Aveanna Healthcare Holdings Inc. (AVAH) CEO Tony Strange on Q4 2021 Results – Earnings Call Transcript

Aveanna Healthcare Holdings Inc. (NASDAQ:AVAH) Q4 2021 Earnings Conference Call March 29, 2022 10:00 AM ET

Company Participants

Shannon Drake – Chief Legal Officer and Corporate Secretary

Tony Strange – President and CEO

David Afshar – Chief Financial Officer

Jeff Shaner – Chief Operating Officer

Rod Windley – Executive Chairman

Conference Call Participants

Pito Chickering – Deutsche Bank

Sarah James – Barclays

A.J. Rice – Credit Suisse

Matthew Borsch – BMO Capital Markets

Joanna Gajuk – BofA Securities

Operator

Good morning, and welcome to Aveanna Healthcare Holdings Fourth Quarter 2021 Earnings Conference Call. Today’s call is being recorded and we have allocated 1 hour for prepared remarks and Q&A.

At this time, I’d like to turn the conference over to Shannon Drake, Aveanna’s Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Shannon Drake

Thank you, operator. Good morning, everyone, and thank you for joining us today. Speaking on today’s call are Rod Windley, Aveanna’s Executive Chairman; Tony Strange, Aveanna’s Chief Executive Officer and President; David Afshar, Aveanna’s Chief Financial Officer; and Jeff Shaner, Aveanna’s Chief Operating Officer.

We issued our earnings press release and filed our 10-K yesterday. These documents are available on the Investor Relations section of our website at www.aveanna.com as well as on the SEC’s website at www.sec.gov. A replay of this call will be available until April 5, 2022. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, March 29, 2022.

Today’s call may contain forward-looking statements, which may be identified by the use of words such as may, could, will, expect, intend, plan and other similar words and expressions. All forward-looking statements made today are based on management’s current beliefs and assumptions about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Except as required by federal securities laws, Aveanna will not publicly update or revise any forward-looking statement subsequent to the date made as a result of new information, future events or changes in circumstances.

Also, we supplement our financial results reported in accordance with GAAP and certain non-GAAP financial measures. A reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and Form 10-K, both of which are available on our website and the SEC website at www.sec.gov or is otherwise available separately on our website.

Following today’s prepared remarks, we will open the call to questions. Please limit your initial comments to 1 question and 1 follow-up so that we can accommodate as many callers as possible in the allotted time.

With that, I will turn the call over to Aveanna’s Chief Executive Officer, Tony Strange. Tony?

Tony Strange

Thank you, Shannon, and good morning, everyone. Thank you for joining Aveanna’s fourth quarter and 2021 year-end earnings call. On the call today, we will provide some insights into our Q4 results, update you on current operating and reimbursement environments, bring you up to speed on our most recent M&A activity as well as lay out our expectations for the full year 2022.

Before we get into these results in the details, I’d like to take a minute and thank the Aveanna team. As you know, this is our first year-end reporting period for Aveanna as a public company. Our legal, accounting and finance teams have done an outstanding job in preparing us for today. We’ve successfully completed our audit, finalized the 10-K as well as the proxy, all within the required time lines and have line of sight into accelerating our filings by a few weeks for next year.

In addition, I’d like to thank all of our branch personnel and our caregivers for what you do each and every day. By putting our patients and our families first, you create the foundation on which these results are built. Thank you for your dedication and your hard work.

Let’s jump right into our results. As a reminder, at the end of Q3, we acknowledged that the pandemic was continuing to provide disruption to the labor markets. And as a result, we lowered our revenue expectations to a range of $1.675 billion to $1.680 billion. However, through a disciplined approach to managing gross margins, we felt confident that we could maintain our full year EBITDA guidance of $185 million. I’m pleased to report that for the year ending 12/31/21, we reported revenues of approximately $1.679 billion and adjusted EBITDA of approximately $184.2 million or 11%.

Given the ongoing headwinds of the pandemic, inclusive of the sudden onset of the Omicron variant, we are extremely proud of our year-end results. Congratulations to all of our operators for a job well done in a very difficult environment.

In thinking through our year-over-year comparisons, I’d like to remind everyone that Aveanna uses a 4, 4, 5 calendar for accounting purposes. As a result, every 5 years, the fourth quarter has an extra week, making it a 53-week year. Aveanna’s 2020 results include this 53rd week, making it a 14-week fourth quarter.

Revenue for the quarter was $414 million, down 1.9% from Q4 of 2020. However, adjusted for the 53rd week for comparative purposes only, revenue would have been up 5.6%. Likewise, EBITDA for the quarter was $45.8 million, up 1.3% over Q4 of 2020. Again, adjusting for the 53rd week for comparison purposes, EBITDA would have been up by 9.1%. Jeff will provide further details of our segment results in his prepared comments.

We believe that eventually, the pandemic will be in our rearview mirror. And having displayed the discipline to protect our gross margins during these difficult times, we will be well positioned to accelerate growth once again.

Along with the disciplined approach to managing expenses, we continue to experience rate wins across our diversified payer platform. As I mentioned on our last call, 24 of our 31 states have put through rate increases in the last 12 months.

For the first time in my career, we have managed care plans, state Medicaid agencies and even CMS reaching out and asking what can be done to increase access to home and community-based services. We continue to see benefit expansions in several of our key states and are already discussing further rate improvements in states that recently put through rate increases in 2021. And while growing, Medicare represents only 12% of our overall revenue, making it the largest single concentration of any one payment source.

