Thank you everyone for being here. Welcome to the 2024 Jefferies Global Healthcare Conference. I'm Brian Tanquil, Healthcare Services Analyst here at Jefferies, and our next presenter is Aveanna Healthcare. Jeff, maybe I'll toss it over to you. If we could do a state of the union of what's going on at Aveanna. I mean, a lot of things have happened in the last two years, obviously, so we'd love to hear it. Thank you.
Awesome. Well, and first of all, thanks for having us. It's been a great day, and good to be here in New York. You know, as Brian alluded to, you know, the state of the union of Aveanna, I would start by saying things are good, and even things are great. 2024 is year two of our strategic transformation as an organization. We have, you know, sunset year one of 2023, and it was really stabilizing the company, our business model, making sure that we'd stabilize both our revenue and our earnings streams, and really getting our arms around what our preferred payer strategy was going to be, and how to think about it going forward.
As we now move into year two of our strategic transformation in 2024, we're really now accelerating the story. We'll get into that here in a few minutes, I know, Brian, but really accelerating our preferred payer government affairs strategy. And aligned with that is moving our caregiver capacity. Core to our preferred payer strategy, you'll hear Debbie and I talk about, is really moving our capacity, moving nurses, moving our caregiver capacity to those payers who pay us an enhanced rate in value-based models. So we're excited about it. Debbie will talk today about free cash flow and generating free cash flow as a company, ultimately positioning ourselves better as we think about our capital structure. But I think, Brian, things are good. Momentum's a powerful thing, and we're winning again, which is great.
That's awesome. Great to hear. So maybe I'll start first. You know, Q1 was really strong.
Yeah.
You beat, you raised your guidance, and it sounded like second quarter is off to a good start. So is the expectation that Q2 should be another strong quarter, has that changed since we last heard from you? And how are you thinking about the ability to sustain that momentum, as you just said, right, into the back half of the year?
Yeah, yeah, nice start to the year. As you said, Brian, you know, to cut 35 million in EBITDA was a nice start to the year. We're a labor company, so Q1 to us is a lot of payroll taxes. We had about $3.5 million of payroll tax headwind in Q1. Nice to kind of put that behind us and still have a great start to the year. It allowed us to do a modest beat and raise. Q2 is one of our best quarters. It's one of our best quarters. It's got the fewest holidays, less weather disruptions, so just from a labor standpoint, it's a good quarter for us. We've had nice trends, both in volume, we had nice rate wins, year to date.
We'll talk in August at earnings call about, you know, some of the rate wins we've already know about, and we're in that legislative cycle right now with a lot of our states, where the rate wins will play out here in the next 30-45 days, but really nice place. And, Debbie, we're far enough in the quarter-
Yeah.
You feeling good about it?
I am feeling good. Q2. We're halfway through. Q2 results are strong. We've seen that preferred payer and government affairs strategy kind of play through in the top line growth. We've got some SG&A levers we're pulling on, which are flowing down to the EBITDA, and that's all looking very strong. And as Brian, Brian knows, we've done a little bit of a beat and raise here the last couple of quarters, and I think we're on track to do that again at Q2.
Ah, that's exciting. Maybe another thing here. Jeff, you mentioned the states. Maybe let's hit on that first, right? We've heard some states in, you know, personal care. Illinois already gave a rate increase to personal care providers, but in the key states for you guys, I mean, what does that look like today? What are you watching out for? What have you been already awarded, if there's anything out there?
Think of us 33 Medicaid states. We are targeting between 6 and 10 of those states every year for material rate increases. We're not going to get it in all even all 10 of the 33, but we're looking for about a third of the states to give material rate increases every year. And that's how we build our lobbying strategy and government affairs strategy around. This year, we specifically called out California, Georgia, and Massachusetts. Unfortunately, California's been on that list now for 3 years in a row. It'll be in our minds, it'll be on that list for a fourth year, probably a fifth year, based on what the current deficit in California is.
But we called out Georgia and Massachusetts because we haven't had a rate increase in those two states in almost five years. The Georgia budget's already been signed. Very proud to say the Georgia governor you know signed the budget, a sizable rate increase for us, including that. And it's... You know, last year was Oklahoma, South Dakota, Minnesota. Those rate wins were in the 30%-40% range. Georgia's gonna be in the 34% range, and if you think about it, Georgia was one of our worst states from a rate, and Georgia's still a Medicaid. It's a non-MCO state, so our single payer is the Medicaid system.
