Good day, and welcome to the Addus HomeCare Second Quarter 2023 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 second quarter 2023 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 2023 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 its second quarter 2023 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

Thank you, Dru. Good morning and welcome to our 2023 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 call, I'll begin with a few overall comments and then Brian will discuss the second quarter results in more detail. Following our comments, the three of us would be happy to respond to any questions. Before I turn the discussions to our results, I want to take a moment and update you on a bench related to the CMS proposed rule for Medicaid services. As you know, in early May of this year, the Health and Human Services Department introduced the proposed rule titled Assuring Access to Medicaid Services. While we have previously stated our agreement with the goal of broadening coverage and expanding the caregiver workforce, we questioned the specific approach proposed and the target threshold concept for caregiver wages as there are inherent challenges in setting a one-size-fits-all minimum percentage. This is due to the wide variance among state waiver programs, which directly impacts the administrative burden required to provide home and community-based services in individual states. We also believe that many providers, especially small local providers and those operating in states with larger rural populations, may be unable to continue providing care due to the significant administrative burden and related costs required to provide quality regulatory compliance, home and community-based services. These challenges, if not properly considered and addressed, may have the opposite effect intended by the proposed rule by inadvertently reducing access to services, particularly in rural areas. We recently submitted our comment letter to this Proposed Medicaid Access Rule. We also participated in the development of comment letters from our various trade associations. Overall, over 2,000 comments were submitted to CMS, including comments from 31 states. From our review of the CMS database, comments related to the 80% threshold proposal were significantly opposed. Many other comments shared observations consistent with ours, including the difficulty in implementing a one-size-fits-all approach, the lack of evidence or data to support the 80% proposal, and the potential to negatively impact Medicaid through access. States including California, Oregon, and Washington, as well as the National Association of Medicaid Directors, expressed serious concerns or opposition to the 80% minimum threshold. Among the comments filed were letters from several law firms representing either providers, trade associations, or states strongly asserting that Congress did not provide the Health and Human Services Department the legal authority to mandate the specific proposed 80% threshold rule on states and that the setting of any national threshold based on limited to no data is arbitrary and therefore invalid. On July 21st, Addus participated in a listening session with the CMS administrator, other CMS staff, and several home-based care trade associations. These associations verbally expressed providers' collective concerns regarding the proposed rule and presented alternative approaches primarily focused on increasing Medicaid rates to help alleviate the workforce crisis. As of now, advocacy and education to Congress and others will continue. However, no conclusive action will occur until CMS issues a final rule. Once the final rule is published, if it includes an 80% or similar threshold, we expect legal challenges to be initiated. While we do not know the outcome of all of our actions, we are encouraged by the volume of comments from many diverse parties, the vast majority of which expressed significant concern with any minimum wage percentage threshold. In summary, the bottom volume and substance of the comment letters may have an impact on the final rule, and the final rule that is implemented is likely to be subject to legal challenge. It is important to note and emphasize that there are many unknowns around the proposed rule and its long-term impact on our operation, even if it were to be implemented as proposed and withstand legal challenge. Among these, we do not know when a final rule will be issued and therefore when the four-year implementation period would begin or if the implementation period might be extended for a longer timeframe. In addition, we would explore operational changes to manage our business to minimize the potential impact of any final rule. The proposed rule does not cover parts of our personal care services. We currently estimate that over 20% of our existing PCS revenue would not be covered by the proposed rule. Now let me turn to the quarterly financial