Earnings Call Transcript - AVAH Q1 2026

Operator, Operator

Good morning, and welcome to Aveanna Healthcare Holdings, Inc. First Quarter 2026 Earnings Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I would like to turn the call over to Debbie Stewart, Aveanna's Chief Accounting Officer. Thank you. You may begin.

Deborah Stewart, Chief Accounting Officer

Good morning, and welcome to Aveanna's First Quarter 2026 Earnings Call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeffrey Shaner, our Chief Executive Officer, and Matthew 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 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, Jeffrey Shaner. Jeffrey?

Jeffrey Shaner, Chief Executive Officer

Thank you, Debbie. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q1 results and how we are moving Aveanna forward in 2026. My initial comments will briefly highlight our first quarter results, along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payers to create additional capacity. I will then provide updates on the recently announced Family First Home Care acquisition and how we are thinking about our 2026 strategic initiatives and our enhanced guidance before turning the call over to Matthew. Moving to highlights for the first quarter. Revenue for the first quarter was approximately $648 million, representing a 15.9% increase over the prior year period. First quarter adjusted EBITDA was $84.4 million, representing a 25.2% increase over the prior year period, primarily due to the improved rate and volume environment and continued operational efficiencies. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aveanna resume the growth trajectory that we believe our company could achieve. It is important to note that our industry does not have a demand problem. The demand for home and community-based care continues to be strong, with both state and federal governments and managed care organizations asking for solutions that create more capacity while reducing the total cost of care. Our Q1 results highlight that we continue to align our objectives with those of our preferred payers and government partners. By focusing our clinical capacity on our preferred payers, we achieved solid year-over-year growth in all three of our business segments. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts with those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging environment, our preferred payer strategy supports our ability to achieve accelerated growth rates in all three of our business segments. Since our fourth quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and payer partners, as well as continued signs of improvement in the caregiver labor market. Specifically, as it relates to our private duty services business, our government affairs strategy for 2026 was twofold. First, we continue to advocate for Medicaid rate integrity on behalf of children with complex medical conditions. Our strong advocacy presence in both federal and state legislatures across our national footprint enhances our value proposition. Second, we expect to achieve mid-single-digit state rate enhancements in 2026. As of Q1, we have received three private duty services state rate wins and believe we will achieve our goals as states complete their annual budget processes. After three years of meaningful rate increases in a majority of our PDS states, we are in a very stable rate environment and are shifting our focus to cost-of-living and wage rate adjustments. Moving to our PDS preferred payer initiatives. Aveanna's preferred payer strategy continues to gain momentum and allows us to invest in caregiver wages and recruitment efforts to accelerate the hiring and staffing of nurses. Our preferred payer goal for 2026 is to achieve eight additional agreements for a total of 38 preferred payers. We signed four preferred pay agreements in Q1 and are well on our way to achieving our 2026 target. Additionally, our Q1 PDS preferred pay agreements accounted for approximately 60% of our total private duty services MCO volumes, up from 57% at the end of 2025. This positive momentum in preferred payer volume continues to highlight the shift of our caregiver capacity and recruitment efforts toward our preferred payer partners. Moving to our preferred payer progress in home health. Our goal for 2026 is to maintain our episodic payer mix above 75% while returning to a more normalized growth rate. I am pleased to report in Q1 our episodic mix was approximately 80% and our total episodic volume growth was 23.1% compared with the prior year period. The continued investment in clinical outcomes, sales resources, and a focused approach to growth is driving results, with Q1 total admissions of