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

Hi, good morning. Welcome to the JPMorgan Healthcare Conference. [indiscernible] We are just having some technical difficulties during [indiscernible]. So I just would like to introduce everyone to Aveanna Healthcare...

Andrew, this is Tony. We're having a very difficult time hearing you. So if it's okay with you, I'm just going to take over, and I'll make the introductions.

Perfect.

So first of all, my name is Tony Strange. I'm the CEO of Aveanna, and it's a pleasure to be here with you this morning. And JPM, thanks for having us. Also joining us on the call today, I have Rod Windley and -- who is the Executive Chairman of Aveanna. Also in the room with me is Matt Buckhalter, he heads up our Investor Relations function. And joining us via video is our CFO, Dave Afshar, and Dave is out of his home office today for being through an abundance of caution, making sure that he is well. So we want to thank you for joining our call today. We're very excited to share with you information about Aveanna. We think Aveanna represents a unique opportunity for a great investment into the health care, and more specifically, into the home care space. We believe we're on the right side of the health care equation. Obviously, home care is an undeniably -- has an undeniable value proposition for the overall health care equation. We have a seasoned management team that's been together for quite some time. Our reimbursement environment right now is very positive. We've had rate increases that we'll share more information. The demographics are growing. There are 10,000 people turning 65 every single day and that continues for the foreseeable future. And currently, we're trading at a discount with some of our peers. So we think we represent a very unique opportunity for a good investment in the health care space. If you go at this slide, what I'd like to talk just a little bit about is our team. We've been together for quite some time. Rod and I have been partners in the health care space for going on 35 years. And this is -- Aveanna marks the fourth company that we built together. The first 3 had been very successful, and we're just kind of running up the hill one more time. Jeff Shaner, who's our Chief Operating Officer, has been with us. We acquired a company where Jeff worked in 2001, and he's been with us ever since. Dave Afshar has also been with us. We tried to recruit Dave in our previous company and were unsuccessful. And when we put together Aveanna, we reached over and tapped Dave and Dave joined us in 2018. And so jokingly, we look across the spectrum here, and we've got over 100 years of experience in the health care space and specifically into home care. I think probably even more significant is if you look deeper in our organization, we probably have 40 to 50 people deep in the organization that have been with us for various phases of those 3 companies that we developed and they continue to stay with us today. So 40 or 50 people deep have been with us for 10, 15, 20-plus years. And so we think that offers us a pretty significant advantage given that we've got a team of people that we've been with for quite some time. If you look at the history, Rod and I joined PSA Healthcare with J.H. Whitney. J.H. Whitney made the acquisition of PSA in 2015. They asked Rod and I to be on their Board of Directors. Shortly afterwards, they came back to us and said, we think there's an opportunity to build something significant. Would you guys like to be involved and work inside the company full time? We made an agreement that if we could invest along with them, pari-passu, then we would come on board and we'll start building the next relevant home care company in America. In 2017, we joined with Bain Capital in the acquisition of the second largest home -- pediatric home care provider in Texas. And Bain was successful in acquiring Epic. And on the same day that they acquired Epic, we merged PSA and Epic together, and those -- the combination of those 2 companies formed Aveanna. So Aveanna was born in March of 2017. The goal had always been to reenter the traditional Medicare home health and hospice space. Our noncompetes were burning off at the time. And so moving along that path, we acquired a company called Five Points in October of 2020. The significance of Five Points, like when we talked about our management team, 7 of the top 9 leaders inside of the company, Five Points, were former employees of both Rod and I in our previous companies. So we bought Five Points not for its size and scale, but we really bought it because it brought with it a ready in-place infrastructure that we could build out the home health and hospice segment. So we reentered the home health and hospice business in October of '20, creating that platform. Since then, we've acquired Doctor's Choice, a home health agency, in April of '21. And then most recently, we announced the 2 acquisitions of Accredited and Comfort Care in Q4. So being acquisitive has been a significant part of our story, and we'll continue to be that going forward. If you look at the next slide, the combined company on a trailing basis is just under $1.7 billion. However, Matt, we'll look at the next slide because if you look at the business on a pro forma basis as if we had owned both the Accredited transaction and the Comfort Care transaction for the full year, the way that we think about Aveanna is our revenues are about $1.9 billion, and we'll do $220 million to $225 million in EBITDA on a pro forma basis. So if you look at the right-hand side of that slide, since 2018, we've been -- we continue to grow at mid-teens year-over-year growth. About 10% of that growth is driven through acquisitions and the other 5% to 6% is driven organically on a go-forward basis. We operate 3 different business segments at the bottom left-hand side. The first 3 are components of our Private Duty Services segment. And then we have a Medical Solutions segment, which is primarily the integral and nutritional support business. And then lastly, the home health and hospice segment. Culture plays a big role at Aveanna. We spent a lot of time creating a culture of accountability and compliance. And we do this through the ongoing Aveanna Leadership Academy, and all of our leaders go through Aveanna training. We spend a great deal of time making sure that we are producing -- we call it or refer to it the 5 Cs, but it's clinical outcomes, customer satisfaction, census growth, cost controls and then finally, we're collecting