results. Yesterday we announced our results for the second quarter of 2023. These results indicated continued strong financial performance by Addus. I want to thank our team for providing quality care to our clients and patients in the home while allowing us to deliver these consistent financial results. For the second quarter of 2023, our total revenue was $260 million, an increase of 9.7% as compared to $236.9 million for the second quarter of 2022. This revenue growth resulted in an adjusted earnings per share of $1.07 as compared to adjusted earnings per share for the second quarter of 2022 of $0.91, an increase of 17.6%. Our adjusted EBITDA of $28.3 million was an increase of 12.7% over the second quarter of 2022. During the second quarter of 2023, we continued to see strong cash flow from operations as our states and other payers have continued to pay in a timely manner. This strong cash flow, along with conservative management of our balance sheet, has allowed us to maintain a net leverage position of less than one times adjusted EBITDA, continuing to give us financial flexibility, which should enable us to be opportunistic as we anticipate seeing additional transactions come to the market over the next two quarters. While our goal is to use our financial capacity to acquire strategic operations that align with our overall growth strategy, we will continue to be diligent with the use of our capital. As has been the case over the last few quarters, the overall labor environment continues to improve. During the second quarter of 2023, we continued to experience solid hiring in our personal care segment with 81 hires per business day. Our new candidate management and tracking system, which now has been fully implemented across all of our service lines, has allowed us to better engage with potential employees, shortening the time between application and hire by approximately 10 days. Finding ways to continue reducing the timeframe between application and the first client visit is narrow that we will continue to focus on to help us meet our growth target. Hiring in our clinical segment continues to be more challenging than in our personal care segment, although we have seen modest improvement as compared to this time in 2022. While hiring in our clinical segment continues to improve overall, there are certain markets that have been more difficult and have impacted our growth rate in those markets. During the second quarter, we continue to utilize the funding we received from the American Rescue Plan Act, or ARPA. To date, we have received approximately $25 million, of which we still have $10.6 million remaining to use over the next few quarters. As previously mentioned, these funds have been helpful with our recruitment and retention efforts to support patient care and should continue to help those efforts in the future as we deploy the remaining funds. As for Illinois, our largest state of operation, on April 1 of this year, we received an increase of $1.26 per hour. As a result, our Illinois state reimbursement rate is now $26.92 per hour. This increase covers the July 1, 2023 minimum wage increase in Chicago and allows us to continue to raise wages for all of our Illinois caregivers. We are pleased to see strong support from the state as the most recent approved budget cost for an increase of $1.15 per hour in our reimbursement rate effective January 1, 2024. One additional issue I'd like to discuss is the proposed rate decrease for home health that CMS recently released. We are very disappointed that CMS continues to propose rates for this important level of home care that do not take into consideration the increase in wages and expenses our industry has experienced. While home health has only seen a proposed rate decrease, hospice recently saw a slight improvement in the final rate coming year, so we are hopeful that the final home health rate when published will more appropriately reflect our increased costs. However, we believe that these reimbursement pressures are unlikely to moderate over the next few years, and as such, we will continue to look for acquisition opportunities that are strategic to our overall growth. Now let me discuss our same-store revenue growth for the second quarter of 2023. For our personal care segment, our same-store revenue growth was 12.6% when compared to the second quarter of 2022. During the second quarter of 2023, we saw personal care same-store hours per business day grow 3.8% over the same period in 2022 and 1.2% on a sequential quarter basis. We are excited to see our various hiring and scheduling initiatives beginning to take hold and contribute to sequential hour growth over the past several quarters. Turning to our clinical operation, our home health segment, same-store revenue decreased 10.9% over the same quarter in 2022, as we continued to reduce admissions from payers that do not currently reimburse us adequate rates to cover our