So Georgia moving it materially in that 30% or 40% rate, really just means that we can staff cases, we can grow the business now, and we're one of the few remaining national pediatric providers who stayed in the state over the last few years, while rates struggled. So great outcome for Georgia. Massachusetts is a little bit later in the year. It'll play out here over the summer, but I think we'll be talking about two of the three of our target states being material rate increases. With that said, we still expect to be... We had 19 state rate increases. That was our best year ever last year. Well, our target is kind of 8-12 per year. We think that's sustainable moving forward.
We, we think we'll be in that kind of, you know, 10-12 rate increase, state rate increases to our government affairs. So another good year in 2024, and that's kind of how we think of, you know, think 2025, 2026, Brian, is really somewhere in that 8-12 states per year.
Maybe let's take a step back, right? So these are some big numbers that you're seeing in terms of rate increases, but, I know a lot of that, you pass through down to your-
Good
... caregivers and clinicians. So if you can share with us how you're thinking about what these rate increases actually do for you, right?
Yeah, that's well said. So we use Georgia as an example. You know, Georgia, we have struggled to hire nurses, you know, for the last 2 or 3 years, fiscal years in. So what you get is you get a backup of children that are in the children's hospitals. You get the children's hospitals yelling at everyone, like: "Get these kids out of here." They're yelling at the Medicaid system, us, and the families are just stuck. I mean, you've got families that are spending another 3 or 4, 5 months in a children's hospital. Economically, it's the difference between about $5,000-$6,000 a day in a NICU/PICU setting, and less than $1,000 a day at home.
So the economics are just so great that eventually the pent-up demand just plays itself out through our lobbying efforts and advocacy efforts. As we ultimately flip to the preferred payer strategy, it's so much easier for us to sell this strategy to an MCO because they just get it. They intuitively get it in a matter of, you know, days, weeks, or months. State legislatures take more time, right? It's an annual process. So, you know, you think about Georgia right now, the rate increase will be effective coming up in July 1, here in a few weeks. We started passing through material rate, you know, $3, $4, $5 an hour to nurses, to our current nurses, about two weeks ago. We're still doing that as we speak here through Zoom.
We've already reposted positions, kind of $4-$5 more an hour wage. Well, while we're here at the conference, I'm getting texts, you know, 15 more nurses today, you know, like... So it goes from us hiring two or three nurses a week to us hiring 15 or 20 nurses a week in Georgia. And that will play out through the second half of the year, and even into 2025. Eventually, this rate increase will settle, too, and the market will reset, but I think it shows you how much pent-up demand there really is in this business to get these kids out of the hospital and keep them.
In states like Georgia and many others, California, Massachusetts, many others, it's been four or five years since they've addressed it, and therefore, the demand is so great to get these kids out of the hospital.
And maybe Debbie, just to follow up on Jeff's point, right? As we think about the patient base here and what that pent-up demand looks like, right, your fill rate maybe is another way that we could look at what this could mean from a growth perspective and, you know, maybe just putting the 15 nurses per day into context. Just curious what you can share with us with that.
Yeah, that PDS segment has historically grown from about 3%-5% every year, about 1% rate, 2% volume. What we're seeing with this strategy is that, that volume is now closer to 3%-4%, and so we're, we're expecting that continue to another year, year and a half, and then we'll think it normalize. We'll think it'll normalize in that 3%-5%. But that's what it's doing. It's increasing that volume. It's driving that volume a lot faster in that PDS segment.
And that's. I think as we play that out, we think the growth of the PDS business, which through COVID was negative, right? It was negative growth, now is in that, you know, probably 4-5, and we may touch 6%. Eventually, that, 2-3 years from now, that'll settle down. And Brian, you're talking about fill rate. Pre-COVID fill rates, and fill rate's just the number of hours that are authorized versus the number of hours we staff, right? And it creates a percentage. It used to be in the 70%-80% pre-COVID. It got down to, like, 40s and 50s during COVID, and we've been coming out of those dark ages of staffing. In our preferred payers, we're seeing fill rates now touch 90%.
