Aveanna Healthcare Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Avina Healthcare Holdings Third Quarter 2024 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 Debbie Stewart, Avianna's Chief Accounting Officer. Thank you. You may begin.

Speaker 1

Good morning and welcome to Avianna's Q3 2024 Earnings Call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeff Schoenher, our Chief Executive Officer and Matt Buckhalter, our Chief Financial Officer. During this call, we will make forward looking statements. 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 file with the SEC.

Speaker 1

The company does not undertake any duty to update 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 when filed. With that, I will turn the call over to Avianna's Chief Executive Officer, Jeff Shaner.

Speaker 1

Jeff?

Speaker 2

Thank you, Debbie. Good morning and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q3, 2024 results and how we are moving Avianna forward in 2024 and beyond. My initial comments will briefly highlight our Q3 along with steps we are taking to address the labor markets and our ongoing efforts with government and preferred payers to create additional capacity. I will then provide insight on how we are thinking about year 2 of our strategic transformation and our enhanced outlook for 2024 prior to turning the call over to Matt to provide further details into the quarter and our outlook.

Speaker 2

Let's move to highlights for the Q3. Revenue for the Q3 was approximately $509,000,000 representing a 6.5% increase over the prior year period. 3rd quarter adjusted EBITDA was $47,800,000 representing a 32.2% increase over the prior year period, primarily due to the improved payer rate environment as well as cost reduction efforts taking hold. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aviano resume the growth trajectory that we believed our company could achieve. It is important to note that our industry does not have a demand problem.

Speaker 2

The demand for home and community based care continues to be strong with both state and federal governments and managed care organizations asking for solutions that can create more capacity. Our Q3 results highlight that we continue to align our objectives with those of our preferred payers and government partners. By focusing our clinical capacity on our preferred payers, we achieved solid year over year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts to those payers willing to engage with us on enhanced reimbursement rates and value based agreements. While we continue to operate in a challenging labor and inflationary environment, our preferred payer strategy allows us to return to a more normalized growth rate in our business segments.

Speaker 2

Since our Q2 earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and preferred payers, as well as continued signs of improvement in the caregiver labor market. Specifically, as it relates to our private duty services business, our goal for 2024 was to execute on our legislative strategy to improve reimbursement rates in our various states with particular emphasis on Georgia, Massachusetts and California, which represented approximately 15% of our PDS revenue. As we reported in Q2, we secured double digit rate improvements in both Georgia and Massachusetts effective the second half of twenty twenty four. These states demonstrate our government affairs strategy partner with state legislatures, governors to identify shortfalls in private duty nursing wages and to align reimbursement rates to improve access to care for patients with complex medical conditions. We are experiencing accelerated caregiver hiring trends, patient discharges from children's hospitals and improved staffing levels in both Georgia and Massachusetts.

Speaker 2

Year to date, we have secured 12 private duty services state rate increases and expect a few remaining states to be effective in early 2025. While we are pleased that our PDS legislative messaging has been well received by state legislatures, there is still work to do. As an example of the work ahead, California continues to be a challenging landscape to secure funding for an appropriate PDN rate increase. We've made significant strides with the Governor, Medi Cal Department and California Legislature, demonstrating the importance of private duty nursing rate investments and how it supports an overall lower healthcare cost, improved patient satisfaction and quality outcomes. During the latest legislative session, we were successful in obtaining an increase to the Medi Cal PDN rates despite the headwinds with the anticipated California budget deficit.

Speaker 2

Our PDN rate investment would have been effective on January 1, 2026 and funded under the MCO tax provision similar to numerous other Medi Cal rate investments. However, our PDN rate investment along with the other Medi Cal rate investments was tied to a voter referendum on the November 5 election ballot designated as Proposition 35. As we expected Proposition 35 was approved and therefore our PDN rate investment will not be included in the MCO tax provision on January 1, 2026. We will continue to partner with the governor and the legislature on a rate increase in the 20 252026 budget process. We are committed to advocating for California's children with complex medical conditions and won't stop until an appropriate rate investment has been secured.

Speaker 2

We have a proven track record of expanding our preferred payer programs and we'll continue to enhance our efforts in California similar to our approach in other states. Now moving on to our preferred payer initiatives in other states. Our goal for 2024 was to increase the number of PDS preferred pay agreements from 14 to 22. Year to date, we have added 7 additional preferred payer agreements, increasing our total to 21. With a robust payer pipeline, we expect to exceed our goal of 22 preferred payers by the end of the year.

