet on what comes out of D.C. And quite frankly, I find that more importantly, whether this ends up in a bill or done in a bit of bill, whether it ends up being a $140 billion or $180 billion or whatever the number is, the positive takeaway is that people in Washington are talking about Home Care, and they're talking about it as a part of a solution, not a part of a problem. And I think that's the overarching message that I'd like to convey today is, for the first time in quite some time, I believe Home Care is getting the respect that we need, that we can be a part of reducing the overall health care spending in America. And we're the most cost-effective setting to do that and I believe that people are taking note of that and that's why you hear people, state governments, federal governments, private payers are all putting additional resources to work in the community and home-based services.

Joanna, it's Rod. One of the things, Jeff and Tony, we don't talk much about, but the Choose Home Care Act of 2021, which just got giant bipartisan support in both the House and the Senate is gathering steam as we move forward. And that is more along the lines of allowing patients on the front end freedom of choice with regard to how they want their recovery to be, which is basically further support for supporting home care versus the community care side of the things, which is in the Biden proposal for the $150 billion. That's an addition.

No, exactly. The Choose Home legislation, right, is also getting traction. That will be a positive for -- I guess, on the home health side potentially. But I guess -- so before we move there, just to kind of wrap it up in terms of the private unit business, can you talk about kind of big picture, right? Because we talked about this improving base and a lot of demand, but there's also labor shortages. So kind of can you help us frame here kind of the organic growth for a core PDS business? Maybe the next year or so, but also longer term, how should we think about that?

Well, we haven't given any specific guidance related to '22 at this point. But I think we've indicated that growth in the business right now, because of the labor disruption is -- has been timing. When that sorts itself out -- and I don't know if it's going to be wage expansion because of rate increases. Jeff talked about the spread. We know where the spread needs to be in order for us to manage our business. But the end result of that, sooner or later, we are going to reach an equilibrium. And we're going to find -- there are going to be people who'll come to the table and says, "We don't mind putting additional resources to work if we can reduce length of stay in hospitals." And so whatever that -- whatever form that takes place, there in the Private Duty business, that market, the population growth is 2% to 3% a year. We've always experienced kind of in that 4% to 5% growth rate. We have no reason to believe that it should return to that level of growth organically going forward in the Private Duty space. Now in the unskilled side of our Private Duty business, that business is growing 8, 10 double-digit growth year-over-year. And we expect that to continue as more and more states begin to adopt programs that allow additional resources to keep patients out of higher cost savings. Colorado has expanded their benefit. California has a strong benefit. Texas has a strong benefit. In many of the states, we're seeing this expansion of putting additional resources to work in a home to keep patients home. So we believe that the unskilled side of our business will continue to outpace the growth of the skilled side of our Private Duty business. Our most recent acquisition that we announced during our third quarter call was Accredited out in California, and it is an unskilled business. And we're very, very pleased with that acquisition. And we think that, that growth is going to be accretive to our overall growth story.

Exactly. So that's the second topic in terms of just the M&A companies have been very acquisitive this year, right, with those 2 latest transactions. I guess there's going to be almost $600 million for spending that's taking place this year. So as you think about the future, how should we think about the pace of the acquisitions? Are things around those labor shortages and wage pressure and whatnot changing your view of your acquisitions? Or are you going to be somewhat maybe busy with the integration of these larger assets you just acquired? Or kind of any color on the M&A outlook?

I think the answer is yes and yes. What we've said publicly, Joanna, is that we're going to acquire between $150 million to $200 million a year of additional revenue. That's kind of our sweet spot. To the point you made in '21 on an annualized basis, that acquired revenue totaled almost $290 million. We think that we will continue to grow through acquisitions going forward. With that said, we -- both of these transactions will close -- 1 closed, 1 is going to close, but both will be closed before the end of the year. So the first half of next year, we'll really spend probably with our heads down working on integration. But Rod, you've got an active pipeline going. Do you want to talk about kind of where do you see that pipeline going next year?