We have 31 unique payment systems across as many states. In addition, we have in excess of 250 individual Medicaid managed care contracts. And while Medicare is a very good partner in our Home Health & Hospice business, Medicaid is an excellent payer partner in the states in which we operate.

Payers fully understand the impact that COVID-19 has had on access to care and have been not only willing, but eager to deploy more resources to manage the care of these individuals in their homes. And by way of example, we’re in discussions with a couple of payers that are willing to explore new operating and payment models for private duty services that move away from an hourly fee-for-service model to a broader care management model, allowing for greater flexibility in staffing requirements. We believe that our payer diversity along with our desire to drive innovation within the benefit provides us multiple opportunities in the expansion of home and community-based care.

Let’s turn our attention to our most recent M&A activity. As reported during Q4, both Accredited and Comfort Care transactions closed in December. Both transactions are well into integration and both are tracking at or ahead of schedule. As you may recall, we expect these two transactions to deliver approximately $200 million a year in annualized revenue. I’d like to welcome all of the employees from Accredited and from Comfort Care to the Aveanna family and to say thank you for all the hard work that’s gone into integration thus far. We’re excited to have you as part of the Aveanna story.

We had originally thought that we would pay for these transactions through cash on our balance sheet with some additional debt while maintaining leverage around 4.5x and then use equity to fill the gap. However, given that the stock was trading at $6 to $7 range, we decided that it would be in the best interest of our shareholders to fund the entirety of the transactions with cash and debt, taking leverage to the 6x range. In doing so, we’re able to reduce the overall cost of capital and are quite comfortable with the resulting leverage profile.

Given the risk of rising interest rates, we have put in place two different forms of hedges across all of our outstanding debt. While we’re comfortable with the current leverage, it’s our long-term desire to reduce leverage through accretive acquisitions and/or the use of operating cash flow to pay down debt. Dave is going to provide some additional detail on our operating cash flow, debt structure and the hedges that I just talked about.

As I mentioned on the last call, we will focus the first half of 2022 making sure that these businesses are fully integrated and look for further acquired growth in the second half of the year. As a reminder, we have a $200 million delayed draw term loan for which we’re already servicing the spread associated with the debt. In addition, we have $182 million of availability under our revolving credit facility should additional financing be needed.

We believe that we’re well positioned to continue to grow through acquisitions as opportunities present themselves. That brings us to where we are now and how we’re thinking about the full year 2022.

Like most businesses, the Omicron variant has had a meaningful impact on our business. Through most of the pandemic, we had between 200 and 300 caregivers out or quarantine due to COVID at any one time. Beginning in December, we saw that number begin to climb, and it climbed to almost 3,000 caregivers for most of January and February. By mid-March, we saw that number begin to trend back down, and I’m pleased to say that as of today, we’re back down to those pre-Omicron levels.

In addition, during the same period, we experienced the great vaccine mandate debate, while the OSHA mandate was ultimately rejected, the CMS mandate has been upheld. While complying with vaccine mandates has been a struggle for most companies, including Aveanna, I’m proud to report that 98% of all of our employees have either been vaccinated or have a qualifying exemption on file, and we are in compliance with all local, state and federal mandates.

All of these transitory disruptions have had an impact on our business, not only in Q4, but more specifically in Q1. While the impacts of Omicron have subsided, the labor markets continue to offer challenges in identifying and hiring enough caregivers to meet the demand. We anticipate these challenges to continue through the first half of 2022 with much of them being realized in the first quarter.

Keep in mind that Q1 will reflect a full quarter of Accredited and Comfort Care but partially offset by the disruption of Omicron, which could negatively affect revenues in the range of $30 million and EBITDA in the range of $10 million to $12 million. As a result, we believe that revenues for the full year 2022 will be in the range of $1.890 billion to $1.920 billion, and adjusted EBITDA will be in the range of $190 million to $205 million or between 10% and 11%.

Notwithstanding further disruptions from additional variants and assuming that the labor market stabilized, we would expect the second half of 2022 to return to a run rate of $215 million to $225 million in EBITDA on an annualized run rate basis.

In summary, Aveanna is a diversified home care company, generating $1.9 billion in revenue with EBITDA margins between 10% and 11%, and we will consistently grow in the low to mid-teens year-over-year. We have an excellent track record clinically and a strong commitment to compliance. Like Medicare, Medicaid is an excellent payer for home and community-based care. The demand for our service has never been higher and the sentiment from regulators and payers alike is that home care is a solution, not a problem.

We believe that Aveanna is positioned to continue its role as a leader in the provision of care and the innovation that will redefine home care as we know it today.

With that, I’ll turn the call over to Jeff for a little bit deeper dive into our segment results.

Jeff Shaner

Thank you, Tony. Before I dive into Q4 and our 2021 year-end operating indicators and key metrics, I’d like to spend a few minutes on our COVID vaccination efforts, Omicron variant impact and caregiver employment trends.

As Tony mentioned, we are very pleased with our overall Aveanna vaccination and approved exemption rate of 98%. Our collective efforts to fully vaccinate our staff has largely been achieved. And at this point, all new employees are documented with a vaccine or qualified exemption at their hire date. While this was a major push for 2021 and specifically Q4, we are in full compliance with local state and federal laws regarding vaccination status. Going forward, we see this process being a part of how we manage the business day to day.

