Aveanna Healthcare Holdings Inc.

Good morning and welcome to Aviana Healthcare Holdings' second quarter 2025 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the call over to Debbie Stewart, Aviana's Chief Accounting Officer. Thank you. You may begin.

Good morning and welcome to Aviana's second quarter 2025 earnings call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeff Shainer, our Chief Executive Officer, and Matt Buckhalter, our Chief Financial Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release which is posted on our website, aviana.com, and in our most recent quarterly report on Form 10-Q when filed. With that, I will turn the call over to Aviana's Chief Executive Officer, Jeff Shainer. Jeff?

Thank you, Debbie. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q2 results and how we are moving Aviana forward in 2025. My initial comments will briefly highlight our second quarter results, along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payers to create additional capacity. I will then provide updates on the ThriveSkill pediatrics integration, the current regulatory environment, and year three of our strategic plan. Lastly, I will comment on our enhanced outlook for 2025 before turning the call over to Matt to provide further details into the quarter. Moving to highlights for the second quarter. Revenue for the second quarter was approximately $590 million, representing a 16.8% increase over the prior year period. Second quarter adjusted EBITDA was $88.3 million, representing a 93.6% increase over the prior year period primarily due to the improved rate environment and continued cost savings initiatives. We continue to execute our strategic transformation strategy, focusing on obtaining adequate rates from our payer and government partners for the services we provide, which is clearly evidenced in our second quarter results. Our second quarter performance benefited from some timing-related revenue items including an uptick in value-based payments, which had a favorable revenue and EBITDA impact of approximately $9 million in the quarter. Matt will provide further details on the positive impact in his prepared remarks. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aviano resume the growth trajectory that we believed our company could achieve. It is important to note that our industry does not have a demand problem. The demand for home and community-based care continues to be strong with both state and federal governments and managed care organizations asking for solutions that create more capacity while reducing the total cost of care. Our Q2 results highlight that we continue to align our objectives with those of our preferred payers and government partners. By focusing our clinical capacity on our preferred payers, we achieved year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts with those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging environment, our preferred payer strategy supports our ability to achieve normalized growth rates in all three of our business segments. Since our first quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and payer partners, as well as continued signs of improvement in the caregiver labor markets. Specifically, as it relates to our private duty services business, our government affairs strategy for 2025 is twofold. we plan to execute on our legislative agenda to improve reimbursement rates in at least 10 states. And second, we continue to advocate for Medicaid rate integrity on behalf of children with complex medical conditions. We have a strong advocacy presence with both federal and state legislatures, as well as solid support from our governors across our national footprint. Legislatures have recognized how meaningful private duty nursing is to the overall cost savings and improved outcomes of our nation's most vulnerable children. As it relates to rate updates, we have achieved 10 rate enhancements year to date in our private duty services segment and are well on our way to achieving our legislative goals for 2025. I am proud of our government affairs and advocacy teams for their commitment to protecting children with complex medical conditions. Now moving on to our preferred payer initiatives. Our goal for 2025 is to increase the number of private duty services preferred payer agreements from 22 to 30. We added one additional preferred payer agreement in Q2 and are currently positioned at 25 agreements in total. Aviana's preferred payer strategy is gaining momentum and allowing us to invest in caregiver wages and recruitment efforts to accelerate hiring and staffing of nurses for our patients. Additionally, our Q2 preferred payer agreements account for approximately 55% of our total private duty services MCO volumes. This positive momentum in preferred payer volumes continues to highlight the shift in our caregiver capacity and recruitment efforts towards our Private Duty Services preferred payer partners. Now moving to our preferred payer progress in home health. Our goal for 2025 was to maintain our episodic payer mix above 70% while returning to a more normalized growth rate. In Q2, our episodic mix was 74.5% and our total episodic volume growth was positive 6.9% compared with the prior year period. The continued investments in clinical outcomes, sales resources, and a focused approach to growth is now paying dividends with Q2 total admissions of 9,800 or a positive 4.3% growth over the prior year period. We currently have 47 preferred pay agreements in home health. Our focus on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis has led to positive momentum in our clinical and financial outcomes. Finally, as we have achieved our desired preferred payer model in private duty services and home health and hospice, we have embarked on a similar strategy in our medical solutions business. We are in the mid-stages of implementing our preferred payer strategy in medical solutions and believe it will be fully realized by the end of this year. To date, we have 18 preferred payers in medical solutions, and we expect that number to grow as we achieve our desired preferred payer model. Our gross margins are stabilizing in the 42% to 44% range as we align our clinical capacity with those payers that value our services and pay us in a timely fashion. I am pleased with our Q2 growth of approximately 91,000 unique patients served, as we work to achieve our target operating model. While we expect our volume growth to be relatively muted this year, we are experiencing improvement in our clinical outcomes, customer satisfaction, and financial outcomes. Our medical solutions business is well on its way to achieving its target operating model, and I look forward to updating you on its continued progress throughout the year. We are encouraged by our rate increases preferred payer agreements, and subsequent recruiting results. Our business has demonstrated solid signs of recovery as we achieve our rate goals previously discussed. Home and community-based care will continue to grow, and Aviana is a comprehensive platform with a diverse payer base providing a cost-effective, high-quality alternative to higher-cost care settings. And most importantly, Tate, we provide this care in the most desirable setting the comfort of the patient's home. As it relates to our recent acquisition of ThriveSkill Pediatrics, I am pleased to report that we are on target with our integration efforts. Our combined leadership teams are collaborating on effective and efficient operations and strategies to optimize care delivery for our patients and families. As a reminder, The Thrive acquisition expanded our PDS offerings in five current states while adding two new states in Kansas and New Mexico. We expect the Thrive acquisition to be accretive to our 2025 results and a really nice addition to our Aviana family. Now, turning to the current regulatory environment with Medicaid and Medicare, we have been quite busy since our last earnings call with our advocacy efforts, primarily based in Washington, D.C. We focused our efforts on two fronts. First, supporting overall Medicaid policy, and second, defending the Medicare home health benefit for American seniors, America's seniors. On the Medicaid front, we believe our patient population fared relatively well in the one big beautiful bill legislation. pediatric and adult patients with complex medical conditions were not directly targeted in the bill, and the initial view is that PDN was mostly insulated in the almost $1 trillion cut to Medicaid. With that said, we are experiencing general headwinds with state Medicaid directors and governors as they plan for less overall Medicaid funding and the possibility of shouldering more of their Medicaid costs in the future. As it relates to the proposed home health rule for calendar year 2026, frankly, we were disappointed by the significance of the proposed cuts, totaling 6.4%. We are totally aligned with the National Alliance for Care at Home and our home health peers in our opposition to the proposed rule. This proposed rule would be a direct cut to Medicare and seniors receiving and expecting to receive health care at home. Although not overly material to Aviana's 2026 results, this proposed rule is very challenging for the home health industry. Ensuring adequate access to care for seniors is paramount, and especially in America's rural communities where there is a dire need for more, not less, access to care. We strongly object to the proposed rule are commenting during CMS's open comment period and will continue to advocate in all 38 Aviana states for CMS and Congress to halt any cuts to the home health benefit. Before I turn the call over to Matt, let me comment on our strategic plan and enhanced outlook for 2025. We will continue to focus our efforts on five primary strategic initiatives. First, enhancing partnerships with government partners and preferred payers to create additional capacity and growth. Second, identifying cost efficiencies and synergies that allow us to leverage our growth. Third, modernizing our medical solutions business to achieve our target operating model. Fourth, managing our capital structure and collecting our cash while producing positive free cash flow. And finally, engaging our leaders and employees in delivering our Aviana mission. Based on the strength of our second quarter and year-to-date results, we now anticipate 2025 revenue to be greater than $2.3 billion and adjusted EBITDA to be greater than $270 million. We believe this enhanced 2025 outlook provides a prudent view considering the challenges we still face with the evolving regulatory environment. In closing, I am incredibly proud of our Aviana team and their dedication to executing our strategic transformation while holding our mission at the core of everything we do. We offer a cost-effective patient preferred and clinically sophisticated solution for our patients and families. Furthermore, we are the right solution for our payers, referral sources, and government partners. With that, let me turn the call over to Matt to provide further details on the quarter and our 2025 outlook. Matt?

