Aveanna Healthcare Holdings, Inc. Q2 FY2023 Earnings Call

Greetings. Welcome to the Aveanna Healthcare Holdings, Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now turn the conference over to your host, Shannon Drake. You may begin.

Thanks, Shumali. Good morning, everyone, and welcome to Aveanna’s second quarter 2023 earnings call. My name is Shannon Drake. I'm the company's Chief Legal Officer and Corporate Secretary. With me today is Jeff Shaner, our Chief Executive Officer; Matt Buckhalter, our Interim Chief Financial Officer; and Debbie Stewart, our Chief Accounting 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 at www.aveanna.com and in our most recent quarterly report on Form 10-Q filed with the SEC. With that, I will turn the call over to Aveanna’s Chief Executive Officer, Jeff Shaner.

Thank you, Shannon. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our second quarter results and how we are continuing to progress against our near and longer-term objectives for 2023 and beyond. My initial comments will briefly highlight our second quarter results, along with the progress we are making in addressing the labor markets and our ongoing efforts with government and managed care payers to create additional capacity. I will then provide some thoughts regarding our liquidity and refreshed outlook for 2023 prior to turning the call over to Matt to provide further details into the quarter and full year guidance. Starting with some highlights for the quarter. Revenue was approximately $471.9 million, representing a 6.5% increase over the prior year period and a 1.2% sequential improvement. Gross margins was $155.3 million or 32.9%, which is essentially flat when compared to the comparable prior year period, but a 7.5% sequential improvement. And finally, adjusted EBITDA was $35.8 million, representing a 3.2% decrease when compared to the prior year period, primarily due to the costs associated with the current labor environment. However, a 25.6% sequential improvement reflecting the improved payer rating environment as well as cost reduction efforts taking hold. As we have previously discussed, the labor environment remains the primary challenge that we are aggressively addressing in 2023 and to see Aveanna resume the growth trajectory that we believe our company can achieve. As a reminder, we do not have a demand problem. Demand for home and community-based care has never been higher with both state and federal governments and managed care organizations asking for solutions that can create more clinical capacity. As communicated in our previous quarter, our ability to recruit and retain the best talent is a function of rate. Our business model offers a preferred work setting that is mission-driven, providing a deep sense of purpose for our teammates. However, our caregivers need to be able to provide for themselves and their families in this inflationary environment, and we must offer a competitive wage. Since our first quarter earnings call, I am pleased with the progress we have made on several of our rate improvement initiatives with both government and managed care payers. Specifically, as it relates to our private duty services business, our goal for 2023 was to execute a legislative strategy that would increase rates by double-digit percentages across our various states with particular emphasis on California, Texas and Oklahoma, which represent approximately 25% of our total PDS revenue. Year-to-date 2023, we obtained double-digit PDS rate increases in six key states, including Oklahoma. We have also achieved rate wins in an additional 11 states that were either in line or slightly better than our expectations. These combined 17 states represent approximately 50% of our PDS footprint, and we should continue to see positive progress throughout 2023 and into 2024 as we continue to focus on the remaining states. As a point of reference, the majority of the rate increases are effective in the second half of 2023. So we will get a full year benefit as we head into 2024. Finally, we were successful in expanding the family caregiver benefit in two additional states, which should help ease caregiver capacity constraints. While we're pleased with our PDS legislative messaging being well received by state legislators, we still have much work to do. As an example of the work ahead, we received a modest increase in Texas effective September 1, and do not anticipate being included in the California budget until mid-2024. While we believe we have made significant strides with both Texas and California legislature, demonstrating the importance of rate increases and how they support an overall lower health care cost improve patient satisfaction and quality outcomes, it is clear that we need to further accelerate our preferred payer strategy and continue to focus on opportunities within our current