The Omicron variant had an impact on our December results as it picked up steam aggressively into the new year. We experienced the greatest disruption from Omicron in Q1 of 2022 as it affected almost 10x the number of quarantine employee cases. Prior to December, we averaged 200 to 300 employees per week in quarantine status and therefore, not working. By late December, that number had grown to over 1,000 employees per week and at its peak, in Q1, almost 3,000 employees per week in quarantine. Although short-lived, Omicron left a significant mark on our ability to staff open shifts, admit new patients and complete even day-to-day branch task.

Now on to caregiver employment trends. Without the benefit of knowing the impact of the upcoming Omicron variant, we made the strategic decision to invest in a onetime effort to reengage caregivers and provide them with a monetary incentive to stay engaged or return to Aveanna. We refer to this program as the return to work program. In short, the program began in December and ran through December 31.

During the program, caregivers were incentivized to do one of the following: Either, a, join Aveanna as a new nurse; b, rejoin Aveanna if they previously worked for us but had left; c, work additional hours if they already work for us; or lastly, commit to working exclusively for Aveanna.

Leading up to the onset of Omicron, we saw 10 straight weeks of increased caregiver engagement. On a onetime basis, we invested close to $11 million in cash to run the program with moderate success. The return to work program has ended, and at this time, we do not have plans to reinstitute similar programs for 2022.

Now on to the Private Duty Services segment. During Q4, we produced $330.5 million of revenue. Revenue was driven by approximately 9 million hours of care provided during the quarter or a 7.7% decline in volume over Q4 2020. The 7.7% decline in PDS volume is adjusted for the comparable 13-week Q4 2020.

Patient demand continues to be at all-time highs as we continue to partner with children hospitals and payers to find new solutions to get our pediatric patients home. The primary drivers of the decline in volume was the number of caregivers exposed to Omicron and the overall labor shortages. I do expect PDS hours to improve in Q1 2022 on a sequential basis, even with the impact of the Omicron variant.

Our Q4 revenue per hour of $36.56 was up $1.85 from Q4 of 2020 or 4.6%. This was primarily driven by reimbursement rate improvements and Medicaid program enhancements. With 24 2021 PDS rate increases, we continue to actively pass through wage rate improvements to our caregivers. We are already experiencing rate wins into 2022 and expect this trend to continue as we progress throughout the new year.

Turning to our cost of labor and gross margin metrics, we achieved $86.7 million of gross margin or 26.2% in Q4. However, when adjusted for the approximately $11 million invested into the return to work caregiver program, our Q4 comparable gross margin would have been 29.6%. As this caregiver program was onetime investment in Q4, I expect PDS gross margins to remain in the 29% to 30% range moving forward.

Our spread per hour of $9.59 was also impacted by the return to work program. On a comparable basis, Q4 spread per hour would have been $10.81, down from its peak of $11.18 in Q3 of 2021. As I mentioned during our Q3 call, we continue to pass through the rate increases in the form of strategic investments in caregiver wages to drive volume growth in our PDS segment. Long term, I still believe $10 to $10.50 is the ideal spread for our target balanced against a 3% to 4% year-over-year organic volume growth for our PDS segment.

As Tony mentioned, we closed on the Accredited Home Care acquisition in December. Our IMO team is working through the integration plans, and I am pleased with the progress we’ve made to date. We expect to wrap up the Accredited integration and synergy capture by the end of Q2. California continues to be a very important state to our Aveanna story and the Accredited business only further strengthens our position.

Moving on to our Home Health & Hospice segment for Q4, where we have continued to expand our geographic presence in Alabama and Tennessee with our acquisition of Comfort Care. I’m pleased to share that we are moving efficiently through integration and the Comfort Care team has assimilated very well into our Aveanna family. The business is performing in line with expectations, and we expect to finish integration in the majority of synergy capture in Q2.

During the quarter, we produced $48.7 million in revenue, a 181% increase over Q4 2020. This growth was driven by 10,500 total admissions, approximately 67% being episodic, and 11,000 total episodes of care. These volumes are in line with the Q4 seasonality of the Home Health business and reflect the impact of the Omicron variant in December. Revenue per episode for Q4 was $2,942, up 1.7% from Q3.

On a current run rate basis, our Home Health & Hospice division is approaching $300 million in annualized revenue. I’m pleased with the organic growth rates of our Home Health & Hospice business and believe it will remain a high single-digit admission growth segment for Aveanna.

From a cost and margin perspective, Q4 gross margins were 45.9% primarily driven by higher seasonal PTO usage and the temporary impact of the Omicron variant in December. 2021 annual gross margins were 47.2%, and we believe there remains additional room for improvement. We see the Home Health & Hospice business segments ideal gross margins landing in the 48% to 50% range.

Lastly, we continue to ramp up our clinical innovation investments to support the value-based purchasing efforts in Home Health. We are well positioned for value-based purchasing and look to benefit from its nationwide expansion in 2023.

Now on to our Aveanna Medical Solutions segment results for Q4. During the quarter, we produced $34.9 million of revenue. Revenue was driven by approximately 77,000 unique patients served, UPS, or revenue per UPS of $453.39. Revenue per UPS was down approximately $10 or 1.9%. The primary driver of rate decline was the impact of the national enteral contract we signed effective September 1, 2021. The longer-term impact on rate per UPS should normalize in the $440 to $460 per UPS range. Lastly, from a volume perspective, adjusted for the 13-week Q4 2020 impact, volumes for Q4 were flat year-over-year.

We’re experiencing enteral product supply chain delays that have temporarily burdened our ability to fill orders. In some cases, we have patients needing specialty enteral products and the supplier doesn’t have inventory available. We see these supply chain issues as temporary in nature and are working with our distribution partners to immediately address them.