Thank you, Jeff, and good morning. I'll first talk about our second quarter financial results and liquidity before providing additional details on our improved outlook for 2025. Starting with the top line, We saw revenues rise 16.8 percent over the prior year period to $589.6 million. We achieved year-over-year revenue growth in all three of our operating divisions, led by our private duty services, home health and hospice, and medical solutions segments, which grew by 19.2 percent, 10.0 percent, and 2.2 percent compared to the prior year quarter. Consolidated gross margin was $210.8 million, or 35.8%. Consolidated adjusted EBITDA was $88.3 million, or 93.6% increase as compared to the prior year. This growth reflects an improved rate environment, increased volumes, as well as enhanced operational efficiencies. Additionally, second quarter results were positively impacted by time-related rate enhancement, improved revenue reserves, and annual value-based payments in our PDS segment, which contributed approximately $9 million to revenue and EBITDA in the quarter. Now taking a deeper look into each of our segments, starting with private duty services, revenue for the quarter was approximately $486 million, a 19.2% increase and was driven by approximately 11.1 million hours of care, a volume increase of 6.9% over the prior year. Q2 revenue per hour of $43.97 was up 12.3% as compared to the prior year quarter, primarily driven by our preferred payer volume growth and the rate enhancements previously discussed. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics, we achieved $157.9 million of gross margin, or 32.5 percent. Cost of revenue rate of $29.68 in Q2 was up 95 cents, or 3.6 percent from the prior year period. Despite continued wage pressures in the labor market, our Q2 spread per hour was $14.29. This figure was influenced by the previously discussed $9 million timing-related items, as well as the reversal of a $6 million legal settlement that was previously accrued and resolved during the quarter. We expect this metric to normalize over time as we make ongoing adjustments to caregiver wages to support higher volumes and improve clinical outcomes. Moving on to our home health and hospice segment, revenue for the quarter was approximately $60.1 million, a 10% increase over the prior year. Revenue was driven by 9,800 total admissions with approximately 74.5% being episodic and 12,400 total episodes of care up 6.9 percent from the prior year quarter. Medicare revenue per episode was $3,231, up 4.5 percent from the prior year quarter. We continue to focus on right-sizing our approach to growth in the near term by focusing on preferred payers that reimburse us on an episodic basis. This episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic admissions well over 70%, we have achieved our goal of right-sizing our margin profile and enhancing our clinical offerings. We are pleased with our Q2 gross margin of 55%, up 1.2% over the prior year period, and representing our continued focus on cost initiatives to achieve our targeted margin profile. Our home health and hospice platform has dedicated to creating value through effective operational management and the delivery of exceptional patient care. Now, to our medical solutions segment results for Q2. During the quarter, we produced revenue of $43.4 million, a 2.2% increase over the prior year. Revenue was driven by approximately 91,000 unique patients served, up 2.2 percent sequentially, and revenue per UPS of approximately $477, up 5.4 percent over the prior year period. Gross margins were approximately $19.8 million, or 45.6 percent for the quarter, up 3.2 percent over the prior year period. As Jeff mentioned, we continue to implement initiatives to be more effective and efficient in our operations to achieve our targeted operating model. We are accelerating our preferred payer strategy and medical solutions by aligning our capacity with those payers that value our resources and appropriately reimburse us for the services we provide. We expect gross margins to normalize in the 42 to 44 percent range and UPS to continue its growth as we implement our targeted operating model. We will update you on our progress as we execute on this initiative. In summary, we continue to fight through a difficult environment while keeping our patients' care at the center of everything we do. It is clear to us that shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Aviano. With the positive momentum we experienced in Q2, we remain optimistic that such trends will extend throughout 2025. We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now, moving to our balance sheet and liquidity. At the end of the second quarter, we had liquidity of approximately $354 million, representing cash on hand of approximately 101 million, 106 million of availability under our securitization facility, and approximately 147 million of availability on our revolver, which was undrawn as of the end of the quarter. We had $23 million in outstanding letters of credit at the end of Q2. During the quarter, we extended our securitization facility to 2028, increased its availability by $50 million, and achieved more favorable pricing. These enhancements further strengthened our overall liquidity position, providing flexibility to operate the business and invest in continued growth and future M&A. On the debt service front, we had approximately $1.47 billion of variable rate debt at the end of Q2. Of this amount, $520 million is hedged with fixed rate swaps, and $880 million is subject to interest rate caps, which limits further exposure to increases in SOFR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026, and our interest rate caps extend through February 2027. As a reminder, we have no material term loan maturities until July 2028. Looking at year-to-date cash flow, cash generated by operating activities was $42.9 million, and free cash flow with positive $36.9 million. We are encouraged by the strong cash collections and expect to generate additional free cash flow throughout the remainder of the year. Before I hand the call over to the operator for Q&A, let me take a moment to address our improved outlook for 2025. As Jeff mentioned, we now expect full-year revenue to be greater than $2.3 billion and adjusted EBITDA to be greater than 270 million. This enhanced guidance is inclusive of our Thrive acquisition. As we reflect on the Q2 results, I'd like to take a moment to express my sincere gratitude to all of our Aviana teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I'm excited for the execution of our 2025 strategic plan. and look forward to providing you with further updates at the end of Q3. With that, let me turn the call over to the operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for questions. Our first questions come from the line of Benjamin Rossi with JP Morgan. Please proceed with your questions.