infrastructure to allow us to pass meaningful wages through to our caregivers. This allows us to become a solution for overcrowded children's hospitals and distressed parents who want their children to be cared for in the comfort of their home. Moving on to our progress with preferred payers. Our goal for 2023 was to double our PDS preferred payer volumes from approximately 10% to 20% by year-end 2023. In the second quarter, we added one additional preferred payer agreement in a key market. Our preferred payer volumes increased to approximately 16% of total PDS volumes as compared to 13% at the end of Q1. We have since signed an additional preferred payer agreement in early July and are optimistic we will continue to execute this strategic initiative throughout 2023. While we are taking a national approach to our PDS preferred payer strategy, we are placing particular focus on the state of Texas due to the moderate rate increase and intensifying our ability to shift capacity to our preferred payers. As of June 30, we now have over 50% of our Texas PDN volumes with preferred payers, and we believe we have an opportunity to further improve this trend to approximately 70% by the end of the year. Finally, we discussed the need to shift our current labor capacity to those payers that value our services and appropriately reimburse us for the care we provide. We continued several initiatives to shift caregiver capacity to our preferred payers, to optimize staffing rates, while minimizing days in an acute care facility. In the second quarter, our preferred payer relationships benefited from accelerated caregiver hires, up 2.5 to 3 times more than our other payers. We continue to experience staffing rates approximately 20% greater with significantly higher patient admissions. The value proposition is straightforward. Preferred payers reimburse us at a fair rate, and we pay market competitive wage rates while also earning value-based payments for achieving positive clinical outcomes and improved staff hours. We are encouraged by our 2023 rate increases and the subsequent recruiting results and believe our business can rebound quickly, as we achieve our rate goals previously discussed. Home and community-based care will continue to grow and Aveanna is a comprehensive platform with a diverse payer base, providing a cost-effective, high-quality alternative to higher cost care settings. And most importantly, we provide this care in the most desirable setting, the comfort of the patient's home. Before I turn the call over to Matt, let me briefly comment on our liquidity and refreshed outlook for 2023. We recently renewed and extended our AR securitization facility for an additional three-year term effective July 31, 2023, maintaining our ability to access up to $175 million in cash proceeds associated with our ongoing receivable balances. I am pleased with the work of the entire team in finalizing this agreement and allowing us to maintain our focus on running the business. On the liquidity front, more broadly, we continue to make progress on improving our cash flow by focusing on obtaining adequate reimbursement rates and growing our volumes. We have also implemented several initiatives to rightsize our corporate cost structure, while optimizing our collections. As Matt will discuss further, we have ample liquidity to operate our business while we work with government and payers to improve the reimbursement rates to reflect the inflationary environment. As it relates to our refreshed outlook for the year, based on the strength of our first six months results and the rate increases that will impact the back half of the year, we are comfortable raising our full year revenue guidance to a range of $1.85 billion to $1.86 billion and an adjusted EBITDA guidance range of $132 million to $135 million, respectively. We believe it is important to continue to set expectations that acknowledge the environment that we are operating in and the time it will take to transform our company and return to sustainable growth. We believe our revised outlook provides a prudent view, considering the challenges we face with the current inflationary labor environment. And hopefully, it proves to be conservative as we execute throughout the remainder of the year. Finally, I am proud of our Aveanna team, as we continue to execute on our 2023 strategic objectives, the power and efficiency of the home as a healthcare setting remains critical to our patients, families, payers, referral sources and government partners. The value of our clinical workforce continues to be recognized through various rate increases across the country and through our expanding preferred payer relationships. I look forward to updating you on our results at the end of Q3. With that, let me turn the call over to Matt, to provide further details on the quarter and our 2023 outlook.