Turning to our cost of goods and gross margin metrics. We continue to experience stability in gross margin with $15.4 million in Q4 or 44.1%. Medical Solutions 2021 gross margin of 44.6% was in line with our expectations. Moving forward into 2022, we expect gross margins to remain in the 41% to 43% range as a result of the impact of the national payer contract mentioned above, and pressures on supply chain product availability.

Finally, the demand for our enteral nutrition products and services continue to be very robust. Our industry-leading clinical model and highly efficient distribution network will allow us to weather the short-term impact of the supply chain shortages. We remain upbeat about the long-term value that Medical Solutions provides and its positive growth impact to Aveanna as a whole.

In summary, all three of our business segments have proven to be very resilient in a challenging environment. I am proud of our disciplined approach to managing margins while investing in additional caregiver wages. The Aveanna team is dedicated to providing high-quality and cost-effective healthcare in our patients’ homes. Regardless of the short-term market conditions, home care remains the #1 choice of our patients, families, referral sources and payers.

With that, I’d like to turn the call over to Dave for additional color in 2021. Dave?

David Afshar

Thanks, Jeff. Tony and Jeff have provided some details on the fourth quarter, and I’ll go ahead and provide an overview of fiscal year 2021 as well as provide some cash flow, debt and hedging details.

Starting out with revenue. 2021 revenue was $1.68 billion, an increase of $184 million or 12.3% from 2020. Our 2021 revenue growth was primarily attributable to $146 million of growth in our Home Health & Hospice segment as our 2020 HHH M&A contributed a full year of revenue in 2021 as well as incremental partial year revenue provided by our 2021 HHH M&A. Our PDS and Medical Solutions segments also contributed to incremental revenue of $28 million and $9 million, respectively, to our 2021 revenue growth. And as Tony and Jeff both mentioned, fiscal year 2020 contained 53 weeks as compared to 52 weeks in 2021, which affects the comparability of our 2021 key performance measures to 2020.

Now turning to gross margin. Our gross margin percentage increased to 32.3% in 2021 from 30.4% in 2020. This was attributable to the significant growth in our HHH business, which has a higher gross margin percentage than our PDS business as well as a 50 basis point increase in our PDS gross margin percentage. Field contribution margin also increased 30 basis points to 14.6% in 2021 from 14.3% in 2020.

As we think about Field contribution, recall that while HHH has higher gross margins relative to PDS, it also has higher branch and regional administrative expenses. And as a result, we would not expect to see the full amount of the increases in gross margin percentage flow through to Field contribution margin.

Corporate expenses were 7.8% of revenue in 2021 as compared to 7.6% of revenue in 2020, primarily as a result of growth in our noncash share-based compensation costs as further discussed in footnote 13 to our financial statements and in our MD&A. Adjusted corporate expenses, however, decreased from 5.5% of revenue in 2020 to 5% in 2021. The principal adjustments from corporate expenses to adjusted corporate expenses in 2021 include integration costs and noncash share-based compensation that can be found in the corresponding table in our press release.

I’d like to provide a little color on the goodwill impairment charge we reported in Q4. We preserved a significant decline in our market capitalization over the course of 2021. The continuing impact of COVID-19 on our business has pressured our clinical workforce and caregiver availability in our core PDS businesses, thereby constraining PDS volume growth and expectations. As a result, we recorded a $117.7 million impairment charge in our PDS segment in the fourth quarter.

Moving on to net operating loss, net loss and adjusted EBITDA. Operating loss was $36.1 million for fiscal year 2021 as compared to $3.5 million in 2020. While operating loss was positively impacted by a $31.5 million increase in Field contribution in 2021, the primary driver of the increase in operating loss was $42 million of incremental goodwill impairment charges that we took in ’21 versus ’20.

Net loss was $117 million in 2021 compared to $57.1 million in 2020. There are a number of moving parts driving the increase in net loss, which you can see in our income statements with the primary drivers being the increase in operating loss I mentioned earlier as well as the absence of a $50 million legal settlement that we received in 2020.

As Tony mentioned earlier, we were pleased to report adjusted EBITDA of $184.2 million for fiscal year 2021, a $31.8 million or 21% increase from 2020. And this represents an 11% adjusted EBITDA margin for 2021.

Turning to operating cash flow. Net cash used by operations was $11.4 million in 2021. Bear in mind that this included $38.1 million of cash repaid to government agencies in 2021 related to certain CARES Act items, including $25.9 million paid to the IRS for payroll taxes that we deferred in 2020 and $12.2 million paid to CMS for advances received in 2020 by certain of the companies we acquired.

Over time, some of our analysts and investors have asked questions about how to think about GAAP operating cash flow in relation to adjusted EBITDA and I want to provide some color on that here.

When you think about our operating cash flow in relation to our adjusted EBITDA, there are a couple of significant drivers of variances between the two, with the largest being cash paid for interest. In 2021, cash paid for interest was $59 million. And as a result of rising forward-looking market expectations for interest rates in ’22 based on current leverage, we expect the cash paid for interest will increase in ’22 and be more significant in relation to our adjusted EBITDA.

Our M&A-related costs also create a variance between adjusted EBITDA and operating cash flow. M&A-related costs include acquisition-related costs and integration costs, both of which you can find in our adjusted EBITDA reconciliation in MD&A and which approximated $30 million in 2021. COVID related costs were $19 million in 2021, which can be — which can also be found in our adjusted EBITDA reconciliation.

