Aveanna Healthcare Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Avianna Healthcare Holdings First Quarter 2023 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q and A. At this time, I'd like to turn the call over to Shannon Drake, Avianna's Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Speaker 1

Thank you, Maria. Good morning and welcome to Avianna's Q1 23 earnings call. I'm Shannon Drake, the company's Chief Legal Officer and Corporate Secretary. With me today is Jeff Shaner, our Chief Executive Officer and Dave Ashar, our Chief Financial Officer. During this call, we will make forward looking statements.

Speaker 1

Risk factors that may impact those statements and could cause Actual future results to differ materially from currently projected results are described in this morning's press release and the reports we filed with the SEC. The company does not undertake any duty to update any such forward looking statements. Additionally, during today's call, we will discuss certain non GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release, which is posted on our website, avianna.com, and in our most recent quarterly report on Form 10 Q filed with the SEC.

Speaker 1

With that, I will turn the call over to Avianna's Chief Executive Officer, Jeff Shaner. Jeff?

Speaker 2

Thank you, Shannon. Good morning and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q1 results and how we are progressing against our near and longer term objectives My initial comments will briefly highlight our Q1 results along with the early progress We are making in addressing the labor markets and our ongoing efforts with government and managed care payers to create additional capacity. I will then provide some thoughts regarding our liquidity and refreshed outlook for 2023 prior to turning the call over to Dave to provide further details into the quarter and full year guidance. Starting with some highlights for the quarter.

Speaker 2

Revenue was approximately $466,400,000 representing a 3.5% increase over the prior year period. Gross margins was $144,500,000 or 31 percent, which is essentially flat when compared to the comparable prior year period. And finally, adjusted EBITDA was $28,500,000 representing a 25% decrease when compared to the prior year period, primarily due to the costs associated with the current labor environment. As we have previously discussed, The labor environment represents the primary challenge that we are aggressively addressing in 2023. To see Avianna resume The growth trajectory that we believe our company can achieve.

Speaker 2

As a reminder, we do not have a demand problem. The demand for home and community based care has never been higher with both state and federal governments and managed care organizations asking for solutions that can create more capacity. As communicated in our previous quarter, our ability to recruit and retain the best talent is a function of rate. Our business model offers a preferred work setting that is mission driven, providing a deep sense of purpose for our teammates. But our caregivers need to be able to provide for themselves and their families in this inflationary environment and we must offer a competitive wage.

Speaker 2

Since our year end earnings call, I am pleased with the progress we have made on several of our rate improvement initiatives with both government and Managed Care Payers. Specifically, as it relates to our Private Duty Services business, Our goal for 2023 was to execute a legislative strategy that would increase rates by double digit percentages in 3 important states, California, Texas and Oklahoma, which represent approximately 25% of our total Private duty services revenue. In the Q1, we were able to demonstrate the value we create for medically fragile patients in Oklahoma and have successfully secured a double digit rate increase, which was retroactive to January 1st this year. Since the Oklahoma rate increase, we have doubled the number of caregivers hired per week in Oklahoma, demonstrating The impact rate increases have on our ability to attract caregivers at the right wage profile. We have also made significant strides with the Texas legislature that gives us increased optimism that we will achieve our targeted double digit rate increase for our Texas Private Duty Nursing business beginning September 1.

Speaker 2

While this rate increase isn't guaranteed at this stage, Early indicators reinforce our optimism that our efforts are gaining meaningful traction. Finally, We have spent considerable time with the California legislature and the Governor's office demonstrating the importance of these rate increases and how they support an overall lower healthcare costs, improved patient satisfaction and quality outcomes. Based on our actions to date, we believe that we are taking the appropriate steps needed to support our requested increase in this upcoming California budget cycle that is effective July 1. While there is still much work to be done on the legislative front, We believe that we can accelerate our growth by increasing caregiver capacity and bringing more patients to the comfort of their home, By passing meaningful wages through to our caregivers, we become a solution for overcrowded children's hospitals and distraught parents who want their children to be cared for in the comfort of their home. We also discussed the need to double the number of preferred payers in 2023.

