Good morning, and welcome to Aveanna Healthcare Holdings Second Quarter 2025 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the call over to Debbie Stewart, Aveanna's Chief Accounting Officer. Thank you. You may begin.

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

Thank you, Debbie. Good morning and thank you for joining us today. We appreciate your time this morning to understand our Q2 results and our plans for Aveanna in 2025. I will start with an overview of our second quarter results and the actions we are taking to navigate the labor markets and enhance capacity with government and preferred payers. After that, I will update you on the integration of Thrive Skilled Pediatrics, the current regulatory landscape, and year 3 of our strategic plan. Finally, I will share our improved outlook for 2025 before handing over to Matt for more details on the quarter. For the second quarter, our revenue was about $590 million, marking a 16.8% increase compared to the same period last year. Our adjusted EBITDA for the quarter was $88.3 million, a 93.6% rise over the previous year, mainly due to a better rate environment and ongoing cost-saving efforts. We are continuing our strategic transformation strategy, aiming for appropriate rates from our partners which is reflected in our second quarter results. Our performance this quarter was positively impacted by timing-related revenue, including a boost in value-based payments that contributed roughly $9 million to revenue and EBITDA. Matt will elaborate on this during his remarks. As we have noted before, the labor market poses a significant challenge that we need to navigate for Aveanna to return to the growth we believe is possible. It’s important to highlight that there is no lack of demand in our industry. The need for home and community-based care remains robust, with state and federal governments and managed care organizations seeking solutions to increase capacity while lowering the total cost of care. Our Q2 results demonstrate that we are aligning our goals with those of our preferred payers and government partners. By directing our clinical resources towards these partners, we have achieved year-over-year growth in both revenue and adjusted EBITDA. We have also seen improvements in hiring and retention trends by working with payers who are committed to enhancing reimbursement rates and value-based agreements. Despite the tough environment, our preferred payer strategy enables us to attain normalized growth across all three of our business segments. Since our first quarter earnings call, I am pleased to report ongoing progress on various rate improvement initiatives with both government and payer partners, and we are seeing signs of improvement in caregiver labor markets. Specifically, for our private duty services business, our government affairs strategy for 2025 encompasses two key goals. First, we aim to pursue legislation to enhance reimbursement rates in at least 10 states. Second, we will advocate for Medicaid rate integrity for children with complex medical needs. We have a strong advocacy presence in both federal and state legislatures and receive robust support from governors nationwide. Legislatures are recognizing how critical private duty nursing is for cost savings and improved outcomes for vulnerable children. Concerning rate updates, we have achieved 10 rate enhancements this year in our private duty services segment and are making progress toward our legislative objectives for 2025. I commend our government affairs and advocacy teams for their dedication to the welfare of children with complex medical needs. Now, regarding our preferred payer initiatives, our target for 2025 is to increase the number of preferred payer agreements in private duty services from 22 to 30. In Q2, we added one new agreement, bringing our total to 25. Our preferred payer strategy is gaining momentum, enabling us to invest in caregiver wages and recruitment to enhance staffing. Additionally, our preferred payer agreements now represent about 55% of our total private duty services MCO volumes, reflecting a positive trend in our caregiver capacity and recruitment efforts toward these partners. Moving to our preferred payer progress in home health, our target for 2025 is to keep our episodic payer mix above 70% while returning to a normalized growth rate. In Q2, our episodic mix was 74.5%, with overall episodic volume growth of 6.9% compared to the previous year. The ongoing investments in clinical outcomes, sales resources, and a targeted growth strategy are yielding results, with total admissions of 9,800, reflecting a 4.3% increase year-on-year. We currently have 47 preferred payer agreements in home health, and focusing our caregiver capacity on