costs. While we did see lower admissions primarily due to intentionally limiting admissions from these non-strategic Medicare Advantage plans, our gross margin improved as did our mix of episodic volume and overall profitability. While we have limited certain admissions due to contract rates, our managed care team continues to work with our Medicare Advantage and commercial payers to adjust our contract rates to a more appropriate level, which will allow us to selectively accept more non-episodic volume going forward. In addition to renegotiating rates, our operations team continues to work on improving both case mix and staffing in home health to ensure we maximize the value of the services we provide. We remain excited about our home health operation as it complements our personal care services, particularly where we participate in value-based contracting models. Our hospice same-store revenue decreased 1.1% when compared to the second quarter in 2022. However, excluding the impact of sequestration, our hospice same-store revenue growth was basically flat year-over-year. While our hospice segment is continuing to take longer to recover from the difficult period during and after the pandemic, it is encouraging to see sequential growth in our Average Daily Census (ADC) as compared to the first quarter of 2023. During the second quarter, we started to see an increasing length of stay from patients coming from skilled nursing facility referrals. As of the end of the quarter, our hospice medium length of stay was 29 days exclusive of our JourneyCare operation, which historically has a higher proportion of short-stay patients. We believe this is a trend towards a more typical length of stay from those referral sources, primarily due to the expiration of certain provisions implemented as part of the public health emergency declaration, which ended on May 11th. This morning, we announced we closed on our Tennessee Quality Care acquisition, a provider of home health, hospice, and private duty nursing services. Tennessee Quality Care serves an average daily census of approximately 1,800 patients through 17 locations, covering a service area of over 50 counties in Tennessee and generating approximately $40 million in annualized revenue. This is a very strategic acquisition for Addus as it allows us to offer all three levels of home-based care in an attractive market as well as being a certificate of need state. With this transaction, we will also be able to expand our home health and hospice services into nine additional counties as we look to add de novo locations in the future. We are excited about the potential of this new operation and look forward to working with our new team member. Over the past few quarters, we have discussed our strategic focus around potential acquisition opportunities in both personal care services and home healthcare. With the announcement of the Proposed Medicaid Access Rule from CMS, we have become far more selective in relation to potential acquisitions in the personal care service line. While we continue to believe strongly in our strategy of providing home healthcare and hospice with personal care services, we believe it is prudent to focus our PCS efforts primarily towards modifying this proposed rule. However, we will remain open to development efforts in the PCS space if any highly strategic acquisition opportunities emerge. As for our value-based care efforts, we are continuing to see positive initial results from our various contracts and hope to have outcome data to share by the end of the year. While we are pleased with the current status of our value-based efforts, we are still in the early stages of our goals to have this segment grow into a more significant part of our long-term business. However, we continue to see a great deal of interest from payers wanting to work with us on these types of arrangements. We are continuing to invest in value-based strategies and related technology resources in 2023, which we believe will help give us an opportunity to accelerate our revenue growth in this part of our operation. With the addition of our most recent acquisition of Tennessee Quality Care, we now have three states where we can offer all three levels of care. We believe this coverage positions us well to continue to add value-based contracts in these markets. As I say, each quarter, I am so proud of our team for the care they are providing to our elderly and disabled consumers and patients. There is no question that the majority of clients and patients want to receive care in the home, which remains one of the safest and most cost-effective places to receive this care. We believe the heightened awareness of the value of home-based care is favorable for our industry and will be a growth opportunity for our company. 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 clients, patients, and their families. With that, let me turn the call over to Brian.