Thanks, Jeff, and good morning. I will first talk about our second quarter financial results and liquidity, before providing additional details on our refreshed outlook for 2023. Starting with the top line, we saw revenues rise 6.5% over the prior year period to $471.9 million. We experienced revenue growth in both our Private Duty Services and Medical Solutions segments, which grew by 8.5% and 15.9%, respectively, while our home health & hospice segment declined by 9.7% as compared to the prior year quarter. Consolidated adjusted EBITDA was $35.8 million, a 3.2% decrease as compared to the prior year, but a 25.6% sequential improvement reflecting the improved payer rating environment as well as cost reduction efforts taking hold. Now taking a deeper look into each of our segments. Starting with private duty services. Revenue for the quarter was approximately $378 million, an 8.5% increase and was driven by approximately 9.9 million hours of care, a volume increase of 2.7% over the prior year. While volumes improved over the prior year, we continue to be constrained in our top line growth due to the shortage of available caregivers, although we are beginning to see signs of improvement in our labor markets. Q2 revenue per hour of $38.28 was up $2.04 or 5.8% as compared to the prior year quarter. We expect to see continued improvements in 2023, as we execute on our rate increase initiatives, and we continue to be encouraged with our ability to hire and attract caregivers and address the market demand for our services while we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $111.5 million of gross margin or 29.5%, a 0.4% increase from the prior year quarter. Our cost of revenue rate of $26.98, which is a 5.2% increase as compared to the prior year, represents the rate pressures we continue to experience in the labor markets. That being said, our cost of revenue rate improved in the second quarter by $0.49 or 1.7% on a sequential basis. Our Q2 spread per hour was $11.30, representing a 7.3% year-over-year improvement. Our Q2 spread did benefit from some timing-related items and should normalize in the $10 to $10.50 range in the back half of the year. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $55.4 million, a 9.7% decrease over the prior year. Revenue was driven by 9,900 total admissions with approximately 69% being episodic and 11,100 total episodes of care. Medicare revenue per episode for the quarter was $3,051, up 2.8% sequentially from Q1. We have intentionally focused on rightsizing 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 approaching 70%, we have achieved our goals of rightsizing our margin profile and enhancing our clinical offerings. As we think about Q3, we expect relatively flat admission growth with improvements in growth coming in Q4. We are committed to a disciplined approach to growth while shifting our capacity to those payers that value our clinical resources. We were pleased with the gross margin improvement from 44.6% in Q1 of 2023 to 48.6% in Q2, demonstrating our continued focus on cost initiatives to achieve our targeted gross margins. Despite the challenges faced by our HHH segment in 2022, we hold a strong belief in this business and its lasting value proposition. Our Home Health & Hospice platform, which is prime for growth, is dedicated to creating value through effective operational management and delivery of exceptional patient care. We'd expect to see improvements throughout 2023 as our direct and indirect cost initiatives continue to take hold. Now to our Medical Solutions segment results for Q2. During the quarter, we produced revenue of $38.9 million, a 15.9% increase over the prior year. Revenue was driven by approximately 85,000 unique patients served and revenue per EPS of $457.26. Gross margins were $16.8 million, a $2.8 million or 19.7% improvement over the prior year period. Gross margins, which were 43.3% in the quarter, represented a 1.4% increase as compared to the prior year period. We continue to evaluate ways to be more efficient and effective in our back office to leverage our overhead as we continue to grow. While other enteral providers decided to exit the market, we see this as an opportunity to expand our national enteral presence and to further our payer partnerships. In summary, we continue to fight through a difficult labor and inflationary environment while keeping our patients’ care at the center of everything we do. It’s clear to us that shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Aveanna. As Jeff stated, our primary challenge is reimbursement rates. With the positive momentum we saw in Q1, we’re optimistic that such trends will continue into the second half of 2023. As we make progress in 2023 with the rate environment, we will pass through wage improvements and other benefits to our caregivers in the ongoing effort to better improve our volumes. Now moving on to balance sheet and liquidity. At the end of the second quarter, we have liquidity in excess of $205 million, representing cash on hand of approximately $28 million, $15 million of availability under our securitization facility and approximately $162 million of availability on our revolver, which was undrawn as of the end of the quarter. Lastly, we had $38 million of outstanding letters of credit at the end of Q2. While we analyze the 2023 earnings timetable and their related cash flows, there's a possibility of utilizing the revolver for the short-term due to timing-related needs. However, our primary goals are to have the revolver undrawn as of the end of the year and achieve positive operating cash flows during the latter half of 2023. On the debt service front, we had approximately $1.48 billion of variable rate debt at the end of Q2. Of this amount, $520 million is hedged by fixed rate swaps and $880 million is subject to interest rate caps, which further limits our exposure to increases in SOFR above 2.96%. 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. One last item I will mention related to our debt is that we have no material term loan maturities until July 2028. Looking at cash flow. Cash provided by operating activities was negative $3 million for the quarter as a result of certain one-time working capital items. Free cash flow was approximately negative $9.5 million. We also expect to see cash flow benefits throughout 2023 as our top-line and cost management initiatives come to fruition. Before I hand the call over to the operator for Q&A, let me take a moment to address our refreshed outlook for 2023. As Jeff mentioned, we are comfortable raising our full year revenue guidance to a range of $1.85 billion to $1.86 billion, and adjusted EBITDA guidance range of $132 million to $135 million, respectively. If the trends we saw in the second quarter continue and we are successful in obtaining our additional rate increases, along with expanded preferred pay arrangements, we would expect to further update our guidance in the back half of the year. As we think about seasonality, we expect our revenue to grow as rate increases are implemented throughout the year, which drives our volumes. As we now have more clarity into the annual rate increases we will receive their effective date, we now expect approximately 25% to 26% of our full year guided adjusted EBITDA to be recognized in the third quarter. Our EBITDA is expected to further ramp in the fourth quarter as we realize the benefits of our cost savings initiatives. I'm proud of all of our Aveanna team members and their hard work achieving these results. I look forward to the continued execution of our 2023 strategic plans and updating you further at the end of Q3. With that, let me turn the call over to the operator.