Speaker 2

We define preferred payers as those payers that support value based care by offering an above market reimbursement rate and value based payments in exchange for proven savings. Our goal for 2023 was to double our volumes from private duty services preferred payers from approximately 10% of volumes to 20% by year end 2023. In the Q1, we've added 2 additional preferred payer agreements in key markets. Our preferred payer volumes increased to approximately 13% of PDS volumes. Also, We have a robust preferred payer pipeline and are very optimistic we will continue to execute on this strategy sorry, strategic initiative throughout 2023.

Speaker 2

Finally, we discussed the need to shift our current labor capacity To those payers that value our services and appropriately reimburse us for the care provided, we have begun several initiatives to shift In the Q1, our preferred payer relationships benefited from accelerated nurse hires of 2 to 3 times more than our other payers and we continue to experience staffing rates 15% to 20% greater with significantly higher patient admissions. The value proposition is straightforward. Preferred payers reimburse us a fair rate. We pay market competitive nurse wage rates while also earning value based payments for achieving positive clinical outcomes and improved staff hours. While we are encouraged by our early 2023 rate increases and subsequent recruiting results, We believe our business can rebound quickly as we achieve our rate goals previously discussed.

Speaker 2

Home and community based care will continue to grow and Aviana is a comprehensive platform with a diverse payer base providing a cost effective, high quality alternative to higher cost care settings. And most importantly, Before I turn the call over to Dave, let me briefly comment on our liquidity and refreshed outlook for 2023. On the liquidity front, we continue to make progress on improving our cash flow by focusing on attaining adequate reimbursement rates and growing our volumes. We are also implementing initiatives to right size our corporate cost structure while optimizing our cash collections. As Dave will discuss further, we have ample liquidity to operate our business while we work with government and payers to improve the reimbursement rates to reflect the current inflationary environment.

Speaker 2

As it relates to our refreshed outlook for the year, while we exceeded our original revenue and EBITDA goals in the Q1, We have several rate initiatives that still need to come to fruition over the next few months with particular emphasis on Texas and California. That being said, on the strength of our Q1 results, we are comfortable reiterating our full year revenue and adjusted EBITDA guidance of greater than $1,840,000,000 in revenue and at least $130,000,000 in adjusted EBITDA respectively. We believe it is important to continue to set expectations that acknowledge our environment we are operating in and the time it will take to transform our company and return to sustainable growth. We believe our outlook provides a Finally, I am proud of our Avianna team as we execute on our 2023 strategic objectives. The power and efficiency of the home as a healthcare setting remains critical to our patients, families, Payers, referral sources and government partners, the value of our clinical workforce continues I look forward to updating you on our results at the end of Q2.

Speaker 2

With that, let me turn the call over to Dave to provide further details on the quarter and our 2023 outlook. Dave?

Speaker 3

Thanks, Jeff, and good morning. I'll first talk about our Q1 financial results and liquidity before Providing additional details on our refreshed outlook for 2023. Starting with the top line, we saw revenues rise 3.5% over the prior year period to $166,400,000 We experienced revenue growth in both our Private Duty Services and Medical Solutions segments, which grew by 6.5% and 10.7% respectively, while our Home Health and Hospice segment declined by 15.8% as compared to the prior Consolidated adjusted EBITDA was $28,500,000 a 25% decrease as compared to the prior year. Now taking a deeper look into each of our segments, starting with Private Duty Services. Revenue for the quarter was approximately 373,000,000 6.5% increase was driven by approximately 9,800,000 hours of care, a volume increase of 1.8% over the prior year.

Speaker 3

While volumes improved over the prior year, we continue to be constrained in our top line growth due to the shortage of available caregivers, Although we are beginning to see early signs of improvement in the labor markets. Q1 revenue per hour of 38 12 was up $1.69 or 4.7 percent as compared to the prior year quarter and is a $0.46 or 1.2 percent Sequential improvement as compared to Q4 of 2022. We expect to see continued improvement in 2023 as we execute on our rate increase initiatives And we continue to be encouraged with our ability to attract caregivers and address the market demand for our services when we obtain adequate reimbursement rates. Turning to our cost of labor and gross margin metrics, we achieved $104,200,000 of gross margin or 27.9%, A 0.2% decrease from the prior year quarter. Our cost of revenue rate $27.47 which is 4.9% Increased as compared to the prior year represents the rate pressures we saw in the labor markets throughout 2022.