Thank you, Dirk, and good morning everyone. Addus has had a strong financial and operating performance for the second quarter of 2023, continuing our solid performance through the first half of the year. Our personal care results reflect robust demand for our services in a favorable rate environment led by a very strong 12.6% year-over-year organic revenue growth for the quarter, well above our normal expected range of 3% to 5%. We are very pleased with the momentum in the core personal care segment with an 11.7% revenue increase for the year-to-date period over the prior year. As expected, we received our second statewide increase of the year in Illinois, our largest personal care market on April 1. This increase is in addition to our January 1, 2023 increase in the state. Additionally, we received a retroactive reimbursement increase in New York, which was largely focused on our consumer-directed business and has brought our margins in this program more in line with our other programs in the state. As a result, we have resumed taking new clients into our consumer-directed program and therefore are no longer excluding those results from our same-store revenues. While our hospice business has been slower to recover to pre-pandemic levels, we experienced modest sequential improvement in several key metrics this quarter over the first quarter. Our average daily census, median length of stay, and patient days all improved in the first quarter of the year with our median length of stay the highest we have seen since before the pandemic at 29 days. We expect to see further gradual improvement in our hospice business in the second half of this year with the expiration of the public health emergency, expected to lead to an increase in our skilled nursing facility hospice length of stay. The JourneyCare hospice operations acquired effective February 2022 are included in our same-store revenues for the first time this quarter. Same-store revenue for our home health services declined 10.9% from the same period a year ago as we focused on appropriately balancing our mix of episodic versus non-episodic cases to improve profitability. We’re continuing our efforts to negotiate more favorable rates with certain of our payers and have limited emissions under some agreements in the interim. Total net service revenues for the second quarter were $260 million. The revenue breakdown is as follows: personal care revenues were $198.3 million or 76.3% of revenue; hospice care revenues were $50.2 million or 19.3% of revenue; and home health revenues were $11.5 million or 4.4% of revenue. In addition to JourneyCare, these results include the operations of Apple Home Health, which we acquired in October last year. As Dirk noted, we announced this morning that we completed our acquisition of Tennessee Quality Care, a provider of home health, hospice, and private duty nursing services, which will complement our personal care services in the state. For 2023, we will continue to actively pursue acquisitions that meet our criteria and further our growth strategy. While the market environment for acquisition opportunities continues to be somewhat suppressed, we believe we will have a more favorable market environment as we gain more clarity around proposed rule changes and reimbursement and program structures. Other financial results for the second quarter of 2023 include the following. Our gross margin percentage was 31.7%, a slight decrease compared with 31.9% for the second quarter of 2022, but an increase sequentially from 31.2% in the first quarter. With the most recent rate increase in Illinois, we will not experience the negative impact we have seen the past two years from the July 1 increase to Chicago minimum wage as our wage rates have been adjusted statewide to be higher than this requirement. With our Tennessee Quality Care acquisition, we will see the positive impact on our gross margins of a higher mix of clinical services beginning in the third quarter and fully realized in the fourth quarter. G&A expense was 22.1% of revenue compared with 23.3% in the second quarter a year ago, reflecting the positive impact of leveraging our expenses as a percentage of our strong top-line growth. Adjusted G&A expense for the second quarter of 2023 was 20.4%, a decrease from 21.3% from the same period in the prior year, and a decline sequentially from 20.8% in the first quarter. The company’s adjusted EBITDA increased to $28.3 million compared with $25.1 million a year ago. Adjusted EBITDA margin was 10.9%, compared with 10.6% for the second quarter of 2022, and a 50 basis point increase from 10.4% in the first quarter of 2023. Adjusted net income per diluted share was $1.07 compared with $0.91 for the second quarter of 2022. The adjusted per share results for the second quarter of 2023 exclude the following: the positive impact of the retroactive New York rate increase of $0.05, acquisition expenses of $0.08, and non-cash stock-based compensation expense of $0.13. The adjusted per share results for the second quarter of 2022 exclude acquisition and de novo expenses of $0.08 and non-cash stock-based compensation expense of $0.13. Our tax rate for the second quarter of 2023 was 23.8% in line with our expectation. For calendar 2023, we continue to expect our tax rate to be in the mid-20% range. DSOs were 35.6 days at the end of the second quarter of 2023 compared with 43.7 days at the end of the first quarter of 2023. We have continued to experience consistent cash collections from most of our payers and received a material payment from the Illinois Department of Aging immediately prior to quarter end. As a result, DSOs for the Illinois Department of Aging for the second quarter were 22.3 days compared with 43.7 days at the end of the first quarter of 2023. While we are appreciative of the department’s continued emphasis on keeping their provider payments current, we would anticipate our DSOs to return to more normal levels in the second half of the year. Our cash flows have continued to be very strong in 2023 with our second quarter net cash provided by operations of $41.6 million. Year-to-date, cash flows from operations are $63.8 million exclusive of $3.4 million in ARPA net spending, well ahead of our expectations. Primarily as a result of the accelerated cash collections we have experienced, we have seen a $23.2 million positive impact from working capital changes year-to-date, which we would not anticipate to continue long-term. At quarter end, we have $10.6 million in ARPA funding still available to be utilized. As of June 30, 2023, and prior to our borrowing related to the Tennessee Quality Care acquisition, the company had cash of $84.2 million with capacity and availability under our revolver of $409.3 million and $319.9 million respectively. With our strong cash flow, we have continued to pay down debt in 2023 and have reduced our revolver balance by $53.5 million since the beginning of the year with a $30 million reduction in the second quarter. We have a capital structure that supports our growth initiatives and acquisition strategy, and as previously noted, we expect to remain active in the M&A market. At the same time, we will continue to diligently manage our net leverage ratio, with the company debt-free at quarter end net of cash on hand. This concludes our prepared comments this morning. We would like to thank you for being with us. I will now ask the operator to please open the line for your questions.