Speaker 2

I am proud of our payer relations team as they continue to develop partnerships with managed care organizations to find solutions for children with complex medical conditions. Avianna's preferred payer strategy is gaining momentum and allowing us to invest in caregiver wages and recruitment efforts to accelerate hiring and staffing of nurses for our patients. Additionally, our Q3 preferred payer agreements account for approximately 47% of our total private duty services MCO volumes, up from 45% in Q2. This positive momentum in preferred payer volumes continues to highlight the shift in our caregiver capacity and recruitment efforts towards our private duty services preferred payer partners. Moving to our preferred payer progress in home health.

Speaker 2

Our goal for 2024 was to maintain our episodic payer mix above 70%, while returning to a more normalized growth rate. In Q3, our episodic mix was 76% and we achieved positive episodic volume growth of approximately 1% over the prior year period. We also signed 3 additional episodic agreements in the quarter, bringing our total episodic agreements to 38. I am proud of our home health and hospice leadership teams and their commitment to driving positive clinical outcomes, episodic growth and profitability. We will continue to remain focused on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis and focus on improved clinical and financial outcomes.

Speaker 2

And finally, as we have achieved our desired preferred payer model in both private duty services and our home health and hospice businesses, we now embark on a similar strategy in our Medical Solutions segment. We are in the early stages of implementing our preferred payer strategy in Medical Solutions and believe it will be fully realized by the end of 2025. As the nation's leading provider of infant nutrition, it's critical for us to ensure our capacity is aligned with those payers who value our services and our partnerships. Our goal is to improve clinical outcomes and customer service, while protecting our margins and collecting our cash. Matt will comment further on how we think about our margins and volumes in Medical Solutions moving forward.

Speaker 2

I look forward to updating you on our progress in the coming quarters similarly as we have in our PDS and Home Health and Hospice segments. We are encouraged by our 2024 rate increases, preferred pay agreements and subsequent recruiting results. Our business is demonstrating solid signs of recovery as we achieve our rate goals previously discussed. 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, we provide this care in the most desirable setting, the comfort of the patient's home.

Speaker 2

Before I turn the call over to Matt, let me comment on our strategic plan and our improved outlook for 2024. As we navigate year 2 of our strategic transformation, we remain highly focused on those initiatives that created positive momentum in 2023 and continued execution in 2024. We will continue to focus our efforts on 4 primary strategic initiatives. 1, enhancing partnerships with government and preferred payers to create additional carryover capacity 2, identifying cost efficiencies and synergies that allow us to leverage our growth 3, managing our capital structure and collecting our cash, while producing positive free cash flow and 4th, engaging our leaders and employees in delivering our Avianna mission. Based on the strength of our Q3 and year to date results and the continued execution of our key strategic initiatives, we now expect full year 2024 revenue to be approximately $2,000,000,000 and adjusted EBITDA to be greater than $168,000,000 We believe our enhanced outlook provides a prudent view considering the challenges we still face with the evolving labor market.

Speaker 2

In closing, I am so proud of our Avianna team and their dedication to executing our strategic transformation, while holding our mission at the core of everything we do. We offer a cost effective patient preferred and clinically sophisticated solution for our patients and families. Furthermore, we are the right solution for our payers, referral sources and government partners. By partnering with preferred payers, we can and will move rate and wage metrics in meaningful ways that support our growth. This strategy allows us to hire, retain and engage more caregivers in providing the mission of Aviana every day.

Speaker 2

With that, let me turn the call over to Matt to provide further details on the quarter and our 2024 outlook. Matt?

Speaker 3

Thank you, Jeff, and good morning. I'll first talk about our Q3 financial results and liquidity before providing additional details on our refreshed outlook for 2024. Starting with the top line, we saw revenues rise 6.5% over the prior year period to $509,000,000 We achieved year over year revenue growth in all three of our operating divisions led by our Private Duty Services, Medical Solutions and Home Health and Hospice segments, which grew by 6.4%, 12.6% and 2.2% respectively compared to the prior year quarter. Consolidated gross margin was $159,700,000 or 31.4%. Consolidated adjusted EBITDA was $47,800,000 a 32.2% increase as compared to the prior year, reflecting the improved payer rating environment as well as cost reduction efforts taking hold.