Good morning. Thanks for taking my question. Just first glance at 2025 guidance, so protected EBITDA now up to sort of 50% year-over-year. Could you just walk us through what is being contemplated in that $63 million increase in guidance in terms of aggregate improvements in either times and pricing across these segments? And then for cadence, we had the 26 million in one-time items during one queue and two queues that you described. Are there any other year-over-year dynamics to consider or expected M&A within this guide for the back half of the year?

Thanks. Hey, Ben, good morning, and thanks for the question. I guess I'll start with, you know, at this point, I think as we said at the end of Q1, we had really good rate outlook and certainty in 2025. And I think this guidance now shows that playing through our mid-year state legislative efforts. We talked about 10. 10 PDS rate wins year-to-date. So we've got really good visibility into 2025. And really, from the Medicaid side of business, good outlook into 26 from rate as well. Clearly, the volume of our PDS business has picked up. We've talked about that being in the 3% to 5% range over the last two years. I think the last three quarters, that number's been in the 6%, 6.5%, now almost touching 7%. And remember, our payers want us to staff more hours. So more volume is good for our payers, good for the state Medicaid systems because we're keeping patients in the right cost setting at home. But good rate certainty. We now know the hospice rule, so we set a hospice rule. So probably the one still hanging rate conversation for us is the home health proposed rule for 2026. Obviously, we've aligned with our peer group, working incredibly hard on getting that overturned between now and the final rule so that there's not a decrease in rate in home health for 26. But with that said, I think at this point in the year, we clearly have very solid rate certainty. All three of our business segments are just performing at a really high level right now. I do want to point out Medical Solutions. Matt and I are really proud. We're all proud of a medical solutions team that's going through their modernization efforts and yet are executing on growth and great outcomes and good profitability. So really nice shout out to all three of our businesses. And I think that's contemplated in the idea of greater than 270. Matt, you want to?