approximately 11 thousand, or 13.4% organic growth over the prior year period. Additionally, we exited 2025 with 45 preferred pay agreements in home health. I am pleased to report that we added four additional preferred pay agreements and expect to add five more in 2026 for a total of 50. As of Q1, we are well on our way to exceeding our goal of 50 preferred payers in home health in 2026. Our dedicated focus on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis has led to double-digit year-over-year growth in home health total admissions and episodes, as well as improvement in our clinical and financial outcomes. Finally, as we have achieved our desired preferred payer model in private duty services and home health and hospice, we are continuing with a similar strategy in our medical solutions business. As we exited 2025, we had 18 preferred payer agreements in Medical Solutions and expected that number to grow to 25 by 2026. As of Q1, we signed two additional agreements for a total of 20 preferred pay agreements to date. Our gross margins have stabilized in our desired range as we align our clinical capacity with those payers that value our services and pay us in a timely fashion. I am pleased with our Q1 volume growth in Medical Solutions of approximately 93 thousand unique patients served, or +4.5% over the prior year period. As we think about Medical Solutions growth in 2026, I would expect us to remain in the mid-single digits for the next few quarters and then return to double-digit growth by the end of the year. We are encouraged by our rate increases, preferred payer agreements, and subsequent growth in our businesses. Our company has demonstrated a stable return to organic growth 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. Now turning to our recently announced transaction to acquire Family First Home Care, a Florida-based company with a great reputation for quality in home pediatric care. Again, I would like to send my warm welcome to the Family First teammates. I am thrilled to continue our acquisition growth story with great companies like Thrive Skilled Pediatrics and Family First Home Care. Both companies continue to build upon the Aveanna brand of high-quality, compassionate care in the most cost-effective setting: the comfort of our patients' home. We continue to work through the regulatory approval process and expect the transaction will close sometime in late Q2. I look forward to updating you on our progress in the coming months. Additionally, let me comment on our strategic plan and enhanced outlook for 2026. We will focus our efforts on five primary strategic initiatives. First, strengthening our partnerships with government partners and preferred payers to create additional capacity and growth. Second, improving clinical outcomes and customer engagement scores while lowering the total cost of care. Third, implementing high-priority artificial intelligence and automation efforts to improve operational efficiency and productivity gains. Fourth, growing through acquisitions while improving net leverage and free cash flow. And finally, engaging our leaders and employees in delivering on our Aveanna mission. Based on the strength of our first quarter results and the continued execution of our key strategic initiatives, we are increasing our full year revenue and adjusted EBITDA guidance to a revenue range of $2.56 billion to $2.58 billion and an adjusted EBITDA range of $328 million to $332 million. We believe this enhanced 2026 outlook provides a prudent view considering the challenges we still face with the evolving environment and does not include the impact of the Family First acquisition. As I reflect on the strong start to 2026, I want to take a moment to comment on our second annual Aveanna Cares month of community service. We dedicate the month of April to not only focusing on our mission, but living that mission in our 379 communities. Aveanna Cares is an extension of the care we provide families every day, and we are proud to give back, help others, and strengthen our communities and our teams through our volunteering efforts. We set an ambitious goal this year to serve 7.5 thousand volunteer hours, and I am extremely proud to announce that our Aveanna family completed over 9 thousand total volunteer hours. Our teams held approximately 200 volunteer events nationwide and lived our core values while giving back to important local charities that support children, adults, and seniors in our communities. I look forward to raising the bar in 2027 with plans to further expand our Aveanna Cares impact across the country. With that, let me turn the call over to Matthew to provide further details on the quarter and our 2026 outlook. Matthew?