Speaker 3

Now taking a deeper look at each of our segments. Starting with Private Duty Services. Revenue for the quarter was approximately $409,000,000 a 6.4% increase and was driven by approximately 10,500,000 hours of care, a volume increase of 3.8% over the prior year. While core volumes have 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 continuing to see signs of improvement in the labor markets. Q3 revenue per hour of $39.10 was up $0.97 or 2.6 percent as compared to the prior year quarter.

Speaker 3

We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $109,800,000 of gross margin or 26.8 percent. The cost of revenue rate of $28.62 in Q3 was down slightly from Q2. Despite ongoing wage pressures in the labor markets, our Q3 spread per hour was $10.48 We expect spreads per hour to remain in the $10 to $10.50 range going forward.

Speaker 3

Moving on to our Home Health and Hospice segment. Revenue for the quarter was approximately $54,100,000 a 2.2% increase over the prior year. Revenue was driven by 8,900 total admissions with approximately 76% being episodic and 11,300 total episodes of care, up approximately 1% from the prior year quarter. Medicare revenue per episode for the quarter was $3,104 up 1.9% from the prior year quarter. We continue to focus on rightsizing our approach to growth in the near term by focusing on preferred payers that reimburse us on an episodic basis.

Speaker 3

This episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic admissions well over 70%, we have achieved our goal of rightsizing our margin profile and enhancing our clinical offerings. We are committed to a disciplined approach to growth while shifting our capacity to those payers who value our clinical resources. We are pleased with our Q3 gross margins of 53.9%, up 6% from the prior year period, representing our continued focus on cost initiatives to achieve our targeted margin profile. Our home health and hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care.

Speaker 3

Now to our Medical Solutions segment results for Q3. During the quarter, we produced revenue of $45,300,000 a 12.6% increase over the prior year. Revenue was driven by approximately 92,000 unique patients served, a 4.5% increase over the prior year period and revenue per UPS of approximately $493 Gross margins were approximately $20,700,000 or 45.6 percent for the quarter, up 18.8% over the prior year period. Revenue and gross margins were impacted by some timing related revenue adjustments in the quarter. We expect gross margins to normalize in the 43% to 44% range moving forward.

Speaker 3

As Jeff mentioned, we continue to implement initiatives to be more effective and efficient in our operations to leverage our overhead as we continue to grow. We are accelerating our preferred payer strategy and medical solutions by aligning our capacity with those payers that value our services and appropriately reimburse us for the services we provide. As I said before, we expect gross margins to normalize in the 43% to 44% range and UPS to settle around $90,000 per quarter before returning to a more normalized growth rate. We will continue to update you on our progress as we execute on this initiative. In summary, we continue to fight through a difficult labor environment while keeping our patients' care at the center of everything we do.

Speaker 3

It's clear to us that shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Avianna. Our primary challenge continues to be reimbursement rates. With the positive momentum we experienced year to date, we remain optimistic that such trends will continue into 2025. As we continue to make progress with the rate environment, we will pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity.

Speaker 3

At the end of the 3rd quarter, we had liquidity of approximately $285,000,000 representing cash on hand of approximately $79,000,000 $38,000,000 of availability under securitization facility and approximately $168,000,000 of availability on our revolver, which was undrawn as of the end of the quarter. We had $32,000,000 in outstanding letters of credit at the end of Q3. Our ample liquidity provides room to operate the business and invest in the company to support our continued growth. On the debt service front, we had approximately $1,480,000,000 of variable rate debt at the end of Q3. Of this amount, dollars 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 SOFR above 3%.

Speaker 3

Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026 and our interest rate caps extend through February 2027. As a reminder, we have no material term loan maturities until July 2028. Lastly, in early Q4, we successfully extended our revolving credit facility, ensuring that we have ample access to liquidity to support our growth initiatives. Looking at year to date cash flow.

Speaker 3

Cash provided by operating activities was $19,200,000 and free cash flow was approximately $17,000,000 Q3 cash flow exceeded our expectations and we continue to expect to be a positive operating cash flow company for full year 2024. We also expect to see continued cash flow benefits 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 revised outlook for 2024. As Jeff mentioned, we currently expect full year revenue to be approximately $2,000,000,000 and adjusted EBITDA greater than $168,000,000 These results would not be possible without the hard work and dedication from all of our Avianna team members. I look forward to the continued execution of our 2024 strategic plan and updating you further at the end of Q4.