payers willing to reimburse on an episodic basis has led to positive clinical and financial outcomes. Finally, as we achieve our preferred payer model in private duty services and home health and hospice, we are initiating a similar strategy within our Medical Solutions business. We are in the mid-stage of implementing this strategy and expect to fully realize it by year-end. So far, we have 18 preferred payers in Medical Solutions, and we anticipate this number to grow as we reach our target model. Our gross margins are stabilizing in the 42% to 44% range as we align our clinical capacity with payers who value our services and ensure timely payments. I'm proud to report that in Q2, we served approximately 91,000 unique patients as we work toward our target operating model. While we anticipate relatively muted volume growth this year, we are seeing improvements in clinical outcomes, customer satisfaction, and our financial position. Our Medical Solutions business is progressing toward its target operating model, and I'm excited to keep you updated on our ongoing developments throughout the year. We remain optimistic about our rate increases, preferred payer agreements, and subsequent hiring results. Our business has shown signs of solid recovery, and we believe Aveanna offers a comprehensive platform with a diverse payer base, presenting a cost-effective, high-quality alternative to more expensive care settings. Moreover, we deliver this care in the most desirable setting: the comfort of the patient's home. Regarding our recent acquisition of Thrive Skilled Pediatrics, I am happy to confirm that we are on track with our integration efforts. Our leadership teams are collaborating effectively on operations and strategies to optimize care delivery for our patients and their families. The Thrive acquisition has broadened our PDS offerings in five existing states and added two new ones: Kansas and New Mexico. We expect the Thrive acquisition to positively impact our 2025 results and be a valuable addition to the Aveanna family. Now, moving on to the current regulatory environment concerning Medicaid and Medicare. We have been quite active since our last earnings call with our advocacy initiatives primarily in Washington, D.C. We are focusing on two key areas: supporting overall Medicaid policy and defending the Medicare home health benefit for seniors. On the Medicaid front, we believe our patient population fared relatively well under the recent legislation, which spared pediatric and adult patients with complex medical needs from major cuts. However, we are facing general challenges with state Medicaid directors and governors who are preparing for reduced Medicaid funding and possible future cost burdens. Regarding the proposed home health rule for 2026, we are disappointed in the significant proposed cuts of 6.4%. We stand united with the National Alliance for Care at Home and other home health organizations in opposing this rule, as it directly impacts Medicare and the healthcare that seniors anticipate receiving at home. While the proposed rule may not significantly affect Aveanna’s results for 2026, it poses challenges for the home health industry overall. Ensuring adequate access to care for seniors, especially in rural areas, is crucial, and we strongly oppose the proposed changes during CMS' open comment period. We will continue advocating across all 38 Aveanna states for CMS and Congress to halt any cuts to the home health benefit. Before I pass the call to Matt, I want to touch on our strategic plan and our improved outlook for 2025. We will maintain our focus on five primary strategic initiatives: enhancing partnerships with government and preferred payers for growth; identifying cost efficiencies and synergies to leverage growth; modernizing our Medical Solutions business to reach our target operating model; managing our capital structure and generating positive free cash flow; and actively engaging our leaders and employees in fulfilling Aveanna’s mission. Given the strength of our Q2 performance and year-to-date results, we now expect 2025 revenue to exceed $2.3 billion, with adjusted EBITDA surpassing $270 million. We believe this enhanced outlook is reasonable in light of the ongoing regulatory challenges we face. In closing, I want to express my deep pride in our Aveanna team and their commitment to executing our strategic transformation while keeping our mission at the forefront of all we do. We provide a cost-effective, patient-preferred, and clinically advanced solution for our patients and families, and we are the right partner for our payers, referral sources, and government allies. With that, I will turn the call over to Matt for further insights on the quarter and our outlook for 2025.