Thank you. At this time, we will be conducting a question-and-answer session. Please limit yourselves to one question and one follow-up question to allow everyone to ask questions. Our first question comes from the line of Joanna Gajuk with Bank of America. Please proceed with your question.

Hi. Thanks for taking my question. This is on behalf of Joanna Gajuk. My first question is regarding the negative operating cash flow this quarter. I would like to understand your outlook for the year and whether you expect it to remain negative in the third quarter or turn positive in the fourth.

Yeah. Good morning and thanks for joining us. As we said last quarter, we expected our second quarter to be slightly negative in our operating cash flow, and it was a negative $3 million. Our goal all year has been to reach positive operating cash flow by the end of the year. And I think everything that we know today tells us we're still on that trend. We'll have some certain one-time items that will play through Q3 and Q4, but we still feel very optimistic on reaching that positive operating cash flow and ultimately, heading into 2024 as a positive operating cash flow and free cash flow company, as we really move through 2024. Matt, anything you'd add to?

No, I think you said it well, Jeff. A couple of one-time working capital items this quarter resulted in that negative $3 million that we saw. But given our outlook of what we're looking at with continued rate improvements as well as our continued cost initiatives that we will continue to take, I think improvements in the business will continue. And from there, we should see positive operating cash flow going forward.

Okay. Perfect. Thank you. I just have one follow-up question or a separate question. On PDS volumes and how, I guess, the 10-Q listed that it was primarily attributable to growth in demand for non-clinical services. So what was the volume change year-over-year and quarter-over-quarter for these clinical services? And where do you expect the volumes to be for the rest of the year? Thank you.

Yes, that's a good question. We experienced a notable increase in some of our lower skilled and less nurse-driven businesses. Positive year-over-year growth of 2.7% is encouraging, especially since it's been a couple of years since we saw positive growth in our PDS business. Our preferred payer strategy is showing results, both in terms of rates and beginning to affect volume. We have committed to directing caregiver capacity to those payers that are supportive of us, which is evident in both our PDS and Home Health & Hospice segments. As we look towards the latter half of the year, we anticipate continued improvement in our PDS business in both rates and volume. We are proud of our PDS team for rebounding well in 2023 after the impact of COVID. We see a clear path ahead with our preferred payers to advance the business, and we are satisfied with our current position. Thank you.

Thank you.

