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

All right. I think we'll go ahead and get started. My name is Sarah James. I'm the emerging health care delivery model and provider analyst at Barclays. And we're very happy to have Aveanna here with us, overweight-rated. We've got the full team. So Rod Windley, Executive Chairman; Tony Strange, CEO; and David Afshar, CFO; and then also in audience here, [ Matt Burkholder ], VP of FP&A.

So home health is an area that gets a lot of interest. And I feel like you guys -- one of the areas that you don't get enough appreciation for how differentiated your model is. From how you approach recruitment and retention, how you're doing with M&A, this is the year that we think of you guys really standing out and making that differentiation. You had a big strategic year with 2 large acquisitions, and are poised for an even bigger '22 with the rollout of your caregiver technology. But the stock continues to trade under some pressures. So I was hoping that you could talk about what you attribute this to and what's within Aveanna's power to attract incremental investors.

Well, you just jumped right into it. It is -- first of all, thank you for having us. It is good to be out and about and in person. This was the first conference that actually got canceled in 2020, and so it's really good to be back. It's appropriate for this to be the first one where we're kind of back out and in person. So meeting people face to face was nice this morning. So yes, we agree. I think our story is one that's a little misunderstood for a couple of reasons, and I'll spend a minute going through them. First and foremost, we're really the first home care company that has a significant penetration into the Medicaid space. In our Private Duty segment, we're predominantly paid through Medicaid or Medicaid like. And I think a lot of people tend to believe that Medicare is good, Medicaid is bad. But in the home care space, specifically in the Private Duty Services business, Medicaid is a very good payer. And I think that's up to us to get out and tell that story and make sure that folks understand the value that can be created. Along those lines, the other thing we really like about that space is the diversification that it gives from a payer mix perspective. If you look at our payer mix instead of dealing with just Medicare, which Medicare represents about 12% of our overall revenues, when you look at Medicaid, people tend to think that Medicaid is a single payer. The reality is, is that Medicaid is a unique payer in 31 different states that we operate in. And so we love the derisking nature that through the stroke of a pen, it would take the stroke of 31 pens to actually hurt us. Conversely, we have 31 opportunities to go out and have positive rate impact as well. And so I think those are the 2 -- 2 of the fundamentals that we have to go and tell that story and make sure the market understands the Medicaid side of our business. On the other side of the coin, I think the 2 things that do put pressure on our stock is there are a group of investors that are uncomfortable with leverage. We have used leverage to grow. We had -- at the time of our IPO, we had said we would try to maintain leverage at about 4.5x. However, in -- you mentioned the 2 transactions. We actually did 3 transactions in 2021, Doctor's Choice in April, Accredited and Comfort Care in -- late in the fourth quarter. And at the time we were closing Comfort Care and Accredited, we had originally thought we would use the cash on our balance sheet, plus we would use some additional debt. And then whatever hole we might have, we would go to the market and fill with equity. However, at $7 a share, it wasn't a very good use of our equity, and we decided to take leverage to -- in the 6 range to close those deals with. So -- and not take our shareholders through dilution, which I think is the right decision. However, there are some investors that aren't comfortable with that kind of leverage. The other thing that I think tugs on the value of our stock is just the sheer math, there's just not a lot of float in our stock. We still have a significant concentration with Bain and with J.H. Whitney. And while neither of those have expressed any interest or any hurry to sell or get out, they're not going to sell at $5 or $6 or $7 a share. So the fact that there's just not a lot of float, so when someone does want to sell our stock, it -- whether -- I think our stock today is traded 27,000 shares, and 27,000 shares moved our stock. So I think until those 2 things are addressed, I think we'll continue to have some weight on our stock.

Let's talk about the rate environment. So as part of COVID, there were some extra money available for Medicaid, but I don't think that it's fully reflected yet. So can we talk about how much runway you have there for actually getting that into the hand of your employees and what difference that could make?