Thank you, Jeff, and good morning. I'll first talk about our second quarter financial results and liquidity before providing additional details on our improved outlook for 2025. Starting with the top line. We saw revenues rise 16.8% over the prior year period to $589.6 million. We achieved year-over-year revenue growth in all 3 of our operating divisions, led by our private duty services, home health and hospice, and Medical Solutions segments, which grew by 19.2%, 10.0% and 2.2% compared to the prior year quarter. Consolidated gross margin was $210.8 million or 35.8%. Consolidated adjusted EBITDA was $88.3 million or 93.6% increase as compared to the prior year. This growth reflects an improved rate environment, increased volumes as well as enhanced operational efficiencies. Additionally, second quarter results were positively impacted by timing-related rate enhancement, improved revenue reserves and annual value-based payments in our PDS segment, which contributed approximately $9 million to revenue and EBITDA in the quarter. Now taking a deeper look into each of our segments, starting with private duty services. Revenue for the quarter was approximately $486 million, a 19.2% increase and was driven by approximately 11.1 million hours of care, a volume increase of 6.9% over the prior year. Q2 revenue per hour of $43.97 was up 12.3% as compared to the prior year quarter, primarily driven by our preferred payer volume growth and the rate enhancements previously discussed. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $157.9 million of gross margin or 32.5%. Cost of revenue rate of $29.68 in Q2 was up $0.95 or 3.6% from the prior year period. Despite continued wage pressures in the labor market, our Q2 spread per hour was $14.29. This figure was influenced by the previously discussed $9 million timing-related items as well as the reversal of a $6 million legal settlement that was previously accrued and resolved during the quarter. We expect this metric to normalize over time as we make ongoing adjustments to caregiver wages to support higher volumes and improve clinical outcomes. Moving on to our home health and hospice segment. Revenue for the quarter was approximately $60.1 million, a 10% increase over the prior year. Revenue was driven by 9,800 total admissions with approximately 74.5% being episodic and 12,400 total episodes of care, up 6.9% from the prior year quarter. Medicare revenue per episode was $3,231, up 4.5% from the prior year quarter. We continue to focus 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 well over 70%, we achieved our goal of rightsizing our margin profile and enhancing our clinical offerings. We are pleased with our Q2 gross margin of 55%, up 1.2% over the prior year period and representing our continued focus on cost initiatives to achieve our targeted margin profile. Our home health and hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care. Now to our Medical Solutions segment results for Q2. During the quarter, we produced revenue of $43.4 million, a 2.2% increase over the prior year. Revenue was driven by approximately 91,000 unique patients served, up 2.2% sequentially and revenue per UPS of approximately $477, up 5.4% over the prior year period. Gross margins were approximately $19.8 million or 45.6% for the quarter, up 3.2% over the prior year period. As Jeff mentioned, we continue to implement initiatives to be more effective and efficient in our operations to achieve our targeted operating model. We are accelerating our preferred payer strategy in Medical Solutions by aligning our capacity with those payers that value our resources and appropriately reimburse us for the services we provide. We expect gross margins to normalize in the 42% to 44% range and UPS to continue its growth as we implement our targeted operating model. We will update you on our progress as we execute on this initiative. In summary, we continue to fight through a difficult environment, while keeping our patients' care at the center of everything we do. It is clear to us that shifting caregiver capacity to those preferred payers who value our partnership is the path forward at Aveanna. With the positive momentum we experienced in Q2, we remain optimistic that such trends will extend throughout 2025. We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity. At the end of the second quarter, we had liquidity of approximately $354 million, representing cash on hand of approximately $101 million, $106 million of availability under our securitization facility and approximately $147 million of availability on our revolver, which was undrawn as of the end of the quarter. We had $23 million in outstanding letters of credit at the end of Q2. During the quarter, we extended our securitization facility to 2028, increased its availability by $50 million and achieved more favorable pricing. These enhancements further strengthened our overall liquidity position, providing flexibility to operate the business and invest in continued growth and future M&A. On the debt service front, we had approximately $1.47 billion of variable rate debt at the end of Q2. Of this amount, $520 million is hedged with fixed rate swaps and $880 million is subject to interest rate caps, which limits further exposure to increases in SOFR above 3%. Accordingly, substantially, all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026 and our interest rate caps extend through February 2027. As a reminder, we have no material term loan maturities until July 2028. Looking at year-to-date cash flow, cash generated by operating activities was $42.9 million and free cash flow was positive $36.9 million. We are encouraged by the strong cash collections and expect to generate additional free cash flow throughout the remainder of the year. Before I hand the call over to the operator for Q&A, let me take a moment to address our improved outlook for 2025. As Jeff mentioned, we now expect full year revenue to be greater than $2.3 billion and adjusted EBITDA to be greater than $270 million. This enhanced guidance is inclusive of our Thrive acquisition. As we reflect on the Q2 results, I'd like to take a moment to express my sincere gratitude to all of our Aveanna teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I'm excited for the execution of our 2025 strategic plan and look forward to providing you with further updates at the end of Q3. With that, let me turn the call over to the operator.