our cash. And this Aveanna culture permeates through. We spend, again, a great deal of time making sure that our folks are playing right down the middle of the fairway from a compliance perspective and putting the right emphasis on our clinical outcomes. The next slide, if you look at that heart, we refer to this as the Aveanna heart. One side of the heart represents a family or a patient with an unmet need. The second side of the heart represents a caregiver that has a skill. And where those 2 come together, we feel like that's the role of Aveanna. Our job is to make sure that we are matching a skill from a caregiver to an unmet need of a patient. Our referrals come from traditional referral sources, our hospital partners, our physician partners, community-based programs as well as from other families in both families -- family referrals as well as payers and case managers. If you -- we operate in 3 separate divisions, as I mentioned earlier. Our Private Duty Services business is one patient -- Matt, we'll go to the next slide. Our Private Duty Services segment is one patient at a time. We provide care at the patient's bedside through a single caregiver. That caregiver is usually in the home somewhere between 8 and 12 hours per shift. Patients get as little as 40 and as much as 168 hours a week based on the state that the patient lives in as well as the patient's clinical condition. We pay the caregiver by the hour, and we're also reimbursed by the hour. One of the -- and inside the Private Duty Services business, we offer both skilled care through a registered nurse or a licensed nurse practitioner, or we also provide unskilled care, which is more of an attendant or people who help with activities of daily living. One of the key metrics that we will talk a lot about in our private duty segment is the spread, which is simply the difference between our rate per hour that we're paid versus the wage per hour that we're paying. And that spread runs kind of in the $10.50 to $11 range, and our average reimbursement per hour is just over 36 -- just over $36 an hour. Right now, one of the things we talked about on our Q3 call is that we are living in a positive reimbursement environment. 24 of our 32 states have either put through rate increases and/or expanded their benefits. Moving on to our AMS division, it's enteral nutritional support where really we provide the medical supplies, the pump in the equipment as well as the enteral product. Patients are referred to us from physicians and hospitals and other types of referral source. We get patients from referral sources from our home health business as well as our private duty business. So both of these segments fuel the growth in AMS. And as a result, AMS is the fastest-growing segment of our -- our fastest organically growing segment of our overall business. It's really a distribution business. We don't provide clinical care, we're really distributing product and supplies. And what keeps other distributors like McKesson or Amazon out of this business, it's a very complex billing process. We're billing the state Medicaid system, Medicaid managed care organizations and all of these things require preauthorizations. And so it really takes a health care company with a special attention to the revenue cycle to be successful in this business. Our third segment, which is our newest, but it's also the fastest growing is our home health and hospice segment. This is a traditional Medicare-certified home health and hospice business. 75% of the revenues inside this business are derived through home health and 25% through hospice. It's our fastest-growing segment, as I mentioned. We got into this business in October -- we reentered the business in October of 2020, and we're in excess of a $300 million run rate today. So this is the business that is most comparable to our public peers, such as Amedisys and LHCG. Our infrastructure. We have a corporate infrastructure in place that could grow with us probably to $2.5 billion, $3.5 billion in revenue and is quite leverageable. For example, today, that number -- our corporate spend today represents about 5% or so of our revenue. And if you look back 2 years ago, that number was closer to 7%. So as we continue to grow, we believe we'll continue to gain leverage and expand the use of our existing corporate infrastructure. On the gross margin perspective, as we talked about on our third quarter call, we have a very stable gross margin platform. Matter of fact, at our third quarter call, our gross margins were 34%. That was up 280 basis points from a year ago as well as up 40 basis points sequentially over 2Q. And you may ask, well, how have we been able to maintain this margin profile given COVID and the impact it's had on labor. There's really 3 things driving margin improvement. One is with further expansion into our home health and hospice business. The gross margins in home health and hospice are higher than that of the Private Duty Services. So as home health grows, our gross margins will continue to grow. Secondly, the rate wins we've already talked about, we've had significant rate wins across 24 of our states, the latest of which will be implemented January 1, 2022. That's continuing to buoy up margins. And then the last is we have a very disciplined approach to how we manage wage and wage inflation. So all of those things give us great confidence in our margin profile going forward. From the balance sheet perspective, we have a good liquidity position. We have a $200 million delayed draw term loan that we've not tapped but we're servicing the debt already. Secondly, we have a $200 million revolver that we have capped. We've got about $180 million of availability there. We've taken our leverage from 4.5 up to about 6x with the latest acquisitions of both Comfort Care and Accredited. We're perfectly comfortable at this leverage. However, over time, our goal would be to bring leverage back down. We continue to have very strong cash collections. We have a very stable and strong revenue cycle management component and cash flow from -- free cash flow from operations continues to improve. We do believe that our total addressable market is another competitive advantage for us. Unlike some of our peers who play primarily either in just the home health or home health and hospice space, we have a total addressable market that crosses over $100 billion in revenue. So we love the diversity of our payer structure because with that diversity in our payer structure, it gives us comfort in a downside scenario