Well, that's a really good question. If you go back to our Q3 earnings call, one of the things we talked about was in the 31 states that we're in, we had experienced rate -- in the last 12 months, we had experienced rate increases and/or expansion of benefits in 24 of the 31 states. That trend has continued. Probably -- and Rod, you can jump in. Probably in our career, I don't think we've ever seen a more positive rate environment. We actually have state Medicaid systems, Medicaid managed care companies that are actually pulling us in. They're leaning forward into home care as -- in viewing home care as a part of the solution. And that's a great place to be. Our rate environment continues to be positive going forward, and we don't see that changing anytime in the near future. Our only restriction to growth right now is access to caregivers. But I mean, Rod, you've been...

No, I was just going to follow on, Tony. It's been a long drought in the rate world. I mean for Florida, California and one other state, we hadn't had a rate increase in 10 years. And so we've got some pretty meaningful rate increases in '21. And we're back this year and asking for more and deservedly so. And we just got a bill introduced today in California for another rate case out there, which could be meaningful. But the whole -- there's been a paradigm, and the pandemic obviously helped that. So when we sat down to design and build Aveanna from the get-go, we have done it very thoughtfully. And for us, it's -- Medicaid is just as good as Medicare. There's this overhang in the investor community that Medicare is good, Medicaid is bad, and that's just not the case. And so we designed it around Medicaid trying to augment the thrill of victory and the agony of defeat every year in July with regard to the Medicare rates.

One of the things that we're probably most excited about right now is for the first time in decades, we actually have payers, state Medicaid systems, coming to us and looking for alternatives to how we deliver our services. So for example, rate is important. And rate pays bills today, and it produces earnings today and revenue today. However, if you look forward 2 or 3 or 4 or 5 years down the road, the nursing shortage isn't going to go away. And it's going to continue to plague health care services for the foreseeable future. And so we have some of our payer partners that are coming to us saying, "Look, we know that this is not sustainable long term. What can we do together to change the delivery model?" And so we're investing in pilot projects that -- where we might reinvent the way that Private Duty Services specifically is delivered, and that's exciting. And I think that over time, that has to be a part of the solution.

Absolutely. I'm glad you brought up PDS, because I wanted to talk a little bit about payday. I think what you guys are doing there is really innovative, but I would love to hear what kind of response you're getting in recruitment and retention thanks to it? And how it kind of factors into your growth algorithm?

Well, it's a really good question. And what she's referring to is one aspect of what we've tried to do to make it easier for people to not only apply but be hired and oriented and onboarded and then how -- and easier to work for us. And her reference is to same-day pay for clinicians. But in addition to same-day pay, which I'll touch on that, the idea, the strategy behind it is that we wanted to make it easy for someone to come to work for Aveanna. That when a potential new employee has 40 or 50 hours of time, and we want to get all of that time per week that we can. So for example, the operating team has done a really good job of being innovative. Prior to the pandemic, if a nurse wanted to work for us even on a part-time basis, they had to commit to coming into our office for about 2 full days for training and orientation, interview process and such. And if you think about a nurse who works full time at a hospital that wants to work part time in private duty, it's hard to commit 2 full days to come orient for a part-time job. Our team has done a good job in building out infrastructure that allows now this nurse to go through the application process as well as most of the orientation and training all virtually. And so that now a potential nurse who works full time at their own home in -- at their own convenience, we offer virtual these training classes 7 times a day, 7 days a week. And so now these nurses can go through this training at their own pace, at their own time and become eligible. Now they still have to come in for some specific orientation related to patients, but we've cut that time down by about 80%. In addition to that, to Sarah's point, once you come to work, people that want to work some additional hours is because they may have an additional financial need right now. And so through daily pay, we've made it accessible to where clinicians can work today and be paid today for the work that they provided. And we've seen a great deal of adoption related to that, people that want instant access to their income. And so those kinds of ideas we believe we want to elevate us to become the employer of choice, especially as it relates to people who want to supplement or expand their income.

Yes. Tony, and just to pile on top of that, there's actually 3 things. And innovation is one of our core values. And I will say that the pandemic certainly helped us accelerate our innovation. And the third one is our caregiver app. Everybody lives on one of these today. And what we've done is we've created our caregiver app so that the caregiver is more in charge of their own schedule so they can see where the shift is, when it's available, and they can go right on the telephone. So that's great for them.

