RBC Capital Markets Global Healthcare Conference. I'm Ben Hendricks, RBC's Health Services and Managed Care Analyst. We're pleased to host Aveanna Healthcare this morning, a leading provider of pediatric and adult in-home health services. Good morning from management. This is Jeff Shaner, Chief Executive Officer; Matt Buckhalter, Chief Financial Officer; and also with us in the room today is Debbie Stewart, Chief Accounting Officer; and Matt Buckhalter. But anyway, I wanted to start off what you saw in the first quarter. Of course, Adjusted EBITDA was well ahead of consensus expectations. You saw continuing to see strong PDS volumes. You know, how do the results compare to just an overall backdrop of how you're thinking about volumes? Yeah, thanks for having us. Glad to be here. You know, we got to a really nice start to the year as you cover us and know. Really strong Q1. We've had nice growth coming out of 2023 and 2024. We consider 2024 to be our second year of our strategic transformation that we've talked about before and really right-sizing the growth of the company, primarily driven by our Medicaid business, Medicaid side. But we also saw some really nice cost synergies. We've spent the last 15 months or so taking out SG&A costs out of the company, continuing to do that, and really starting to see nice leverage on the adjusted. Nice great start to the year. We expected to have a good first quarter. I think it was better than we expected and really pushing us through Q2. Obviously, we raised our guidance, both revenue guidance to greater than $1.970 billion, and raised our EBITDA guidance to greater than $150 million. So nice tailwinds pushing us through Q2, primarily driven by the Medicaid side of our business. How do we think about the transformation strategy that you guys launched a couple of years ago, or I guess maybe in 2023 it was? You know, how do you characterize the stages of that? Where are we and kind of where do we want to take it? Yeah, I think we think of it probably over a 3-year period. Year one was really stabilizing the business, getting the company back to a stabilized EBITDA, and getting the company growing again post-COVID, getting growing again. I think we checked that box in 2023. 2024, we're really trying to accelerate that growth. You know, we were in the 5.5%-6% year-over-year growth in Q1. We think that will be pretty consistent through the rest of the year, kind of that 5%-6% top-line growth. Then in year two, it was really executing a preferred payer strategy, a government affairs strategy, primarily on the Medicaid side of the business. Not only right-sizing our home health and hospice business from what we did in 2023, but accelerating the growth of our home health and hospice business. Continuing to be very thoughtful on the SG&A side of the business so that we can kind of stair-step gauge, if you will, our Adjusted EBITDA. Our management team's goal is to get back to $200 million of annualized EBITDA. It's going to be a couple of years before we get there, but really stair-stepping the company back to that kind of $200 million annual run rate. And I think, you know, we're in that mid-7% Adjusted EBITDA right now and kind of stair-stepping that into the eights and nines over the next couple of years. So I think we're about halfway through our transformation plan. We see the rest of it playing out through the rest of 2024 and even in 2025 as we kind of optimize growth and ultimately drive the bottom line. The key piece of the growth algorithm has been the labor availability. You know, a key piece of being able to bring on more labor has been the preferred payer strategy. Maybe you can kind of talk about, you know, basically what you're targeting there, what makes a preferred payer, and around that. Yeah, and a lot of people talk about inflation and wage. At the end of the day, we flipped the prism on wage and labor, and we focus on reimbursement rate. We don't have control over inflation. We don't have control over what the wage rate is in any market for a nurse. So we flipped it about 15-18 months ago and just said, the thing we can control is where our clinical capacity goes, to whom it goes with. We can control what the rate that person or that payer is paying us. So that bore out our preferred payer strategy. We have a two-pronged approach. Not all of our payers are MCOs, right? A lot of our payers are actually Medicaid systems. We have a government affairs strategy that is dedicated specifically to state legislatures, governors, head of Medicaid departments that we focus that strategy on to move Medicaid rate over time. Then we've got our preferred payer strategy, which is very focused on MCOs and commercial payers. All of it is focused on driving enhanced rates per hour to Aveanna so that we can pass through enhanced wage rates to our nurses. I think as we've looked at it, the magic has really been raising the rate to raise the wage. I think we've done a really nice job of driving both of these. If you look at last year, you know, we took from 7 preferred payers to 14. And then we also added another 4 in Q1 to get ourselves to 18 as well. Last year on the government affairs side, we had 19 state rate wins. And those aren't to increase gross margin or anything. Those are to