against a negative rate reaction. However, it also provides us with a lot more total addressable market to continue to grow. The public peers that you may know, LHCG, Addus, Encompass, Amedisys. Those are our public peers. Again, each one has its own unique business lines. Amedisys and LHCG more in the home health and hospice space as well as Encompass. Addus plays a little bit more in the Medicaid space where our private duty lies. There's a couple of larger private companies, BAYADA, Maxim, Kindred Home are on the private side. However, I think the takeaway from this slide, though, is that our real competitor is really derived on a local basis. More times than not, we're not necessarily competing head-to-head with Amedisys or LHCG. It's market by market. And usually, especially in the private duty space, we're really competing more with a small local regional provider, which gives us great opportunity to continue to grow through acquisition. Let's go to reimbursement. We've talked about reimbursement earlier. We believe that we're in a very positive reimbursement environment today. As you already know, the final rule through CMS for home health and hospice were either equal to or better than was originally expected. And like I mentioned earlier, on the private duty side in the 32 states that we operate, we've had 24 of the 32 states either expand the benefit and/or increase rates for us within the last 12 to 18 months. So we continue to have a very positive impact on our business from improved rates. From an M&A perspective, as we've mentioned earlier, we are a very acquisitive company. We've continued to grow through acquisition and will continue for the near future. One of the things that we get accused of sometime is being a roll-up company. We find that quite offensive. I believe I would characterize us as an operating company that has learned to grow through acquisition. The reason I say that is we are very disciplined about our acquisition strategy. We look at a lot of transactions but closed very few. And in our approach to our acquisition growth, we have a dedicated IMO function, integration management function. And in this IMO function, we do our own diligence internally, and the same team that's doing the diligence is also putting together the integration plan. And so for that reason, we're able to get to the integration pretty quickly and efficiently. If you -- our goal is to acquire between $150 million and $200 million a year of revenue that generates somewhere between $15 million and $20 million of new acquired EBITDA. Our goal is to acquire both home health as well as private duty. We love home health. We love home health that has a hospice component with it. However, we're probably not the acquirer of stand-alone hospices. On the private duty side, we really like the unskilled business. We've had great success there. That tends to be another area we're focused on. And if you look most recently at our acquisitions, the Accredited transaction is an unskilled private duty business in California and the Comfort Care deal is more of a traditional Medicare-certified home health and hospice platform. If you look, one of the things that we do believe that differentiates us between being an operating company that grows through acquisitions and a roll up company is our aggressive approach to how we integrate the businesses. From the day -- from the start of close, we usually achieve 80% to 90% of the synergies within the first 90 to 120 days, and we're usually fully integrated within the first 6 months of owning the company. And for those reasons -- and when I say integration, we -- everything from our clinical documentation system to our compliance program to our education and training to our billing and collecting platforms, we fully integrate a business and we start very aggressively when we close. And we do believe that, that is a differentiator between us and some of our peers. If you move on -- just I'll touch briefly on the 2 deals that we announced in Q4 of '21. The first is Comfort Care. As I mentioned, it was a home health and hospice deal primarily in the state of Alabama, revenues of about $100 million or so with a purchase price -- with tax adjusted. We had a pretty significant tax benefit in the acquisition. So tax adjusted were paid -- will pay about 290x. On a post-synergy basis, we're buying these home health assets kind of in the 11 to 12 range as it relates to Comfort Care. Accredited on the other hand is totally an unskilled business, a Private Duty Services business based in the state of California. Again, about 100 -- just over $100 million in revenue. And although there is an earn-out component, we expect that purchase price to be somewhere around $212 million. And again, kind of in that post-synergy basis, kind of that 8 to 9x. So we paid for that business. As I mentioned earlier, we've taken leverage from 4.5 to right at 6x. We put a new $120 million securitization loan, which is quite favorable terms in place. To close that, we raised another $415 million of Term Loan B. And again, even at the Term Loan B, if you look at the cost of capital in our new capital structure was significantly better than our capital structure before our IPO. So we feel very comfortable with our leverage and cash flow today. And if you -- if you look at the capital structure, the $200 million delayed draw term loan that we have at cap as well as the revolver, we've got plenty of capital to move forward with our M&A strategy through 2022, which we'll get after in just a minute. If you'll skip over with me, I'll summarize. Going back to the investment thesis, we've got continued double-digit revenue growth and EBITDA growth. We have a very diversified and positive payer reimbursement environment. We love the diversity that it gives us. If you -- our gross margins are very stable and continue to be stable. We have a very disciplined approach to protect those gross margins. And then again, we have a very strong cash position and the liquidity that we need to continue to grow. With that, if you accompany that with the leadership team that we have in place and the depth throughout the organization, we believe that not only can we weather the storm that we're in with this pandemic, but we believe that when we come through the other side, we'll be well positioned. And by protecting the margins through the pandemic, we'll be well positioned to pick up our pace and start back on our path to growth. With that, operator, I think we'll open it up and entertain some questions.

