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Operator
Good day and welcome to the Addict Home Care's second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead.
Drew Anderson
Thank you. Good morning and welcome to the Addis Home Care Corporation second quarter 2022 earnings conference call. Today's call is being recorded. To the extent any non-GAAP financial measure is discussed in today's call, You will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding ADDIS expected quarterly and annual financial performance for 2022 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations, and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in ADIS filings with the Securities and Exchange Commission and in its second quarter 2022 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. I would now like to turn the call over to the company's chairman and chief executive officer, Mr. Dirk Allison. Please go ahead, sir.
Dirk Allison
Thank you, Drew. Good morning and welcome to our 2022 second quarter earnings call. With me today are Brian Popp, our chief financial officer, and Brad Bickham, our president and chief operating officer. As we do on each of our earnings calls, I will begin with a few overall comments, and then Brian will discuss the second quarter results in more detail. Following our comments, the three of us would be happy to respond to any questions. While Brian will give you a more detailed review of our financial results, I wanted to highlight a couple of items from our second quarter performance. First, even with the labor challenges we are seeing in parts of our industry, our team grew revenue 8.7% to $236.9 million for the second quarter of 2022, as compared to the second quarter of 2021. This resulted in sequential adjusted earnings per share growth to 91 cents as compared to 77 cents for the Omicron impacted first quarter of this year. Second, we had a strong cash flow from operations of $56.5 million this quarter, which reduced our net leverage position to less than one times EBITDA. While we expected our results to return to a more normal level following the decrease driven by the first quarter Omicron surge, it is nice to see our team actively manage the challenge and make it a reality. I am very pleased overall with our second quarter performance with favorable trends beginning around mid-February, continuing each month through the end of the quarter and further through July. Even with the growing prevalence of the most recent Omicron subvariant, our team has continued to perform. Let me discuss this latest COVID subvariant that we have started to see. Throughout most of the second quarter, we saw little effect from the COVID virus. During April and May, we saw continued decline in the number of patients and caregivers who were in quarantine from the first quarter Omicron wave. However, During June, we saw increased effects of the new Omicron sub-variant primarily in our personal care segment. This newest wave has resulted in a slight increase in our consumer and employee quarantines, which so far has had a minimum impact on our financial results as total quarantines remain significantly below those we saw with the Delta and original Omicron waves. We continue to monitor quarantine rates closely but believe that we will be able to successfully work through these ongoing surges as we have historically. As we discussed last quarter, the labor environment remains one of our most challenging issues. While we are still facing this issue across our company, we are starting to see improvements in our personal care segment, with hires per business day for the second quarter of 2022 increasing approximately 21% over the second quarter of 2021 and approximately 9% on a sequential basis over the first quarter of this year. This improving hiring trend has continued into July with hires per business day running slightly ahead of our second quarter of 2022 performance. As we previously discussed, we are constantly evaluating our sourcing, hiring, and onboarding processes to further improve our personal care hiring numbers to meet the continued demand for our services. While hiring in the hospice and home health business remains a challenge, we did see improvement over the last couple of quarters with an increasing ability to hire new clinicians as well as a modest reduction in our clinical turnover numbers. Overall, we feel the trend in both hiring and turnover is moving in a positive direction in all segments of our business. During this quarter, we started to receive more substantial funding from our states as they implement their plans to deploy funds provided to them under the America Rescue Plan Act, or ARPA. With respect to our three largest states, Illinois used the funding to accelerate last year's rate increase by two months, as well as fund the upcoming statewide rate increase, which will be effective January 1st, 2023. New Mexico and New York have provided funding for direct payments to providers to be used primarily to assist in recruitment and retention of caregivers. Several other states have been given either temporary or permanent rate increases, which should help us hire and retain more caregivers as the majority of these funds are to be passed along to our employees in wage increases. As for Illinois, our largest state of operation, we will receive a 70 cent per hour statewide rate increase effective January 1st, 2023. However, on July 1st of this year, we saw an approximate 40 cents per hour minimum wage cost of living increase for our Chicago area personal care caregivers, which will have a slight negative effect on