take, re-engage our workforce, bring workforce back into the home, and really pass those wages through it. A lot of it is catch-up, though. You know, there was obviously high inflation, high wage inflation that occurred. But we said, hey, guys, there's nothing we can do about it. We can't control macro trends or CPI out there. What we can do is go partner with those payers that value our clinical resources. We take those dollars and pass them through to our caregivers, ultimately just to provide more care. That prevents hospitalizations, prevents some increases in our fill rate, prevents any emergency room visits that go into place there, but also gets our clinical outcome scores up too. Well said. I know that historically, Aveanna's PDN segment has been very focused on margin discipline in terms of the gross margin. It's historically held a very stable kind of 30% range, 28%-30%. How do you think about that margin variability? How much wiggle room do you have there? And are you still kind of staying very consistent there? I'll just start. Matt will come in on kind of where we see margins because we have pulled them back. At the end of the day, we'll go back to that reimbursement rate. We're still focused on driving the reimbursement rate. Our spread per hour is what we manage to. And it's really that $10-$10.50 spread per hour in the PDS segment has been that way for seven, eight years. And we see that. It dipped down to $9.76 in Q1 for a couple of one-time related items. We see that being $10-$10.50 throughout the rest of the year and forth. But as we think the gross margins, we are seeing them settle down in that 26%-28% range. And I think that's okay. That is the commitment we've made to our preferred payers to drive capacity and drive volume with them. We don't want to see that drop below, much below 26%, right? Because at the end of the day, we do have a relatively fixed overhead. Yeah. Jeff said it well. But if you look historically, you know, we had decades of 30% gross margin. And that's where we kind of sat in. But at the same time, rates were pretty stagnant. I'm saying reimbursement rates and labor rates were both stagnant during that time period. And so they just kind of ticked along. As we've seen caregiver wage inflation increase significantly, we've done a really nice job of driving reimbursement rates through government affairs, payer relations strategy. We've taken those dollars, and it's almost every dollar that we receive, we're passing it down to those caregivers. So what's happening is your margin percentage is actually being compressed, but the same $10-$10.50 spread per hour is still staying intact in there. And so that's the kind the metric that, hey, we're going to hold to. As Jeff mentioned, Q1 had a little bit of a headwind, payroll taxes, normal things like that. We are a labor company at any point. A little bit of proactiveness around our reserve, just making sure we're in a solidified nature with some EVV implementation. But for the year, it'll be $10-$10.50. Q2 itself will be a 27 and change gross margin. So a nice rebound that we'll see from Q1 to Q2. Great. And you just began reporting your preferred payer volumes against a total managed care opportunity. And in the first quarter, just over 40% of total MCO volumes were in preferred payer relationships. So how do you see that progressing? And kind of what's the long-term opportunity? How do you characterize it? Yeah, and to your point, we just introduced this new indicator in Q1. We thought it was more representative of what the opportunity is and where we are on that journey, Ben, to your point. And so we reported we're just over 40% of all potential volume being dedicated to preferred payers. That ties to the 18 preferred payers we announced in Q1. You know, I think, as I said earlier, we're about a year and a half into this strategy, and the strategy is going to play out over the next three to five years. So we see the opportunity potentially even doubling in size. I don't know whether we'll get to 100%, but we see the opportunity over the next three or four years to double this from low 40s% to 70s% and 80s%. It will take multi-years to get there. And there's a two-pronged approach. One, c ontinue to sign preferred payers in states that have the opportunity with commercial payers and MCOs. The second is almost all of our admissions going forward are only to preferred payers, right? Because in the markets where we have preferred payers, we can't admit any other business other than what the preferred payers have. And I say that to say they still have more demand for our services than we're able to even give our preferred payers. So the compounding impact will happen is 18 is going to go to 22, 24, 26, and keep building over the course of the years in preferred payers, the number of contracts. The second part is the amount of census we have with them will just continue to grow over time. So I think we'll continue to sign in that 6-10 contracts per year moving forward, new contracts. And our capacity with those will continue to even expand. If we got to 50% this year, I think we would be pleased with that movement. We'll certainly be in the mid- to high 40s by the end of the year. But I think if we got above 50% this year, we would say that was a