Yeah, just to add to it, Jeff, we're really proud of the teams. I mean, everybody's executing at a very high level. We're delivering exceptional patient care out there. At the same time, we recognize there's still a lot of work to do. And so we're going to focus on getting back to work and doing what we do best, and that's providing the best care possible to all of our patients.

I think you said it, but, you know, Ben, you mentioned it, but Thrive is included in this uptick in our guidance, both in revenue and EBITDA. And, you know, we're really pleased with the Thrive acquisition integration. The Thrive team has been amazing. Our teams are working well, incredibly well together, as I said in my prepared remarks. And we really think Thrive will be a great part of our story as we move into 26. I mentioned we're really excited about Kansas and New Mexico as two new Medicaid states for us. So just excited on how the business is operating. I think Matt said it well. We're humbled by the opportunity to get back to work every day and just do the right thing for our patients, our payers, and our government partners.

Understood. So just, I guess, tying on the rates. So last quarter, you mentioned expectation of the spread rate in TDS normalizing in the sub-11 range during 3Q. Obviously, with the $15 million combined favorable one times and maybe some of that M&A in there, seeing the rates stay elevated during 2Q. Is there any way to think about where your core spread rate currently sits, excluding those items? Just trying to understand the lift you're getting purely from your previous payer contracting efforts there.

Yeah, Ben, let's talk about the spread rates for a second because I think it's a great question. I really want to clarify, you know, that last $6 million that we talked about from the reversal. So Q2, we, you know, had some elevated one-time benefits in there. And, you know, one-time in nature is probably more timing-related items than anything else than one-time. But that was a $9 million benefit. That was the increased value-based payments we discussed, some rate enhancements in there as well, as well as continued phenomenal cash collections from previously aged accounts that the team's done a great job on. Additionally, there was that $6 million legal settlement in there. That did not benefit EBITDA. If you go look at our adjustments, it actually comes out of EBITDA as well. And so though it impacted or influenced spread rates or our wage rate was compressed because of it, it did not impact our EBITDA at all for that $88 billion. So you've got to pull that out of your one-time benefit in there as well. Looking ahead, we're obviously going to continue to pass through additional wages and benefits to achieve that full wage pass-through. That's continuing in Q3, but we expect a full wage pass-through to be accomplished by the end of this year. Probably not fully baked in Q4, but exiting the year in December, we expect to be on that run rate basis. We're doing that because we want to align our caregivers with what our preferred payers want to do, and that's helping to fill more shifts and to support our patients.

And I think it's well said that that Underlying in all this is wage pass-through has been happening every week of every month of this year, including 2024. So it's not like we're waiting for specific dates to pass through wages. We have been continuing to be methodical. But I think after three years of our strategy playing through, what we're seeing is It's not across the board wage increases in every market. It's very targeted areas, specific geographies, specific shifts on specific days and nights and weekends and holidays. So our teams are just being very methodical in how they think about it. But I think the most important thing is our payers continue to lean into us, Ben, and ask for more nursing coverage, more home coverage at home, and really more hours being filled for their patients, which is a great outcome. Thanks, Ben. We appreciate you.

Thank you. Our next question has come from the line of Brian Tanquilla with Jefferies. Please proceed with your questions.

Hey, good morning, guys, and congrats on another solid quarter. Maybe, Jeff, just to follow up on that comment you made there. So are you seeing kind of like a notable increase in the number of caregivers as these wage rate increases are coming through? I know you've passed it through, but Is that already translating to increased capacity, and what does the labor market look like right now for your caregivers?

Yeah, great question, Brian. Thank you. Yeah, and I'll lean back to Q1, that the momentum coming out of 24 was probably greater than we expected it or knew at the time, that those rate wins through 24, the enhanced wages that we had put through, and really what we'd done the first half of the year. You know, we had 11 million hours for the first time as an organization in Q2 in our PDS segment. Every one of those hours is a caregiver that's in the home. So, yes, I think we're seeing... both from a Medicaid standpoint, the investments we've seen in Medicaid states, as well as the preferred payer model, picking up momentum, you know, hiring more nurses, more caregivers. And I wouldn't say it's a, it happened at one specific date or one specific month. It's been just a continued uplift. But I do want to remind us, there's not one preferred payer who has enough nurses from Aviana. So, you know, our top preferred payers, every time I talk to them, which is often, They want more. They just want more coverage. They want more of our patients, more of their patients to be seen by our caregivers, which means we just got to keep hiring more and more. So, you know, it's a continued evolution of the strategy. But I think as we've settled in kind of year three here, it finally has settled institutionally into both the Medicaid state systems and our preferred payers that the uplift in rate has equated to uplift in wage and uplift in number of caregivers providing care.

That's awesome. And then maybe my follow-up, since you talked about payers, you know, we're all aware that some of these Medicaid MCOs are facing struggles right now. I mean, are you hearing anything from them in terms of, you know, their interest in driving more patients to you guys or rate negotiations? Anything you can share with us as we think about the managed Medicaid MCOs?