our margins over the next two quarters until the upcoming rate increase occurs. Once we receive the statewide rate increase, we expect to be able to adjust wages for our remaining Illinois employees, which we believe will continue to help with caregiver recruitment. Now let me discuss our same store revenue growth for the second quarter of 2022. For our personal care segment, exclusive to New York CDPAP program and ARPA funds, our same store revenue growth was 2.5% when compared to the second quarter of 2021. However, While our personal care hours were down year over year, we did see the first sequential growth in hours in a number of quarters. Our second quarter personal care hours were up 3.8% over the first quarter of this year as we continue to see improved hiring and lower quarantine levels. We have seen sequential growth each month this year since January in personal care starts of care, employees worked, and clients served. Turning to our clinical care operations, our home health segment same-store revenue was up 24.6% from the prior year and 36.4% sequentially. We continue to see improving home health admissions, which were up 25.2% over the second quarter of 2021. We are excited about our home health operation as it complements our personal care services, particularly where we participate in value-based contracting models. We will continue to focus our efforts on expanding these services into our existing personal care markets. As we anticipated on our last call, our hospice same-store revenue increased 2.5% over the second quarter in 2021. We also saw a sequential increase in our average daily census as our medium length of stay improved to 23 days in the second quarter as compared to 17 days for the second quarter of 2021 and 20 days for the first quarter of this year. Overall, our hospice ADC increased to 3,333 for the second quarter of 2022 as compared to an ADC of 2,460 for the second quarter of 2021, inclusive of the ADC attributable to our journey care acquisition which closed on February 1 of this year. As for our development efforts, over the past quarter, most of our deal flow has consisted of smaller acquisition opportunities across all three levels of care. We continue to have conversations with brokers and other third parties, and based on the feedback we've received, we expect to see an increase in potentially larger transactions in late 2022 and early 2023. I do want to mention that with the proposed rate cut by CMS and home health, we are seeing an overhang related to differing price expectations from buyers and sellers. We have seen some home health deal processes being put on hold while waiting for the publication of the final rule in late October. We expect there to be a lower level of transaction activity in the skilled home health sector until reimbursement is finalized. Once the final home health rule is published, We expect to see activity in this sector increase and believe we are well positioned to take advantage of these opportunities. While skilled home health activity may be slower in the short term, we are still very optimistic on our M&A outlook and will continue to build a pipeline focusing primarily on personal care and home health. We continue to believe that acquisitions will remain an important part of achieving our 10% minimum annual revenue growth target which we have exceeded for the past few years as we have previously discussed we are starting to see additional momentum in our value-based care efforts currently we have four value-based contracts which are now in three of our states these contracts are focused on helping our patients avoid both unnecessary emergency room visits and hospital admissions as well as readmissions at various time frames following a hospital discharge. These programs currently cover approximately 4,700 of our personal care clients. An important component of each of these contracts is a focus on care quality measures and metrics. We feel this quality focus fits well with our overall mission at Addis. Today, we have been able to show measurable improvements in these targeted goals, which is what we believed would occur as our personal care and clinical staff are able to closely follow these patients. To help us with data collection and analysis of our patient outcomes, we plan to invest in additional software tools, which will help us as we continue to scale these type of arrangements. While the revenue generated from our value-based efforts are relatively immaterial today, we continue to expect them to grow to a more meaningful amount over the next few years. While the COVID virus continues to be difficult for everyone, our team has been able to prove the value of taking care of elderly and disabled consumers and patients in their homes. The home remains one of the safest and most cost-effective places to receive care and is also the place where most elderly individuals and their families prefer to be. We believe the heightened awareness of the value of home-based care is favorable for our industry and will continue to be a growth opportunity for our company. As I mentioned on our last earnings call, we understand and appreciate that our operations and growth are dependent on our dedicated caregivers who work so incredibly hard providing outstanding care and support to our consumers, patients, and their families. I am thankful for each of our team members and I'm proud of the job they have done in the past and continue to do each day. It is important that we all focus on achieving our mission by putting our consumers and patients first. With that, let me turn the call over to Brian.