Speaker 3

That being said, Our cost of revenue rate improved in the Q1 by $0.61 or 2.1 percent on a sequential basis. Our Q1 spread per hour was 10.65 representing a 4.2% year over year improvement and 11.2% sequential improvement as compared to Q4 of 2022. Moving on to our Home Health and Hospice segment. Revenue for the quarter was approximately $56,100,000 a 15.8% decrease over the prior year, but a sequential improvement of $1,400,000 over the previous quarter. We're pleased with the gross margin improvement from 41.9% in Q4 of 2022 to 44.6 percent in the current quarter as we continue to focus on additional direct and indirect cost initiatives to achieve our targeted gross margins in the 45% to 46% range.

Speaker 3

We continue to see admission trends for the division return to a more normalized level. As a reminder, at our lowest point in mid summer, our weekly home health admissions were in the low 800s. In Q4 of 2022, We averaged approximately 850 home health admissions per week with an episodic rate of 63%. These positive trends continued in Q1 of 2023 where we experienced approximately 900 home health admissions per week, while improving our episodic mix. Our first quarter revenue was driven by Medicare revenue per episode for the quarter was $29.69 essentially flat with the prior year quarter and sequentially.

Speaker 3

And although 2022 was a difficult year for our Home Health and Hospice segment, we firmly believe in this business and its long term value proposition. We've established we have an established Home Health and Hospice platform poised for growth, focused on delivering value through sound operational management and delivering excellence in patient care. We expect to see sequential improvement throughout 2023 as our direct and indirect cost initiatives take hold. Now to our Medical Solutions segment results for Q1. During the quarter, we produced revenue of 37,300,000 A 10.7% increase over the prior year.

Speaker 3

Revenue was driven by approximately 85,000 unique patients served and revenue per UPS of 439.29 Gross margins were $15,300,000 a $1,200,000 or 8.5 percent improvement over the prior year quarter. Gross margins, which were 40.8% in the quarter, represented a 0.9% decline as compared to the prior year quarter, but a 1.1% We continue to evaluate ways to be more efficient and effective in our back office to leverage our overhead as we continue While other enteral providers decided to exit the market in 2022, we see this as an opportunity to expand our national enteral presence and to further our payer partnerships. In summary, we continue to fight through a difficult labor and inflationary environment while keeping our patients care at the center of everything we do. It is clear to us Shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Avianna. As Jeff stated, our primary challenge is reimbursement rates.

Speaker 3

With the Positive momentum we saw in Q1, we're optimistic that such trends will continue into the 2nd quarter with sequential improvement expected in all segments. As As we make progress in 2023 with the rate environment, we will pass through wage improvements and other benefits to our caregivers in the ongoing effort to better improve our volumes. Now moving on to balance sheet and liquidity. At the end of the Q1, we had liquidity in excess of $215,000,000 representing cash on hand of approximately $34,400,000 $20,000,000 of availability under our securitization facility and Approximately $162,000,000 of availability on our revolver, which was undrawn at the end of the quarter. Lastly, we had $38,000,000 of outstanding letters of credit at As we look at the timing of earnings for 2023 and the related cash flows, while we may draw on the revolver for short term timing related items throughout the year, Our goals are for the revolver to be undrawn as of year end and more importantly to drive positive operating cash flows in the second half of the year as we begin to realize the benefits of all the efforts that we're On the debt service front, we had approximately $1,480,000,000 of variable rate debt at the end of Q4.