It's key. I would say it's been positive. I mean, we are very sensitive to their success is also our success. And so we're very, very tuned, like you are, to the health and well-being of both the Medicaid and the Medicare MCOs. We consider them partners because they are our partners. So their success ultimately is our success. And I think the answer that we would give you is even in these turbulent times that they are working through, They continue to lean deeper and deeper in us, and their plan presidents continue to expect more of us. They expect not only more hours, but better quality. And we talked about our value-based payments was part of the lift that was in Q2, just like Q2 of 24 as well. But that's the annual base payments from our previous year coming through and being adjudicated and now paid. None of our payers balked at paying us their value-based bonuses from 24, even in quarters where they had, you know, turbulent quarter, which just tells me that they need us. They need more from us. They expect more from us. I will say, you know, they have raised the bar for us. So the better we do, the more they expect, which I think is a good thing. They just expect us to become more sophisticated, you know, not only more hours, but better at managing costs, better at managing quality. And I think that's one of the reasons that they really like Aviana is that we're comfortable being held accountable for great outcomes and cost-effective care. So it's a win-win related to the MCOs. Thanks, Brian.

Thank you. Our next question has come from the line of Andrew Mock with Barclays. Please proceed with your questions.

Hi. Good morning. As we think about the right jump-off point for EBITDA for next year, is 270 million less, I think, 20 million items that you've called out year-to-date? Does that get you to 250 million? Is that the right number to think about as we contemplate kind of growth for next year?

Yeah. Good morning, Andrew. You know, I think I'd say that there still is more to play out this year. I think as you think about Q3 and Q4 and as these volumes settle in in all three of our businesses in our second half of the year, I think you'll see that it's probably we've underpinned a little bit higher number than 250. I will say to Matt's points earlier, the timing-related events in Q1 and Q2 are all revenue in EBITDA. They're not one-time adjustments to lawsuits that we're taking credit for. It's revenue. It's cash collections. It's improved rates. So even though we might move them in the quarters in which they belong, it is good quality business. And so I think Matt and Debbie, we would all be careful to not try to underpin an $88 million quarter moving forward. We would absolutely hedge against that, that we don't believe Aviana is a 15% EBITDA company at this point, and we certainly would not try to have anyone underpin that. I do think we've been striving for a long time to be north of a 10% EBITDA company, and I think at this point, clearly, we can underpin the fact that we're north of 10%. Matt, additional thoughts?

Yeah, I would also just like to add, Jeff, We're halfway through the year right now, and there's a lot of wood to chop out there with our teams. Our teams know that there are a lot of patients that still need our care. There's patients stuck in the hospital. There's nurses that need to be hired. And so we're going to continue to focus on doing that and driving volume and driving results. We think that the way to do so is providing the best care possible, and everything will work its way out in the end.

Got it. And maybe related to that point, you mentioned passing through the caregiver wages. Do you expect to get back to the 10 to 10.50 spread this year? Just curious kind of like timing and progression of what that looks like from here.

Back to the exiting the year, you know, it'll take time for us to get back to that number itself, Andrew. And, you know, we talked about in Q3, it'll continue to come down. In Q4, it'll continue to come down. We expect to be exiting, and I'm saying exiting December, and the idea of being in our go-forward range. But it'll still be a little bit elevated of that throughout the remainder of the year. there's still thoughtfulness on this wage pass-through. How do we feel that next shift? How do we feel that night? How do we feel that weekend? How do we feel that holiday? And so we just want to make sure we're getting the best coverage for our patients.

Thanks, Andrew.

Thank you. Our next questions come from the line of Ben Hendricks with RBC Capital Markets. Please proceed with your questions.

Great. Thank you very much. Just wanted to talk a little bit more about your Medicaid policy comments. Appreciate that HCBS dodged most of the headwinds from the OBBBA. But as states and their budgets start to address these Medicaid cuts and their impact on other providers, you know, how do you characterize HCBS positioning, you know, amid some broader headwinds, budgetary headwinds, and kind of how are you thinking about that impacts your efforts to achieve those 10 rate updates or those rate updates in at least 10 states this year? Thanks.

Hey, Ben, good morning, and thanks for your question. I think we've already seen this year just the feedback. I think we shared in the Q1 call. We've had great conversations with our state governors and the Medicaid directors, and obviously they were anxious the whole first half of the year and probably are still anxious today, being occurred that they're probably still anxious today on the settling in of the OBBA over the course of the next decade. I will say, you know, the rate enhancements we've got mid-year are more muted, right? So, they're in the single-digit, low single-digit percentages, where over the last three years, you know, we were probably receiving double-digit rate improvements in many states. You know, so, and we're hearing from our state partners just the need to be fiscally, incredibly fiscally responsible, which we expected. At the end of the day, I do believe the three and a half years of work post-COVID or during COVID has settled in nicely within our state legislatures. And it's the same work that we're trying to get done on the federal side with CMS and Congress related to home health, that you need home-based care, both in Medicaid and Medicare. You need the most cost-effective patient-preferred healthcare setting at home. And I think in the Medicaid system, maybe not in every one of the 50 states, aka California, that message has resonated incredibly well. So I don't think at this point we have to start over with our state governors and that, hey, let us tell you the value of home care. I think they get it. I think they absolutely get it. It's really now about partnering with them that as their Medicaid budgets inevitably have gotten tighter and are going to get tighter, that we are a partner with them and a solution with them. So And I think as we've said over the course of the last few quarters, you know, three years ago, we had 30 states that we needed to get major rate improvements. As of the end of last year, we were down to one. And as we sit here today, it's still the same one. So, you know, we're not going to give up in California. We're going to continue to advocate and partner with California to move the PDN rate. But effectively, that is the only state at this point that we don't have a rate that we can be successful in. So, Matt, anything to add?