good year related to preferred payer growth. Got you. I know that Texas is one state where you've had particularly strong momentum here, 70% of volume under preferred arrangements by year-end, kind of where you're targeting. Then you've also got expectations of launching similar programs in California, which I know is a little bit of a different environment. Kind of where are some of the geographic opportunities and where the headwinds tailwinds? About 2/3 of our 30 Medicaid states have already gone to MCO payers for us, for PDN services and PDS services. So Texas, Florida, Pennsylvania are some examples of states that are relatively mature on the MCO transition process. North Carolina is an example of a state that's going through the transition as we speak. So as you think of like a Texas or a Florida, Pennsylvania, we're 2/3 or three-fourths of the way in our preferred payer strategy in these states. And these are now in year 3, 4 from the transition to MCO. So we're mature in those states. States that are still flipping, so the kind of the 1/3 or 1/4 of the states that are still Medicaid that are slowly moving, that becomes the future opportunity for us is to continue to execute in those states. You mentioned California. California is primarily still a fee-for-service Medicaid system. The rates have been very low. We've talked about that publicly. The rates are $44.12 an hour for our PDN services, which in California is we're almost paying $44 an hour to a nurse. So it's drastically low. But what we've seen is through the Whole Child Model programs, which is county-specific payers in California, and just some of the Kaiser-like payers who have worked themselves in on a commercial or MCO basis, we've seen families migrate away from fee-for-service themselves. Families are making choices to leave the California Medicaid and move to MCO because they can get more services. In those arrangements, you know, we've negotiated with those payers almost 140%, 150% of the Medicare rate. So we're being paid well and well above what the Medicare rate, which makes sense. At $44.12, it's way too low. So even in California, that has not moved to an MCO state, we're seeing a nice movement of patient population away from the Medicaid product. So in California, we have two strategies. We're still working the California legislature, the governor, the head of HHS on, you've got to move the rate. And we're also implementing our preferred payers strategy. So the families who are able to move to the MCOs, we're executing at a higher rate. So both strategies work. We mentioned last year, Ben, we mentioned Oklahoma and Texas outside of California, specifically on the government affairs. This year, we called out Georgia and Massachusetts on purpose. And those are states where we're looking for 30%-40% rate increases on the PDN because they haven't implemented rate increases over the last 3-5 years. And that's how far the wage has fallen behind over that time. Great. A couple of follow-ups there. Is the transition that you're seeing of kind of the members in California going kind of away from the traditional fee-for-service Medicaid, is the governor taking heed? No, it's actually a good thing. And we actually brought it back to them. As you probably know, they're staring down like a $50 billion-$70 billion deficit this year. So they've got real economic problems that they're having to deal with in California. We asked them for a 40% rate increase. We've been lobbying the governor and his staff for over two years. We have a good relationship with them, as well as Dr. Ghaly, who runs HHS for California. We actually went back to them recently and just said, listen, we understand any rate increase right now is difficult in your current situation. But you know what? This migration is happening. It's a good thing for you. These patients are finding them ways to capitated payers already in the California market. And this is a good thing. They're finding a way to elevated services. You should allow this to happen and even accelerate it. And so the conversation we're having with them even currently is just accelerating this movement. It's only 3,000-ish families. So it's not like it's some 300,000 patient movement. It's a couple thousand families. But they need access to services, right? They need access to elevated services. And it's not happening today at the Medicare. So I think over time in helping them understand that, advocate for them, I think Dr. Ghaly will come around to that. Yeah, this is a good thing and we should support it. The families want it. These families are very loud in nature. They advocate a lot for themselves, their services. So helping them get to the ultimate place that they need to be is a good thing. Great. And then outside of California, getting back to your comments on Georgia and Massachusetts, maybe you can kind of frame, and I think we've talked about this a little bit offline, but you can frame kind of what you're seeing, the environment in those states versus kind of the dynamics in maybe in Oklahoma where you saw a nice strong double-digit update versus Texas and California, which are still kind of fighting the good fight. We call that Georgia. I think every year we'll call out 2 or 3 states that we are absolutely focused