Our first questions come from Benjamin Rossi with JPMorgan.

Just first glance at 2025 guidance. So projected EBITDA now up just short of 50% year-over-year. Could you just walk us through what is being contemplated in that $63 million increase in guidance in terms of aggregate improvements in either times and pricing across 2 segments? And then for cadence, we had the $26 million of one-time items during 1Q and 2Q that you described. Are there any other year-over-year dynamics to consider or expected M&A within this guide for the back half of the year?

I guess I'll start by saying that at this point, we have a strong rate outlook and certainty for 2025, as we mentioned at the end of Q1. Our guidance reflects the success of our midyear state legislative efforts, which have resulted in 10 PDS rate wins year-to-date. This gives us clear visibility into 2025, and on the Medicaid side, we have a positive outlook for 2026 as well. The volume of our PDS business has increased, moving from the 3% to 5% range over the past two years to around 6%, 6.5%, and nearly 7% in the last three quarters. Our payers have requested that we increase staffing hours, which benefits both our payers and state Medicaid systems by ensuring patients are receiving care in the appropriate cost setting at home. We have good rate certainty now that we know the hospice rule, although we still need to address the proposed home health rule for 2026. We've been working closely with our peers to advocate for changes before the final rule to avoid a rate decrease in home health for 2026. Overall, we have very solid rate certainty at this point in the year, and all three of our business segments are performing exceptionally well. I'm particularly proud of our Medical Solutions team, which is undergoing modernization while also achieving growth and strong profitability. This positive performance across all three of our businesses is reflected in our expectation of greater than $270 million. Matt, do you want to...

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

Matt, I think you said it, but Matt, you mentioned it, but Thrive is included in this uptick in our guidance, both in revenue and EBITDA. And we're really pleased with the Thrive's acquisition, integration. And the Thrive team has been amazing. Our teams are working well, incredibly well together, as I said in my prepared remarks. And we really think Thrive will be a great part of our story as we move into '26. I mentioned we're really excited about Kansas and New Mexico as 2 new Medicaid states for us. So just excited on how the business is operating. I think Matt said it well. We're humbled by the opportunity to get back to work every day and just do the right thing for our patients, our payers and our government partners.

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

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

And I think it's well said that underlying all this is wage pass-through has been happening every week of every month of this year, including 2024. So it's not like we're waiting for specific dates to pass through wages. We have been continuing to be methodical. But I think after 3 years of our strategy playing through, what we're seeing is it's not across the board wage increases in every market. It's very targeted areas, specific geographies, specific shifts on specific days and nights and weekends and holidays. So our teams are just being very methodical in how they think about it. But I think the most important thing is our payers continue to lean into us spend and ask for more nursing coverage, more home coverage at home and really more hours being filled for their patients, which is a great outcome.

Our next questions come from the line of Brian Tanquilut with Jefferies.

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

Yes, great question, Brian. I'll refer back to Q1, where the momentum we've seen coming out of '24 has exceeded our expectations at that time. The rate wins throughout '24, the enhanced wages we've implemented, and our performance in the first half of the year have been significant. For the first time as an organization, we logged 11 million hours in our PDS segment in Q2, with each hour representing a caregiver providing care in the home. We're observing positive trends from a Medicaid perspective due to our investments in Medicaid states and the increasing momentum of the preferred payer model, which involves hiring more nurses and caregivers. This improvement hasn't occurred on a specific date or month; rather, it's been a gradual uplift. However, it's important to note that our top preferred payers are still seeking more nurses from Aveanna. Every time I communicate with them, they request additional coverage, wanting more of their patients to be attended to by our caregivers, which necessitates ongoing recruitment. This process is part of our evolving strategy. As we move into year three, it's becoming more established both within the Medicaid state systems and among our preferred payers that the increases in rates correlate with higher wages and more caregivers available to provide care.

