Good day and welcome to the Addus HomeCare's Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Thank you. Good morning and welcome to the Addus HomeCare Corporation's 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 Addus' 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 Addus' 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 like to now turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

Thank you, Dru. Good morning and welcome to our 2022 second quarter earnings call. With me today are Brian Poff, 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 first quarter results in more detail. Following our comments, the three of us would be happy to respond to your 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 $0.91 as compared to $0.77 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 1x EBITDA. While we expect 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'm 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 had started to see. Throughout most of the second quarter, we saw little effect from the COVID virus. During April and May, we saw a 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 subvariant, 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 remained 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 American 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 1, 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 and wage increases. As for Illinois, our largest state of operation, we will receive a $0.70 per hour statewide rate increase effective January 1, 2023. However, on July 1 of this year, we saw an approximate $0.40 per hour minimum wage cost of living increase for our Chicago area personal 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 of the New York CDPAP program and the 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 21.6% 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 JourneyCare acquisition, which closed on February 1 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 about 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 timeframes 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 Addus. Today, we have been able to show measurable improvements in these targeted goals, which we believe 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 types of arrangements. While the revenue generated from our value-based efforts is 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.

Thank you, Dirk and good morning everyone. Addus 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 at 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 for their 1% cut effective April 1. We expect to see an additional 20 basis point impact in the third quarter with the additional 1% cut is 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. G&A 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 the 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 expectations. For full calendar 2022, we expect our tax rate to remain in the 25% to 26% range. DSOs 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 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 funding 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 in further reducing our already low net leverage, which is currently just under one times. 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.

The first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys. Dirk, thanks for all the discussion on 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 new Medicare Advantage plans that are looking to employ more personal care going forward?

Yes. 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 that they've now expanded in 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, our ability to depend on the contract and they're somewhat structured differently depending on who's involved. 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 achieve. So, again today, we've been in 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. 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, honestly, we spend some money and we're going to continue to invest some dollars as we look to develop some software to help us with analytics and tracking outcomes from our patients. So, generally, we're very excited about this progress. While it's not material today, we think it will become so in the next two or three years.

Got it. Appreciate that. And then as I think just about the organic growth rate, I mean, in the quarter, you did 2.5% same-store revenue growth, your long-term guidance has been 3% to 5% for a long time now. So, just wanting to hear your thoughts on the opportunity to accelerate growth? I know you're still winding down the CDPAP business in New York, but maybe without going to guidance, just your thoughts on organic growth for the back half of the year and into next year?

Well, 3% to 5% as you say has been our target for a long time. 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 3% to 5% range, largely due to rate increases over the last couple of years. It's not been as much focused on volume as it has been an historical part of our business. If you look back historically over our operation, we were excited to see this quarter that our personal care hours are starting 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 to have those hours available to serve our clients. So, 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 hopefully we believe we could get towards the higher end of that in the next couple of 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.

Got you. Thanks, Dirk.

The next question comes from Joanna Gajuk with Bank of America. Please go ahead.

Yes. Thank you. So, I guess two follow-ups. So one is, you mentioned the improved hiring in personal care, so can you give us a little more color there in terms of what's driving that improvement? And I guess, how would you contrast this with what you see in hospice and home health?

Hey, Joanna, this is Brad Bickham. On the personal care side, we have seen a nice trend and increase in hiring for business day, which is a metric that we follow. I think from the reasons behind that, one, you've seen the federal stimulus money play out, it really ended at the kind of the end of last year. The unemployment benefits went down. You have also seen the higher inflationary environment. I think people need to work more hours and also potentially another looking for maybe a second job. That's something that personal care is set up for very well that we have quite a bit of part-time employees. I mean, that's primarily what our workforce is based on, and it allows people, 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’re seeing certainly a more challenging environment than we have on the personal care side. That being said, we've seen some improvement. There are 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 pickup in hiring.

No, definitely good to hear about that on the personal care side. And just a 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, CMS published the first quality measure set for home and community-based services? Why they try to encourage the use of some sort of consistent quality measures across different states that participate in the program? So, what are the implications for you and, could this help with the value-based care shift?

Yes, this is 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. If we look at one value-based contract in particular, it actually tracks some of those same metrics that CMS is looking to implement. So, I think in our value-based contracting that we have today is going to position us well, but when those metrics are formally adopted, it’s certainly something that I think the industry as a whole and Addus in particular have been pushing for. I think it should be helpful for us going forward.

Next question comes from Scott Fidel with Stephens. Please go ahead.

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 how you're 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, maybe it would be helpful if you know how you're thinking about ARPA fund flow through continuing in the back half of the year and then any other notable working capital items that you would call out for the back half of the year?