And one last item is the $38.1 million of cash we paid to government agencies in ’21 related to the CARES Act items that I mentioned a moment ago. This caused in part working capital to drive a significant variance between adjusted EBITDA and operating cash flow in ’21.

To finish up on this topic and overall, hopefully, this led some useful color on some of the larger drivers of variances between adjusted EBITDA and operating cash. I would also encourage you to review our statements of cash flows included in our audited financial statements as well as our adjusted EBITDA reconciliation in MD&A because the examples I provided here are not all inclusive, but again, intended to provide useful reference points and color.

I’ll now provide a credit facility and hedging update. As a refresher, after our IPO last April, we used $407 million of proceeds to fully repay our second lien term loan at the time and pay $100 million down against our first lien term loans. Then in August 2021, we refinanced our first lien term loans into a single $860 million first lien term loan bearing interest at LIBOR plus 3.75% with a 50 basis point floor.

Then in Q4, we entered into a new $415 million second lien term loan to finance our Q4 M&A for the reasons that Tony mentioned earlier. The new second lien term loan bears interest at LIBOR plus 7%, also with a 50 basis point LIBOR floor.

In Q4, we also entered into a $150 million accounts receivable securitization facility. In aggregate, we had $1.39 billion of outstanding variable rate debt as of year-end.

We do have two hedges in place against our debt. The first is a $520 million notional interest rate swap that converts $520 million of variable rate debt to fixed rate debt. The swap expires in June 2026. We also have an $880 million notional interest rate cap, which caps our exposure to LIBOR increasing over 3% and that — the interest rate cap expires in February 2027.

In summary, and as I wrap up here, our 2021 operating results underscore the resilience of the Aveanna team amidst the challenging operating environment. Our IPO and subsequent capital structure improvements have prepared us to take advantage of the opportunities ahead of us with liquidity that is supportive of our 2022 acquisition goals.

In addition, I’d like to say a big thank you to the entire Aveanna team for supporting the timely completion of our audit and filing of our first 10-K as a public company, in particular, our accounting, revenue cycle, finance and legal teams have moved mountains to make it all happen. And our professional services providers, including Ernst & Young and Greenberg Traurig, have provided exceptional service to Aveanna in the process.

And with that, operator, I think we’re ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Pito Chickering with Deutsche Bank.

Pito Chickering

So a lot to unpack here. I guess on the PDS segment, what happens sort of in the first quarter when the patients were unable to sort of be staffed in the first quarter? Did they go back to the hospital? Did they live without care? Or did they go to another provider? And how should we think about sort of that rebounding back when your staff is available?

Tony Strange

So first of all, thank you for your question, Pito. And let me tell you what doesn’t happen. They didn’t leave and go to another provider.

Outside of that, all of the above is probably true. Some patients might have had to seek care in a hospital if they’re ventilator- or trach-dependent. The most common answer is the family has to pick up that additional care. So mom and dad or grandmother or brothers and sisters all have to chip in and pick that care up.

And I think what I thought where your question was headed, though, that once those hours are lost, there’s really no way to go back and make up those hours. And so to your point, as the caregivers reengage or come back out of quarantine, then we can begin staffing those hours.

I think we talked about in the prepared remarks that we really kind of saw that bottom. January and February were pretty dire months in terms of the impact of Omicron. And then in March, we began seeing those caregivers reengage. But Jeff, anything you want to add to that?

Jeff Shaner

Just the fact that Pito, like as Tony said, with this variant, it was really a 7- to 10-day quarantine period. It was a rolling period because it was exposing and positive confirmations on so many different states and different communities.

But to Tony’s point, we paid those caregivers as if they had worked in that period of time that they were gone, which is — which was our policy all along, which did allow those caregivers to stay with us. This is a very transient group of PRN employees. We felt it was necessary to pay them to keep them whole with that process.

And so as abruptive as it was, the good — the positive side of it was those nurses and caregivers did come back after their quarantine. And I echo Tony’s comments, it’s a tremendous burden placed on the parents and the family. They have to be up with these pediatric children and sometimes 24 hours a day, stay with them while they’re sleeping. And so you can imagine a family and the pressure puts on them, but we are pleased to be able to reengage the caregivers after the quarantine period was over.

Pito Chickering

Okay. And then one for a guidance question. I assume there’ll be a lot of questions around guidance today, but sort of two parts. The first one, can you sort of help me bridge what fourth quarter EBITDA would have been if all the deals are closed at the beginning of the quarter, just the launch pad in the first quarter. I was estimating around $53 million. Is that in the ballpark?

And the second one, with the first quarter effectively closed, you gave guidance on the first half of the year, but can you be more specific about a range of first quarter EBITDA has now give us sort of the cadence in the rest of the year?

Tony Strange

All right. Well, let me see if I can take that kind of one piece at the time. So if you think about Q4 with a full quarter impact of both Accredited and Comfort Care, however, let me caution you because we won’t have realized all of the synergies that quickly in the Comfort Care and Accredited deal. So remember, the synergies will roll on as we move throughout really the first half of 2022.

And Pito, I want to be careful because we don’t give — we don’t really provide quarterly guidance. But if you were to take our fourth quarter numbers and think that there’s probably another, call it, $6 million to $7 million of additional EBITDA associated with having the full year of — I mean, a full quarter of Accredited Comfort Care in place and then offset that by the impacts of Omicron, so that’s kind of how to think about fourth quarter moving into first quarter.

However, for all the reasons we’ve already talked about, the Omicron variant really impacted our business January and February. And you can really — well, if you can really see it across all three segments, however, the most significant was Private Duty because that’s where we got one nurse, one patient. And if that nurse is not working, revenue is not being generated.