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

Hi. Good morning. You've got Taji on for Brian. Thank you for taking my question. So my first one relates to the raised guidance, right? So just looking at revenue first, if we're looking at first half or second half, that implies a ramp down in the back half, but at the same time, we're hearing some strong momentum in PDS and your other segments. So maybe if you can just kind of talk through the moving pieces and what's informing the, I guess, ramp down in the back half? And then, on EBITDA as well, I know that you guys have kind of called out a couple of cost savings. But as we reconcile this with like the different margin profiles for PDS, HHH, and MS. Just curious if you can talk about the areas where you have more leverage to improve the margin profile across the three different segments, especially in PDS. I know that you guys said you expect that to normalize. But I think if I factor that into my model, I'm still getting to the lower end of the margin you guys had kind of loosely commented on. So, just we'll start there.

Good morning, Taji. That's a lot to discuss, but we’ll do our best. Let’s begin with Q3. For the first time since COVID, we are noticing a seasonal impact on our Q3 business. Traditionally, Q3 coincides with school being out, which typically means a slight decrease in volume for both our PDN and PDS businesses. We are experiencing this trend in Q3 and expect revenue to be seasonally lighter, probably in line with or slightly softer than Q2 in terms of earnings. Matt hinted at our expectations for Q3 EBITDA in his remarks. Regarding the second part of your question about the latter half of the year, most of our rate increases took effect either on July 1 or between September and October, impacting both PDS and the hospice rate increase. We anticipate an increase in volume across all three businesses during the last four months of the year, particularly from September through December, along with continued rate enhancements. As we stand now, Taji, it's still early in our transformation journey. We deliberately use terms like prudent and conservative because we recognize that this revision to our guidance is a cautious approach. Matt mentioned that if circumstances unfold as we anticipate, we plan to revisit our guidance in the November earnings call. To emphasize, Q3 is our seasonally low period, and current information suggests this will remain the case for both our PDS and Home Health & Hospice businesses. It truly is our seasonal low point. Matt, do you want to add anything regarding costs or margins?

No, I think Taji, it’s a great question altogether. I think there's improvements throughout all three business segments in there, and I'm going to say that's above gross margin and below that we're focusing on. And so I think as we continue to kind of dig into it being transformational in nature and lean into technology in certain segments, but then also make sure that we're delivering the appropriate amount of care, the right amount of care with the right amount of overhead supporting it as well. We'll continue to be prudent in that one and all portions of our business. And I think that will lead to your little bit of margin expansion as well.

Great. Taji, anything else?

I have one more question, and I appreciate the detail on my first question. Regarding the topic of labor, could you share some key performance indicators related to your labor force today, such as recruitment, retention, turnover, and how those metrics have changed over the past year? Additionally, I understand you mentioned that the issue isn't related to demand but rather capacity. If you had enough labor, what percentage increase in volume do you think you could handle?

Thank you, Taji. We view labor primarily through the lens of reimbursement rates rather than inflation rates affecting caregivers in both PDS and Home Health & Hospice. Since we can’t control inflation, our focus is on reimbursement rates and fostering relationships with partners that align with our capacity. This leads us to emphasize our preferred payer and government affairs strategies, which we've clarified over the last two quarters. Our aim is to secure appropriate reimbursement rates and reinvest in caregiver wages. Through these relationships, we demonstrate our ability to grow the business while being a reliable partner. However, in markets where payers are not offering above-market rates, we are not seeing additional hires or improved staffing levels. For instance, in Texas, 50% of our PDN volumes are now connected with preferred payers, and we are working to increase that to 70% by year-end. This alignment is crucial for enhancing clinical outcomes, reducing overall care costs, and increasing hours, which are goals shared by our payers. Concerning Home Health & Hospice, we are committed to aligning our workforce with preferred payers, particularly focusing on episodic payers. Currently, we are approaching 70% for episodic admissions. Even with declines in admissions and revenue year-over-year, we refuse to allocate our capacity to low-margin payers. We are actively terminating contracts with those payers to ensure we partner with those offering fair rates. Our home health and hospice teams have significantly improved operations recently, achieving a gross margin of 48.6%, the best we've seen in the past year, and we are observing better clinical outcomes because we are not pursuing low-margin business. Overall, our resources are limited, and we will continue to align them with payers interested in long-term partnerships. Thank you, Taji.