Now, non-preferred payers' fill rates are in the, you know, still in the 50, 60, 70%. So it's, it's creating this us and them, you know, from the payer standpoint. In states like Georgia, you take Georgia, I don't know what our exact fill rate in Georgia is, but it'd be sub 70% pre this. You'll see a 10, 15, or 20% shift in the fill rate being closer to 85 or 90%, which is what payers and government should expect in our space.
So maybe, Jeff, just on the preferred payer strategy, right? So you've had a lot of success there. What are those discussions like, and how much further do you think you can take that?
They're honestly refreshing. I'll say that. People are like, "Well, it must be so hard to get a payer to pay you more money," and the answer is, it's really not. As long as you have size, scale, density, and relevance, it's really not. The hard part is delivering what you sell, and moving capacity to those payers. So asking for more money from a payer, when you can show them that you're passing that, the majority of the rate through to wage and increased capacity, is how you sell that. And honestly, Brian, at least on the Medicaid side of it, it's a little bit harder on the Medicare side, as you know. On the Medicaid side, it's really a pretty easy sell.
The hard part is living up to that commitment that when I told you we would shift hundreds of nurses to you, I have to now shift hundreds of nurses to you, and when I told you we would hire more nurses, we have to actually hire more nurses. So it's really, it's really executing the strategy, selling the contract, getting the signed contract. Most of the incremental rate, we pass right through to the caregiver. It's why we love adding on the value-based agreement, 'cause the majority. And we don't, we don't target a specific pass-through percentage, but it's the majority. It's, you know, the 80-20 rule, where 70, 75% of it being passed through to the caregiver.
The Value-Based Agreements on top of this really allow us to then go execute against bill rate, and PPVs, hospitalization rates, and days to admission. That's where we can earn meaningful bonuses with our payers because we're saving them money and executing the contract, and so that's where this gets fun for us, is, you know, execute the higher enhanced rate, move capacity to them, and then ultimately earn bonuses where, where we're, where we're doing our job by executing against the strategy.
Okay, that's helpful. And then, maybe as I think about recruitment, right?
Yeah.
How quickly, or what does that look like? From the time that you get your rate increases, whether it's through the preferred payer agreements or the state raising rates, what does the market look like? I mean, 'cause we've heard-
Yeah
... and we see the data, right? BLS data showing that permanent recruiting and nursing is up. So what does that look like for you guys?
It's quick.
There are nurses, in other words-
It is
... as long as you have the rate.
It is. In pre-COVID, we would pass the wage through in a matter of months. Post-COVID, it's a matter of hours. I mean, the moment that Georgia signed their budget and people heard that there was a material rate increase, if we didn't get to our hundreds of nurses within hours and let them know wage was coming, we would risk losing them, right? 'Cause the market is gonna move that fast. And then reposting wages, the moment we reposted the wages in Georgia, and by the way, the rate increase still isn't effective for another, you know, 35 or 28 days, whatever the math is. The moment we repost the positions $4 and $5 higher, lo and behold, there were plenty of nurses that wanted to come into the home care environment. Now, it will run its course.
It's not an infinite elasticity. I mean, it will run its course over the next five, six months. Eventually, we will find ourselves where it's tough to hire nurses again, and be working incredibly hard. But when we sign a Preferred Payer agreement, we are committing to that payer, that MCO. Within a matter of days, we will move what you're giving us materially to our current nurses, 'cause it's protecting the current base, and then reposting the positions. And the beautiful part now with Indeed is most of our jobs are posted on Indeed. You can go see what the wage rate is. Anyone can look at it, and so that seemed like a risk three years ago.
Mm.
Today, the transparency is actually beautiful because you can show the payers, "I'm posting an LPN job in Houston for $26 an hour today. The moment you pass this through, I'll post it at $31." And they can see that, and they can feel that, which really, that transparency helps us in these conversations.
No, it makes a lot of sense. Maybe shifting gears a little bit, home nursing. You know, so I know it's been a the red-headed stepchild of the business for a little bit here, but as we think about you know, the developments in the industry, Jeff, you and I chatted about this recently, right? Like, it feels like, you know, you're, you're starting to show improvement in that business, but maybe let's start with what's your strategy today in terms of how you view that business and your willingness to grow-
Yep
... home health?