Yeah, Ben, just to add on there, we're going to continue to advocate for our patients and our families. In the meantime, we're going to continue to do what we do best. We're going to provide the best quality care with great operational efficiency and the most cost-efficient setting in that patient's home, to Jeff's point. Regardless of whatever policy ends up coming out of it, that's going to be our focus. We do believe that we're positioned to partner with these payers who really want to take care costs out of health care, and we believe that's in the patient's home.

Appreciate that commentary. Just shift over to the home health side real quick. Assuming we do see a callback in the six plus percent range get finalized, what is the potential for that level of cut to trickle into some of your episodic rates that are embedded in those home health preferred payer relationships? Thanks.

Yeah, thanks, Beth. First of all, I don't think I can speak strongly enough about how disappointed we are in the proposed rule. It makes absolutely no sense in today's environment. To use a statistic from the Alliance for Care at Home, since 2015, the cumulative impact of the rate increase to home health, including 2026 proposed rule, is 1.1% over an 11-year period. CMS has invested 1.1% rate increases into home health. You know, our peers have received over 30% rate increase, and by the way, that includes COVID, that includes inflation, hyperinflation. Labor is up, as you know, Ben, over 40% wage labor improved, sorry, increase in that 11-year period. It just doesn't make sense. It makes absolutely zero sense if I'm being blunt. And it's not the right thing to do. It's not helping control costs. You know, we know the lower that you utilize home health, the more that hospital and SNF care ends up being utilized, so higher cost care settings. Yeah, I just can't speak loud enough. I'm proud of my peers. We have been working together with the Alliance for Care at Home for the last 45 days. I will tell you, Ben, you know, the government has awoken the home care industry, and we are united in our response that not only is it the wrong thing to do, it's harmful to seniors. It damages rural home care, rural health care. Home care is a great recipient for that. So, It's just bad policy throughout, and we really want to work with CMS to overturn that policy between now and the final rule. With that said, let me come back to Aviana for a second. 70, almost 80% of our revenues are driven through Medicaid and Medicaid MCOs. So Aviana is going to be fine regardless of the outcome of the home health rule. Aviana is going to be strong. We've got a lot of momentum. One of the things I'm most proud of with Matt and the team and Debbie is is our cash flow results and our liquidity. It is compared to when we started three years ago, our positive operating cash flow, free cash flow, the improvement in liquidity, the improvement in our balance sheet, the deleveraging that we have accomplished at Aviana, it truly is phenomenal. So Aviana is going to be fine, but we can't sit down and allow home health to be effectively eliminated as a benefit. That's not okay for American seniors. You're going to hear us be incredibly passionate. You're going to hear our peers be incredibly focused on overturning this. And, you know, one of the great things about home care is we're in every community of all 50 states, and we represent seniors throughout the entire United States of America. And I truly believe the government, through our Congress, through our administration and CMS, will hear from home health in every single county in all 50 states, and it will be crystal clear in the messaging. Anyways, you can tell I'm passionate on this subject. Thanks, Ben.

Thank you. Our next question has come from the line of Pito Chickering with Deutsche Bank. Please proceed with your questions.

Hey, good morning, guys. Nice job this quarter. I guess, you know, sitting back here, you know, looking at rate increases, looking at the preferred providers that, you know, that you've been doing, How much demand sort of remains left there? I mean, you know, what inning are we in for getting patients out of the hospitals? Are we in the early innings and the latter innings? How much more demand is there going to be as these rates are coming up into levels that you guys are able to stop better?

I like, Peter, thank you. I like to think of this year's All-Star game, which was hosted right here in Atlanta, that, you know, we're probably an inning four or five, and, you know, we're going to go into extra innings, and we might even need to get the best batter from both the American League and the National League up to bat to bring this home. But all kidding aside, I don't know, Peter, that we can ever fully solve the demand, and that's why we say it in every script, that we don't have a demand problem. There's not one preferred payer that would say, yes, Aviana has solved all of our home care issues or all of our PDN issues because we can't. We, at best, would have 50-ish percent market share with a single preferred payer, at best. So there is a tremendous still upside in these relationships. And so, you know, we're not in the first or second inning to your point. I mean, we are now in year three with many of our relationships, certainly year two with the majority of our relationships. So they are maturing in nature. But there's not one plan president from one MCO plan who would say, yes, Aviana has solved all of my PDN issues. They say anything but the but. We need more from Aviana. So I just think, you know, all joking aside, that – this will play out the next three to five years. And ultimately, we probably never will be able to fully solve all the issues of our MCO partners. We certainly can make a significant impact as we're making today.

