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

All right. Thank you for joining us. Sorry for running a few minutes late. Very pleased to have CEO and CFO from Aveanna Healthcare. For anyone that doesn't know about this company, I just want to point out this thing is up 1,700% since you took ownership in end of 2022, start off as a stressed equity, almost not making payroll. Here we are, 14x leverage huge into arguably too low. This big move 1700% that's not so bad. This move has been basically been primarily moving into preferred networks, which is structurally involved sort of your entire company. So I guess, can you just talk about the preferred network strategy in each of the segments? And where are we in terms of inning feed segments as you think about this over a 1-, 2-, 3-, 5-year window? And when it gets sort of fully penetrated and start growing typically at more "market growth?"

Sounds great. And I want to take the complement because you were 1 of the people who pointed out how bad we stuck on the way down from $10 back to one. So I just want to say thank you, Pito, for giving us some kudos on the other side of it, as you certainly brought up some of the realities to us back in 2021, 2022. But now as you said, Peter, we've been on a multiyear journey. Matt and I and Debbie Stewart, our Chief Panofficer, all kind of took our roles and early 2023 coming out of COVID, we absolutely needed a strategy that dealt with the lack of caregiver capacity in our businesses, obviously, with the hyper wages that all happened through the COVID period. We're in year 4 now of our preferred payer strategy, government affair strategy, both are continuing to work incredibly well. As you talked about in each 1 of our businesses, we underpin our growth and where our clinicians, our focus every day is to know where every 1 of our clinicians is going why they're going there, not just the patients they're seeing, but who is the payer of the patients they're seeing -- and it is that payer in our preferred network and it's sort of the allocation of our clinical capacity. So start with our largest division, our Private Duty Services division, 80% of our revenue is in privacy services. it's our most mature preferred payer market or segment. At the end of Q2, we had 37 preferred pay arrangements roughly 64% of our total volumes are in 1 of those arrangements, sets up from 57% at the begin of the year. So nice movement year-to-date. And really preferred payer. Wins in 2026 today and a couple more that we plan to announce in the second half of the year. So we're going to go right now if you want to -- this is being webcast -- this is really lots were sorry for live here. I'll give out the winning lottery to take it here in a few minutes. But really it's going to end up being a great year for PDS. I'm sure we're going to get to California, we're going to talk about some of the government affairs wins as well. But really continued to be a great momentum with our PDS preferred payers, they want more. Even our very first preferred payers still with us today. the CEO was here this morning. You guys were talking to her. So they've been a great preferred payer for us. They're still with us. They still want more capacity from us. So our very first preferred payer we're about 55% of their census in the specific state. We signed up first contract 4 years ago, and they still want us to take more. They want more nurses, they want more of our capacity because it truly has been in the total cost of care for them. So excited about where PDS goes, put able quickly to home health and hospice. Also really excited about where our home health and hospice teams are 50 preferred payer agreements, Think of those as episodic agreements, both Medicare and Medicare Vantage but all episodic in nature 81% of our business is aligned with an episodic contract in home health that is we believe it's industry-leading, certainly to the higher end of the industry, and we're growing 15.5% year-over-year organically in the home health business. Really, really proud of that. Lastly but not least, we've just finished the Medical Solutions modernization in 2025, coming in early '26. And we've got our first 20 preferred payers identified. We're really working that preferred payer process and the med solutions. It's still stage, but proud to be bringing the preferred payer strategy to Med Solutions as well.

Yes. So 1 of my biggest. Pushbacks in the last couple of years has been your conservatism, which is he should be whipped over there and to Avion's board outside they look at Bloomberg surprise. In terms of seat numbers versus active members in Europe beating by 80% or 50%, it's maybe you're guiding the Street to be too low. I guess if I think about growth in '26 and growth in '27 sort of put out sort of long-term growth rates here. I guess the thing about like this. How much percent of those long-term growth rates are coming from just overall market growth how much are coming from sort of market share for preferred networks? And how much is that coming from just simplistically the sort of very sick kids. There are stuck in hospitals that don't have actually a way of getting home.