It's, and you said it, you said it well. Like, it's been, it's been the red-headed stepchild, and now it's, now it's the favorite child, if you will. As Brian knows, it's about 12% of our business, so it's a much smaller part of our business at Aveanna. But at the end of the day, we struggled to put the four companies together that is now our home health and hospice business for about two and a half years, really from 2021 through 2023. We've turned that business around by really deploying the preferred payer strategy to that business, which is just committing our capacity to episodic-like payers, both Medicare and Medicare Advantage. And it's helped us turn that business around.
With that said, these are some of the darkest days in home health that I've been in in my last 25 years, right? So we're in a down cycle of home health. My gut says we're probably 4 years into probably a 6-, 7-, 8-year down cycle in home health. So we're actually taking it as a, in the short term, being aggressive. We wanna continue to grow. We wanna continue to take on additional geography. We may even find ourselves, and people will be shocked by this, but we may find ourselves buying low, low-end assets, assets for, you know, 2-3 turns of multiple, really to build our base of Southeast and Midwest. You know, we're a regional provider, not a national provider.
But I think long term, Brian, you and I have been doing this long enough, long term, home health and hospice will turn back up, right? It's going to. The government has to allow home health to exist. The payers need home health. So we're gonna continue to grow, acquire tuck-ins in that business that makes sense for us geographically until the point where that market turns back to where that market becomes a, you know, a sexy market, and PE floods back into that market. When they do, our strategy probably shifts at that point.
Jeff, one of the things as you think about episodic, right? The national players have struggled with maintaining target levels of episodic mix. What are you doing differently, and how are you doing this?
Honestly, we're not trying to be a national player, so... So, one of the nice things about being a 15-state—but we're really relevant in home health and hospice in about 8 states, 5 states in the Southeast and 3 states up in the upper Midwest. We're not trying to be a national provider. You know, when, Brian, you know, when we ran Gentiva, we had to act nationally. Amedisys has to act nationally. We don't. We, we have to do what's in the best interest of our patients and our employees in, in 15 states. So we don't negotiate with Humana or United on a national basis.
Mm-hmm.
We negotiate with them on a state-by-state basis, and because of that, we just are able to keep our capacity for those payers who are willing to partner with us. We define partnership in home health and hospice as episodic agreements.
Mm.
As you know, Brian, we're well above 70%. Our goal is to be above 70%. We're well above that. Over the last 2 quarters, we're 74%-75%.
Mm.
We just don't think we have to bastardize that to keep growing the business. Probably are not gonna be growing at 10% year-over-year, but we think we can grow it kind of 4%-6% and keep that episodic mix above 70%. But we understand who we are, and we equally understand who we're not, and we're trying to behave like who we are, and that is we're a regional relevant provider in about 8 states.
Maybe, Debbie, as I think about, you know, there's a—you guys have provided kind of like a long-term goal of getting to a $200 million EBITDA number. Guidance for this year is $150.
Mm-hmm.
Maybe bridge me to how you think you can get to that $200, or what needs to happen?
Yeah. So it's going to be this preferred payer and government affairs strategy to grow that top line, and we think by 2026, we'll have that $2 billion in revenue, which that's gonna help flow down. We've also got several SG&A strategies that we're working through. Last year, we were really focusing on corporate and our triple H, home health and hospice business. We achieved, just this period or Q1, like this year compared to prior year, about $5 million in savings, so $20 million annualized. So that's already flowing through, and we're seeing that improvement. This year, we're really focused on our AMS business, which is our enteral nutrition, as well as the PDS segment, and we're doing two things here.
We're stripping out costs that we're finding, as well as reinvesting in some of our strategies that are gonna help grow that preferred payer and government affairs, so our clinical innovations, our data analytics, the lobbying efforts. So we're using that as well, and the effort with those is to hopefully keep SG&A costs at a dollar basis flat for the next 2-3 years, and that, partnered with the top-line growth, is what we're using to drive to that 200.
So, maybe... Oh, sorry, go ahead, Jeff.