So we think the impact of that in Q1 is going to be pretty significant. I think in my prepared remarks, I painted a picture where we could see revenues being off in total in the range of $30 million in Q1 and impacting EBITDA, which is really a gross margin number kind of in that $10 million to $12 million.

But for those reasons, our full year outlook is reduced by the impact of what we’re going to experience in Q1 and maybe bleeding into Q2 a little bit. But that’s the picture that we’re trying to paint. And we’re actually giving more color than we would be accustomed to because when you’re thinking about Aveanna being a — I think the numbers we used $215 million to $225 million EBITDA run rate company, I think that’s still the right way to think about our business. It’s just we’re going to have a different starting point because of the impact that Omicron had in Q1.

Operator

Our next question comes from the line of Sarah James with Barclays.

Sarah James

I’m going to stick on the guidance topic here for a little bit. You guys mentioned a couple of other moving pieces. You’ve got really strong rate increases coming through, which generally tend to affect PDS hours. Can you talk about the cadence of rolling those out. Should we think about them being fully put into your hourly rates for the full year starting in 1Q?

And then the supply chain issues that you flagged, are those included in guidance? And do you think about it just being a 1Q issue?

Tony Strange

So Jeff, in a minute, why don’t you answer the question about how we’re thinking about the rate increases flowing through in 2022?

Sarah, because you’re kind of pulling in that Q1 number, let me remind everybody that in Q1, especially in private duty where everything is so labor-intensive, we typically see a higher payroll tax impact during the first quarter. That really kind of rights itself in March and April. So that’s another thing that’s going to pull on that first quarter a little bit.

I think some of our most recent increases, you’ve actually seen in a portion or some of Q4. We’ll get to experience that in the full quarter. But as both Jeff and I mentioned in our prepared remarks, we’re already seeing, in some cases, some of the same payers have put through rate increases in 2021 back at the table in discussions with 2022. With that, Jeff, why don’t you comment about how we think about those playing throughout the course of the year?

Jeff Shaner

I think Tony said it well. We already have four rate increases that are in the books for this year. Those are — have effective dates in Q1 and Q2. We’re already engaged with dozens of other states as they trend towards their usually July 1 and September and October 1 fiscal year and your beginning date. So I think we’ll see ourselves back in the mid — probably mid-teens, high teens from rate wins.

And then I think we’ve continued to evolve our strategy around increasing the benefit opportunities through home and community-based services, and we see a real opportunity to continue to do that this year. I think, as Tony mentioned, a lot of the burden has fallen on the families. The parents that are with these children every day. And I think that we see — we have a couple of states that embrace the parent being a lesser skilled worker and we are continuing to lobby for that acceptance in more states, and we had one state adopt that this year 2022. So I think we’ll see more states adopt that family member becoming a full-time caregiver of ours on the lesser skill or unskilled piece.

The second part of that was the supply chain for AMS. Sarah, that really kind of built up over, I’ll call it, the last 4 months of last year as the supply chain as we saw the ships out in L.A. Port. Some of those ships have our enteral specialty products, and they’re coming from Europe. And we just saw that our distribution partners were starting to run thin on inventory, especially on the specialty products, not as much of the generics, but the specialty products. Many of our young, young kids, kids kind of 0 to 5 age really, really are on specialty formulas that are very specific to their disease state. And so getting those products and getting them back in the shelf so we can distribute them with a big deal.

I do see light at the end of the tunnel in that. I think as we look forward, certainly, Q1 continued to be pressure on the supply chain as it related to AMS supply. And I think as we look out, we see some of them — some of the issues being solved in Q2 and then certainly by summer, much of that inventory being resupplied so that we can ship every and any medical solution into a product that is needed at the time the patient is need it.

Sarah James

Great. And just one follow-up here on rates. Can you help us understand, are there any states where the rate enhancements have been part of a multiyear budget? So you have some go-forward clarity.

And as we come to the end of the public health emergency and the enhanced FMAP is rolled back, are you guys having any discussions with states on their view of program funding?

Jeff Shaner

Yes. That’s a great question, Sarah. I think I’d answer both. So — or maybe see all of the above. We’ve got permanent rate. Looking backwards of the 24 of those, we have permanent rate. We have temporary rates that have continued to be temporary and moved into the future around the public health emergency. And then lastly, I would say we’re also seeing onetime payments. So states that are using the home and community-based services, Federal Rewards as onetime payment updates.

And so the thing that we’re most focused on is long-term rate. So we’re most focused on moving the rate long term to continue to attract nurses. And I would say, secondary to what I said before, we are very focused on moving the benefit, additional services both of skilled and unskilled services, but also, as Tony mentioned, we now have audiences with the largest Medicaid managed care providers in America talking about a different payment model. And I think that’s what excites us the most is they have come to us and said, let’s come up with a different solution to where we can keep these kids out of the hospitals, keep them safe at home and truly reduce the total cost of care. And that, to us, is the exciting part of the future.

Tony Strange

And Sarah, I’ll answer the other side of your question, though, and maybe I interpreted it wrong. If your question related to what is the risk of downside in the event that rates were to pull back, I can tell you that in our view today, we don’t have any rates that are pulling back. Our rate is only going to be where it is or positive from here for the foreseeable future.

Operator

Our next question comes from the line of A.J. Rice with Credit Suisse.