Great. How does that relate to what you guys see for churn? So that's been a topic that's come up a lot, how churn looks today versus how it might have prepandemic. And with all these tools, I'd imagine you get pretty good retention. How should we think about churn for Aveanna?

Well, so to understand that question, you have to understand who the workforce is, especially in private duty. In our traditional Home Health & Hospices, we have very little turnover. A matter of fact, I would tell you, we are at or below the industry standard because those employees look and feel like full-time employees. They come to work, they get paid on a salary basis, they get benefits. They do everything that -- what you would think of as a normal full-time employee. On the private duty side, our caregiver looks different. While they're all employees of Aveanna, they sometimes look and feel more like an independent contractor. Well, I don't necessarily like this example. But if you think of an Uber driver who works for Uber, they work when they want to work. When they want to go to work, they turn on their app and they start taking rides. And when they want to stop working, they turn off their app. Our caregiver is very similar to that on private duty. When they want to pick up hours, they either use the caregiver app that Rod talked about or they call the office and tell them what their scheduled availability is, and they take a few shifts. But when they don't want to work, they just stop taking shifts. So when you ask about turnover or churn, that Uber driver doesn't send in a letter of resignation and leave. They just stop taking trips. And that's kind of how our private duty is. In general, when we look at the caregivers that we pay on a weekly basis, about 70% of the caregivers we pay on a weekly basis are the same every single week. And about the other 30% are people that are rotating in and out based on what their availability is and how much they want to work. We have some caregivers that work for us 1 week a month. We have other caregivers that work 4 days a month. And so there's just a lot of variation to how people choose to use our workplace.

Okay. Dave, let's talk about numbers. So can you go over some of the puts and takes as you're thinking about building your assumption set for '22? The pacing of it, I think, is something that is really challenging this year because of the COVID variability. But how do you think about pacing?

Let me set the stage, and then I'll let you answer her question. So we haven't given guidance for '22. I mean, we won't do that until March. This is our first year, and I'm doing this in defense of Dave. This is our first year as a public company. And so we've taken the extra 90 days that we have to be a first-year filer. And so for those reasons, we haven't released our Q4 earnings yet. We'll do that at the end of March. What I will tell you, and we've said this publicly, is that we're not expecting any surprises in our numbers. Again, our numbers for the end of the year are largely in line with our expectations. With that, we haven't disclosed anything related to '22 yet. And -- but Dave, do you want to jump in or?

Sure. I'll just add a little bit and just say that we're excited about the prospects for '22 when the labor markets do begin to normalize. We've run the business judiciously in terms of our margin control and the way we set the business. We haven't gone too aggressive in terms of our costs. And so when the labor market does return, we will be ready and there to capitalize on it. And so we're excited about the prospects. We just want to make our way out of this -- fully out of this variant and hope that there are no others that jump up on us in the coming year.

So -- and I'm going to take your question even further because I know where I think you're headed is as it relates to '22, while we were impacted by Omicron in '21, our expectations -- our results are going to be largely in line with our expectations. However, the Omicron variant did have an impact on our business. And I think we'll see that as we start shaping up Q1 results and as we start giving our forecast for the full year. There will be an impact of Omicron in there. With that said, I think as we sit here today, we could safely say we've begun to see kind of -- as quickly as Omicron brought the business down, we've seen it kind of begin to come back up again. However, the impact that it did have is lasting. So while we think we'll get back to kind of where we -- at run rate where we thought we'd be in the second half of the year, we'll see an impact in the first half.

Okay. Is there any update you guys can give us on the recent acquisitions, how integration and growth is going in those businesses?

She's referring to Accredited and Comfort Care. One was closed at the first of December, and the other was closed midway through December. Both of the transaction -- so there's a bit -- my point is there's a very small portion of that in 2021. Both the integration is actually going extremely well. Both businesses are on track. We closed Doctor's in April. It's fully integrated, and that's completely done. We expect integration of both Accredited and Comfort Care to be final before the middle part of 2022. Rod, anything you want to...