Matthew Buckhalter, Chief Financial Officer

Thank you, Jeffrey, and good morning. I will first talk about our first quarter financial results and liquidity before providing additional details on our enhanced outlook for 2026. Starting with the top line, we saw revenues rise 15.9% over the prior year period to $647.9 million. We achieved year-over-year revenue growth in all three of our operating divisions, led by our home health and hospice, private duty services, and medical solutions divisions, which grew by 17.4%, 16.4%, and 7.4% compared to the prior year period. Consolidated gross margin was $205.4 million, or 31.7%. Consolidated adjusted EBITDA was $84.4 million, a 25.2% increase as compared to the prior year period. This growth reflects an improved rate environment, increased volumes, as well as enhanced operational efficiencies. Now taking a deeper look into each of our segments. Starting with private duty services, revenue for the quarter was approximately $536 million, a 16.4% increase and was driven by approximately 12.1 million hours of care, a volume increase of 10.7% over the prior year. Q1 revenue per hour of $44.43 was up 5.7% compared to the prior year quarter, primarily driven by growth in preferred-payer volume and updated reimbursement agreements. 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 $149.2 million of gross margin, or 27.9%. The cost of revenue rate of $32.50 in Q1 was up $2.17, or 8.1%, from the prior year period. Our Q1 spread per hour was $12.38, reflecting continued normalization driven in part by ongoing caregiver wage adjustments supporting higher volumes and improving clinical outcomes. Moving on to our home health and hospice segment. Revenue for the quarter was approximately $66.6 million, a 17.4% increase over the prior year. Revenue was driven by 11 thousand total admissions with approximately 80% being episodic, and 14.9 thousand total episodes of care, up 23.1% from the prior year quarter. Medicare revenue per episode was $3.17 thousand, up 0.5% from the prior year quarter. Our episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic admissions well over 75%, we have achieved our goal of rightsizing our margin profile and enhancing clinical offerings. We are pleased with our Q1 gross margin of 53.7%, 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 Q1. During the quarter, we produced revenue of $45.7 million, up 7.4% over the prior year period. Revenue was driven by approximately 93 thousand unique patients served and revenue per UPS of approximately $491, up 2.9% over the prior year period. Gross margin was approximately $20.4 million, or 44.7%, for the quarter. As Jeff mentioned, we are in the final stages of implementing 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. As a result, we expect margins to normalize and UPS to continue to accelerate its growth in 2026. In summary, we remain focused on keeping our patients' care at the center of everything we do. It is clear that aligning caregiver capacity with preferred payers who value our partnership is the right path forward at Aveanna. With the strong momentum through Q1, we are optimistic these trends will continue into 2026. We will continue to pass through wage improvements and other benefits to our caregivers in the ongoing effort to improve volumes. Now moving to our balance sheet and liquidity. At the end of the first quarter, we had liquidity of approximately $525 million, representing cash on hand of approximately $189 million, $110 million of availability under our securitization facility, and approximately $226 million of availability on our revolver which was undrawn as of the end of the quarter. We had $24.5 million in outstanding letters of credit at the end of Q1. On the debt service front, we had approximately $1.48 billion of variable rate debt at the end of Q1. Of this amount, $520 million is hedged with fixed rate swaps, and $880 million is subject to an interest rate cap, which limits further exposure to increases in SOFR above 3%. Accordingly, substantially all our variable rate debt is hedged. Our interest rate swaps extend through June 2026, and our interest rate caps extend through February 2027. In anticipation of the swap expiration, we entered into an additional interest rate cap agreement effective July 2026. This agreement limits exposure on $520 million of variable rate debt to increases in SOFR above 4% through December 2029. Looking at year-to-date cash flow, cash generated by operating activities was $4.3 million and free cash flow was negative $3.8 million. We are encouraged by our strong cash collections and cost efficiency efforts which drove solid operating and free cash flow in 2025, and we expect similar cash flow performance in 2026. As a reminder, the first quarter is typically our seasonal low point for both operating and free cash flow, with improvement expected throughout the rest of the year. Before I hand the call over to the operator for the Q&A, let me take a moment to address our raised outlook for 2026. As Jeff mentioned, we expect full year 2026 revenue of $2.56 billion to $2.58 billion and adjusted EBITDA of $328 million to $332 million. Consistent with our standard practice, our full year 2026 guidance excludes the pending Family First acquisition, which we expect to close in late Q2. As we reflect on our Q1 results, I would like to take a moment to express my sincere gratitude to our Aveanna teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I am excited for the continued execution of our 2026 strategic plan. I look forward to providing you with further updates at the end of Q2. With that, let me turn the call over to the operator.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. To allow everyone in the Q&A queue to be able to ask a question, we ask that everyone limit themselves to only 1 question and 1 follow-up. One moment, please, while we poll for questions. Our first question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Ben Hendrix, Analyst

Great. Thank you very much. Congrats on the strong performance. Just wanted to get some comments on the regulatory backdrop, specifically with the home health moratorium on new Medicare licensure announced yesterday. Just wanted to get any overall thoughts and any impact it is having on your acquisition strategy to the extent to which it might impact acquisitions like Family First or others? Any kind of comments you can give on the backdrop? Thanks.