We will now begin the question-and-answer session. The first question today comes from Brian Tanquilut with Jefferies. Please go ahead.

Good morning, guys. Dirk, I guess I’ll start. You mentioned that if the CMS rule is finalized as proposed, Addus would explore operational changes. So, I know it’s pretty early, but any details you can provide on what levers you can pull to offset any negative impacts from that rule?

Well, Brian, once we see what the rule, the final rule entails, there are things we can do such as we’ll look at states, which may be due to the rule limiting your ability to properly operate in that state, and we will potentially look at moving out of those states if necessary. We would hate— we don’t really want that to be the way the operations end up, but certainly if the rule forces that we will look at it. More importantly, what we really would do from an operational standpoint is really try to grow in the markets in which the rule works. We would try to accelerate our—both our M&A growth and our organic growth in those markets, really focused on the areas, the states that give us a high enough reimbursement rate to be able to pass along whatever percentage if there is a change in the final rule, whatever that is to our caregivers. Let me make sure you understand, I know you do Brian, but I want to state it publicly, and that is we want to make sure that we pay our caregivers a legitimate pay. That is absolutely critical for Addus and our caregivers and both. But the way to do it in our mind is not for this stated minimum percentage, it’s more through making sure the states are paying an adequate rate, and that is what the states we would focus on in the future.

Yes, I understand that. And then maybe as I think about kind of your fill rate, right and I know you’ve done a great job ramping up hiring on a daily basis. How are you thinking about the remaining opportunity to increase the fill rate, maybe get it back to pre-COVID levels and what that would take? And maybe kind of layering that on I know your quarter-over-quarter hours are up north of 1%, so just try to put that growth algorithm on what the remaining opportunity is to drive growth over the next couple of quarters. Thanks.

Hey Brian, this is Brad. Yes, happy to discuss that. When we’re looking at the bill rate, we have certainly seen some nice improvement over the past 12 months. We’ve probably increased a couple 200 to 300 basis points on the bill rate. A lot of that is focused on the improved hiring that we’ve seen over the past 12 months. The things that we’re focused on are frankly, in order to kind of get another couple of hundred basis points out of that number to get back up to where we were pre-pandemic is: one, continue to focus on the hiring piece, but then also when you look at our new candidate tracking system and the speed to hire getting those people on board and then also focusing on getting them to their first billable days, because we still lose too many caregivers between honestly, hiring and when they actually take a billable case. So, really focused on accelerating that process which also will improve turnover as well, which actually takes a little bit of the pressure off of the hiring. We’ve been really focused this year on getting back to the basics on the scheduling, and the serving and assigning of caregivers. We’ve got some enhanced technology tools that we’ve added to help our schedulers, our service coordinators to make their job easier. So, certainly seeing good progress on that I still think that we have a couple of hundred basis points more opportunity there.

Alright, got it. Thank you.

The next question comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning. First just appreciate the color you gave us in the advocacy efforts on the HCBS rule. My first question though was just wanted to ask on the home health contracting environment, if you can just give us a little more details on how those re-contracting efforts are going with those that lower tranche of payers, is there any way that you can sort of, you know, quantify, I guess, what percentage of the MA payers would be in that insufficient reimbursement bucket? And then also just wondering as you are bringing the Tennessee acquisition online given the revenue mix is heavily weighted towards home health how you would describe the MA contracts underneath that asset and sort of against this backdrop of trying to be disciplined on your reimbursement with MA payers here?