Speaker 3

Of this amount, $520,000,000 is hedged with fixed rate swaps and $880,000,000 is subject to an interest rate cap, which limits further exposure to increases in LIBOR above 3 Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June of 2026 And our interest rate caps extend through February of 27. One last item I will mention related to our debt is that we have no material term loan maturities until July 2028. Looking at cash flow, cash provided by operating activities was $7,500,000 for the quarter as a result of certain one time working capital items and free cash flow was $2,900,000 We also expect to see cash flow benefits throughout 2023 as our top line and cost management initiatives come to fruition. Before I hand the call over to the operator for Q and A, let me take a moment to address our refreshed outlook for 2023.

Speaker 3

While we're pleased with our Q1 results, we believe it's prudent to maintain both our original revenue and adjusted EBITDA guidance of greater than 1 point $4,000,000,000 and at least $130,000,000 respectively. The trends we saw in the Q1 continue and we're successful in obtaining the requisite Rate increases needed in California and Texas, we would plan to update our guidance in the back half of the year. As we think about seasonality, we expect our revenue to grow as These are implemented throughout the year and our volumes grow. We now expect approximately 45% of our full year guided adjusted EBITDA to be recognized in the first half 23. As most of our annual rate increases typically become effective in the second half of the year, we expect our adjusted EBITDA to ramp as we use the increases to attract and retain more caregivers and drive volumes.

Speaker 3

Our EBITDA will also ramp as we realize the benefits of our cost savings initiatives. And finally, as we wrap up National Nurses Week tomorrow, we would like to take a moment to recognize our incredible caregivers and the impact they make on the lives of our patients and their families every day. And with that, I'll turn the call over to the operator.

Operator

At this time, we will be conducting a question and answer We ask that you limit your questions to 1 and a follow-up so that others may have an opportunity to ask questions. Our first question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Speaker 4

Hey, good morning, guys.

Speaker 2

I guess my first question,

Speaker 4

I know there's that CMS proposal on Personal Care Services. Just want to clarify, I mean, will that Cover the services that you provide under your PDS segment, and just any thoughts on that rule proposal from CMS? Thanks.

Speaker 2

Yes, Brian. Good morning and thanks. Thanks. And Yes. Obviously, we're acutely aware of the proposed rule and it's not material to Avianna in our business, but we stand firm with our With the industry, we stand firm with our peers, the National Association For Home Care, PMHE, other trade organizations and the fact that a lot of work is left to be We think the precedent that the proposal creates is concerning and certainly the open comment period That we're in right now is a very, very appropriate time for both us, the trade associations, state governments, all to give feedback to CMS.

Speaker 2

We applaud the intent of the rule, which is to open access to Medicaid beneficiaries It certainly improved quality measures and transparency and rate setting, but the idea that CMS would set an 80% Threshold for direct care workers compensation is significantly concerning and the precedent that that would create, we just don't think is appropriate. We also think, Brian, that as our peers have talked already that the proposed rule significantly underestimates the oversight training, onboarding as well as the EVV or electronic visit verification expectation requirements that CMS mandates. So In the end, we think this will play out for the next few months with a good open dialogue. And although not material to Avianna's results, We just want to make sure that we stand firm with our peers in the industry to make sure that we find a good landing place for this final rule with CMS.

Speaker 5

I got it.

Speaker 4

That makes sense. And then I guess my follow-up, great to hear about Oklahoma and you called out how you saw a very notable uptick in Interest and applications for new employees. So how does that work? Like when you get an increase, is it as simple as we offer higher rates and We get more people coming in to apply or is there like an advertising strategy that has to come along with that as you try to drive recruitment and

Speaker 2

That's a great question, Brian. I'll be honest, it happens very quick. We've got a Pipeline of inactive nurses, caregivers in every location, every market, the people who worked with us enjoyed the home care setting, liked the 1 on 1 Setting of being with a patient in their home. However, they left us over wage or just pure wage, dollars 1, dollars 2, dollars 3 an hour. And so when you see a rate increase like Oklahoma, like what's proposed for Texas and California, We are able to immediately we stay in touch with that nurse as she's moved on or he's moved on to their next jobs.

Speaker 2

The moment we can call them and say, Hey, we got a rate increase effective yesterday. We can meet your needs of $3 more an hour, dollars 2.50 more an hour, Something meaningful that nurse is excited to come back to us and we see a strong movement of nurses back to us. But Yes, it's great to stay in touch with them. It's great to talk to them. But until we can meet their expectations, the conversation is a little bit mute.