Jeffrey Shaner, Chief Executive Officer

Morning, Ben. Matthew won the bet because we figured that would be the first question, the second question, the third question. So I appreciate you just getting us right there. I'll kid you aside. If I think macro industry-wide, let's start with the industry, then we will come back to Aveanna. Dr. Oz and CMS have been pretty deliberate with their messaging around fraud, waste, and abuse now for at least a year, if not longer. I view yesterday's CMS announcement regarding home health and hospice six-month enrollment moratoria as consistent with Dr. Oz's messaging over the last six months to a year. I would be remiss as an industry participant to say that we are pleased a nationwide moratorium is the way to solve Los Angeles County's specific targeted fraud, waste, and abuse. But I do think it is consistent with the messaging that CMS has been sharing the last six months. If I drill down to Aveanna and Family First, it has absolutely no impact — zero impact — on Aveanna. The way we have read it, it has zero impact on our 2026 business plan or our 2027 business plan. Our home health and hospice business was built through M&A and then organic growth. I think the moratorium was thoughtful to not penalize current Medicare beneficiaries and current providers. We would like in this next six months, with the Alliance, the National Alliance for Home Care and all of our industry peers, to work with Dr. Oz and CMS to really target the areas where fraud, waste, and abuse are occurring, specifically places like Los Angeles County. Because this does punish rural-type health care. Rural health care needs more providers; they need more robust home health and hospice providers. So we want to work with the administration, and we think the thoughtfulness of how Dr. Oz has approached things presents an opportunity. But expect to get this question a lot today, and I will reiterate: absolutely zero impact on our 2026 guidance, our results, and our ability to grow the business successfully.

Ben Hendrix, Analyst

Great. Thanks. And just to be clear, there is nothing involved in the transfer of a Medicare licensure that would require you guys to reapply that might be impacted by this moratorium?

Jeffrey Shaner, Chief Executive Officer

No. I think that CMS did a nice job yesterday in releasing the Q&A. You were able to read the Q&A and the 36-month rule has been in place for at least a decade, maybe even two. So you still have to adhere to the 36-month rule in any kind of targeted acquisition on home health or hospice assets, and that has been in place. So nothing new there, and nothing that limits our ability to do normal things like move an address or the normal things that we do. I think in the Q&A they did a good job of laying that out and we do not see it having any impact on future M&A in that space as well. Again, they are targeting bad actors and I think they were thoughtful in this to avoid penalizing good actors and reputable providers like us. Thanks, Ben.

Operator, Operator

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

Brian Tanquilut, Analyst

Hey. Good morning, guys, and congrats. Maybe I will add to Matthew's pot here for a little bit. Jeffrey, question for you. I appreciate the answer to Ben's question. Just want to clarify: the moratorium is only on the Medicare home health side, right? And then I guess the second part of my regulatory question would be, when we think about the core PDS business in the context of all the scrutiny we are seeing in private duty or personal care services and their Medicaid, just want to make sure that your business is not impacted or you are not seeing anything there.

Jeffrey Shaner, Chief Executive Officer

That is a great question, Brian, and I will answer it in two parts. One, kudos to CMS — I thought they were very thoughtful in how they put the information out there yesterday. They did talk about CHIP programs and they certainly are encouraging states to be thoughtful on how they audit Medicaid and CHIP programs. They were crystal clear that it did not impact Medicaid reimbursement. Second, we do operate under a significant number of Medicare provider numbers to get our Medicaid license in certain states. So we have many Medicare provider licenses in our PDS business; it is just to have the right to do business and to have a Medicaid license. So again, no impact to our Medicaid business. And as we think of growing our Medicaid business, we put the business together through four acquisitions over the last five years; the rest has been organic growth the last three years. Nothing in yesterday's announcement would prevent us from continuing a thoughtful M&A strategy in our home health and hospice business. I appreciate that.

Brian Tanquilut, Analyst

And then, Matthew, this one's for you. When I think of the guidance for the year, given some of the one-timers that were in the quarter, just curious if you can call out the cadence that we should be thinking about, especially from Q1 to Q2. Thanks.

Matthew Buckhalter, Chief Financial Officer

Great question, Brian. I will start by saying how proud we are of all three of our divisions and all three teams. Significant organic growth in all three operating divisions has really driven great financial performance and the financial results that you are seeing today. That has also driven phenomenal clinical performance in the background as well. All that being said, we continue to see very strong cash collections in Q1 on some previously reserved AR. That was to the tune of about $6 million, which impacted both our revenue and our EBITDA in the quarter itself. That was a little bit heightened in the quarter. We have said this for quite a few quarters now, but we are continuing to win and it is really because of the AI and the automation that the teams have put in our RCM department. It has allowed us to reduce our DSO, improve our cash collections, and shift some of our capacity to go grab some of that aged AR that we thought previously was uncollectible. We will continue to push that forward and remain focused on AI, especially in our RCM department because we are seeing such wonderful results from it. One plug I'll put in there as a reminder: for Q2 itself, in 2025 we did benefit from about $11 million of timing-related items. If you exclude those for 2025, we still expect to see really solid EBITDA growth in 2026. Once again, proud of the teams and what we have been able to accomplish not only on the cash collection side, but the clinical side and the operational and organic growth side as well.