Yes, Scott, this is Brad. So yes, we’ve been really focused on frankly trying to get some quick wins when you look at the Medicare Advantage really focusing on, let’s introduce the concept of getting to an episodic type reimbursement, but we’re in the near term, let’s really focus on just getting those per visit rates up. And I think we’ve done a pretty good job of adjusting those rates in some key markets still have some work to do there, but it’s really kind of market-by-market as to which payers that we’re focused on. When you look at the Tennessee Quality Care they’re contracting pretty – a good mix, but I think there are opportunities from upside there for us. And so that’s one of the things that our contracting team will be focused on is working on those rates. They continue to work with the other payers to adjust not just to try to get the episodic, but also let’s try to get those per visit rates up to where we can start taking more of those referrals and continue to have good operating margins or improved operating margins that we currently are showing.

Okay. Thanks for that, Brad. And then just my follow-up question would just be on sort of taking the improvement that you’ve had in personal care on the hours and sort of – maybe you’ve sort of giving us some visibility into how you are thinking about that continuing to trend out in the back half of the year in any seasonality that you would maybe want to comment on. And then separately, I guess just Brian maybe for you just on the Tennessee acquisition, maybe just sort of I know you talked about sort of starting to see some positive impact on margin at 3Q and then more fully realizing then in the 4Q? Any sort of, I guess quantification you could give us side of what the, the gross margin impact would be, the sort of start out there from that acquisition in the third quarter? That's it for me. Thanks.

Sure, Scott, I'll start with the PCS question first. I think we've talked about the last couple quarters to see nice sequential growth in hours per business day I think Q4 and Q1 was 1.9%. We saw that at 1.2% quarter-over-quarter. This year I think our expectation is going to be probably more similar to what we've seen in this last quarter. So around 1% maybe give or take over 2%, 3%, 4% there's not a lot of seasonality really in PCS. I think typically where we see impacts is more in the winter months where maybe you have some service delivery issues or shifts that get canceled, et cetera. Obviously, you're probably not going to see a lot of that. I mean, Q3 might start to see some impact a little bit into the year as things get colder holidays et cetera, but it's going to be pretty minimal. So wouldn't expect a lot of seasonality kind of in that trajectory. And on the Tennessee Quality Care, just a couple of metrics to give you guys, I think. We mentioned there are about $40 million in annualized revenue. It's a skilled business, so that gross margin profile is going to be in that mid to upper 40% range. And I think we've talked about it before the bottom line expectation to EBITDA, that's going to be in more that mid-teens as a percentage. So one thing I would just advise on as well with an acquisition that's ties, obviously there's going to be some depreciation, amortization that'll come into play with the intangibles we are borrowing for this acquisition. So with the most recent hike from the Fed, all in interest rate now is just a little over 7%. So we'll also be thinking about that from an interest expense perspective. But those are probably some good metrics, I think from a modeling perspective.

Very helpful. Okay, thanks.

The next question comes from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hi, this is Mike Murray on for Ben. Can you give us a little bit more color on hospice? Same for ADC decline, 3.2% driven by lower admissions with, with higher length of stay, a partial offset. Are you still seeing pressure from referral sources? Is there an increase in competition in some of your markets? Any color would be helpful.

Hey, Mike, it's Brad. Yes, we did see a kind of a drop on the admission front. What was encouraging is to start seeing that median length of stay increase as Dirk pointed out in his comments, primarily in the nursing facility, which we had anticipated with the expiration of certain provisions in the public health emergency. Frankly, we had kind of a slow May, the second half of June, and its continued July we've seen a kind of a pickup in admission volume with task force bonded into increased ADC. So we did have sequential growth, so we saw some recovery from Q1. I anticipate that we'll continue to see recovery into Q3 and into Q4, both from an admission standpoint but more importantly on the ADC front.

Awesome, that's helpful. Just switching gears a little bit: you've seen some nice operating leverage on G&A past two quarters, but it still remains around 21%, 22% of revenue. How do you think about this line item longer term? Do you think you could get it back to pre-pandemic levels, which were call it, 19%, 20%?