Speaker 2

It's Just a relationship. And so I think Oklahoma, just like other examples in our preferred payers, where the moment we're able to negotiate a higher rate, We focus on about a 50 ish percent pass through directly to the caregiver of direct wages, not other benefits, but direct wages. And Yes, the ability to do that, Brian. We were not surprised in Oklahoma, nor will we be surprised in California and Texas. As soon as we execute on those rate wins, California is effective July what would be effective July 1, taxes would be effective in September 1.

Speaker 2

We would expect meaningful Improvement in hires. And then Brian, one of the pieces that we don't normally touch on, we have current nurses that are working for us that are also working other jobs. When we can call those nurses and say, hey, we can up your entire hourly wage by $3 or $4 an hour, not only do they feel the shifts they were filling, Many times they feel incrementally more shifts and they'll push off that second job for us. So we get a lift internally too of our organic Already patients that are already in service with us. So it's really a win win and I think Oklahoma recognized that opportunity and Ken came through very strong with the rate increase.

Speaker 2

In our conversations in the Texas legislature and the California legislature are very similar to that of Oklahoma. It's the Same story. And it seems to be resonating very well. Awesome. Thanks, Jeff.

Speaker 2

Thanks, Brad.

Operator

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Speaker 6

Hi, there. You've got Kieran Ryan on for Pito. Thanks for taking the question. So looking at PDS This quarter, I think volumes came in about where you expected them and then obviously some nice acceleration on rates. Looking at the gross margin there as the year progresses and you think about these other rate increases coming through, do you think 1Q is a fair kind of Baseline to use for the rest of the year at this point or is it still a little too volatile out there to make that call this early?

Speaker 2

Yes. First of all, it's a very thoughtful question. And I think the thing that we've really kept focusing on is driving rate to then pass through wage, Just like Brian's question. And so I think as you think about a 28% gross margin up to Q1, we'll be in that range as we push forward. We may get a temporary point where we get more rate than wage pass through, but that's a timing issue.

Speaker 2

Our goal is to get these rates to the caregivers and move volumes and overall revenue. In the process, I think here what you'll see is us be in around that 28%. Getting back to 30 where we were a couple of years ago is probably not in the game. Could we touch 28.5? Absolutely.

Speaker 2

But I think it's more of a timing thing that as to As the rate comes through, we may get a little bump, but we're aggressively pushing that rate through to the caregiver with the intent to really drive more volume, more shifts and really more missions.

Speaker 6

Got it. That's helpful. Thank you. And then just a quick follow-up. Could you Quantify or maybe just speak a little more to how much of the overall PDS rate performance in 1Q came from steering more of that business to the preferred payers.

Speaker 6

Thank you.

Speaker 2

Yes. I think in our prepared remarks, we talked about going into the year, 10% of our PDS volume was driven by preferred payers. By the we started the year with 7 preferred payers. We signed 2 more preferred payers in the quarter, so we're at 9% within our PDS segment. We moved 10% volume to 13% volume, so we had a nice bump.

Speaker 2

We're excited to talk about Q2's performance. We've already signed more agreements already effective in Q2. So we have a strong pipeline for Q2. Some of the preferred payers are smaller, so some of them they're not all the same amount of volume, the same amount of covered member lives. So some of the Preferred payers that will sign won't be as big as some of the current preferred payers we have on service.

Speaker 2

But As we think about the year playing out, 20% was an aggressive goal, to be at by the end of the year. But I think you should think about 10% to 13% in line with 13% to maybe 15% in Q2. In the back half of the year, we would be driving that To the high teens and probably ending the year right at about 18%, 19%, 20% of our business is now in the preferred payer. And You asked the rate question. Yes, our preferred payers and our government wins are what's driving the rate, right?

Speaker 2

So that the reimbursement rate is being driven By this strategy, I'll also say as a follow-up, if you look at our wage rate, our wage rate is growing almost the same rate as our Reimbursement rate is in PDF. So it's proof that we're pushing that rate through to the caregiver every day. And that's our intention.