Speaker 3

With that, let me turn the call over to the operator.

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Ben Hendricks with RBC Capital Markets. Please proceed with your question.

Speaker 4

Great. Thank you very much. Congratulations on the quarter, guys. Just a couple of questions on the home health side. Just wanted to know what inning we are in, in terms of your progress with your preferred payer relationships in that segment.

Speaker 4

And clearly, that's kind of garnering strong episodic volume recovery there. Just wanted to see what your outlook is for kind of long term episodic growth as we move forward given the given those relationships you've made? Thanks.

Speaker 2

Awesome. Good morning, Ben. Great question. Yes, I think as Matt and I both said in our prepared remarks, especially as we start to focus on our Medical Solutions business, we believe really our preferred payer strategy in home health and hospice and in PDS is really, I'd say, is in the back half of those innings, 7th, 8th inning. But we feel it's fully baked into our business at this point and now it's really growing those relationships.

Speaker 2

Specifically to your question on home health, we're really not trying to drive the business past the 75%, 76% episodic mix. We think that's probably running a little bit hot. We'd like to be, as we've said, kind of between that 70% and 75%. We were proud of our 1% organic year over year growth as that was a first time we've had both organic growth in revenue and in volume growth in home health year over year on a comp basis. So it's been a long time coming.

Speaker 2

I think as we said before, we expect the home health business and hospice business to kind of land in that 3% 3 plus percent growth rate. And we think we're there now. We think we've got the right infrastructure. We've got the right clinical capacity. We are entering season as our Florida business kicks in.

Speaker 2

I will say, like our peers, we did have a disruption at the end of September, 1st 2 weeks of October with the double hurricanes that kind of we've got a decent amount of business up through Florida and through the Carolinas and Georgia. So a little bit of disruption in that 1st month of the quarter, but back to business, the last few weeks have been great for both home health and PDS and we're really just focused on our business. So landing in that kind of 3 plus percent growth rate for our home health and hospice business organically, I think is where we think we can land.

Speaker 4

Great. Thank you very much. Just as a follow-up, any observation thoughts about the final home health rule? It feels like more of the same in terms of taking the can on that budget neutrality assumption. Just wanted to get your take.

Speaker 4

Thanks. Yes. No, it's a great question. I'll comment on both home health

Speaker 2

and hospice. Obviously, continued support of the hospice benefit, which we think makes a ton of sense. We like our peers are very disappointed and not surprised, but disappointed in CMS' continued failure to really address the temporary and long term hang around or hangover, if you will, of the PGM of a clawback. With our model though, Ben, I think we're uniquely different in the industry and that is we have found a way to be successful under the current reimbursement structure. So as disappointed as we are with CMS, although not surprised that they didn't do anything in the election year, we have found a way to be successful in this business and we're going to continue to be successful at this rate.

Speaker 2

This rate was slightly positive to us. So it's above 0%, kind of between 0% and 1%, which is it doesn't keep up with inflation, but our model, we have found a way to be successful and we can thrive under this reimbursement model today for home health. Thanks, Ben.

Operator

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

Speaker 5

Hey, good morning, guys. So I know that you're giving guidance at this point. But looking at 2025, can you help us see a bit go over the headwinds, specifically on the pricing increases for next year, for new increases that you guys know about as a comp out rate increase you've seen this year? And then views on the labor market for next year, like you talked about sort of how that's improving. And then also how the preferred peer networks can grow in all three business segments now and how that can potentially provide benefits for pricing for next year?

Speaker 4

Got it. That was a

Speaker 2

lot, Peter, but thank you.

Speaker 4

All right. So I think

Speaker 2

I'd start with just a general comment of part of what was fueling Q3's private duty services growth was really the rate increases, specifically in Georgia and Massachusetts, but the other 10 rate increases that were included with that. Q3's growth rate, I think was we were very pleased with that. I use that as a basis because

Speaker 4

as

Speaker 2

you know, Pito, when we get the rate wins, we can solve the problem. We can get the kids out of the hospital. We can staff more cases, I. E, California, right? So I keep coming back to California that many states have now shown the success tracker that we want to implement in California or continue implementing California.