on. The states take about a year or 2 because you really got to educate the legislatures. You got to talk with the governors and the governor's staff. You got to meet with the head of the department that oversees the PDN services. So it takes about a year to year and a half to move states meaningfully. But I think Georgia and Massachusetts are great examples of they have just fallen behind. They're still Medicaid states. So there's no MCO population penetration in those two states for our services. But they've just fallen behind. So to catch back up the nurse wages, it isn't a 3% or 4% rate increase. It's 30%, 35%, 40%. And they get it. The legislators get it. With the CMS funding right now, the federal funding for Medicaid programs, you know it's only about 50% of the dollars that they're allocating are coming from the states themselves. The other 50% are coming from CMS and the federal government. So we've seen this when we put a state on our focus point, we advocate, we lobby. We've seen that it takes us about a year or two to get the states to help support this. And for us, it's all about helping the families. Yes, it helps us grow volume and revenue and rate, but it's really about us engaging more, as Matt said earlier, engaging more caregivers, passing through more wage, and helping these families. Because right now, these families are stuck in children's hospitals. And the delta per day between a children's hospital and our services is about $5,000, $6,000 a day in savings. Even bending the curve by 4 or 5 days to one family is a huge savings to the healthcare system. Great. Moving on to home health on the Medicare side, you know obviously we've heard some of your larger peers battle some of the mixed shift, but you are pursuing successfully a preferred payer strategy there as well. Maybe we can kind of talk about what you're seeing in episodic volumes and in rates. All three of our divisions have a preferred payer strategy. To your point, about 15 months ago, we made the fundamental decision in our home health and hospice business. We're going to drive aggressively towards our preferred payer strategy. We were low 60% episodic. High 50s. That business doesn't work. The home health business doesn't work at low-to-mid 60%. At least we've not seen it work. So we pivoted strongly. We canceled contracts that were not willing to be episodic in nature, that were pay-per-visit. We just reallocated our sales force, focused our business, aligned our clinical capacity, similar to PDS, aligned our clinical capacity with those payers who are willing to pass on an episodic basis. Over the last six quarters, we've driven from 58% to mid-60s-percent to high 60s-percent. Today we're sitting at. 75%. 74%-75% consistently. Our goal, as we talked about in Q1, was to be above 70% episodic. Some of our peers are going the opposite direction, and they've got different issues than us. We're just focused on the 14 states that we're in, focused on being the best episodic payer. Matt always adds appropriately, we're driving great gross margin and great contribution margin with that, but we're also driving great clinical outcomes. So our clinical outcomes are getting better by focusing our capacity on the episodic payer. And I think. Star ratings have improved significantly for us by doing so. We've right-sized the business. It just goes to show the demand outweighs the supply still. That's in that category. Obviously, it does in our PDS segment. It does in our enteral segment. Also in HHH, the demand for services far outweighs supply. Hey, guys, be strategic, be the right thing. Take those that value your resources the most and provide them the best care. Being able to take a patient and give them 13, 14, 15 visits over an episode and take the real care for them opposed to running 4 PT visits and then leaving the home and not knowing if that patient ever got better, the outcomes are just far better in an episodic format than our traditional pay-per-visit. As we sit today, we have a clear path now. So you talk about where are you in the transformation. Fixing home health and hospice last year was number one on our list. And we can put a check by that, that our home health and hospice business is back where we need it. 53% gross margin Q1, a little bit hot. We think that probably settles down in the 49%-51% range. But we're doing the right thing for the business. We're structured in this current choppy Medicare environment. And I would say we are in a choppy home health and hospice Medicare environment. So we're positioned well to now grow this business and grow it being profitable and also driving great clinical outcomes. Great. And moving on just to the guidance that you alluded to earlier, $150 million, that represents a little under 8% margin for the year. And you've talked about line of sight and returning to double-digit EBITDA. And I'm sure this is part and parcel with some of the pathways you've already discussed, but can you kind of talk about the path to get back to that double-digit? Yeah. I think we think it over the next three years, 2024, 2025, and 2026. Ultimately, I mentioned earlier, our goal was to get back to north of $2 billion in revenue and north of $200 million in Adjusted EBITDA. That would put us at about 9.5%, high 