Let me start with why we kind of got to the long term and jump in with the actual growth rates by segment. But you were kind enough at the end of Q1, just to remind us how much we beat consensus by and that was too much from your professional experience. So -- we spent effectively May through the end of July with our Board looking at reunderpinning all of our business units. And really, the key drivers was we were 15 or 16 months into the One Big Beautiful Bill, and we had enough experience now with 32 states, 32 Medicaid states. And with the rate wins from 25, we knew what the rate wins for 26 were shaping up to be we had just gone to California news that we had gotten in the California budget for 2027. That was a big deal for us, 32nd state. And then we hired Capstone to underwrite all 50 states, the impact of BBA. And specifically, what was in their best systemization, what would the output be to the pediatric private duty nursing population. We had strong feelings because we're in it every day, but we really needed a market validation. And all of that kind of came together in the summer with -- the 1 big beautiful bill is real, and it does impact Medicaid. We know that. It does not primarily target pediatric PDM. And if anything, our pediatric PDM population is incredibly well insulated. States are going to continue to invest generally into pediatric PDM care because it's a winning solution for them. The other thing that was helpful was we had -- we're big betters on home health, get home health and we saw in the 25 final rule, what we thought was a turn in the policy of this administration. When we saw the proposal, we'll come out in July, it validated. We think home health has turned. We think the trough has happened, and we're starting the way back up in home health. That was a nice validation for us to reunderwrite the growth algorithm. As Matt will talk about really give us confidence. And probably the best way I could give you is clarity. We felt like we had enough clarity at this point to readdress our long-term growth algorithm. .

Yes. And Pito, I think there was a compliment in there somewhere with 14 consecutive quarters of beating raising guidance. But by huge amounts maybe stats. -- average of 40% to 50%, it's been process. We've done a pretty nice job as an organization. But to kind of echo Jeff here a little bit with our long LRP updates that we had, there was a lot of noise that came out with the BBA, and there was quite a bit of noise of just what is this going to mean to us? Is there going to be friendly fire? Are we going to get elected by this? Is it just going to be across the board cuts to happen in Medicaid? And what we have felt since then is absolutely nothing. We have had no interruption to our authorizations, no interruptions to our started care, no interruptions to our payment cycles. Everything has just been business as usual in the best possible way out there. And so as we were even a little bit more conservative at the beginning of the year, just as we wanted to see things, how they settled with the and year-to-date, 7-state rate wins right on plan with our expectations even additional preferred payers, getting that to 64% of our MCO volumes on preferred payer contracts themselves. All that's just been more underpinning of just, hey, guys, this is the lowest cost setting that anybody can be in who are going to continue in the PDS services, and they're not impacted by the OBBA. And so taking our PDS growth range, LPs from 3.5 -- 3% to 5% from 5% to 6%. And as well as updating our home health and hospice from that 5% to 7% to the 8%, 10%, even on that one, looking at a positive rate environment for the first time in 6 years. Now that's kind of -- it was nice to see a proposed rule come out and not half panties around it for the first time in 5 years. And so we're seeing that be 2.4%, 2.5%. That's our expectation going forward as well. So that gave us confidence to move that up another 2 percentage on our growth rate. And then even on the Medical Solutions side, we kept that at that 8% to 10% range. Last quarter, we were right around 9%. We expect that to get back to a single digits or high single digits, low double digits here in the next quarter or 2, just as we finish off that modernization effort and put our repair work on that division as well. So a lot of great work that the teams have done thoughtfully over the last few years. You can't do it all at once, focus on one, focus on, focus on 1 we've been able to accomplish a lot and get the company to where it is right now.