Speaker 2

So I say that to just keep pushing California that they've got to do the right thing and we got to get them to do the right thing. With that said, we have a nice momentum of rate just like we did come out of 2023 and 2024. We have a really nice rate lift both through our home health and hospice business as well through our PDS business that will help continue to drive both rate momentum, but also help underpin kind of our growth rates for both PDS and home health and hospice. Both Matt and I took time to focus on medical solutions in this call. We are going to spend the next 3 or 4 quarters implementing the exact same preferred payer strategy that we've implemented in home health and hospice and in private duty services in our Medical Solutions business.

Speaker 2

The team is already working on it. So we expect some a little bit of choppiness through the volume side of that business and probably in Q4, Q1, Q2 as margins improve both of the gross margins and bottom line margins for the Med Solutions business. So I think I'd say without stamping 2025, there's no negative there's no big negative issue staring us down in 2025. We were not expecting California in 2025. So good momentum going in and we're going to keep our heads down, keep operating the business and keep driving positive results.

Speaker 2

Matt, would you

Speaker 6

add to that?

Speaker 3

Yes. No, I think you said it really well, Jeff. The 12 state rate increases on top of our continued preferred payer execution has really driven our volume and driven our clinical care this year. I see that momentum continuing into next year. There's still a lot of opportunity for us to move forward and move specific rates.

Speaker 3

California, one of those that we keep talking about. But there's others out there where we really need to move the needle or move a specific area for our patients to allow us to get better care. Obviously, Pito, you know the economics. The research demonstrates that we save $5,000 to 6,000 dollars per day compared to acute care stay. Addressing the labor market itself, we're continuing to see that softening.

Speaker 3

I'd say that that little bit of softening in the market, I really attribute that to our hiring success to us being able to drive rates. Those preferred payers are seeing it. They understand the economic benefits. The states are seeing it as well. So as we continue to move rate, that allows us to push caregiver wages up and improve volumes and improve our patient care.

Speaker 5

There's

Speaker 2

a lot to unpack there, Pito.

Speaker 5

Yes. Sorry for that. Looking at your 2024 guidance commentary on revenues and EBITDA, it implies a big sequential decrease of margins in 4Q. Historically, we don't see that. To Ben's question, can you quantify the impact of hurricanes?

Speaker 5

Or just something else that could lead to sequential decrease of margins from 3Q to 4Q? Or is this potentially just some more conservatism from you and your team? Thank you.

Speaker 3

No, I think you've come to know us pretty well, Pito, on how we operate as an organization. And we like to be really rock solid and leave opportunity for us to be in front of it a little bit. Q3 did benefit from a little bit of one timing related items in our Medical Solutions segment. You see that with that 45.6% gross margin that should be in that 43% to 44%. So you get back into the math and say, all right, there's a dollar amount associated with that one.

Speaker 3

And then honestly, we're really proud about our year to date results. The teams continue to execute in all three of our operating divisions, all three of them being positive year over year revenue growth. Jeff did mention in his script or in the answer here that there is a little bit of impact from that hurricane that's going to go through and hit our Southeast business. The good news is that we rebound very quickly. Our patients need care.

Speaker 3

They're highly acute. So we do rebound quickly. But that couple of week interruption does have some impact to us. That's the reason you're seeing that kind of tick down into Q4, but I think we'll rebound nicely into Q1 and continue that momentum into 2025.

Speaker 2

And I think, Peter, I think to Matt's point, he said, well, Q3 was probably a little bit harder than we in a good way. Profitability is probably a little bit above what we thought and we're expecting. And Q4 will kind of come in on a normalized basis. I think to your point, we will continue to beat and raise as we think of Q4 and feel very confident for how we end the year and ramp

Speaker 3

into 2025.

Speaker 5

Great. Thanks so

Speaker 2

much. Thanks, Peter.

Operator

Our next question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Speaker 7

Hey, good morning, guys. Congrats on

Speaker 8

the quarter. Maybe just first question, free cash flow generation was strong in Q3. So just curious how you're thinking about the sustainability of that or if there's anything that we need to be thinking about in terms of what went into that cash flow strength?

Speaker 3

Great question, Brian. Really proud of it as well. We're pleased with our current year to date free cash flow and performance and where it's currently sitting through Q3. Q3 is our seasonally high period. If you go back and look at last year, you can see where it upticks into Q3 as well.

Speaker 3

So a lot of that DSO and the delayed billing comes through in Q3. So a little bit of net working capital changes. I will say that our teams over performed as well and that's throughout our RCM operations. Payer relations teams did a phenomenal job of bringing in cash in Q3 as well. We will continue to be a positive free cash flow company for all of 2024.