Yes, there's no slowdown of acquisition candidates out there, Joanna. The -- matter of fact, it kind of has picked up in the fourth quarter of this year. But we -- as Tony said, we're integrating both these transactions. We're going to -- we've got 2 separate teams doing it. That's the way we designed the company. So we're going to pull these in over the next really 90 to 180 days, and they should be fully integrated. And -- but we're going to concentrate in the near term right now. Because of labor shortage, we're going to kind of keep our eye on that and let it shake out on kind of the mom-and-pop deals, something -- the $20 million range. And we're going to focus on that probably for the first 6 months of next year and then wait to see what happens in the second half of the year. There are some -- there's a lot of pent-up demand to get to the public markets in the home care space. And we think that a lot of people are going to be coming out to join us maybe in the second half of the year. So there could be some opportunities out in the second half of the year. But we're going to continue to -- as Tony said, we're going to continue to work our plan. And work our plan somewhere between $150 million and $200 million a year. There's certainly no lack of transactions out there at all. And multiples are not coming down. They're staying up. They go up fast, and they come down very slow. So we're very disciplined as we approach all of our transactions. All these transactions that we have done have been highly, highly competitive. And I can tell you that we have passed on a couple of transactions where we got outbid by 20% to 40% and just not going to chase them. So that's kind of the long and short in the acquisition.

That's very great color. So I guess there's still a lot of activity and multiple finality coming down. Are you trying to, I guess, change your strategy there in terms of more hospice or home health? Where are you seeing more activity where it's kind of equally ready? Because I know in the past, you kind of said that maybe hospice is not like the primary offers that you would buy, unless you've seen the markets where you have home health. But anything changed there? Are you still looking at home health mostly? Or you would consider hospice as well?

Yes. Joanna, I think what we've said historically, Tony, Jeff and myself going back to our Gentiva days, we were never, I guess, stand-alone hospice players. We created a concept called One Gentiva. We believe that home care and hospice go hand in hand. So I think what we've told you in the past as well is we're not out there looking for hospices. We've got no appetite for that business whatsoever. But if it comes as part and parcel of a home care transaction, we'll certainly take it. We believe that they do go hand in hand. And so -- but to give you some more color is that we're not concentrating all on home health -- traditional home health care and ignoring the PDN side of the business. As a matter of fact, the accredited transaction in the unskilled business, look, we love that business. And so I can tell you that I got a couple of interesting deals sitting on my plate today, and we're looking at them. But it will be traditional home care that we'll be looking at and the -- probably more along the lines of the unskilled business. So that's what we're -- that's what's boiling right now -- simmering.

Right. No, it's interesting. Definitely the unskilled business, I guess it sounds like you're also seeing this [ business ], in some states, expansion of those benefits. So can you kind of frame for us that business in terms of some of the metrics? I mean you mentioned that this actually grows much faster. I assume you mean organically, just because the benefits are expanding. And then anything around wage growth that's maybe different versus the skilled business or margins? So any kind of frame -- how should we think about that business when you compare the skill versus unskilled?

Well, we....

Go ahead Tony.

I'll start talking. What we said was that we expect that unskilled business to grow kind of in that 8% to 10% a year. Rod talked about the Accredited deal. One of the things that we really like about that property is that almost all of their business is in the unskilled -- is in unskilled programs. And they're in programs where the family identifies the client, the caregiver. And so it really -- one of the things Jeff talked about was that the recruitment side of the business is so difficult right now. The fact that we just brought on another, call it, $110 million in revenue, where the family is responsible for identifying the attendant or the caregiver really takes a burden off of us. And more and more states are moving in that direction. Like I mentioned before, Colorado has got a very strong program where the family can identify the attendant or the caregiver. Texas does as well. We like that business because it really helps shoulder the burden of identifying caregivers and shares that responsibility with the family, and we like that a lot. I'm sorry, Jeff, you were going to add something?

Yes. I think it's just a win-win, right? It's a win-win. It's good for the family. They know the caregiver. You choose your neighbor or a loved one. And I think one day, it was frowned upon that the idea that a family member could also be paid to provide unskilled care. And I think both CMS and states have shifted that, as Tony said, to being a positive, not a negative. And I think not only to the states that we currently service in have a strong backing behind it and appetite behind that, what we're talking to and both states today about the expansion of that. And I think overarching, we're seeing CMS see that as a positive, not a negative. And I can tell you from -- as a provider standpoint, it's definitely a positive when the family knows the caregiver and has a relationship with caregiver. It makes it so much easier for us. And as Tony said, there virtually is no recruiting in that business. So I think, as you said, Joanna, we do expect that to move throughout many of the states that we operate in, maybe not all, but certainly many over the next kind of 3 to 5 years. And that will be a business that not only we organically develop, but I think, as Tony said, and I would agree, we -- inorganically, we'll go after that business as well.