I was just gonna say, I think that Debbie's point hammered home, we're growing between 5 and 6% per year, you know, so $100-$120 million a year in revenue growth. As you know, Brian, our gross margins are relatively fixed. I mean, gross margins are, we're between 30% and 31%. We don't see it being 26, 25, but we also don't see it being 35%. So we'll be in that 30%-31%. So I think if you, if you pull Debbie's comments through from 2023 to 2025, to hold SG&A fundamentally the same number for three fiscal years. And by the way, I don't think we can do that forever, but I think, I think we can accomplish that three years. That, that's how we get $20-$30 million of-
Growth
... you know, of growth. Now, Matt Buckhalter's home. He just had his baby, so he is freaking out right now. He's just like, "You're not giving guidance that we're growing $30 million." So-
No.
We'll hedge that to say we're gonna invest in the areas that make sense to us. We, you know, won't be penny wise and pound foolish, but as part of our recovery to get back north of $200 million, you know, I do think that SG&A leverage that Debbie talked about is critical in how we get there.
Since on that topic, from that $200 million number, right, as we think about leverage, obviously a big topic, and interest coverage-
Yep
... and all that stuff, right? So maybe how do you view the capital structure and your path to sort of de-leveraging and maybe, you know, having a cap structure that's more equity friendly?
Yeah. I'll start, and then Debbie will hammer it home, and that is the best part of our capital structure is we are fully hedged in swaps. So we're fully - we have a full hedged strategy, so we have time. And that's the best part of our capital structure. We have about three years to execute the business plan, and so we're gonna use that time to both grow the company, execute the business plan, but also to evaluate the three or four opportunities that would allow us to de-lever before we get to really early 2027. Any comments about cash flow or how you-
Yeah. So cash flow, we are expecting last year, which is, was a great achievement for us, cash flow positive. We are projecting the same for 2024. Q1 was negative, that's very seasonal, you know, for us. We've got a lot of, you know, annual contracts that are getting paid, we've got bonuses that are going out. It's our TPL season, which slows down our cash collections. We'll work through that in Q2, and by Q3 and Q4, we'll start to have that EBITDA run down and generate free cash flow. So it'll be another free cash flow year. 2023 was very great, 2024 is gonna be right there with it. It's gonna be 2025 and 2026 where we start to really generate meaningful cash flow, and that's gonna be driven by, again, the top line growth through our strategies and these SG&A savings.
And it is meaningful. It's not meaningful not to pay down debt, right? So-
No.
So it's $30-$50 million a year, Debbie's point. So it's, we're gonna use it to continue to fuel activity, Brian, and, and do M&A and grow EBITDA. But, but again, we've got 3, 3 years to execute our business plan. We've got a hedged strategy, so, you know, our interest rate, we're, we're fully exposed on our interest rates as, as it sits today. We're gonna be generating positive free cash flow. We've got great partners with Bain and Whitney. You know, we've got levers to pull to de-lever between now and the end of 2026. So, you know, we have a healthy amount of debt, and we're comfortable with it. It doesn't keep me up, us up at night. We're focused on executing the business plan.
Jeff, maybe last question. You know, as we think about where the Aveanna story is today, how do you see that, you know, progressing and evolving over the next few years?
Mm-hmm.
Yeah, I, I think, it's a great question. At the core, we're a Medicaid and Medicaid-like company. You know, almost 85% of our revenues are generated by either state Medicaid programs or Medicaid MCO companies, and we're gonna continue to be that. We're the largest provider of pediatric and adult, skilled home care in America, largest provider of inpatient nutrition in America. We're gonna continue to drive those businesses. We're pleased with our home health and hospice business. We're gonna continue to operate that business and drive it. You know, and if one day it makes sense for that business to be somewhere else and monetize it, great, we'll do that if that becomes the case, but today we're gonna continue to operate it.
But, you know, we've committed to partnering with payers, and we're not gonna move away from that. Our best asset is our ability to lean in and align our capacity with payers, and I think when you talk to payer CEOs, as you do, Brian, they appreciate that. They appreciate people helping solve their problems, not create other ones. So we're gonna continue to be a solution for payers. Think of what United and Humana have done with the geriatric, think of us more Centene, Elevance, Molina, United Community, those are our payers, and we're gonna continue to lean in in a meaningful way.
Awesome. Thank you so much, Jeff.
Thank you.
Thanks, Debbie.
Thank you.
Thank you.