Yes. Mike, this is Brian. I think we're continuing to see leverage. So as our top line continues to grow. We definitely saw that from Q1 into Q2 with kind of a decline in that percentage. So that would be our expectation. So a lot of those costs particularly on the corporate side are fixed. We'll flex a little bit in the field on SG&A, but that's probably going to move more slowly than our revenue growth. So yes, we would anticipate over time as we continue to see our top line growth that we're going to continue to get more leverage on G&A.

Alright, thank you.

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

Hey, good morning. You gave us some metrics on, on hiring productivity. I'd be curious to share a little bit on the other side of that on the retention side. What sort of improvement you've seen and if there are technology tools that you can implement or evaluating to help drive that further? Thanks.

Yes. That's Brad. So when you look at our personal care hiring and we carve out that family caregivers, so you look at kind your traditional caregivers. We have seen nice improvements on the turnover rate probably about to, to the tune of you. We gone from 64%, roughly Q1 of last year we're down to 56% which is again still ahead of industry standard. I think some of the things that we're looking at that I think have helped us on the turnover is one, really working on caregiver engagement; second, making sure that they have the hours that they want to work because we're still probably one of the biggest reasons that a caregiver leaves us is because they're not getting sufficient hours. So there's been a lot of focus on our part of trying to ascertain who wants more hours, what the schedules are they looking at and putting some technology tools that help match that those additional hours they're looking for with clients that are available. So I think our IT team has done a great job of putting together some very helpful tools. We're continuing to modify and work with those. Again, I think speed to hire is important from a – to really kind of maximize our fill rates. But honestly, it's really about making sure people are getting the hours. In addition, we actually do conduct surveys with our caregivers. We just recently completed a round of surveys, got great responses. Almost half of our caregivers responded, so you think about getting input from 14,000 caregivers. You learn a lot, but again it's kind of interesting that hours working in that, getting enough hours is probably one of their key things and that's what we're focused on.

Okay, understood. And then on M&A. Dirk, you spoke to sort of the Addus side of it where you are focused from a PCS versus Home Health versus Hospice perspective. But curious more on, on supply side what you all are seeing given some of the reimbursement dynamics that might be affecting potential sellers' willingness to come to market as well as maybe just the general sense of your activity levels, obviously just completed the Tennessee deal, but relative to historical what you're seeing from an activity and pipeline perspective?

Hey Matt, this is Brian. I think on the supply side, I think we kind of mentioned in our comments, it's been slow. I think there are some opportunities out there. We're being pretty selective on the ones that we're looking at with some of the rule and reimbursement overhang. So we're being, I think cautious in that front, but I would also say the environment has not – has not kind of turned, it's not what I would call robust at this point. So – but there are still opportunities for us to look at. I think still from a priority standpoint, we still believe heavily in carrying skilled home health with our personal care, having hospice as an available alternative as well. But it really comes down to more strategic markets and pricing opportunities, I think probably are, are driving us more today on what our opportunities are that we're going to pay more attention to.

And let me – let me add to what Brian has said, and that is we're facing challenges right now, as you know in both personal care and home health as it relates to either rural change – proposed rural changes or proposed rate reductions. Long-term, we don't believe those should affect our strategy. We remain completely focused on our growth of all three levels of care in markets that allow us to appropriately deal with value-based care. One of the things we think these changes indicate is that you need to be larger as a company so that when you sit across the table, certainly from Medicare Advantage payers, but others as needed that you have something that they need, and that is size and quality of operation. And so while we are currently being more focused and on our strategic model as to what we will look at, if something came up in either one of these segments of care that was extremely strategic, we're not going to let the proposed rules out there affect us long-term. Now whether or not it affects the price, that remains to be seen, I mean, certainly from our standpoint we’re going to negotiate if we can with the fact that there are these challenges out there. But we're still focused on the long-term growth and profitability of Addus.

Okay. Understood. And just quickly one more on the timeline for the Medicaid rule. I think in the past, you had mentioned you expected some uptake in the fall. I don't know, if based on the quantity of comments and the listings that you had, if you have a different perspective when that might come acknowledging some uncertainty?