Yes, Scott. I think it was definitely a great quarter for us. I think as we noted in our first quarter call, we had some timing differences with payroll. I think we got some benefit from a working capital perspective in the second quarter, just on that timing, but the ARPA funding has netted about $14.2 million. I think we're still expecting to get additional funds later this year; we’ve 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, when you back up the $14.2 million in net ARPA, you're right at $42 million for the quarter. I think it's $48 million net of ARPA year to date. I think our expectations for our full-year projection is our conversion rate from an adjusted EBITDA perspective is in the upper 60s, close to 70%. So that would put us in that mid to upper 60s range for a full-year target and we're tracking at $48 million year to date through the second quarter. So, we've definitely seen DSOs come down, another big contributor during the quarter. Obviously, we wouldn't expect to see continued movement toward the 30s, but we have seen strong collections year to date and we expect to see consistent payments going forward.

Got it. And then just my follow-up question, just wanted to revisit the M&A dynamics and that was helpful, kind of framing that, Dirk had given just around some of the dynamics with the proposed home health rule. I guess, two follow-up questions on that. The first one would be just, you had mentioned some of the larger deals getting deferred to later this year and to next year. I just want to confirm 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, despite the proposed home health rule, or is it just simply too hard to determine intrinsic value right now until we get those final 2023 home health rates?

Yes, 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 of quarters, we're focused more on home health and personal care acquisition today than hospice. That doesn't mean we wouldn't look at the 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. Some of the processes we were in were well underway, and when the proposed rule came out, they went into a holding pattern waiting for the publishing of the final rule later on this year. The overhang is mostly what we're talking about in terms of the differences in valuation thoughts between buyers and sellers. I think it really goes mostly to home health. I think the sellers believe that the rule is not a big deal and that we should be willing to pay the value regardless, while buyers are looking and saying great, if that's the way it works out in October and November, we'll reassess then. So, I think if that understanding comes out the same way, then the value between buyers and sellers in home health isn't that much of a disconnect. I do think there's still somewhat of a disconnect between sellers of hospice programs and buyers. The markets seem to have come down. The public multiples have come down. I don't think all of the sellers thought process had quite come down to that level. Regarding personal care, the good thing about it is it stays pretty consistent. Smaller deals, as Brian has said in the past, are in the 6x to 7x range, larger deals may be 8x to 9x, and a really large deal that's very strategic might be 10, but those are all reasonable multiples that we could agree with. So, realistically, the rule is probably the biggest impediment right now to signing deals in the home health market.

Helpful color. Okay. Thanks.

The next question comes from Kyle Chu with Stifel. Please go ahead.

Hey, good morning. This is Seth Canetto for Kyle. I just had a question on the personal care. 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 as the labor force continues to improve, how much acceleration could we see into the second half of 2022?

Yes, Seth, it's Brad. I think really what you saw, we experienced a pickup in the COVID quarantines. Clearly, that last week in May carrying over into June, that dampened our June results. I think that had more of an impact on the numbers rather than the hiring numbers. The hiring numbers, as I said, have been very robust. We expect as we're still seeing some case counts elevated, it’s nowhere near what we experienced in Q1 or in back in the fall with the delta variant. So, we're optimistic that those numbers should start coming back up or we should see some better volume numbers towards the back half of the year.

Great. Thanks for that color. 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?

Yes. We still expect to receive the additional amount as scheduled, it's just timing on when we're receiving those funds from the state. I think we expect to see most of that money, to be honest, through the third quarter.

The next question comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Thank you. Could you just touch on the – as you talk about potential acquisitions, what you think is motivating sellers here? Is it retirement of the key owner or some perhaps sense that there is an urgency to scale this advantage? I don't know if you know that motivation, but also if you just combine with that question on how high you'd be willing to go on your debt leverage to do a larger acquisition?

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 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 closer to the end of hopefully the major effect of the COVID surges, see an opportunity to monetize 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 to think about monetizing what they've invested in the companies over the years.

Yes. I'll just add to that quickly, Matt. I think on the skilled side particularly, obviously private equity has been very active in putting assets together with a return in mind and with the markets where they have been in the last couple of years have done very well. We've seen quite a bit of instances where private equity would buy a platform, put together several acquisitions, then look to sell those. So we see more of that on the home health and hospice side, while on the personal care side is where we see more of what Dirk was referring to, which is more individual proprietors that have been running those businesses and looking for exit strategies. Regarding leverage, we're very well capitalized today. We've said historically that we would be very comfortable at the 2.5x to 3x range. We'd be willing to go higher than that for the right deals that made a lot of strategic sense for us and that we saw a path to kind of bring that leverage down through cash flow on the other side. That's pretty consistent with our thinking today; we can find deals that could put us in that range.

Thank you. That was very helpful.

The next question comes from John Ransom with Raymond James. Please go ahead.

Hey, good morning. So Dirk, the home health companies have been struggling with this transition to Medicare Advantage and one of the big companies has been publicly talking about changing the economics to something more of a case rate versus a per visit. My question is, I know this is hypothetical, but as you look at a home health asset, do you think you're big enough to go into see UnitedHealthcare, negotiate differently on this book of business or is that something that you would just have to fight through that transition at a per visit at a lower margin and put that in the valuation?