I know we'll get into M&A later, but also all of the execution in the last 3.5 years has led to -- you've mentioned it, but a significantly improved capital structure. -- massive deleveraging the balance sheet, producing nice free cash flow. So the other thing that we updated in the LRP was really the M&A update of we were effectively in the and we updated that 2% to 4%. We've been above that the last 2 years with Thrive and Family First. My assumption is we'll play on the higher end of that scale, if not above that in the next few years, but we were able to also put an improved capital structure, lean back into M&A in a more material way.

Look if I have to write to get earnings now 3Q of 27. So a year from now, and you guys have another big basically, it's a different way of asking the kind of where could these levels be conservatism? Would it be you keep on driving new preferred contracts that you're driving depth within these contracts. Is it because of more states of California to reprice their offerings? Or is it just from the SG&A leverage, I don't think you're guiding to a whole lot of margin expansion despite SG&A come down 140 basis points a year for the last couple of years.

Yes. I would tell you it's growth. I mean growth is going to be the main driver of that one. And we've done a great job. And Mattel getting to California here in a little bit. But California was the last state to kind of move 32 to 32. And we can now just compete in every single state that we're in Pito. Like there was the black sheet over there that we just couldn't do anything with. We're going to hire caregivers, we can provide clinical outcomes. Families or upside, kids are stuff in the hospital. With the 1 on go live of that one, that will help California. And now in every single state in 39 states, 32 in the PDS division, we can compete. It's never easy. It's never going to be easy. Caregivers are in high demand. There's a lack of caregivers out there. It's also the reason why the preferred payer strategy also works in there. But I think if you -- if there is a beat that comes out there, it will continue to be on the volume side of things, less on the rate side, just because there continues to be that pent-up demand for our services. .

I would also say just more of the same. So a year from now, with the exception of a little bit more meaningful M&A, I would tell you more of the same, that we're going to continue doing the things that have been incredibly successful for the last 3.5 years. Being very effective and efficient in the back office, to your point, getting SG&A leverage or maybe some of our AI and automation from the back office in collections to the front-facing and scheduling and some other dictation type exercises that are actually in the branch in the homes, better bring some efficiencies to us in the future out years in the branches, but continuing to drive the preferred payer strategy. I agree with Matt. We've solved the 32 states. We'll be back to the table with 8 or 10 additional states next year, looking for colo level adjustments, meaning anywhere from 2% to I'd call it, 10%. And we have about 1/3 of our states every year that we're winning rate, but I think at this point that those are going to be smaller rate enhancements, and we're okay with that. That works in our growth algorithm. And I just think doubling down on home health. I mean we are living so far above what the industry is living today from a growth standpoint, a margin clinical outcomes, we need to double down in that business with our team.

Okay. So California, obviously, pretty big shift there. And frankly, I'm a little amazed that it came through in the economic savings this data is so high. You guys have talked about sort of $10 million. We modeled sort of like low 20s. As you think about like the timing of sort of how California comes in, the size of California. And then also I think you talked about sort of giving rates ahead of time and I think about 4Q '26 versus 4Q '27?

Let me start with just the work that was done and the Matt will talk about the wage pass-through side of it. But to your point, we're 5 years into advocating and lobbying for this freight increase. We've had a 40% -- there's 1 PDN rate in the entire state, which is simplistic, it doesn't necessarily make sense for the wage metrics of other state. But one PDN rate of $44.12, we have asked for 40% -- we the industry has been asking for a 40% PDN rate increase now for almost 5 years. I think part of the story is just how do you stay at the table, you keep talking, you keep advocating. We don't leave states when we don't get rate increases, right? We stay at the table, we fight for our families -- and so I think there's a story here of like just staying at it being committed to the outcome to these families. And ultimately, the last 4.5 years, our California business was just slowly dying on a line with no rate lift, very, very few MCO opportunities in the state. Most of our children are still on the Medical program. The business went from relevant 5 years ago, last rate increase was 8.5 years ago, to irrelevant or irrelevant for our business model in '25 and '26. So as a company has been accelerating and growing California is slowly going behind the scenes. Clearly, that's about the change in a material way. So we're excited to be able to put California back on the map, be relevant. We're one of the two largest providers in the state. We cover the entire state, which is great. So the infrastructure there to be able to go execute. Matt will tell us more about our Q4 plans and how we grow in 2027. .