Jeffrey Shaner, Chief Executive Officer

As Matthew said, normally Q1 is one of our lowest EBITDA quarters, and I think our build will be a little bit different this year where Q1 was — as Matthew laid out — about $5 million to $6 million stronger than we had expected on both the revenue and EBITDA side. So our build to Q2 will be a little bit less than it normally is, but we still expect to have a very strong Q2. If you back out the $11 million in 2025 timing items, it will be a nice year-over-year continued growth. The AI and automation and our preferred payer relationships continue to generate great and efficient collections, which is a wonderful opportunity for us. Thanks, Brian.

Operator, Operator

Thank you. Our next question comes from the line of Raj Kumar with Stephens Inc. Please proceed with your question.

Raj Kumar, Analyst

Hi. Good morning. Maybe just kind of — I know you talked about some of the preferred-payer wins this year on the private duty services side, and maybe thinking about the value-based care contracts within this year too. Any update on the movement on that front?

Jeffrey Shaner, Chief Executive Officer

Yeah, Raj. Let me step back for a second. We have had a nice balance the last three years of government state and federal rate wins, mainly Medicaid-driven, and preferred payer wins. We started messaging mid last year that the government side of that would start to slow down, and we have seen that in 2025 and the early parts of 2026. We have also seen payer relations and preferred payer activity pick up for us. As we exited 2025, we had nice momentum going into 2026. So we see our preferred payer wins both in PDS and home health, and we had our first two additional preferred payers in Medical Solutions in Q1. This year you'll hear more about preferred payer wins than government rate wins, which is what we expected. We've set goals — five additional agreements in home health; we signed four in Q1, so we'll exceed that goal. Eight preferred payers in PDS; we signed four in Q1 and we feel confident we'll reach that goal. Big picture: think of 2026 as more preferred payer wins and more moderated government affairs wins.

Raj Kumar, Analyst

Got it. And then maybe following up on the strategic initiatives within Medical Solutions and the preferred payer strategy there: as you think about the opportunity, is there a way of framing the number of unique patients that are under the preferred-payer arrangements relative to the number of contracts as we think about the opportunity ahead?

Matthew Buckhalter, Chief Financial Officer

Raj, over time we will continue to release this information as we continue to roll out. We're proud of what the teams are doing and finishing these modernization efforts, which we expect to complete in Q2. We started with zero preferred payers at the beginning of last year, worked to about 18 by the end of 2025, and added two in the first quarter. We're seeing the pipeline pull through preferred payers quicker. Once we complete the modernization efforts in Medical Solutions, we will start releasing additional data on this.

Jeffrey Shaner, Chief Executive Officer

To add, Raj, anchor to 4.5% organic year-over-year growth and a 44.7% gross margin in Medical Solutions. We had 93 thousand unique patients served in a quarter, showing we are back to growing the business. The team has been under the hood for 18 months and has done a lot of work. Shout out to our Medical Solutions team — they've done a lot of work over the last year and a half to get this model in place.

Operator, Operator

Thank you. Our next question comes from the line of Benjamin Michael Rossi with JPMorgan. Please proceed with your question.

Benjamin Michael Rossi, Analyst

Hi. Good morning. Regarding Q1 margin dynamics, I imagine you got some margin lift quarter-over-quarter with the 53rd week dynamic in Q4. You mentioned the AI contribution in RCM. As you have been assessing the cost structure and the context of your long-term margin profile, can you walk us through how expenses trended during Q1 compared to your expectations and how you are thinking about expense trends within your revised 2026 outlook?

Matthew Buckhalter, Chief Financial Officer

Great question, Ben. Thinking about the 53rd week transition and timing, the most impactful item was the roughly $6 million I referenced earlier that hit our revenue and EBITDA. If you normalize that, we are in a very good position: for private duty services we are sitting around a 28% gross margin, right in line with our expectations. On the SG&A side, I'm really impressed with what the teams have accomplished. We continue to grow organically and add volumes in all three divisions while adding very little overhead. This is driven by automation efforts in scheduling, RCM, and other areas where we can get real leverage. I would expect to see what you saw in Q1 pretty consistent for the rest of the year, while getting small basis point wins in Q2, Q3, and Q4 and continuing to ramp that up over time.