Brian Popp
Thank you, Dirk, and good morning, everyone. Addis had a solid financial performance for the second quarter. Our results reflect positive same-store growth trends in all three segments compared to the second quarter last year. We also benefited from our hiring and retention efforts and an improving labor market for our personal care business segment compared to prior quarters. Our home health business continues to expand and reflects the addition of the two acquisitions we completed in 2021, Armada Home Health and Hospice and Summit Home Health. We are also pleased to see more historically normalized trends for our hospice business. We experienced strong cash flows during the quarter and remain well positioned in the current inflationary environment. As Dirk noted, total net service revenues for the second quarter were $236.9 million. The revenue breakdown is as follows. Personal care revenues were $174.3 million, or 73.6% of revenue. Hospice revenues were $52.1 million, or 22% of revenue. When compared to the second quarter last year, hospice care revenues include the addition of the Hospice Division of Armada, which closed on August 1, 2021, and the first full quarter of the acquired hospice operations of JourneyCare, which closed on February 1, 2022. Home health revenues were $10.5 million, or 4.4% of revenue. As noted, these results include the operations of two acquisitions, the Home Health Division of Armada, which closed on August 1, 2021, and Summit Home Health, which closed on October 1, 2021. We have a strong business model in place across our home care continuum and believe we are well positioned in all our operating segments. In addition to our strong organic growth, we have added $55 million in revenue to date in 2022 with the acquisition of JourneyCare. We continue to evaluate and pursue other acquisition opportunities and have a robust pipeline of potential transactions that meet our criteria. As Dirk mentioned, the overhang from the proposed reimbursement changes in home health and lack of visibility on the ultimate financial impact on potential acquisition targets has delayed the transaction process with respect to some potentially larger acquisitions in skilled home health. We expect this to be a timing issue on rate information that will largely be resolved in the fourth quarter, and we continue to actively pursue other strategic acquisitions that meet our criteria. Other financial results for the second quarter of 2022 include the following. Our gross margin percentage was 31.9%, compared with 31.6% for the second quarter of 2021, as we continue to see the benefit from a higher proportion of clinical services. However, we were negatively impacted by approximately 20 basis points during the second quarter from the initial reinstatement of Medicare sequestration, with a 1% cut effective April 1st. We expect to see an additional 20 basis point impact in the third quarter, with the additional 1% cut as implemented. Additionally, we will have a short-term headwind from the July 1, 2022 minimum wage cost of living increase in our Chicago market, which will have a negative impact of approximately 30 basis points through the end of the year. We are scheduled to receive a statewide reimbursement increase in Illinois effective January 1, 2023 that will offset this most recent minimum wage increase. We were pleased to see the recent announcement regarding the upcoming hospice rate adjustment with some recognition of the current inflationary market. This increase will be effective on October 1, 2022, and will benefit our consolidated gross margin by approximately 50 basis points. Like others in the industry, we continue to advocate against the proposed home health rule, although our exposure is minimal as home health constitutes less than 5% of our consolidated revenues. DNA expense was 23.3% of revenue, slightly higher than 22.1% of revenue a year ago. and primarily due to a larger percentage of clinical services with a higher G&A profile. It also includes the first full quarter of our JourneyCare acquisition, which closed on February 1, 2022. Adjusted G&A expense was 21.3% of revenue for the second quarter, compared to 20.4% for the same period last year, and up slightly sequentially from 21.1% in the first quarter. The company's adjusted EBITDA increased to $25.1 million compared to $24.3 million a year ago. Adjusted EBITDA margin in the second quarter was 10.6% compared with 11.2% for the second quarter of 2021. Adjusted net income per diluted share was $0.91 compared with $0.90 for the second quarter of 2021. The adjusted per share results for the second quarter of 2022 exclude the following. Acquisition and de novo expenses of $0.08 and non-cash stock-based compensation expense of $0.13. The adjusted per share results for the second quarter of 2021 exclude the following. The impact of a retroactive Illinois rate increase of $0.07. Acquisition and de novo expenses of $0.11. Restructure and other non-recurring costs of $0.02. And non-cash stock-based compensation of $0.12. Our effective tax rate for the second quarter of 2022 was 25.1% within the range of our expectation. For full calendar 2022, we expect our tax rate to remain in the 25 to 26% range. ESOs were 45.9 days at the end of the second quarter of 2022 compared with 52.4 days at the end of the first quarter of 2022. We continue to see consistent payments from the majority of our payers across all of our operating segments and expect to see this trend continue, especially in our key markets where the states currently have budget surpluses and a focused approach to payments. Our DSOs for the Illinois Department of Aging for the second quarter were consistent with the first quarter at 43 days. Our second quarter net cash provided by operations was very strong, totaling $56.5 million, inclusive of a net $14.2 million in ARPA funds. and based primarily on our strong collection activity. As a result, during the quarter, we were able to pay down approximately $60 million on our revolver, reducing the outstanding bank debt balance to $196.3 million and reducing our exposure to rising interest rates. As of June 30, 2022, the company had cash of $120.9 million, with capacity and availability under our revolver of $376.4 million and $168.4 million, respectively. While we remain focused on pursuing our acquisition strategy, we will continue to be opportunistic, further reducing our already low net leverage, which is currently just under one ton. This concludes our prepared comments this morning. We'd like to thank you for being with us. I'll now ask the operator to please open the line for your questions.