Speaker 3

I think Q4 last year was slightly negative $4,000,000 to $5,000,000 That's probably not unreasonable to think how our Q4 lands plus or minus a few $1,000,000 But overall, pleased with our performance, pleased with the team coming out on top of it and really happy to be a positive 2024 free cash flow generating company.

Speaker 8

Got it. That makes sense. And then as I think about maybe asking Peter's question a little differently, on PDS gross margins at 26.8 percent in Q3, is that the right way to be modeling 2025 at this point? Or how should we be thinking about that number?

Speaker 2

Yes. And let me start with

Speaker 4

the top end and then we'll kind of

Speaker 2

bring it back. Matt will bring it back, Brian, to really ask the question. I think the key thesis here is every time we win rate, our commitment to both the governor, the legislature or the payer is we're pushing the rate through to drive to fill more shifts, to get more kids home and ultimately to hire more nurses and engage more nurses. So we are taking an absolute focus to not just winning the rate, but to pushing it through. And I use Georgia as a great example.

Speaker 2

Governor Kemp really stood firm and made his words, a historic investment into home based nursing and what he meant was private duty nursing for the state of Georgia this year. And it's crucial for us to be able to go back to him and the rest of the legislature and show him that we have passed them the majority of that through to the nurses. We can feel that volume. You can see that volume in Q3. You'll see it in Q4.

Speaker 2

It's lifting our volume because of the historic nature of the investment they made. Matt, as we think about the actual margin profile, how do you think about that?

Speaker 3

Yes, Brian. And I always kind of go back to the spread per hour being kind of the end all be all there for us. That $10 to $10.50 range, Obviously, we know Q1 has some seasonality to it, so it's going to be significantly below that, but play catch up for the full year on how we view it. And it goes back to you might continue to see some margin compression that happens, but if we continue to stay in that $10 to $10.50 spread per hour range, that's right where we want to be. And that's doing exactly what Jeff just talked about, winning rates, investing to our caregivers, investing into our clinical outcomes and providing better care to our patients and entail that drives our volume and gets more kids from home from the hospital.

Speaker 2

And it's a winning, as you know, Brian, especially in Medicaid, right, 30 ish, sub-thirty ish is the legislature understands that kind of gross margin. So being in that 27% range, we can be proud of what that means, proud of the investment we're making. And it really does, as you know, it does matter when you go back to these payers and legislators that you can show them that you have invested these dollars that they gave you into incremental nursing wages and incremental nurses, which again, we will continue to tell that story in California because it's the same outcome in California. We just got to get the legislature and the governor to validate that.

Operator

Our next question comes from David MacDonald with Truist Securities.

Speaker 7

This is actually Grayson McAllister on for Dave. Congrats on the quarter. First question for me, just obviously margins came in quite a bit better than we were thinking and better than last year. Could you just talk a little bit about the cost savings initiatives in place, kind of what inning you're in? And just any low hanging fruit or obvious opportunities at this point?

Speaker 7

Thanks.

Speaker 2

Hey, Grayson. Good morning. Well, we certainly said in Q2, we were not a 9% company moving forward. In Q3, we validated we are a 9% business 2 quarters in a row. I think as Matt said in his prepared remarks, there were a couple of things that were timing related, specifically in our AMS business, we had some revenue related adjustments.

Speaker 2

But I do think that the takeaway, Matt will answer the detail of the question, but the takeaway is the cost reduction efforts that we've been talking about now for almost 7 quarters really have taken hold. In. I think for the most part, we can tell you we're really done with home health and hospice. We're done with our PDS business. We're pretty much done with our corporate office and corporate support and we're really just heightened focus on medical solutions as we roll into 25.

Speaker 2

So I think the majority of the work is done. I will tell you that we never stop. We're always looking for efficiencies, always looking for areas where we can find ways to be more efficient in our RCM and other areas of business. But the majority of our work in our businesses with the exception of Med Solutions is really done at this point.

Speaker 3

Yes, Jeff, I'd just pile on to your statements, what I believe are 100% accurate in here. I mean, really, we're just proud of the teams and the hard work they've done to address costs on the direct and obviously mostly indirect side of things. Home health and hospice last year, you're seeing the full benefit of that come through this year. PDN in this year and you continue to see the benefit of that in the back half of twenty twenty four and you'll see that to 2025. Medical Solutions to JustPoint is the last area of focus for us to go take out significant savings.