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

Yes, I would say it's been positive. We are very sensitive to their success because it is also our success. We are closely attuned to the health and wellbeing of both the Medicaid and the Medicare MCOs. We consider them partners, and their success ultimately becomes our success. Even during these turbulent times they are experiencing, they continue to rely more deeply on us, and their plan presidents expect more from us. They are looking for more hours and better quality. We discussed our value-based payments as part of the lift that occurred in Q2, similar to Q2 of '24. This includes the annual base payments from the previous year that are now being processed and paid. None of our payers have blocked the payment of their value-based bonuses for '24, even during quarters when they faced challenges. This indicates that they need us, they need more from us, and they have raised their expectations. The more well we perform, the higher the expectations become, which is a good sign as they trust us to become more sophisticated—managing not only more hours but also costs and quality better. This is one of the reasons they appreciate Aveanna; we are comfortable being held accountable for delivering excellent outcomes and cost-effective care. Therefore, it's a mutually beneficial situation related to the MCOs.

Our next questions come from the line of Andrew Mok with Barclays.

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

I believe there's still much to unfold this year. As we approach Q3 and Q4, and as volumes stabilize across all three of our businesses during the latter half of the year, it's likely that we'll see numbers exceeding $250 million. To address Matt's earlier points, the timing-related impacts in Q1 and Q2 pertain to revenue and EBITDA, not one-time adjustments related to lawsuits or mere cash collections; they reflect improved rates. Even if we adjust these in the appropriate quarters, they represent quality business. Therefore, Matt, Debbie, and I would exercise caution in suggesting that we can count on an $88 million quarterly performance moving forward. We firmly believe that Aveanna is not currently a 15% EBITDA company, and we wouldn’t advocate for that position. We have consistently aimed to exceed a 10% EBITDA margin, and I think it's clear now that we can affirm we are indeed above that threshold. Matt, do you have any further insights?

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

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

As we approach the end of the year, it will take time for us to return to that number, Andrew. We discussed in Q3 that it will continue to decrease, and it will keep going down in Q4. We anticipate exiting December within our target range, but it will still be somewhat elevated for the rest of the year. We are being thoughtful about the wage pass-through and how to ensure we cover the next shift, night shifts, weekends, and holidays. Our priority is to provide the best coverage for our patients.

Our next questions come from the line of Ben Hendrix with RBC Capital Markets.

I would like to discuss your comments regarding Medicaid policy further. I recognize that HCBS has largely avoided the challenges posed by the OBBBA. However, as states begin to address Medicaid cuts and their effects on other providers, how do you view HCBS's position in light of these budgetary challenges? Additionally, how are you approaching the impact of these factors on your goal to implement rate updates in at least 10 states this year?

Yes, I believe we've received valuable feedback this year. In our Q1 call, we noted productive discussions with state governors and Medicaid directors. They expressed concern during the first half of the year, and likely still do, regarding the implementation of the OBBA over the next decade. The midyear rate enhancements we received were more modest, situated in low single-digit percentages, whereas in the past three years, we had seen double-digit rate increases in many states. Our state partners are emphasizing the need for strong fiscal responsibility, which we anticipated. I think the work we've done over the past 3.5 years during and after COVID has been well understood by our state legislatures. We are striving for similar progress on the federal level with CMS and Congress regarding home health care, highlighting the importance of home-based care, which is the most cost-effective and patient-preferred option in both Medicaid and Medicare. Although this message might not resonate universally across all 50 states, we find significant support in many areas, including California. At this stage, we don't feel the need to reintroduce the benefits of home care to our state governors as they are already aware of its value. Our focus now is on partnering with them, especially as their Medicaid budgets are tightening further. As we've discussed over the past few quarters, three years ago, we faced challenges in 30 states regarding rate improvements. By the end of last year, we had reduced that number to one state, and currently, it remains the same. We are committed to advocating and collaborating with California to improve the PDN rate. Therefore, California is the only state where we currently have not achieved a satisfactory rate. Matt, do you have anything to add?

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

Thank you for that insight. I would like to turn our attention briefly to the home health aspect. If we do see a callback in the range of 6 percent or more finalized, how might that level of reduction affect some of your episodic rates tied to those preferred home health payer relationships?