Operator
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you were using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Brian TenQuillet with Jefferies. Please go ahead.
Brian TenQuillet
Hey, good morning, guys. Derek, thanks for all the discussion and the value-based progress that you're making. But maybe if you can help us understand what you're seeing there in terms of the economics or maybe the margin profile that you're getting out of that business and then your thoughts on how that could be scaled and what it would take for greater adoption with some of the managed care or managed Medicaid plans and even Medicare Advantage plans that are looking to employ more personal care going forward.
Dirk Allison
Yeah, you know, interesting, Brian, with the value-based care, it's something that we have seen continually become more important over the last few quarters. And as we see today, we've got four contracts. They've now expanded into three of our states. The important part we see is that having personal care with clinical services is very important to these contracts. And so, you know, our ability to... depending on the contract. And they're somewhat structured differently depending on who it's with. Our margin profile is basically consistent with what we've seen in the past. In some contracts, we get paid for our personal care service plus a savings. In others, it's more of a payment for our personal care services and then certain bonus payments based on what we're able to help accomplish that the particular payer wants to accomplish. So, you know, again, today, uh, we've been in, uh, a couple of our contracts over a year. We're starting to develop outcome data, which I think is extremely important as we try to scale this up in the future. Uh, so I believe over the next two or three years, you will continue to see this grow to be a more material part of our business and one in which, uh, honestly, we spent some money and we're going to continue to invest some dollars As we look to, we're going to help develop some software to help us with analytics and looking at what we have from outcomes coming from our patients. So it's an area we're very excited about. Again, not material today, but we think in the next two or three years we'll become more so.
Brian TenQuillet
I appreciate that. And then I think just about organic growth, right? I mean, in the quarter you did 2.5%, same sort of rev growth. you know, your long-term guidance has been 3% to 5% for a long time now. So just wanting to hear your thoughts on, you know, the opportunity to accelerate growth. I know you're still winding down the CDPAP business in New York, but maybe, you know, without going to guidance, just your thoughts on organic growth for the back half of the year and in the next year.
Dirk Allison
Well, you know, Three to five percent as you say has been our target for a long time and it's you know we've come through a very interesting time frame as you know with the COVID environment over the last two plus years. We've been able in most quarters to hit that three to five percent range largely due to rate increases over the last couple years. It's not been as much focused on volume as it has been in the historical part of our business. If you look back historically over our our business operation. We were excited to see this quarter our personal care hours start to grow from the first quarter. That's exciting. Again, part of what we've been facing is not just us hiring caregivers that help us with this growth, but also some of our states and others being able to hire personnel to actually get through the authorization process to allow us then to have those hours to serve our clients. As this continues to move forward and if we continue to see the trended growth that we've seen over the last few months, we expect that 3% to 5% to be a solid number. And, you know, hopefully we would believe we could get towards the higher end of that towards, you know, in the next couple, three quarters, especially as you see, again, the rate increase we're going to get from Illinois in the first part of the year, which will be very helpful.
Scott
Tasha. Thanks, Derek.
Derek
The next question comes from Joanna Gajuk with Bank of America.
Joanna Gajuk
Please go ahead. Yes, thank you. So I guess to follow up, so one is you mentioned that improved hiring in personal care. So can you give us a little more color there in terms of, you know, what's driving that improvement? And I guess how would you contrast this with what you see in hospice and home health?