Okay, great. Then to follow up here, this is for being asked a couple different ways, so I'll go differently. In the script, you talked about discussions with state medical directors as they look for changes next year just for the lower dollars. I mean, what areas... could these, could they do to impact you guys? Would it go back to lower rates? Would they put different screening mechanisms? I mean, you know, what could state medical directors do next year as the Medicaid dollar pool gets smaller that could negatively impact you guys?

Yeah, I don't think, first of all, thoughtful question. I don't think there is one, a silver bullet answer to that. I think every state is different. And you can ask the question, why did 10 states this year give us rate increases if they knew that the bill, they knew there was going to be headwind, they knew there was going to be cuts to Medicaid, right? They did it because they still value the services. Those 10 states didn't give rate increases to all health care, right? They gave increases specifically to at least PDN. So I think the key is for us to be incredibly thoughtful partners, right? with our states. And it would be foolish for us to go to, I'll use Georgia, you know, as an example, which I think we talked about Georgia, you know, last year, this time had just given us the largest investment in home-based nursing in the history of Georgia, according to Governor Kemp. It'd be foolish for us to go to Governor Kemp this year and say, okay, we need another 30% rate increase, right? Because it just wouldn't land well. It wouldn't show that we understand the environment. But With that said, we are going back to those same state directors and legislatures, and we're showing you gave us this investment two years ago. Here's what we've done with it. Here's where we spent that money. Here's how we've hired more nurses. Here's how we've taken more children home. So part of our job is to go back and retell the story to the people who've already invested money in us and show them what we've done, including Medicaid systems and governors. So, you know, I think being a thoughtful partner has been our goal for the last three years, will continue to be our goal, you know, I keep coming back to California. We could solve so many problems for California with a thoughtful rate increase. And so we are still at the table with California. We are still with our peers and the state association pounding on Governor Newsom's door and pounding on the director of Medicaid's door, really focusing on Like, you know, you're the one state that's not invested in this, you know, clearly $6,000 a day to $600 a day change in settings. So, again, we're not going to give up. We're going to keep advocating for these families. We are thoughtful enough to know that there are general headwinds in Medicaid that we're going to have to navigate through over the next, you know, 12, 18, 24 months. I think the company is well prepared to do so. Thanks, Peter.

Thank you. Our next question has come from the line of Raj Kumar with Stevens. Please proceed with your questions.

Hi, good morning. Just, you know, appreciate the color on the medical solutions business and the preferred payer strategy there. Maybe, you know, you talked about 18 preferred payer contracts in place. Maybe just kind of framing that and what that means in terms of a percent revenue contribution or from a volume perspective. And then kind of thinking about the margins in that business, you know, it's, you know, towards the, at least here today, it's looking at, you know, towards being the high end of that 42 to 44%. So how should we kind of think about the back half progression of margins relative to that framework?

Yeah, great question, Raj. I mean, we're really excited about the implementation of the preferred payer strategy and honestly the targeted operating model that the team's putting in place in medical solutions. You know, we added one preferred payer in Q2 of this year to get us up to 18 preferred payers to date. We'll continue to expand that through the back half this year and continue to add to it as well. To your point, you know, gross margins were a little hot at 45.6%. We think that'll settle back into that 42% to 44% range in H2 of this year. And then kind of live there indefinitely. We are really, really proud of this team's expansion now in growth while going through this modernization effort and this transformational effort to go sequentially 2.2% growth as they're going and reshaping this division is unheard of. And hats off to that team, what they've been able to accomplish. But you should see that gross margin start to come down a little bit. But reciprocally, you will continue to see that growth continue in there.

And I think you said it well, which is, 18 is just the beginning. We expect 18 to go north of 20 and one day be north of 30 and potentially 40 preferred payers. Matt sets it up well with the TSA pre-check line. Think of this like TSA pre-check. We're trying to get payers into a mode where we know that they're going to pay us appropriately, they're going to allow us to provide a great clinical service with great customer satisfaction, and we're going to get paid for those services in a timely manner. That's what a preferred payer in medical solutions looks like. not necessarily the highest payer, but someone that we can count on to get paid for the services that we provide. And so Matt said it well. We're really proud of this team. The fact that they hit 91,000 UPS in the middle of the modernization is fantastic, and our leader there is doing a fantastic job, and we're so proud of her and her team. So really excited about what this business looks like in 26 and 27 because it should not have the constraints that we've been talking about related to PDS and Medicaid.

Got it. And then kind of thinking about free cash flow and even accounting for the one-time items, it seems like the year-to-date contributions for free cash flow are higher versus last year. So maybe helping us frame a bogey for this year. I know you called out higher tax payments this year just given the earnings growth, but maybe anything else to think about in the second half as we think about free cash flow and then any prioritization towards debt pay down as well. That would be helpful.