9%, close to 10% by some point in 2026. I think that Matt will talk about our synergies. Our gross margins that we've talked about are relatively fixed, meaning they won't change a lot. Our consolidated gross margins will be in that 30%-31%, maybe 31.5%. But as we grow, it won't change a lot, up or down. So where we got to leverage is really SG&A. We took an approach last year to go attack the home health and hospice business and the corporate infrastructure. This year, we're focused on our largest division, our PDS division, and then ultimately looking forward for our Medical Solutions division in 2024 and 2025. Just doing the right thing, taking out the right cost, reinvesting where it makes sense. But we think about leveraging SG&A over a three-year period to help us stair-step back to $200 million. And to do that, we're adding $20 million, $25 million, almost $30 million of EBITDA a year to about $100 million of growth. So I think it's a really nice SG&A story. You can see it in Q1. You can see it in Q1, the work we did in 2023, but I think there's more work to be done in 2024, Matt. Yeah, as Jeff stated, you know we did a really nice job last year focusing on corporate expense and then in HHH and pulling on those levers pretty hard to get the right outcome. Maneuvering that focus forward, PDS is doing a great job this year, actually, of starting to achieve that. And that'll kind of bleed into 2025 a little bit and Medical Solutions kind of starting in Q4 and then kind of knocking that out in 2025. And it's not just cost removal. You know, like, I mean, anybody can go take costs out of an organization. That's not necessarily the short-term or the long-term play if you just turn around and put it back in 6, 7 months later. We're taking away and then investing in the right areas, investing in technology, investing in automation, places where we can get leverage and grow indefinitely with a lot of that leverage. That's where our real focus is. So going and grabbing $3 million and turning around and putting another $2 million back in and it didn't solve anything is now what we're trying to do. Taking out that $3 million and putting in $3 million and then or putting in $1.5 million and then being able to grow 10% without adding another dollar, that's really where we're going to get that operating leverage and need to get that operating leverage. And let me tie that into cash flow, right? Because it's a core part of the conversation. So as we started this transformation in January of 2023, we were still a negative-generating cash flow company. And one of our first commitments was to get to positive operating cash flow. When we did that 2023, we're committed to doing that again in 2024. And really, we're at this inflection point where we've been floating around negative $10 million or positive $10 million of cash flow. But as EBITDA jumps from $150 million to one-something to $200 million, almost all of that is flowing down to positive operating and free cash flow. So we go from being this slightly positive operating cash flow company to really now generating $20 million, $30 million, $40 million a year as you think of 2025 and 2026. It's an important part of our story to our investors and our lenders to get to where we're generating meaningful cash flow. So I think the story Matt just talked about, as we think of 2024, we've commented that we plan to be a positive operating cash flow company this year. I'll be modest. But we're at that inflection point where the difference between $150 and like $170 really is generating meaningful cash flow moving forward for us. That's an important part of our story. Great. Then in the last minute here, maybe we can talk about balance sheet. You guys have a lot of focus on interest rates. You guys have done a lot of good work hedging your exposure there. Maybe you can kind of talk about your profile. Yeah, really nice position. You know, caps and swaps in place, you know, until 2026 and 2027. That kind of keeps us at a 3%, which is really promising. No mature term loan maturities until July of 2028 as well. So have a lot of time to continue to operate the business and move forward before we have to revisit. So I'm really proud of what the teams have been able to accomplish and do it organically as a company, but obviously in a pretty strong position and have a lot of runway before that becomes any issues. Looking at our debt straight up nicely over the last year. I mean, we've got great lending partners, great equity partners, both from our two primary shareholders, the Bain and Whitney, as well as our public shareholders. So I think we got a great runway the next few years. And Matt's point, you tie back to a growth story, a growing EBITDA story, ultimately growing back into our debt structure, right? And I used $200 million specifically. That was important us to get back there to really justify our debt structure. But I think Matt talked about it well. Matt and Debbie have done a great job just building the capital structure, giving us time and room to be able to operate the business within it and really ultimately grow back into our capital structure and have the time to do it. Well, great, guys. I think that brings us to time. Awesome. Thank you very much. Thanks for having us. Appreciate it.