Seth Caneto
Hey, Joanna. This is Brad Bickham. On the personal care side, we have seen a nice trend, an increase in hiring for business day, which is a metric that we follow. I think from kind of the reasons behind that, I think, one, You know, you've seen the federal stimulus money kind of play out. You know, it really ended kind of at the end of last year. The unemployment benefits went down. You have also seen kind of a higher inflationary environment. I think people need to work more hours and also potentially another looking for, you know, maybe a second job. And that's something that personal care is set up for very well, but we have quite a bit of part-time employees. I mean, that's primarily what our workforce is based on, and it allows people that if they just need to pick up some extra hours, they can do that readily. When you contrast that on the home health and hospice side, we've seen it's certainly a more challenging environment than we have on the personal care. That being said, We've seen some kind of improvement. There's still certain markets that are a little tighter than others where we have more challenges to retain staff and to recruit new staff, but it does seem to be improving a little bit, just not as readily available or obvious as the personal care side where we've seen a nice stick-up in hiring.
Joanna Gajuk
No, definitely good to hear about that on the personal care side. And just follow up, talking about value-based care, I just want to ask your opinion and I guess how meaningful this could be because I want to say a couple of weeks ago already, CMS published the first quality measure set for home and community-based services where they tried to encourage the use of some sort of consistent quality measures within and across different states that participate in the program. So what are the implications for you and And kind of would this be helping with value-based care, kind of a shift towards value-based care?
Seth Caneto
Yeah, this is kind of something that we've been pushing forward, and I think the industry has as well, to have some standards out there on the personal care side. And if we look at, I know one value-based contract in particular actually tracks some of those same metrics that CMS is looking to implement. So I think our value-based contracting that we have today is going to position us well for when those metrics, if and when those get formally adopted. But it's certainly something that I think the industry as a whole, and Addis in particular, we've been kind of pushing on. I think it should be helpful for us going forward.
Derek
Thank you. Next question comes from Scott Fidel with Stevens. Please go ahead.
Scott Fidel
Hi, thanks. Good morning. First question, just wanted to follow up on the cash flows and really maybe get some feedback or guidance from you on thinking about modeling operating cash flow for the back half of the year. Obviously, a really strong print on cash flow in the second quarter. Brian, you called out some of those ARPA funds that did contribute to that. So, you know, maybe it would be helpful if, you know, how you're thinking about, I guess, the ARCA fund flow through continuing in the back half of the year and then any other, you know, sort of notable working capital items that you would call out for the back half of the year.
Brian Popp
Yes, Scott, I think it was definitely a great quarter for us. I think as we noted our first quarter call, you know, we had some timing differences with payroll and some of those items that we normally would see. I think we got some benefit from from a working cap perspective in the second quarter just on that timing. But the ARPA funding is net about $14.2 million. I think we're still expecting to get additional funds later this year. We have not received all the funding that we've been scheduled to receive yet, so you'll still see some of that come through. But at $56.5 million for the quarter, you back out the $14.2 million in net ARPA. We're right at $42 million for the quarter. I think it's $48 million net of ARPA year-to-date. I think, you know, our expectation, just thinking about kind of our, you know, full year projection, you know, our conversion rate from, you know, an adjusted EBITDA perspective is, you know, in the upper 60s to close to 70%. So that would put us in that kind of mid to upper 60s range for a full year target. And we're tracking at 48 million kind of year to date through the second quarter. So nicely ahead. I think we've gotten... Definitely seeing DSOs come down with a big contributor during the quarter. Obviously, wouldn't expect to see, you know, continued movement in that regard, you know, getting down into the 30s. But, you know, I think definitely we've seen strong collections year to date and would expect to see consistent payments going forward.
Scott Fidel
Got it. And then just my follow-up question, just wanted to revisit on the M&A dynamics, and that was helpful sort of, you know, framing that Dirk had given just around some of the dynamics with the proposed home health rule. I guess sort of I have two just sort of follow-up questions on that. The first one would be just you had mentioned some of the larger deals getting deferred maybe to later this year and to next year. I just want to confirm, is that specifically in home health because of the uncertainty around the proposed home health rate, or was that in some of the other markets as well, like personal care and hospice? So that would be the first part. And then, Dirk, just when you had mentioned some of the differentials between buyers and sellers on valuation, is that just that the sellers are actually still wanting the same values, you know, despite the proposed home health rule, or is it just simply too hard to determine intrinsic value right now until we get those finals? 2023 home health rates?