So any way to think about any margin difference for the business?

It's similar in nature. The spread per hour is not that unlike the skilled side. Clearly, the reimbursement rate and the wage rates are lower, right? So it is the reimbursement rates are normally sub-$30 an hour. And the wage rates are usually in that $14, $15 an hour range. So it's a -- but the net of those 2 is not materially different than our $10 to $10.50 per hour range. So it does fit pretty well into our business from a spread per our standpoint. And like everything else we do in that business, it's paid per hour -- we pay per hour. So it is a clean reimbursement mechanism as well.

Right. And when you think about the -- right, your other part of the company in Home Health and like I said, some of those are -- so hospice, can you kind of walk us through how you think about the organic growth in these assets going forward in terms of long term? I guess, because you're not that going to tell us specifically next year, but kind of framing for us how you think these businesses can grow organically.

Yes. If you -- let's take COVID for -- out of the conversation for just a second, that business should grow in that 7% to 10% range as well. So we like the growth profile of that Home Health & Hospice business. Now again, related to this labor -- the disruption in labor markets, those growth rates are somewhat subdued today. But if you think about the overall demand in that side of the business, there are 10,000 people turning 65 every single day. The average age of our patient in that side of our business is a 75-year-old patient. That's going to be the fastest-growing segment of our population for the time to come. And so we believe that demand is going to continue to push that as a high growth rate business for us and don't really see that backing up anytime in the near future. Now all of that said, with the backdrop of the labor markets are disrupted right now, and we've got to get through that. But I think we're all in agreement that we think that's in the near term.

Right. And then when you think about kind of the combined entity, right, in the past, you talked about -- and I guess you've repeated that in terms of the targeted acquisition contribution. So I guess if you combine the organic growth and your organic -- easily, an organization that should be growing in the mid- to high-teens top line growth. So how should we think about this translating into EBITDA growth over time?

Yes. So you would -- we're going to gain leverage, like our corporate overhead won't grow as -- at the same rate. So that's where we see most of the leverage. We also get leverage again at the regional and area level. So our EBITDA growth rate is going to grow faster as well.

Okay. And then a couple of -- we have a few minutes left. So a couple of these questions, we try to ask all the participants during the conference. So we talked about the company being very acquisitive actually. But do you expect just overall more or less consolidation in your industries? And I guess, do you see more kind of what you're trying to do in terms of organizations, trying to kind of control more different type of setting?

So I think to answer your question, we believe that consolidation will continue, both in the Private Duty business and in the Home Health & Hospice business, it's a highly fragmented market. As evidenced, if you look at the public comps in the Home Care space, there are very -- there's very few representations of companies that do private duty as public companies. So there is tremendous opportunity for further consolidation of both in Home Health & Hospice as well as in the Private Duty side.

And then as we talk about the pandemic, obviously, some negatives in terms of just the labor shortages being amplified by the pandemic. But I guess, do you think the pandemic changed perceived value of Home Care in general?

I think the answer is yes. And I think it made it -- I think it even tightened the perceived value of Home Care. I think the evidence is that -- is what we've already talked about. Two years ago, we were fighting for rate increases. We were -- we spent the same effort and energy, and we would expect rates to be neutral to 1% to 2% positive. Now we're living in a world where for the last year, 18 months, rates had been positive by 3% to 4%. And we think that is an indication that people are placing a higher perceived value on the benefits of home care and community-based services, and we think that's going to continue for the foreseeable future.

No, definitely, that's what we're hearing from the second day of the conference, that people have very optimistic views of where this is headed. And I guess also what we try to ask, to summarize all of this, which is hard. Is there 1 word that comes to mind or maybe a couple of words that comes to mind when you think about future of Home Care?

Value.

Innovation.

Persevere.

Perseverance. I guess it pays off, because especially the last comment about the rate increases and how eventually we are in the situation where -- yes, where the payers recognize the value of home care in the home setting as being where a lot of these patients should be and could be safely cared for. So definitely, we are headed in the right direction. So I guess we're almost out of time. So I guess we'll stop here. And I want to say thank you for the team for joining us, and thanks for everyone listening. And I hope you enjoy the rest of the conference.

Joanna, it's been great. Thanks for having us participate in this conference.

Great. Thanks, Joanna.

Sure.