Yes. First of all, I want to express how disappointed we are with the proposed rule. It does not make sense in the current environment. A statistic from the Alliance for Care at Home shows that since 2015, the cumulative impact of the rate increase to home health, including the proposed rule for 2026, is just 1.1% over an 11-year period. CMS has only invested 1.1% in rate increases for home health, while our peers have seen over 30% increases. This includes the effects of COVID, inflation, and rising labor costs, which have increased over 40% in that same period. It simply doesn’t add up. It truly makes no sense if I’m being honest, and it's not the right course of action. It's not controlling costs effectively. The less we utilize home health, the more we're reliant on higher-cost hospital and skilled nursing facility care. I cannot emphasize enough how proud I am of my peers. We have been collaborating with the Alliance for Care at Home for the past 45 days. The government has sparked a response from the home care industry, and we are united in our position that this proposal is not only wrong but detrimental to seniors and rural healthcare. Home care is significantly affected by this. It's poor policy overall, and we are eager to work with CMS to reverse this decision before the final rule is issued. On a side note, about Aveanna, nearly 80% of our revenue comes from Medicaid and Medicaid MCOs, so we will be fine regardless of how the home health rule turns out. Aveanna is strong and has a lot of momentum. I’m especially proud of our cash flow results and liquidity. Compared to three years ago, our operating cash flow, free cash flow, liquidity, and balance sheet have improved significantly, showcasing our successful deleveraging. However, we cannot allow home health to be undermined as a benefit; this is unacceptable for American seniors. You can expect us to be very passionate about this issue. Our peers will be equally focused on reversing this proposal. One of the key strengths of home care is that we are present in every community across all 50 states, representing seniors nationwide. I genuinely believe that the government, including Congress, the administration, and CMS, will hear from home health representatives from every county and the message will be clear. As you can see, I care deeply about this topic. Thank you, Ben.

Our next questions come from the line of Pito Chickering with Deutsche Bank.

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

I think of this year's All-Star game, which was hosted right here in Atlanta, and it's likely that we're in the fourth or fifth inning, heading into extra innings. We might even need the best players from both the American League and National League to bring this home. Joking aside, I don’t know if we can ever completely address the demand, which is why we always mention that we don't have a demand problem. There isn't a single preferred payer who would claim that Aveanna has resolved all their home care or PDN issues because we simply can't. At best, we'd hold around a 50 percent market share with any single preferred payer. This indicates there's still significant upside in these relationships. To your point, we are not in the first or second inning; we're now in year three with many of our partnerships and at least year two for the majority of them. These relationships are developing. However, there isn't a plan president from any MCO who would say that Aveanna has resolved all their PDN issues; the feedback we get is that they need more from Aveanna. I genuinely believe that this will unfold over the next three to five years, and we may never be able to completely resolve all the challenges faced by our MCO partners. Nevertheless, we are certainly making a substantial impact as we are today.

Okay. Great. For a follow-up, this has been asked in different ways, so I'll approach it differently. In the script, you mentioned discussions with state medical directors regarding changes for next year amidst reduced funding. What steps could they take that might affect you? Could it involve lowering rates or introducing new screening processes? What actions could state medical directors take next year as the Medicaid funding decreases that could negatively affect you?

Yes. That's a thoughtful question. I don't believe there's a single solution to this. Each state operates differently. You might wonder why ten states chose to provide us with rate increases this year despite being aware of potential challenges like cuts to Medicaid. They did it because they still appreciate the services we offer. These states specifically increased rates for at least pediatric day nursing. It's crucial for us to remain considerate partners with our states. For instance, it would be unwise for us to approach the Governor of Georgia, who just invested significantly in home-based nursing, and ask for another 30% rate increase since that wouldn't reflect our understanding of the current environment. However, we are returning to those same state directors and legislators to remind them about the investment made two years ago. We are showing them how we've utilized those funds, such as hiring more nurses and bringing more children home. Our responsibility includes revisiting the narrative with those who've already supported us, including Medicaid systems and governors. Being a thoughtful partner has been our aim for the past three years, and it will remain so. California is a prime example; we could address numerous challenges there with a strategic rate increase. We're still actively engaging with California, advocating with our peers and pressing upon Governor Newsom and the Medicaid director, emphasizing the need for investment in services that significantly improve care. We're persistent in supporting these families and are aware of broader challenges in Medicaid that we'll need to navigate in the coming months. Our company is well-equipped to handle these challenges.