Dirk Allison
Yeah, Scott, as part of the first part, what we've mainly seen in the larger transactions that we've been a part of have been home health. Realistically, as we've talked about in the last couple quarters, we're focused more on home health and personal care acquisitions today than hospice. It doesn't mean we wouldn't look at a hospice if it was appropriate in markets where we had strong personal care coverage. But so far this year, we've really focused more of our efforts in the other two segments. And some of the processes, a couple of processes we were in were well underway when the proposed rule came out. And at that point in time, they went into a holding pattern waiting for the publishing of the final rule later on this year. As we would talk about somewhat of an overhang because of the differences in valuation plots between buyers and sellers. I think it really goes, most of what we're talking about there is in the home health. I think the sellers believe that the rule's not really going to be a big deal and that we should be willing to pay a value regardless. I think buyers are looking and saying, Great. If that's the way it works out in October, November, and when the published rule comes out, we're fine. I think if that understanding comes out the same way, then the value between buyers and seller and home health I don't think is really that much of a disconnect. I do think there's still somewhat of a disconnect between sellers of hospice programs and buyers. You know, the markets seem to have come down. The public multiples have come down. I don't think all of the sellers... thought process has quite come down to that level. And then to personal care, you know, the great thing about personal care, it stays pretty consistent. You know, smaller deals, as Brian has said in the past, you know, are in the six, seven times range. Larger deals may be eight, nine. A really larger deal that's very strategic might be ten. But those are all very reasonable multiples that we, I think, could agree with. So realistically, the rule is probably the biggest thing impediment right now to signing deals in the home health market.
Scott
Helpful caller. Okay, thanks.
Derek
The next question comes from Tao Chu with People. Please go ahead.
Tao Chu
Hey, good morning. This is Seth Caneto on for Tao. I just had a question on the personal care. You know, you mentioned earlier the improvement in the hiring and the labor improvement there, but the volumes were a little bit lighter than we had expected. How much of an impact is labor still having on personal care volume? And, you know, as the labor force continues to improve, how much acceleration could we see into the second half of 22?
Seth Caneto
Yes, Seth, this is Brad. I think really what you saw, you know, we experienced a pickup in the COVID quarantines, really that last week in May carrying over into June that dampened our June results. And I think that's what had more of an impact on the numbers rather than the hiring numbers. The hiring numbers, like I say, have been very robust. We expect as we're still seeing case counts that are still a little elevated, but again, nothing like we experienced in Q1 or in back in the fall with the Delta variant. So optimistic that those numbers should start coming back up for us, and we should see some better volume numbers towards the back half of the year.
Tao Chu
Great. Thanks for that, Culler. And then my last question was just on the American Rescue Plan funding. I think you guys received $14 million in the second quarter. Do you still expect to receive the full 20 million or so in benefits funding that you alluded to last quarter? And if so, when should you expect to receive those remaining funds?
Brian Popp
Yeah, we still expect to receive the additional amount that's scheduled. I think it's just timing on when we're receiving those funds from the state. But I think we expect to see most of that money, to be honest, through the third quarter.
Tao Chu
Great. Thanks for taking my questions.
Operator
The next question comes from Matt Forsh with VML Capital Markets.
Matt Forsh
Please go ahead. Thank you. Um, could you just touch on the, uh, as you talk about potential acquisitions, uh, what you think is motivating sellers here? You know, is it, is it retirement of the, the key owner or, um, you know, some perhaps sense that they're at a scale disadvantage. I'm, I don't know if you know that, uh, but also just combined with that question on how high you'd be willing to go on your debt leverage to do a larger acquisition.
Dirk Allison
Let me talk about what we're seeing with some of the sellers, I believe, and then Brian will talk about our leverage. But I think if you look at the two particular deals we've been looking at this year that have now been kind of placed on hold, I think the motivation of the seller is, might be twofold. One, I think in a lot of cases, the last couple of years of operating through the COVID environment has been very tough. It's been a difficult environment. And I think some of the owners of these companies, as they've gotten towards really towards the end of hopefully the major effect of the COVID surges on business, see an opportunity to say, look, it may be time that we ought to see if we can get some value out of the business. I think The other motivation is some of these sellers are at a point in their life where they're looking to do other things, whether that be retirement or other businesses, and it's time for them to see about monetizing what they put into the companies for a number of years. That's really, I think, the motivation we've seen so far.