A.J. Rice

I just want to make sure I understand. I know there’s a lot in the first quarter going on for ’22. But when you look at the rest of the year, and I understand it may be a little spillover to the second quarter, your revenue growth assumption for the back half of the year, if you take out the contribution from acquisitions, have you changed your thinking about what the organic growth was? I think we talked about this year because of labor originally not being the 8% to 10% organic growth, but maybe be it more in the mid-single digits. But it almost looks like, unless I’m doing the math wrong, which is possible, you’re now looking at something in the low single digits. Is that right? Can you give us a little more flavor on what’s baked in acquisition versus organic in the — as you come out of the Q1 noise?

Tony Strange

Yes. A.J., nothing has changed in our thought process. As a matter of fact, and I’ll even unpack it a little bit further, we still think of that private duty business, that core private duty business, in the skill side of that, we’re growing in that 3% to 4% range. In the unskilled side of private duty, that business, to all the reasons Jeff talked about, we expect it to grow in the high single digits.

Our Medicare Home Health & Hospice business is going to grow in the high single digits. Our AMS business is going to grow in the high single digits. And overall, I think our growth rate, we still believe will be in that 5% to 6% year-over-year organically. And I think as you see us get through the end of ’22, we’re assuming that those kind of growth rates are — will come back.

So I don’t think our thoughts have changed at all. I think maybe what you might be seeing is kind of the ramping back of the big dip that we’re taking here in the first half of the year. I think you’re seeing some of the impact of ramping that back. We have a little bit of seasonality that we have to contend with for Q3. So in general, Q3 is usually one of our lower quarters. So you may be seeing that built in.

But I don’t think our sentiment on the overall business has changed at all. If anything, I think we see that there’s opportunity for upside on that. Our Home Health & Hospice business is growing. Some of the creative and innovative things that Jeff talked about with some of our payers where we’re now able to hire family members to provide care and have greater flexibility with staffing, I think all of those things will go into accelerating growth rates.

A.J. Rice

Okay. And then maybe similar question on the labor front. I know a lot of moving parts in the fourth quarter and the first quarter. But again, as you move into the second and then definitely the second half, what is your assumption about year-to-year labor cost on whatever metric you’re looking at it for both the PDS business and the adult home business? What kind of increase are you assuming baked into that guidance?

Tony Strange

Well, I think the best way to think about that, A.J., is in Jeff’s prepared remarks, he referenced spread again. And so instead of focusing on the margin, we will kind of focus on that spread. And in states where we see rate increases, we will take those rate increases and in a very disciplined manner, past some of those rate increases along in wages to our caregivers. And that in and of itself will help facilitate growth.

But as it relates to the spread, we’re going to be very disciplined about passing these rate increases through to caregivers in the form of wages because we have to manage the gross margin. In this business, once you give up the gross margin, you will never get it back. And so it takes that 30% gross margin for us to run that business and we’ll be disciplined about it.

I guess what I’m trying to give you — to paint a picture for you, when we get a rate increase in a state, and I’ll let Jeff, you comment on this, we just don’t say, okay, well, let’s just give everybody an increase across the state. It’s market by market and sometimes patient by patient.

Jeff Shaner

Yes. And A.J., as Tony said, the rate increase is effective on one specific date for all patients that fit a certain reimbursement model. And then to Tony’s point, it takes us weeks, in many cases, months, to spread that wage right out. And that’s why I think our spread, we feel confident will still be in that probably north of $10.50 range in PDS in Q1 and probably closer to $10.50 in Q2.

On the adult side, I think as we said in our prepared remarks, we still see room for gross margin improvement. I think we’re still growing our systems and our KPIs for our Home Health and now our Hospice business. And I think we were in the 47% range at the end of last year for the full year, and we see that probably growing into the 48% to 49% range in 2022. So I think there’s still room for improvement on the HHH side.

Tony Strange

So Jeff, I think the best demonstration of that, not guys, I’m doing this all from memory. But if you go back to Q1 of 2020, I believe the spread was right at $10.50. In Q2, it went to $10.80. And then in Q3, it jumped all the way to $11.18.

And both on our Q2 call and on our Q3 call, Jeff, we talked about having to pull that number back a little bit because at $11.18, that’s actually running a little bit hot. So what you’re seeing play through 2021 is exactly what we said would happen is that as these rate increases come through, there is somewhat of a lag time between that and when you start passing those down through wages. And I think the spread Jeff talked about today was just over $10.80, I think, is a good demonstration of that putting some of those dollars back to work, and we’ll continue to do that in a stair-step function as the continue to improve throughout 2022.

Operator

Our next question comes from the line of Brian Tanquilut with Jefferies.

Brian Tanquilut

Just shifting gears a little bit. I know there’s been a lot of discussion on gross margins. But as I look at your regional and corporate expenses, down sequentially and even down year-over-year in corporate. Just trying to figure out the durability of these levels and how you’re thinking about kind of like G&A growth going forward?

Tony Strange

Well, we — when we go through acquisitions, those are the areas where we’ll get the most synergies. And so as I made a comment a while ago, we will begin to see the synergies associated with a $200 million increase associated with Accredited and Comfort Care, we’ll begin to see those synergies flow through in the first half of the year. So in terms of durability, we think we will be able to continue to control those expenses and leverage those expenses as the company grows.

Now some of that is attributable to some insurance premiums and other things like managing through crude and — every single quarter, we true up incentives to where the business is operating that date. So all of those things will continue to play through. But we think the leverage is quite sustainable at the SG&A line for corporate, regional and area expenses.