Yes. Really excited for our patients and our families, most importantly. I mean it's been 8 years -- 8.5 years since our last rate increase there. And in that time period, COVID happen, hyperinflation, nurse caregiver inflation. It's been a tough, tough environment for the last 5 years out there. In Q4, we're actually going to front run this wage pass-through a little bit. And so we're going to invest a couple of million dollars in to continue the ramp-up period. And I was going to think about it in 3 stages, Pito. The first stage is our current caregivers who are working for us at this time and maybe were their second job because they had to go work a different position that was paying more in the Sicilian facility or a skilled nursing facility. But when we're able to move their wages, books now or $7 an hour they're going to want to pick up more shifts for us. And that will focus on our patients themselves and getting their fill rates up from their authorized owners. Next step is going to be the caregivers who used to work for us. They love home care. They love the one-on-one patient experience. They love the patients, the families, they love also being 2.5 miles down the road from them instead of driving 25 miles into the city to provide care. Those are going to be the next ones that we pull over. They're already up on compliance. They probably have open shifts on the families that they previously worked. And they also once again love that home care. We can get them reengaged relatively quickly. Those are probably our two first big jumps that happen on a volume standpoint itself.

And we'll do that with our cash flow our expense our risk. It's the right thing to do. investment. And think of -- I think we've talked publicly, think of. What should be between 80% and 85% ideal fill rate in California is somewhere closer to 50% or sub 50% over the last 4 years. And to Matt's point, our goal is to reconnect that with the first 2 groups that you just talked about. Over the next 3 to 6 months. As soon as the rate table is published by the department -- the Medical department, we'll start that pass-through with the intention to start to reconnect quickly 50%, 55% to 60% eventually back to 80%, 85%, all -- and that said, all with our current patients.

Yes. And the next step will be just new hires, new patients. So obviously, the McPick us are full California. There's more 10 children hospital in the state itself. So how do we get those beds and how do we get those patients home that have been sitting there for 6 months post the charge date, 8 months post discharge date who just don't have nursing care. And that's the reason the state made the investment because those are the or dollars that they can recognize very quickly and the hard savings they can recognize very quickly. We also don't want to take until we take care of our current patient base that I've stuck with us the entire time, too. So there will be new caregivers, new hires, new start of care, new emissions. That will take time. So that 1 -- so the first one will be quicker. The next one will be pretty quick. The next one will take 12, 18, 24 months before you kind of see that actual impact of what this rate is for us. And it's a little bit of the upfront investment that California has to make to get to the savings they desire as well.

We saw this in Georgia 3 years ago. There's 1 children's hospital in Georgia, so it was easier but it took about 120 days to pull 50 or so families out of the hospital and get them home for good. California will be that times 10. So I agree, Matt, this is going to take us and our peers probably close to a year to fully bake in getting in an efficient stream of patients out of the hospital. If you think about 2 to 4 nurses for every patient we take home from the hospital, you think about how many patients you had to hire to basically chronic children and out of 10 children's hospitals in the state of California. So it's a great growth algorithm for '27, but it's also a growth algorithm all the way through '28.

I mean does the tool rating you talked about were all those potential house in California. And there are other hospitals which they're being capitalized as to hospitals. And obviously, the rate increases for 5 years, -- can you quantify the number of in California of kids obviously uses for asset government for money because you're going to quantify how many kids are currently in California stuck as I think about your other states that you exist in, how big is that number? And nothing about the states you aren't in today to how big as a number. And this is not about like market share is just about how many kids sort of in those 3 buckets of our sales stocking hospitals. Think about your highest acuity patient. .