Thank you.

Our next question comes from the line of Pito Chickering with Deutsche Bank. Please proceed with your question.

HI, good morning, guys. So looking at guidance, can you help us quantify the headwinds and tailwinds on the rate increases versus your prior guidance? I believe that you're looking for mid- to high single-digit rate increases in California and Texas. It sounds like that's a headwind. They also got rate increases from others. So can you just help us, I guess, model sort of these moving parts between what was better versus worse versus your last guidance? And on Texas, do you assume that about 70% of those payers will be in the preferred network within guidance in Texas? Thanks.

Thank you, Pito. Good morning. I want to start by saying that we're disappointed not to be included in the fiscal year 2023 California budget, as it was significant for us. However, I'll turn that into a positive note. We are the largest provider of PDN in California and have been operating here for over a decade, and we plan to continue doing so for at least another decade. We are dedicated to the long-term success of California and anticipate a rate increase for PDN in the state. This is something that should happen. We have made solid progress with both the legislature and the governor's staff, and we will maintain our engagement with them as we approach 2024. Regarding California, as we mentioned earlier this year, it is a crucial factor for Aveanna. We expect that rate improvement in the latter half of 2024, potentially as late as January 1, 2025. This situation will balance out in our 2023 guidance when we consider the rate increases we did receive, including some unexpected increases that were higher than anticipated on a per-day basis. Overall, this will be about equal for us in 2023. Looking ahead to the second half of the year, it will be relatively stable. However, we won't receive the California rate increase in July 2023, meaning we lack that immediate boost, resulting in a more gradual adjustment from Q3 to Q4. As Matt mentioned, we have several levers to pull right now. Our focus on cost management has significantly improved, and we've identified areas within the company where we can enhance overall contribution margin across our businesses. Consequently, when considering the impact on guidance, we believe we'll land in a similar position for 2023. As for 2024, we're still a few months away from fully addressing that, but we won’t have the California rate increase early in 2024. We will look for other strategies, such as the continued advancement of our preferred payer strategy, to ensure that we enter 2024 with solid momentum regarding our preferred payer mixes. I believe that addresses most of your question.

Yes, that's perfect. Regarding the same topic, I understand that each contract is unique. However, since preferred networks are increasingly becoming a significant growth driver for the next four years, could you provide some insight into the payment differences between a preferred partner and a standard contract? Additionally, you mentioned earlier that demand in Texas remains very high. If patients are not receiving treatment, are they being left in acute hospitals, or what is currently happening with patients in Texas?

Yes, that's a great question. We have studies to back this up from both California and Texas, which we've shared with the governor's offices, the Medicaid department, and several legislators. Pediatric home health care costs between $5,000 and $6,000 a day compared to acute care settings. It takes time for legislators to grasp this messaging, but managed care organizations understand it right away. In Texas, our managed care partners recognize the need to transition these children out of hospitals, as some studies indicate that medically fragile children stay in hospitals an average of 54 days longer than necessary. This translates to an additional cost of $200,000 to $300,000 per stay. Our managed care partners, especially in Texas where we have significant scale and expertise, see the value of partnering with us for nursing services. We aim to establish long-term business relationships with our payers rather than switching partners frequently. Our goal is to align with them over multiple years to develop sustainable connections. The fact that we have 50% of our volume in Texas with a preferred payer shows that we are already aligned. The 2% rate increase we received effective September 1 was disappointing and underscored that our preferred payer strategy is the right direction. We expect to secure one or two more preferred payer agreements by the end of the year, which could increase our alignment to around 70%. Regarding market differences, our value-based payments, which are determined quarterly, are significantly higher than the standard Medicaid rates—by about 25% to 30%. Therefore, having a preferred rate and value-based elements is crucial for demonstrating our long-term alignment with our partners. I hope that answers your question.