Brian Tanquilut

Got it. And then, Tony, since we’re in the topic of home nursing. I know you said that the two acquisitions are performing at or above plan. So just any comments you can make in terms of what you’re seeing in terms of like nurse recruitment and the referral patterns that you’re seeing coming out of the hospitals as you’ve started digesting those two assets?

Tony Strange

Well, as it relates specifically — I’m going to broaden your question, as it relates specifically to those two assets, their businesses are doing well. We’ve not seen any slowdown or pullback from referral volumes or admissions or hour staff. And so those two businesses specifically are doing great. .

Matter of fact, I’ll tell you the folks out at the Accredited deal in California, that’s been a pleasant surprise. Their volumes have not only held but improved. And so we’re really excited about both those transactions. I’m going to expand your question a little bit, and I think both Jeff made a comment about it and so did I.

The demand for our services has never been higher. We have — especially on the Private Duty side, we have patients in hospitals waiting to come home. There’s — a matter of fact, we referenced this at our most recent healthcare conference, there’s now — there’s a Los Angeles Times article, there’s a Philadelphia Inquirer article, there’s a Washington article, all around patients waiting to come home and the lack of access to care for home and community-based care. And we think this just creates a tremendous tailwind going forward that people have to recognize and investments need to be made into expanding home and community-based care through some of the innovative things that Jeff talked about. Let’s pay caregivers, let’s pay family members to keep these patients at home. And I think we’re well positioned to lead that innovation, and we’re pretty excited about it.

Operator

Our next question comes from the line of Matt Borsch with BMO Capital Markets.

Matthew Borsch

How you expect markets to shake out as we get to the second — would agree with your assumption that — let’s all hope — how do you see — within that estimate that you’re getting — new constraints — going around.

Operator

Mr. Borsch, your line is cutting in and out.

Tony Strange

Matt, I mean…

Matthew Borsch

Is that better?

Tony Strange

Matt, I’m sorry. You were cutting in that. I couldn’t — we couldn’t hear your question.

Matthew Borsch

I’ll try again. I’ll circle back.

Tony Strange

Yes. Operator, I’m sorry. Matt, we’ll be glad to — if you can hear us, we’ll be glad to catch up with you in a little bit. But operator, maybe we’ll go to the next question while Matt works out his audio.

Operator

Our next question comes from the line of Joanna Gajuk with Bank of America.

Joanna Gajuk

So I guess the one question and one follow-up. So the one question, in terms of the cash flow. So obviously, you highlighted a couple of these different things that impacted last year. So how should we think about the cash outlook for this year going forward?

David Afshar

Joanna, thanks for your question. I think we have a good cash flow generation opportunity. When you look at the net cash use of $11 million in ’21, just recall that $38 million that I mentioned that we repaid related to CARES Act items on the deferred payroll taxes as well as the CMS advances. So that $38 million weighed down our cash used for operations in 2021.

And then I’d say, when you think about the overall flux in cash flow year-over-year, that change might jump out at you. But again, consider some of the nonrecurring items that bridge — I’m sorry, that bring a change into perspective. The biggest driver of the year-over-year change in cash flow was $47 million of cash provided in 2020 related to those social security taxes that we deferred as permitted by the CARES Act. And then in ’21, we repaid $26 million of this to the IRS in the fourth quarter. So that’s a comparative usage of $73 million in operating cash year-over-year.

Then the other significant item driving the flux was a $50 million legal settlement we received last year. As we look out into 2022, we expect to generate positive operating cash flow. Bear in mind that we will pay another $25 million or so to the IRS in the fourth quarter of 2022. Those are some of the larger moving parts in cash flow but I also direct you to our liquidity and capital resources section in the 10-K for some more insight on that.

Joanna Gajuk

Right. Because I guess now with additional debt, for the two deals that you closed in Q4, that’s what I was getting at, whether you expect to be positive operating cash flow considering the incremental interest expense? It sounds like you think it’s going to be positive for the year.

David Afshar

That’s right, Joanna. That’s right. I mean we think we’ve got a good opportunity in front of us. As Tony mentioned earlier, we’re already servicing the spread on our delayed draw term loan. So any M&A that we drive or that we secure with that delayed draw will be very accretive to operating cash flow.

Joanna Gajuk

Okay. And if I may, just a follow-up on the discussion previously in terms of the two acquired assets because I guess, previously, where you talked about combined, I guess they were kind of running at a $40 million annualized EBITDA. But it seems like maybe there was some impact there, too. So can you kind of frame for us whether this is kind of the run rate for this to us? Or how much lower, I guess, they’re running at because of what’s happened in Q1?

Tony Strange

So yes, I think the answer to your question is we don’t — we have not changed our thought process or outlook about these acquisitions at all. We still believe that they’re going to perform at or better than the model we discussed before.

Now with that said, neither Accredited, nor Comfort Care are immune to the impacts of Omicron in Q1. They’re experiencing the same kind of staffing issues that we described for the rest of our business. With that said, all of the impact inclusive of Accredited and Omicron were in the numbers that I talked about where we felt like it was going to impact revenues by $30 million and EBITDA by $10 million to $12 million. That’s inclusive of the impact that it would have with Accredited and with Comfort Care. Hopefully, that answers your question.

Operator

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.

Tony Strange

Thank you, operator. And again, thank you, guys, for investing your time and learning about Aveanna and being interested in our story. As always, we’ve tried to be as transparent as possible and we’ll also make ourselves available to anybody that needs to do some additional follow-up. Please give us a call and let us know. Hope you have a great day, and thanks for your time.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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