Brian Popp
I just add to that quickly, Matt. I think on the skilled side particularly, I think obviously private equity has been very active in You know, putting assets together, you know, with a return in mind and with the markets the way they've been the last couple of years have done very well. So we've seen, you know, quite a bit of those instances where private equity would, you know, buy a platform, put together, you know, several acquisitions, then, you know, get those things integrated and look to sell those. So we see more of that on the home health and hospice side. alluding to with, you know, more individual proprietors that have kind of run those businesses and looking for an exit strategy. So I think on leverage, I think obviously we're very well capitalized today. You know, I think, you know, we said historically in the past, you know, we'd be very comfortable, you know, at the two and a half to three times range, we'd be willing to go higher than that for the right deals. It made a lot of strategic sense for us if we saw a path to kind of bring that leverage down through cash flow on the other side. And I think that's pretty consistent with our thinking today. We can find the deals that could put us into that range.
Scott
Thank you, thank you, that was very helpful.
Derek
The next question comes from John Ransom with Raymond James. Please go ahead.
Scott
Hey, good morning.
John
So, Dirk, you know, the home health companies have been struggling with this transition to Medicare Advantage. And, you know, one of the big companies has been publicly talking about changing the economics to something more of a case rate. versus a per visit. And so my question, I know this is like a hypothetical on top of a hypothetical, but as you look at a home health asset, do you think, you know, you're big enough, you'd be big enough to go into see UnitedHealthcare, Humana, Aetna, and say, gosh, guys, I'd like to be paid differently on this book of business? Or is that something that you would just have to fight through that, you know, transition it per visit at a lower margin and put that in the valuations?
Seth Caneto
Hey, John. This is Brad. You know, I think when we're thinking about Medicare Advantage and trying to migrate from a per visit to more of a case rate or episodic type payment, you know, I think a couple of factors. One, when you think about size, we're not that large in home health yet. We're certainly going to continue to grow that platform and get more scale. But we do have a very large personal care component. And most of those payers have Medicaid plans. And so, you know, I think we have the ability to leverage the personal care size and scale to have those conversations with a United or an Aetna. You know, and then secondly, I think you also have to look at, you know, it's, you know, one thing to have scale nationally, but probably even more relevant is having scale in a regional or localized market, I think is important. And that's where, you know, kind of our philosophy is You know, we're not looking to put pins in all the states for having locations. We're really more focused about getting a density in specific geographic areas, which I think would help us with those negotiations.
John
Okay. And then just as a follow-up, this might be unfair, but once your Chicago rate goes into effect and we look at kind of 1Q23, how does your – rate per day, compare to say 2019 versus your cost per day. Once, once everything's kind of normalized out, um, just thinking about the business over the COVID Valley. Thank you.
Brian Popp
This is Brian. I think if you look at, you know, where we are, you know, this quarter compared to last year, maybe as a good proxy, you know, on, on average across our personal care business, our bill rates are up a little over 5% year over year. Most of our states are increases over the prior year. Wage rates, I think, have slightly outpaced that growth with some of the inflationary pressures and things that we've seen this year. I think going into 2023, seeing any further activity and things that we don't expect from a COVID perspective, et cetera, I think with the next Illinois rate increase obviously still being our largest market, that's going to bring us probably between $9 and $10 million in additional kind of new annualized revenue starting Jan 1 at kind of our normal margin, which is going to be in that probably upper 20% range. It's going to be very helpful. I think we've seen that dynamic the last couple of years. I think we're going to see another benefit in early 2023 from that that will be impactful. But I think our expectation going forward is we should see those level off where you're not going to see wage rates outpace reimbursement. I think that was more the fact of what we've seen over the last year, but we would not expect to see that going into 2023. Thanks so much.
Derek
The next question comes from Matt LaRue with William Blair. Please go ahead.
Matt LaRue
Hi, this is Madeline Mullen on for Matt LaRue. Circling back to M&A, I know that you said right now you're having some trouble finding common ground with sellers, but wondering in general after a couple of years of higher funding levels, higher reimbursement, the sequestration suspension, would you expect home health valuations to come down as separate from the CMS rule as sequestration phases back in? What do you expect long-term for home health multiples?