Tony, it's Lisa Gill. How are you? I'm sure...

[indiscernible]

Tony, it's Lisa Gill. I'm sure you can appreciate this. So one of my kids tested positive for COVID. That was my fire drill at the beginning of your presentation. So I still apologize that I wasn't there for the intro. But let me just start first with the first question, just really being around labor and staffing headwinds. When we talked last quarter, you talked a little bit about that. They've reduced the number of days now from a COVID restriction standpoint down to 5 days quarantine. So can you maybe just give us some thoughts as to think about the new year for labor trends and what your expectations are here for 2022?

First of all, Lisa, I'm sorry to hear that your child has tested positive to COVID. But the good news is, you're in a very big club. I mean COVID has run rampant. I hope the symptom -- your child's symptoms are pretty mild.

[indiscernible]

So we -- as you mentioned, COVID is alive and well. And if you look at our business, in December, in mid and late December, January, I mean, we -- it's running through our business like it is everywhere. We've talked earlier about we've probably got 1,500 employees that are out with COVID right now. And whether they're quarantined for 5 days or 10 days, I don't think that is really making a material difference. Our number has been growing. If you'd ask us that number back in November, that number was probably 25% of that number, and that number has been steadily growing. My guess is we'll hit the peak sometime this week or next week, and it will start coming back down. But during the holidays and right after the holidays, COVID has hit everybody hard, and we're not immune from that. I don't -- like I said, I don't think the 5-day or 10-day quarantining is really impacting us. It's just -- it may shorten the curve a little bit, but I don't think it's having a material impact one way or the other.

And when you talk about the number of practitioners that are out or clinicians that are out, the 1,500, you didn't come out and make any revisions to any of your numbers today. So should we feel confident that you're able to work through that or you had anticipated that when you last updated us?