No, it's gone ahead of schedule. We've never -- we've integrated Comfort Care, for instance, within 90 days on Workday, which we had not done before. So everything is trending ahead of schedule, and the West Coast transaction as well is ahead of schedule.

I'll go on record. I think both transactions are going to go down as being very good transactions. The West Coast transaction Rod talked about, I think will go down as being one of the best 2 or 3 acquisitions that we've done at Aveanna. We really like that unskilled business out there. It's going to be highly accretive for us.

Great. And Dave, how do you think about building the balance sheet to support future M&A versus trying to keep a handle on leverage level?

Sure. Like Tony said earlier, we thought about how to finance the Q4 M&A and chose to increase leverage as opposed to issuing additional equity and dilution based on where the stock price was. I mean, we're not afraid to increase leverage where we need to and where it makes sense for the business. We've operated in a highly levered environment before, and we're comfortable there. I think as we generate free cash flow and operating cash flow, the goal would be to reinvest that in M&A. So net, incrementally reduce leverage. That would be the plan. We'd love to be a turn or 2 below where we are right now in leverage, but we'll just see what the future brings us and how the stock price performs, and we'll make decisions based on what's in front of us.

Can you give any color on what the pipeline looks like, how that's developing both in PDS and in your core business?

Yes, I can take that one, Sarah. So the pipeline is still full. There is a plethora of transactions out there for mom-and-pops, some medium-sized transformational stuff that's floating around out there now. So for us, for the first, I guess, quarter here, I passed on -- or we passed on a couple of transactions. And I think we announced that we were going to try and do 2:1 with regard to Medicare. Transactions takes long lives of their own, no way to predict that. So we've passed on some [ PDS ] and some unskilled stuff. And we're just looking. We do not do troubled acquisitions and turnarounds and anything of that nature. We always pay a fair price, and through synergies, get 2 or 3 turndowns. So it becomes a much more accretive transaction post our acquisition. And we do integrate them very quickly. So we're looking at a lot of stuff, but we're just -- we're -- we've always been acquisitive. This is our fourth chapter. We've done $6 billion worth of acquisitions in this space. So we look at a lot. We just don't do a lot.

What we have said publicly is that we expect to do somewhere between $150 million and $200 million a year of new revenue through acquisitions. And there's no reason to think that that's not a good projection going forward.

And when you talk about there being transformational opportunities out there, is there any other color that you would want to...

[indiscernible] color.

Okay. Got it. No direction. Okay. Got it. Fair enough.

I mean, in fairness, there's a lot of rumors going around. And Rod and I have been in this space for 35 years. And there's not a transaction that's going to get done in home care that we don't have an opportunity to look at. And there's a lot of speculation out there. We wouldn't comment on any transaction that we were considering. With that said, I think, Rod, you said it well. Our pipeline is robust. There's no reason that we wouldn't continue to grow through acquisition. It doesn't have to be transformative. Matter of fact, I can make some really strong arguments that transactions like Comfort Care and Accredited, that's our bread and butter. And so as long as we can continue to do those, we're going to continue to grow...

And there are some of those out there. So I mean we're looking at some stuff.

Great. And as we wrap up Q&A here, I wanted to give you guys a chance to talk about what you think The Street is missing or undervaluing in Aveanna.

Well, I think that's kind of -- we're back to where we started. And I think from our perspective, on a run rate, we're a $1.9 billion company generating in excess of 10% in EBITDA, growing 10% to 15% a year year-over-year. I think that's a compelling story. And I think the underlying pieces, Rod talked about it, I talked about it, understanding that Medicaid is a good payer and that there are certain aspects in that where the payer diversity really brings value, I think we need to make sure that folks understand that. It's not just, well, you're not as big in Medicare as everybody else. And Medicaid is a good payer, and we're going to keep telling that story.

Great. Thank you, guys, so much for joining us.

Thank you.

Thank you for having us, Sarah.

We appreciate your time, too. Thank you.