Brian Popp
Yeah, I think this year our expectation that we want to talk about in the last couple of calls is valuations in home health. With some of those pressures, we expect it to be a more rational market coming into this year. I think a lot of us have been kind of waiting for more of that influx of smaller businesses That's kind of kept some of those guys afloat, but to your point, those things have come to an end. Sequestration coming in in Q2, now in Q3 is going to put more pressure. I think when there's some more clarity on the rule and how that's going to impact, I think that definitely is going to probably help rationalize margins a little bit as well, depending on how that turns out. I think our view is, like Dirk mentioned, some of the larger processes, they've kind of put themselves in a holding pattern. You know, some of the smaller processes where maybe the proposed rule wouldn't be as impactful, I think, are still willing to have conversations and trade. So I think we've still got some opportunities there. But I think overall, our expectation is that home health multiples are probably a little bit lower on the other side of this than what we saw maybe a couple of years ago.
Matt LaRue
Great. Thank you. And then one other question. You mentioned that you were building a personal care version of home care, home-based. Just wondering how that was coming along and how it would integrate with the traditional home care, home base?
Seth Caneto
Yeah. You know, it is, I think when we got into this project with home care, home base, you know, I don't know if they fully realize the complexity of personal care. And, you know, when I say the complexity, as compared to the skilled side where Medicare is your predominant payer, you know, personal care is a totally different animal from the standpoint that you're dealing with multiple states, different types of programs within those states. So the reimbursement codes, all that sort of thing is a lot more complicated. All that being said, We've been pleased with the progress. We anticipate possibly being able to roll out some pilot sites kind of Q1 of next year. The main thing is we want to make sure that we have a product that we're satisfied with before we go forward with it. I think they've certainly indicated their willingness to put those resources to develop that product. And as far as integration, just the second part of the question regarding integration with the home care, home-based, the clinical side, just think about it from the standpoint that all of those patient records will be in one system that we'll be able to access through. And so we think that that's really kind of an important component of really recognizing the benefits of the value-based contracting potential on the personal care side. And then also, just when you think about referrals coming from personal care to home health and to hospice, really helping facilitate that on a larger scale.
Derek
Great. Thank you so much for the caller. As a reminder, if you would like to ask a question, please press star then 1 to be joined into the queue.
Operator
The next question comes from Mitra Ramgopal with Sedoti. Please go ahead.
Sedoti
Yes, hi. Thanks for taking the questions. I was just wondering if you could write some additional color in terms of the new hiring and retention strategies to combat the tight labor market you're seeing, especially on the clinical side.
Seth Caneto
Yeah, so if you think about on the clinical side, it's really putting more recruiting resources to the clinical side. Again, that's a little more challenging. If you think about personal care versus the skilled component. It's kind of a different recruiting environment. We have kind of corporate recruiters that focus on filling positions on the clinical side plus kind of your general administrative positions, whereas our recruitment efforts are predominantly on the PCS side are at the branch level. But it's certainly on the clinical side a challenging environment. When you look at personal care, we've got the ARPA funds that really we haven't tapped into in a meaningful way yet. I mean, those programs and retention programs that we're putting in place to both help keep caregivers, encourage caregivers to work more hours, and also help with our recruitment efforts, that's really just getting started on the PCS side.
Sedoti
Okay, thanks. That's great. And then, Brian, there was a significant debt reduction in the quarter. I was just curious in terms of the capital allocation priority, if it's more a question of trying to overcome the higher interest rate environment versus maybe a shift in priorities.
Brian Popp
Yeah, I don't think there's a shift in priorities. I think we'd still prefer to use that capital toward M&A when those are available. I think in the absence of that and some of the overhang currently, particularly in the direction. So during that period of kind of call it a delay, we've tried to be opportunistic in at least limiting our exposure to the rise in interest rates. I think it's going to be, you know, meaningful savings and interest expense for us. So I think we'll continue to do that until we see M&A pick up. And then, you know, with the access to being full revolver now, not a turn alone, you know, we have that ability to draw that and use that, you know, at the time that we need it. So that'll be kind of our focus over the next, you know, couple of quarters.
Sedoti
Okay, that's great. Thanks for taking the questions.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Dirk Allison, Chairman and CEO, for any closing remarks.
Dirk Allison
Thank you, Operator. I want to thank you for your interest in ATIS and for your being a part of our earnings call today and hope you have a great week.
Derek
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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