Well, I think if you go back to Q3, we did lower our revenue guidance for 2021 in Q3. What [ remained ] was we maintained our EBITDA guidance. And I think we even said on the call that we felt like we could come pretty close to hitting that number through tighter expense management and a disciplined approach to how we manage our gross margins. And so I think that's what we said then, and we haven't provided any update since then. However, as it relates to January and 2022, we haven't given any guidance for 2022 as of yet. What we said to the market was we would come back out in -- sometime in mid- to late first quarter and provide guidance. with that, everything we just talked about on the call today is that COVID has continued to impact our revenues. However, we still feel pretty confident that we're managing our gross margin. One of the questions we get asked a lot is that people make the assumption that we're using temporary help, and we're hiring nurses through staffing companies and all of those types of temporary labor, and how long will it take to get that cost out of the system when the labor market return to whatever the new normal is. And the reality is, is that we don't do that, that our economic structure just doesn't present itself so that we could take on that kind of expense. And to the point of the question, it is very difficult to get it out once you put it in. So more so than gross margins, the impact of COVID we'll feel in volume more so than we will in the cost side of the gross margin side of the business.

And I appreciate you talking about not having temporary labor, et cetera, but have you had to bonus or give any other kind of incentives? Some other companies we've heard talk about giving incremental incentives to employees during this period of time?

So we did talk at the end of our -- during our Q3 call, we did talk about some programs that we were putting into place that were short term in nature and a onetime COVID-type related expense that we were going to put through. While we didn't quantify it, but we did put together some retention -- both retention and bonus structure to try to call people to work more than they were already working. And so we did that during Q4, but we've brought that to a halt going into 2022.

Okay. And then you talked about being roughly 6x levered, and I think you talked about some favorable rates that you have currently. Are you still anticipating roughly $150 million to $200 million of annual revenue from acquisitions? And then secondly, it is anticipated that the rate environment will become more challenging. We do expect rates to rise in 2022. Does that change your outlook at all as far as the amount of revenue that you'll acquire?

I don't think so. We've got the $200 million delayed draw term loan sitting there and we're already servicing the spread on that. So the only piece that we're not paying is the LIBOR piece, which has a floor of 50 basis points. So we've got that $200 million of debt sitting there that we're already paying for that we've yet to use. So when we do that acquisition and we draw down whatever acquisition we do and we draw that down, it will be highly accretive. And in addition to that, we've got a revolver that we haven't touched. And so we've got access to capital to continue to grow going forward. If you accompany that with our growing EBITDA as well as the -- when you look at the 6x leverage today, there's a couple of ways to delever, growing EBITDA or reducing debt. And if you look at the positive free cash flow that we're generating from operations, we can use that debt in one of -- we can use that cash flow in 1 or 2 ways. We can either invest it into additional EBITDA or use it to pay down debt. And we have that flexibility going forward. So we feel pretty good about where we are. We feel good about where we are from a leverage perspective. While at 6x, our goal is to bring that leverage down, our goal is to kind of be in that 4.5x range. But -- and at some point, when the markets reflect the value that we think is locked up inside of Aveanna, we also have our stock to use when the time comes. So we feel good. Our goal is to continue to grow through acquisition. I think our goal of $150 million to $200 million a year is a good goal. I don't -- Rod, obviously, if you've got any comments about 2022, do you see any restraints or any concerns?

No. It continues to be a target-rich environment out there, plenty of acquisitions to tackle.

Great. In our last couple of minutes here, we have Build Back Better that's still sitting in Congress, but is there anything that you would anticipate from any of the proposals that could be a positive or a headwind for you going into the next couple of years?

Well, I think we use that a positive or a headwind. I believe the rate environment right now for us is creating tailwinds for us. The -- meaning the fact that people in Washington, D.C., they're talking about home care today as a part of the solution and not that it's a problem. And I think only good things are going to come out of that. Whether or not Build Back Better is going to pass as it's written or it's not going to pass, I think the environment today, when we talk to people at the federal level as well as people at the different state legislators and policymakers, everybody is talking to us that home care is a part of the solution. We need to invest more dollars into home care. And I think it's evidenced by the fact that the final rule for home health came out that was even better than the industry expected, I think, is a data point that shows people, for the first time in decades, are really seeing the value and the accretive role that home care can play in the overall of cost reductions in our health care equation. And I think we're feeling that all around.

Yes. No, I would agree. I mean, I think if there's anything that I would say about 2022, it's going to be around site of care, right? I mean, you think about the home as the best, safest place for the individual. They're most comfortable in the home and it's the lowest cost. So with that, we're out of time, but I really want to thank you guys for joining us. And I apologize for the technical difficulties at the beginning of our call today. So thanks, everybody, for joining us. If you have any questions, by all means, feel free to reach out to me or anybody on my team. Thanks, guys.

Thanks, Lisa. Thanks for having us.