John, this is Brad. I think we're contemplating Medicare Advantage and trying to migrate from a per visit to more of a case rate or episodic type payment. A couple of factors come into play. 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 achieve more scale, but we do have a very large personal care component, and most of those payers have Medicaid plans. I think we have the ability to leverage the personal care size and scale to have those conversations with a United or an Aetna. Additionally, I think you also have to look at the scale nationally, but probably even more relevant is having scale in a regional or localized market. I think this is important. Our philosophy emphasizes not looking to put pins in all the states but focusing on getting density in specific geographic areas, which I think would help us with negotiations.

Okay. And then just as a follow-up, once your Chicago rate goes into effect, looking at 1Q 2023, how does your rate per day compare to say 2019 versus your cost per day, once everything normalizes out? Just thinking about the business over the COVID valley? Thank you.

Hey, John. This is Brian. I think if you look at where we are this quarter compared to last year, as a good proxy, on average across our personal care business, our bill rates are up a little over 5% year-over-year. Most of our states have increases over the prior year. Wage rates have slightly outpaced that growth with some of the inflationary pressures we've experienced this year. I think going into 2023, further activity is expected. We don’t anticipate significant impacts from COVID. With the next Illinois rate increase, which is our largest market, we should see new annualized revenue starting January 1, between $9 million and $10 million, which will positively affect our normal margin, likely in the upper 20% range. We believe we've seen this dynamic over the last couple of years, and we will benefit early in 2023 from that, but we expect those dynamics to level out, so you're not seeing wage rates outpace reimbursement. That’s been more of the case over the last year, but we wouldn’t expect to see that trend in 2023.

Thanks so much.

The next question comes from Matt Larew with William Blair. Please go ahead.

Hi. This is Madeline Mollman on for Matt Larew. 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 separately from the CMS rule as sequestration phases back in? What do you expect long-term for home health multiples?

Yes. I think this year, your expectations align with what we discussed over the last couple of calls about valuations in home health. With some of those pressures, we expect to see a more rational market. Many have been waiting for the influx of smaller organizations coming to market. The factors you mentioned have helped some of those organizations stay afloat. To your point, sequestration coming back in Q2 and now Q3 will put more pressure. I believe once there is clarity on the rule and how it impacts, that may help to rationalize margins depending on how that turns out. Our view is that while larger processes have put themselves in wait mode, some smaller processes where the proposed rule wouldn’t have as much impact remain willing to engage. We still have some opportunities, but overall, I expect home health multiples will likely be lower than what we saw a couple of years ago.

Great. Thank you. And one other question. You mentioned that you were building a personal care version of Home Care Home Base. Just wondering how that was coming along and how it would integrate with the traditional Home Care Home Base?

I think when we got into this project with Home Care Home Base, I don't know if they fully realized the complexity of Personal Care, and when I say complexity, it’s compared to the skilled side, where Medicaid is your predominant payer. Personal Care is a more complicated environment because you’re dealing with multiple states and different types of programs within those states. The reimbursement codes and all that sort of things are 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 in Q1 of next year. The main thing is we want to ensure that we have a product that we're satisfied with before we go forward with it. They’ve indicated their willingness to allocate resources toward the development of the product. Regarding integration, just consider that all of those patient records will be accessible within one system. We see this as an important component of recognizing the benefits of value-based contracting potential in personal care. Additionally, think about referrals coming from personal care to home health and to hospice, which will help facilitate that on a larger scale.

Yes. Hi. Thanks for taking the questions. I was just wondering if you could provide some additional color in terms of the new hiring and retention strategies that combat the tight labor market you're seeing, especially on the clinical side?

Yes. So, if you think about the clinical side, we are really putting more recruiting resources toward that. Again, that's a little more challenging; personal care versus the skilled components have a different recruiting environment. We have corporate recruiters that focus on filling positions on the clinical side, plus general administrative positions. In contrast, our recruitment efforts on the personal care side occur at the branch level. However, it’s a challenging environment on the clinical side. When considering personal care, we have the ARPA funds that really we haven’t tapped into in a meaningful way yet. Those programs and retention efforts are designed to both keep caregivers and encourage them to work more hours, as well as assist with our recruitment efforts. This is really just beginning on the personal care side.

Yes, Mitra, I don’t think this was a shift in priorities. I think we would prefer to use that capital toward M&A when it is available. Due to the current overhang, particularly in the home health segment, it’s an opportunity for us to limit exposure to rising interest rates. This will result in meaningful savings in interest expense for us. We'll continue this strategy until we see M&A opportunities increase and, with access being a full revolver now—not a term loan— we're in a position to draw when needed. This would be our focus over the next couple of quarters.

This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Allison, Chairman CEO for any closing remarks.

Thank you, operator. I want to thank you for your interest in Addus and for being a part of our earnings call today. I hope you have a great week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.