Yeah, Raj, great question. We're really pleased with the team's progress on positioning Aviana as a free cash flow generating company. $37 million of free cash flow year to date really reflects that dedication to that patient care, but also our team's dedication on collecting that cash on a timely manner as well as coming through. Our revenue cycles team has done a great job, teamed up with our payer relations team and our entire operations and clinical team to make this happen as well. We'll continue to add additional free cash flow throughout the remainder of the year. Q2 was a great quarter for us. Q3, you know, we'll continue to add to it and into Q4. So we're going to keep that liquidity at this time, you know, keep our liquidity position up just for any potential M&A in the future. And the way we're going to be able to do it is through this free cash flow generation.

And Raj, I'll go on top of Matt. He said it, and I'm going to say it again. I mean, three years ago, we were in a very tight cash position, tight liquidity. We've worked incredibly hard as a combined team. And I echo Matt's comments. Just so proud of our team on making, not being a positive free cash flow company, but really controlling costs, collecting cash, and providing great outcomes. And I think, to your point, stronger than where we thought we would be this time of year, but also a nice horizon for the rest of the year. And I think on all fronts, cash flow is going to be a really good story for Aviana this year and certainly much stronger than we had expected coming into this year. So nice job to the entire team who's made that happen.

Thank you. Our next question has come from the line of David McDonald with Truist. Please proceed with your questions.

Good morning, guys. Congratulations. Just one question left. I wanted to come back to labor for a quick minute and just see, can you guys give us some sense, just some framing in terms of whether it's, you know, number of hires, percentage of demand you're able to service, retention you mentioned during the prepared remarks. Just can you give us a sense of kind of where you were, let's say, 12 to 18 months ago and where you are kind of now given, you know, all the success that you've had on the right side?

Hey, David, good morning. Thank you. Yeah, I'm going to focus on home health and hospice for a minute because I think it's a similar story to that of PDS, which is just as we focused on our preferred payer model and really focused on aligning our caregiver capacity with those partners that are willing to partner with us so that we can provide great clinical outcomes and have an appropriate gross margin and appropriate financial outcome I think that showed us that labor was there, but you had to, A, provide the right service at the right patient at the right time, but you had to be very disciplined on who you allocated that labor to. And I just think that's been our story. It's not been go be everything to everyone. It's been being very targeted in each business model. I know labor is not how we think of med solutions, but it's what we're doing in med solutions right now, right? It's aligning our capacity with those payers that value us. So, you know, it's less about inflation. It's less about is the labor market good, bad, or indifferent. If we continue to stay focused on the right partners in each of our businesses, we can produce sustained growth. And I do think, you know, we were very specific on home health and hospice. Everything else has been working, including clinical outcomes, except for positive year-over-year growth. We were break-even, I think, last quarter, just north of 0%. This quarter, we turned the corner. And I don't think we'll look back for the foreseeable future in home health or hospice. Generating almost 10% volume growth in home health or hospice year-over-year is phenomenal. It isn't like we hired 10% more nurses to do that. It's that we've aligned our business with the right payers, and now we can grow because those payers pay us in a timely manner and an appropriate manner to go hire caregivers. And so I just think that's the way we think of it. It's less about labor and inflation and availability. It's more about us managing to our playbook, getting things honed just right, driving great outcomes, and great outcomes do drive growth.

And then, guys, just one quick follow-up, just, you know, with regards to Thrive and kind of the M&A environment. Look, you know, obviously improved financial flexibility. Can you just talk a little bit about, you know, just how you're thinking about, you know, if you were to see another kind of unique opportunity like a Thrive? I mean, obviously in home health with some of the challenge visibility in the near term, I assume kind of nothing to think about there, but just when you think about PDS and potentially incremental M&A? Just, you know, any high-level thoughts there?

Yeah, and thank you for asking that question. You know, one, we have the liquidity to now be meaningful in M&A and continue to lean deeper and deeper in it. Our teams are doing a great job with Thrive, but our teams are head down on integrating Thrive as we speak right now, this week, next week, last week. But we'll wrap up Thrive integration here in the next few months. We would like to, you know, target something for the later half of this year, first of next year, I would have told you most likely home health oriented, you know, and David, but to your point, we're a little bit more muted at the moment to really see where home health lands. We are a big believer in home health over the period of a decade, two decades. So I do think you'll see us continue to lean into home health and hospice from an acquisitive standpoint, just not at the current moment until things settle out. But yeah, I think you should expect us to, you know, we're not a debt pay down shop. That's not what we do, right? We focus on growing M&A and growing revenue. So I think as Matt will talk about, I think you'll see us continue to lean in to both PDS and Triple H. And then as we get into 26, we'll start to lean back into MedSolutions and look at Tuckins and MedSolutions. But Matt, anything you add to that? Yeah, David, I think the way to think about it is thoughtful.

We will be very thoughtful on any M&A in here. We've done a great job of generating free cash flow, being mindful about our expenditures out there. and bringing in really good companies with really good clinical outcomes as well. That's what we're going to continue to target and continue to look for. We've done a phenomenal job of deleveraging this organization, you know, total team effort to do so. So anything that we go out and look to acquire, we're just going to keep all those things in mind, make sure it's a great clinical outcome, it's a deleveraging story for Avriana, and that it will continue to generate free cash flow for us.

Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over to Jeff Shainer for closing comments.

Thank you so much, and thank you for your attention and your focus on our company and your interest in Aviana. We look forward to connecting at the end of Q3. Thank you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.