Speaker 6

Thanks so much.

Speaker 2

Thank you.

Operator

Our next question comes from A. J. Rice with Credit Please proceed with your question.

Speaker 7

Thanks. Hi, everybody. I appreciate the comments about Oklahoma, Texas California, I just want to make sure I understand. So your guidance that you have now, does that embed those rate increases from Texas California, is that part of the step up in the back half? And I know those are big states for you, but any comment on the other The rest of the market and what you're seeing in terms of rate updates?

Speaker 2

Thanks, A. J. Good morning. I'll start with kind of the other and then we'll back into guidance. Yes, I think we're very pleased with where we sit at this point in the year.

Speaker 2

I'll say the next 60 days are probably the most important 60 days of the year as most state governments are in their kind of their final 6 to 8 weeks push To putting through their annual budgets or buying your budgets, but the known rate increase we have today are equal to or slightly ahead of our going into the year and what we included in guidance. We did not include our guidance Oklahoma coming out At the place Oklahoma did. And so I think as you think about Texas and California, again, our second half of the year guidance assumes that We do get some rate lift in those two states, but not the ask that we have on hand in both of the legislatures in Texas and California. But I think we expected this to be a good year, A. J, in all things PDS rate, non Medicare oriented.

Speaker 2

But I think as we Ultimately,

Speaker 5

sit here

Speaker 2

in May, we sit in a very good place. I'll emphasize, We need to finish Texas and California. So those are the 2 most important outcomes for us over the next really 30 to 40 days as they come to a conclusion, Finishing that exercise, we've been engaged with both legislatures and Governor's office now for pushing almost a year. It's important for us to finish those 2, Not just for us, but the entire industry to ensure that both in Texas and California, We can meaningfully impact the families and get them out of children's hospitals. Dave, any comments about guidance?

Speaker 3

Yes, I'd say that's a fair statement, Jeff and A. J, when you think about it, I mean, we do we are expecting rate increases in both states and it does our guidance does incorporate, Call it mid to high single digit rate increases. As Jeff said, we think we're pretty well positioned And we're working collaboratively with the states on it. But and there's a lot of moving parts obviously to guidance. Things can come up and down, but I think mid to high single digits for those states.

Speaker 5

Okay. All

Speaker 7

right. Maybe my follow-up to ask you about the labor I understand if you get the rate increases, you can get incremental caregivers. I wondered sort of within the Sort of steady state environment, is it getting any easier to recruit caregivers with the volatility around the economy in certain The country, are you seeing your turnover rate improve? Any updates on sort of steady state environment and what you're seeing?

Speaker 2

Yes. A. J, I think as we said in March, we felt a little bit of a pop out of the first out of the holidays coming into 2023, Both in Indeed and some of our large recruitment platforms, we saw more applicants, more people engaged. That's really settled. I think in our steady state, we're still in a slugfest.

Speaker 2

And it's why we're so committed to this preferred payer strategy, Because I think long term, we're going to continue to struggle with just inflation and eating up any Current rate we have or steady state rate. So, I'd love to sit here and tell you, yes, the nurses are coming back and they're just but no, I think we saw a little pop 1st part of the year. Our growth in our caregivers paid, our growth in our volumes, our growth in our hours is really around preferred payers and the states in which rate has been passed through. So that's our strategy. We're sticking to it.

Speaker 2

We're not just waiting around for nurses to show up. And we've got great Social media ads, recruitment strategies, but the number one strategy is move rate, move volume, pass through Wage, and so I think that's where you'll see us focused not only in 2023, but in 20 24 as well. And A. J. I can tell you From talking to numerous of our larger Medicaid MCO partners, they feel the improvement.