Speaker 3

But Grayson, as we always talk about, it's just not taketh away, but reinvesting back into the organization, reinvesting back into technology, into automation, so that we're able to leverage that going forward as well. So our goal is to continue to hold that relatively, I'll say, flat. There's a lot of takes, but then reinvestments into that. And you'll see that throughout 2025 adding on to our growth where we're currently been performing. That's where we get that leverage profile and increase that margin at the bottom line.

Speaker 7

Got it. Okay. And then just a quick follow-up for me. Just wanted to follow-up on hiring trends in Georgia and Massachusetts. Just any color you can provide around the number of hires there or how quickly you're able to see that labor begin to come online when you do get those rate increases back through?

Speaker 7

Thanks.

Speaker 2

And Chris, I'll just use Georgia's. I think Georgia is one of the last year we would have used Oklahoma, then 23. This year Georgia will end up being the story we highlight. We're actually building a case study with a third party around Georgia to be able to show to other state governors. But we started, I think we told in Q2, we started passing the wage rate through in our Georgia nursing community back in starting in mid to late April as soon as we knew the governor's budget was signed.

Speaker 2

So we had a ramp of about 75 days and we hit July 1 when the rate became effective, already running. And we can see significant, significant improvement in actual percentage of fill rate, number of cases we're actually filling compared to the authorized hours, the number of new cases, it's cases where we're able to get children out of hospital. And we ran into a great phenomenon in Georgia. And Matt and I have been here 9 years. This has never happened in our 9 years.

Speaker 2

And that is some point kind of mid August, we didn't have any pending discharges in the children's hospitals in Georgia. That's the first time in a decade that that has happened. Now, flu season comes in, infection season, so that will recreate itself. But we had a point in Georgia where we didn't have any pending patients to admit. And again, our pending list in any state could be 30, 40, 50 families or could be a few 100.

Speaker 2

So the fact that we were able to push through that many pending cases and our peers, our peers did as well, just shows how powerful a rate investment can be in a state like Georgia or like state. So it will settle in over the course of Q4, Q1, Q2, but we've seen material changes in hiring nurses. Even the nurses that we had working for us are working more hours and selling more shifts. So we are solving the exact issue that we put forth in the state of Georgia. Massachusetts similarly, but I think Georgia is the best example.

Speaker 2

And again, as Matt would say, we're almost 2 full years into the story in PDS and I think it continues to just hammer home how important investing in private duty nursing really is and the overall savings and the outcomes for these families are just tremendous. Thank you, Grayson.

Operator

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

Speaker 6

Hi, this is James on for A. J. Just had one question for you all. You've previously talked about expanding geographies and possibly doing this through acquisitions of smaller assets. Just wanted to get your updated thoughts on this geographic expansion to build your base in the Southeast and Midwest and just any color there would be helpful.

Speaker 2

Great question and very well I think as we sit today, we feel like we're putting year 2 of our strategic transformation to bed here in Q4. We feel like we have not only stabilized the company, but put the company back on the rightful path for growth and success. And we believe it's time for us to reenter the M and A market. As we go into 2025, I don't think we'll close anything in Q4 at this point, but as we go into 2025, both organic and inorganic growth becomes really priority number 1 for the company. And we do expect to close transactions within our capital structure to your point, Jamie, within our capital structure, both in private duty nursing, private duty services business as well as home health and hospice.

Speaker 2

Those are the two businesses we'll focus on and are focused on. So we've already started ramping up the engine, the M and A engine. We are looking at transactions as we speak with the intent that as we move into 25, we would move back into the M and A market. And again, we'll stay focused on the PDS and Home Health and Hospice businesses for most of our M and A activity. But great question.

Speaker 2

Thank you.

Speaker 6

Great. Thank you.

Speaker 4

There are no further questions at this time. I would now like to turn the floor back over to

Operator

Jeff Schoenner for closing comments.

Speaker 2

Thank you. I just want to say thank you everyone for your continued interest in our Avianna story and thank you to our Avianna teammates, caregivers and leaders for making these results possible. We will look forward to talking to you after the 1st of the year and updating you on our 2025 guidance and our full year 2024 results. Thank you.

Operator

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

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Earnings Conference Call
Aveanna Healthcare Q3 2024
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