Perfect. And just one super fast cash flow question. Just a follow-up to the previous question. You're negative in Q3 or positive in Q4. Is the difference there simply this rate increases flowing through in the last four months of the year, or is there something else that we should be thinking about as you shift from cash flow negative into cash flow positive?

No, it's just a slight dip in volume. As you consider the business, Pito, we experienced a decrease in volumes in Q3, mainly in our core home health and PDN segments. However, we anticipate a recovery starting in September, continuing through the end of the year. Based on our projections, we expect Q4 to be an exceptionally strong quarter for us and to finish the year on a positive path. Q3 is simply lighter for us, which is reflected in our cash flow plans for both Q3 and Q4.

Great. Thanks so much.

Thanks, Pito.

Our next question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Hey, thanks. I definitely appreciate the commentary about your preferred payer mix in Texas. I think for overall, you had noted that you were expecting preferred payers to account for 18% to 20% of nursing hours for the year. I'm wondering if this July contract in Texas gets you there? Are there still kind of wood to chop on that front? That's my first question.

As we look at the year, we started at 10%. By the end of Q1, we were around 13%, and I think our actual number reached 16.5% by the end of Q2. The agreement we signed in Q2, along with the one in July, has been helpful. However, we still have work to do. I expect to sign another three or four agreements between now and the end of the year. I believe we will comfortably reach 20% by year-end, though Matt might have a more cautious outlook. We will then set a goal for 2024 to keep advancing that figure. We're not stopping at 20%, as we aim to make this an increasingly significant part of our business. Matt, do you have anything to add?

No, I think that's well said, Jeff. I mean, preferred payers are the answer for Aveanna, to answer for our caregivers and if they answers for our patients. Moving that to 20% and above is what we're focused on as an organization because it allows us to pay that higher wage rate to our caregivers, which allows us to drive more volume and provide more clinical care for them. So as we kind of check the box on that 18% to 20% in the back half of the year and say that's where we're going to be, we'll set a new goal for 2024 as well and continue to push forward.

Thank you. And just a follow-up on one of your prepared comments. You mentioned for Texas and California that they plan to include you in state budget next year. How much visibility does that realistically give you? Is that something that, kind of, the negotiation process just starts all over, or is there kind of a real indication that those double-digit increases will be realistically considered next year?

That's a good question, Matt. Let me clarify the two situations. Texas has a biannual process, so it's settled for the next two years. Our strategy there focuses on working with the MCO, and we're not waiting for any rate increase; we are actively shaping our future. In California, we are engaged in ongoing discussions daily. This fall, we'll meet with the governor and his key team to further our agenda. California is an annual process, so we reset in January with new legislative considerations. We have been focusing on California for about 15 to 16 months now, and there is still a lot of work to be done. I view it as a matter of timing rather than if it will happen. We are significant healthcare cost savers for California, as our studies demonstrate, and we've received positive feedback from the governor's staff. Collaborating with them this fall as they prepare for the 2024 legislative cycle is crucial for us both as a company and as an industry. It's essential that we align ourselves with the governor's key legislative priorities to facilitate the rate increase. As I mentioned to Taji and Pito, we anticipate this happening in late 2024. So, when considering the timeline, the earliest we might see progress is July 2024, but it is more likely to occur in early 2025, as most rate changes in California begin at the start of the next fiscal year. Overall, we've had a successful year in government affairs advocacy, with 17 state rate increases out of a total of 33 states, which is slightly better than expected. Although we would have liked California to be included in that list, the situation positions us well as many of these increases will be realized in 2024. I'm actually looking forward to what lies ahead in California, as it represents our next opportunity. As Matt pointed out, at the end of the day, we can only compensate caregivers satisfactorily if we have appropriate rates. I am confident that we will achieve this in California over the next six months.

Anything else, Ben?

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Jeff Shaner for closing remarks.

Awesome. Thank you so much for joining our earnings call. And more probably, thank you for your interest in Aveanna story. We certainly look forward to updating you on our continued progress at the end of Q3 in November. Thank you, and have a great day.

This concludes today’s conference and you may disconnect your line at this time. Thank you for your participation.