Speaker 2

They feel Faster discharges, less hospitalizations, less hospitalized days and that's a It's almost a 5 to 1 savings to them. For every dollar they spend in PDM, they save between $5 $6 in total healthcare costs, Specifically from the acute care center. So we're hearing our payer partners telling us it's working, but I think you'll continue to see Avianna shift our

Operator

Our next question comes from Joanna Kajuk with Bank of America. Please proceed with your question. Good morning. Thank you so much for taking the questions. So the first Question, I think, excuse me, in your thank you,

Speaker 8

you talked about $6,600,000 settlement money, I guess, you actually received In the quarter, so did that benefit your cash flow and adjusted EBITDA?

Speaker 3

Joanne, Can you clarify on the $6,600,000 settlement? Yes.

Speaker 8

It looks like it was a positive, like you received The money in the quarter, if I'm reading it correctly?

Speaker 3

Overall, what I could tell you, Joanna, is that we in the Q1, we talked about a legal matter where We had some cash that was garnished from accounts in connection with a legal matter and we posted an appellate bond and we were able to recover that cash of approximately $18,000,000 before the end of the quarter and then we substituted cash for letters of credit for about $18,000,000 So we had a positive outcome there while we To the appeal on that case, there was another case that we funded about $7,000,000 to an escrow account subsequent to And in connection with the sellers of the Epic transaction. But overall From the legal perspective, we're pleased with where we sit right now.

Speaker 2

Yes. And Jonny, although it did have a positive impact to our cash flow in Q1, It had nothing no impact on adjusted EBITDA. So it did help our Q1 cash flow, but not our adjusted.

Speaker 8

Okay. Because yes, that was my follow-up. I was just trying to clarify because cash flow was actually positive, right? And previously, you talked about positive cash flow, I guess, in second half. So how should we think about the full year?

Speaker 8

Any kind of color you might give us how the cash flow were actually turned out for the full year?

Speaker 3

Yes. I mean, Joanna, like we've disclosed, We had positive cash flow in Q1 related to a couple of one time working capital items that were benefits to us. Our goals remain the same, which Which is to drive positive operating cash flows in the second half of the year, whether it's Q3 or Q4, that's our goal Is to drive the business, execute on all the initiatives that we've been talking about and drive positive Operating cash flow in the second half.

Speaker 2

And Joanna, I think we would not be surprised if Q2 is slightly negative and even potentially Q3 is about Negative breakeven, right. So some of those one timers drove the Q1 positive cash flow Dave talked about. But again, I think Dave said it well. Our goal is to end this year As a positive cash flow company and star 24 on that footing.

Operator

Our next question comes from Scott Fidel with Stephens Inc. Please proceed with your question.

Speaker 5

Hi, thanks. Good morning. First question, actually just was hoping to get just a little more of a clarification Just on the first question on the proposed rule and the gross margin cap. I guess, Jeff, just to be specific here, Is it more that you're concerned about a precedent that could potentially lead to private duty nursing Also having a gross margin cap or is there is the gross margin cap actually attributable to PBN, just trying to sort of understand whether you think that if this rule did go into effect, whether that 28% Gross margin would be secure longer term or whether there would be risk to that?

Speaker 2

I think you're reading the right way. As we read it and as our Legal lawyers and lobbyists have read it. It does not pertain to private duty nursing, but it does create a precedent that would be Unfounded in Medicaid today. And as we talk to many of our state governors, Medicaid offices, They don't like the idea of this precedent, right, because they have a lot of their own oversight of the Medicaid program and a lot of oversight of the workforce in their state. We've long been a supporter of driving minimum wage, encouraging minimum wage lifts.

Speaker 2

Many of our states have minimum wage movements in them already that we operate with, but it's really the first part of your answer, Scott, is The precedent that it would set for all of healthcare services and all of healthcare is just we think it's just a dangerous precedent to be set. And again, I think our state legislatures and our partners in the industry all agree on that, especially when You've just exclude so many of the things that we have to do that are mandated by law like EVV and compliance and oversight. So yes, it is as it's written today, as we have viewed it and our lawyers have viewed it, it is not material to Avianna and it's comp proposed, but we do think it's A dangerous precedent to set in the industry.

Speaker 5

Okay, got it. So more of a concern around the slippery slope as compared to direct impact. Okay. And then on I appreciate that clarification. Then on just a follow-up.