Our next questions come from the line of Raj Kumar with Stephens.

I appreciate the details on the Medical Solutions business and the preferred payer strategy. You mentioned having 18 preferred payer contracts. Can you clarify what that means in terms of revenue contribution or volume? Also, regarding margins in that business, year-to-date it seems to be approaching the high end of the 42% to 44% range. How should we expect margins to progress in the second half of the year based on that framework?

Yes. Great question, Raj. I mean we're really excited about the implementation of the preferred payer strategy and honestly, the targeted operating model that the team is putting in place in Medical Solutions. We added 1 preferred payer in Q2 of this year to get us up to 18 preferred payers to date. We'll continue to expand that through the back half of this year and continue to add to it as well. To your point, gross margins were a little hot at 45.6%. We think that'll settle back into that 42% to 44% range in H2 of this year. And then kind of live there indefinitely. We are really, really proud of this team's expansion now in growth while going through this modernization effort and this transformational effort to go sequentially 2.2% growth as they're going and reshaping this division is unheard of and hats off to that team, what they've been able to accomplish. But you should see that gross margin start to come down a little bit, but reciprocally, you will continue to see that growth continuing there.

I think you made a great point, Matt. Eighteen is just the start. We anticipate that number will increase to over twenty and eventually exceed thirty, and possibly reach forty preferred payers. Matt described it well with the TSA PreCheck analogy. We're aiming to ensure that payers are reliable and will compensate us fairly. This approach will enable us to deliver excellent clinical services with high customer satisfaction and timely payments for those services. Preferred payer Medical Solutions is about having dependable partners rather than just the highest payer. As Matt mentioned, we are very proud of this team. Achieving 91,000 UPS during the modernization phase is impressive. Our leader in that area is performing exceptionally well, and we are proud of her and her team. We are truly excited about the prospects for this business in 2026 and 2027, as it should not face the constraints we have discussed regarding PDS and Medicaid.

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

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

And Raj, I want to add to what Matt said. Three years ago, we were in a very tight cash position with limited liquidity. Our combined team has worked incredibly hard, and I completely agree with Matt's comments—I'm very proud of our team for not only becoming a positive free cash flow company but also for effectively controlling costs, collecting cash, and delivering great outcomes. To your point, we are in a better position than we anticipated at this time of the year, and we see a promising outlook for the rest of the year. Overall, cash flow will be an impressive story for Aveanna this year, much stronger than we expected at the beginning of the year. Great job to the entire team that made this possible.

Our next questions come from the line of David MacDonald with Truist.

Congratulations. I have just one question left. I wanted to revisit the topic of labor briefly. Can you provide some insight regarding the number of hires, the percentage of demand you're able to meet, and the retention you mentioned in your prepared remarks? Specifically, can you compare where you were 12 to 18 months ago to your current position given the success you've experienced in terms of rates?

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

And then, guys, just 1 quick follow-up just with regards to Thrive and kind of the M&A environment. Look, obviously, improved financial flexibility. Can you just talk a little bit about just how you're thinking about if you were to see another kind of unique opportunity like a Thrive? I mean, obviously, in home health with some of the challenge visibility in the near term, I assume kind of nothing to think about there. But just when you think about PDS and potentially incremental M&A, just any high-level thoughts there?

Yes, thank you for the question. We now have the liquidity to actively pursue mergers and acquisitions and will continue to engage in that area. Our teams are focused on integrating Thrive, and we expect to complete this integration in the coming months. We are looking to target acquisitions in the latter half of this year or early next year, likely in home health. However, we are currently taking a more cautious approach as we assess the home health market. We believe strongly in the future of home health over the next decade or two, and we plan to invest in that area, but right now we will wait until the market stabilizes. Our primary focus is on growth through M&A and increasing revenue, not on paying down debt. As Matt will elaborate on, we will continue to invest in both PDS and HHH, and as we approach 2026, we will begin to look into opportunities in med solutions. Matt, do you have anything to add?

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

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

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

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