In no way, there's no perfect answer because there's no perfect report, but the best we can tell in California, this is inmate shared with the governor's office and the Head of the Department of Health and Home Services over the last 4 years is 4,000 -- roughly 4,000 children in California should be receiving at home, privately nursing daily in California, they only qualify if they have event or track or both. So it's a pretty high level compared to most of those states. The best we can tell the number of kids being serviced is somewhere below 3,000. It's hard to tell at this point. But somewhere sub-3,000 and factor Aveanna and 1 of our national peers are the 2 largest provider-only providers that cover the entire state. So think of the opportunity being somewhere around 1,000 or 1,400 kids who just -- who either parents are providing the care daily or are stuck in a hospital somewhere or we have been in some kind of long-term institutional care waiting to get home. Now that's a lot of children that would take us normally 5, 6, 7, 8 years to admit that many. Thankfully, we have peers in the market, but it just shows you the unlock in California is that significant. The idea for us to take a couple of hundred of new patients home in the state is a big deal in the course of the year. So I think we see the growth algorithm in California being a 2- to 3-year growth. Eventually, the new rate will run its course over probably a 3-year period. But for the next year to 2 years, we see a clear path to being able to eat into that unlock. And Matt said it, but I will go back to if you're a parent of a child who's got to be seen 24s a day and you only have like 50 hours of nursing care a week, that's 1 time you can sleep. It's the only time you can actually eat or go out of the house. So the idea that you could get -- and your authorization might be up to 24 hours a day, 7 days a week or 168 hours a week. The idea that you get nursing up to that and be a human being gain is so monumental for these families. So I say that to say, it's a huge deal for the families in California. It's a big deal for Aveanna. As you know, we've been talking about it for I was just done talking to you about. I mean, at some point, I was just -- I was hiding from you about California. So like you, I'm glad to have it now be fact and we'll be more excited as we get into 2017, where it's in print, and we're actually out executing. Outside of that, we've talked about 7 states that we're not in that we want to be in, in Medicaid. Think of -- I'm not picking on the big 10 here, but think of Michigan, Ohio, West Virginia, Kentucky, Tennessee, Missouri, Arkansas, kind of the 7 states we're not in PDS that we feel like we need to round out our large peers -- payer peers are asking us to go to some of states specifically Tennessee and Ohio. So that's a nice fill-in for us. These are large Medicaid systems, large mature Medicaid systems, not the highest PDN rates, but good mature Medicaid system. So .

Medicaid systems, good population to say they have labor force you can actually hire as well. And I think I echo 1 thing you said, Jeff. -- our preferred payers are asking us to be there. They're asking us to go to Tennessee. They're asking us to go to Ohio. They've got problems. And so that's an area that we want to focus on getting there sooner than later.

And to your point, all new geography, all new preferred payer opportunities. And for us, a diversification of a Medicaid portfolio makes a ton of sense. We've seen it with the 32 states, we really benefited from being in that -- and taking -- sorry, 32 closer to 40 long term to us make some time sense. .

So I mean, so I guess the same color question as I think about Tennessee and Ohio, what percent of those orders are getting filled just not by you guys...

Much more robust. I mean I would tell you to the best of our knowledge in those 7 states, 6 of the 7 or 77 have appropriate rate structures where the rate is not broken. So it's not a California like. For us, to Matt's point, is the payers saying we want you to go there and we have a preferred rate already in place for you, and we want you to help take -- sell some of our problems. Ohio -- Michigan and Ohio are probably the 2 biggest Medicaid states in those 7 states. We listed those are very, very large Medicaid states. So -- but they're just important for us as we round out our portfolio, you talked about '27. But as we think about '28, '29, '30 us being around a 40 state, 40, 41 state Medicaid provider is probably the ideal. I know you'd like us to be in Montana for personal reasons and maybe Idaho like that where the fishing is good, the hunting is good but an event we'll get there.

But right now, we're going to some more focus where our partners are asking us to really.

Still in the core states and then we can.