Speaker 5

I don't know if you guys But just to the extent that 25% that's from the 3 key states, would you be willing to break out what Texas California are either independently or in aggregate, just so we could ring fence that. So I guess that's Part 1 and then part 2 would just be on the preferred providers as it relates to moving over to Those partners, do we think about the financial benefits being more that you drive better volume there And you sort of are able to achieve that 28% plus gross margin or do you actually see a higher gross margin potential with those preferred partners? Thanks.

Speaker 2

Great, great question, Scott. Thank you. We'll start with the preferred payers and kind of work backwards. The intent of the preferred payer relationship is not to drive more margin percentage, although temporarily it does happen as we get incremental rate and are passing Through to the caregivers, we'll temporarily get a bump in the margin percentage. What we're really engaged in Is more volume, both more patients because we're getting more patients home from the hospitals and we've seen that in our current 9 preferred payers, but also just more hours staffed.

Speaker 2

And that's what the preferred payer wants. The payer wants us to staff all of the hours that are authorized, Not most of them or some of them, but all of them. And then the second part of it, Scott, is many of our preferred payers then have value based Bonus payments on a quarterly basis. And so we're 3 quarters in now to Earnings value based bonuses for reducing hospitalization both in days and cost as well as Staffing more hours. And eventually, we think some of our payers will move us to really a in admitting more patients, more volume of new patients We'll be in that as well.

Speaker 2

So 3 quarters in, we're now comfortable and confident with what we can do to earn those bonuses. We're earning bonuses. Those are in our results both in Q4 and Q1, and it's to us, it's getting more comfortable earning those bonuses and beginning to pass some of those through to the caregivers as well. So Again, the long game here is being a partner, not a provider, but being a partner with the nation's largest Medicaid MCOs And truly helping them bend the cost curve and improve patient satisfaction to us long term that aligns us with the best payers in America And ultimately drives more volume for Avianna. Anything else on the preferred payer, Scott, before we switch back to your questions on California and Texas?

Speaker 5

No, that was great, Jeff. I appreciate that. So yes, just back, I guess, on California and Texas. Thanks.

Speaker 2

So We don't disclose specifically the amount of volume or the amount of rate, but I think we've been clear. These are 2 of our The 3 largest states that we operate in from a Medicaid standpoint. And so we are we, Avianna, are leading the charge in both states. We have I think we mentioned on the last call, we have engaged a research group out of Washington DC. We did studies in both California and Texas on the value of what private duty nursing means to the overall healthcare spend.

Speaker 2

In California, it showed that we save $6,000 a day for every day we can get a child out of hospital. We save 6,000 dollars by getting them home. In Texas, it showed a similar outcome, but it was $5,000 a day just because of the difference And right economics in those two states, but both studies were crystal clear. The more a state invest in PDN, The more they save total net healthcare savings and it's material, it's 100 of 1,000,000 of dollars in some cases in California and Texas, it's pushing $1,000,000,000 a year in savings. And so That has resonated really, really, really well in both Austin and in Sacramento with both Governor's Offices, Medicaid Directors.

Speaker 2

And Again, we're partnering with our peer group, we're partnering with the state associations, but it's so meaningful to Avianna that we've taken the leadership role in both states and We believe we're in a very good position today. As that relates to our guidance, I think we've been Appropriately bagged to say that we expect to get something in both states, but our back half of the year guidance does not include us getting Double digit or certainly I'll use 20% or greater rate increases in either or both states. And so We see that as a great opportunity and our next call is in August and we see as obviously we'll know both outcomes by then. We see it as a great opportunity in August To really readdress the back half of the year and also how we're trending going in 2024 at that point.

Speaker 5

Okay. Thank

Speaker 2

you. Thanks, Scott.

Operator

We have reached the end of our question and answer session. I would now like Turn the floor back over to Jeff Sheena for closing comments.

Speaker 2

Thank you, Maria, and thank you everyone for joining our Q1 earnings call today. And again, thank you for your interest in our Avianna story. We look forward to updating you on our progress at the end of Q2 in August. Thanks and have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Aveanna Healthcare Q1 2023
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