Yes. Well, I think when it first was proposed, there was a discussion around the fact that if you look historically, some of these things could be actually finalized within a few months of getting the final comments in. I think at the last conference call, and certainly we've made visits through the last quarter since then, our feeling is that that's probably shifted and won't be finalized until sometime in 2024, especially if you think about it. When you receive so many comments and most of them are against the proposed change I think there's a lot of thought process going from a CMS perspective. So we're expecting something probably more in line with the first part to mid-part 2024.

Okay. Thank you.

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

Good morning. Thanks for taking the question, Dirk. So I guess, first on the Tennessee acquisition, you mentioned the fact that the situation in terms of the payers, would you make this state as a target for value-based contracting? So when should we expect, I guess, for you guys to have a contract like that in the state, was it maybe the payer there was actually asking for you to add more services to kind of how you expect the situation in the state on that front evolved with this acquisition now closed.

Yes. I think on the value base, I mean, some of the payers that we work with outside of Tennessee are similar to the payers that are in Tennessee. Now it tends to be a different group of individuals that are overseeing those markets. But I think we'll at least be able to have an introduction pretty easily to start having those discussions around value-based care. I think that's something – it's still not something we'd probably be jumping into in three months, but maybe towards the back half of integration within the first 12 months, we'll probably looking to get into value-based arrangements. But we'll start exploring those, frankly, now are engaging with payers to have some of those discussions as we work on some of the other rates that are with some of those managed care payers.

Great. And if I may also follow-up on the fact that this asset comes with a majority of revenues being Home Health. So moving forward with the acquisition despite the rate cuts that are coming next year likely, while there could be more cuts going forward with the recruitment. So I guess, as we think about this business, Home Health segment that is. With this, let's say that the 2% rate that is finalized, maybe a little bit better than proposed. Would you expect to be able to grow EBITDA on a same-store basis, I guess, with these types of rate cuts?

Yes, Joanna, I can address the rate cuts, and I'll let Brad discuss our growth opportunities related to this acquisition. This segment is already quite small for us. The deals we are considering, including this one, account for potential rate cuts anticipated over the next couple of years in our long-term outlook for top-line growth. We've incorporated that into our modeling, which impacts our profitability expectations and informs our pricing discussions with these targets. This is part of our overall strategy, and we are cognizant of the current environment. Specifically regarding this acquisition, as Dirk mentioned, there are opportunities to expand into other counties. We believe there are chances for volume growth in the market, but I'll let Brad elaborate on that.

Yes. So I think there certainly are some volume opportunities with potential de novos based on kind of where they are. I mean, they cover a large geography in Tennessee. I think there's some opportunities to move into some of the more urban markets. They're primarily kind of more rural focused. But also, I think to Brian's point, I mean, Home Health is a relatively small segment for us, so there are operational efficiencies that we gain by scaling up. And so I think that really went into our calculus about doing this deal and about the opportunities to get some same-store growth from a bottom line perspective as well as top line.

Appreciate it. Thank you. And if I may, just a last question, I guess, more strategic and I know this just came out yesterday about CMMI announced a new voluntary demonstration, I guess, across all the states would have focused on dementia patients. So I don't know if something like this would be of interest to Addus. The material from CMS talks about targeting dual eligible populations, but at the same time to talk about us being open to Medicare certified providers. So I don't know if this is something that I guess makes Addus here well positioned given the kind of presence in both Medicaid, also Medicare Home Health?

Yes, Joanne, this is Brad. Yes, very pleased with that announcement. It's certainly something that we're willing to explore. I think it really fits well into our strategy of having all three levels of care because it has a skilled component with the Home Health, but also has a personal care type component as well. And frankly, it's good to see CMS recognize that that's probably the population that honestly has the lack of services or a potential lack of services. Those are individuals that they can need Home Health, they can need Personal Care, they need Hospice but by the same token, it helps – when you look at Hospice, you get a lot of criticism with somebody's on length of stay for a long period of time. And it's primarily those neurological disorders such as dementia. And I think this is really trying to kind of fill some of that gap and some of the pressure you have in trying to take care of those individuals in the right place. So very pleased with it and I'm certainly looking forward to exploring it.

Thanks for the call. Thank you.

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

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

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