Jeffrey Shaner, Chief Executive Officer

We also experienced two major weather events in January, which impacted revenue. The 53rd week pulled the holiday week into last year, which was helpful, but we lost about $5.5 million to $6 million of revenue through two weeks of weather, or about $1.5 million of EBITDA. So we hit these results despite that. If you had asked us without the timing-related collections and the weather impact, we would have landed in the high seventies on EBITDA, which is where we thought this was going to be. So ramping off a high-seventies number, as Matthew mentioned, makes the rest of the year make sense.

Benjamin Michael Rossi, Analyst

Great. Appreciate the added details there. Just to follow up on the preferred payer contract wins in PDS, and thinking about those preferred payer economics: as penetration of preferred payer mix increases in that segment, do you expect your revenue rate to also reaccelerate? Or do you expect growth to continue to be primarily volume-driven with wages absorbing most of the upside in pricing? I'm curious on your efforts in wage pass-throughs here.

Jeffrey Shaner, Chief Executive Officer

I would say the latter. For the most part, our PDS rate and wage are basically settled in the range where we think they will be; they may move by a percentage point or two, but not by 50 cents or a dollar per hour. The team started the year strong with four wins in Q1. Additional wins will be discussed in Q2. The majority of the impact will continue to be volume-driven, and you will see a pretty consistent spread in that low-$12 range moving forward. The team is doing an amazing job on preferred payers.

Operator, Operator

Thank you. Our next question comes from the line of Shane Dodge with BMO Capital Markets. Your line is now live.

Shane Dodge, Analyst

Yeah. Thanks. Good morning. Maybe just staying on PDS for another moment. You talked before about that segment returning to a 5% to 7% organic growth this year. Any updated thoughts on that? If we look at what you did in Q1 in terms of hours and revenue per hour and annualize that, that alone gets me a bit above the high end of that range. I know Thrive contributes some, but it is not adjusting for the extra week, the weather, or any additional rate increases or new preferred payers. So just trying to square that and make sure I am not missing any one-timers or anything else impacting Q1 and how we think about annualizing that.

Matthew Buckhalter, Chief Financial Officer

We continue to see impressive growth across our PDS segment. When you normalize for the Thrive acquisition, we still had growth in the high single digits in revenue, which is impressive. We will pass that in Q2 because we closed that acquisition on June 2, 2025, so you will see that drop back down. We're seeing moderation starting to occur. The 16.4% growth was close to double-digit and phenomenal, but it will eventually mature over time. We don't want to overstate growth expectations; we plan more conservatively for this division, even though we are accelerating now.

Shane Dodge, Analyst

Okay. Great. And then on the AI initiatives: you referenced work in revenue cycle and tackling more front-office functions. Can you help frame the proportion of your OpEx — things within branch, regional admin, and corporate expense — that you think is ultimately impactful with technology over time? And what inning you think you are in when it comes to leveraging tech to drive efficiency and savings?

Matthew Buckhalter, Chief Financial Officer

Top of the first inning: we are still early. We are seeing benefits from it, but we are being thoughtful and not diving headfirst. We have seen benefits in RCM — reduced DSO, collected cash faster — and on the operational side in scheduling and automation in Medical Solutions with Tenor and in accounting. We are chipping away and getting better and faster every day. It is still early to crown any champions, but we will continue to lean in and get results.

Shane Dodge, Analyst

Okay. Great. Thanks again, and congratulations on the great start to the year.

Operator, Operator

Thank you. Our next question comes from the line of John Ransom with Raymond James. Please proceed with your question.

John Ransom, Analyst

Hey. Good morning. Just to hit on the obvious: you beat by 13, you raised by 10. Is there anything going on here other than just conservatism?

Jeffrey Shaner, Chief Executive Officer

No. Let's start with the $6 million of timing-related collections, John. I know it sounds like a broken record since we've discussed this in multiple quarters, but we think of the quarter in the high-seventies EBITDA range, and the additional $5 to $6 million was more legged AR that we were then able to collect. So we think of basing off the high-seventies and a normal step up to Q2, which would be mid-eighties. We do think $10 million of EBITDA upside was aggressive for us, so we felt we were being aggressive but prudent.

John Ransom, Analyst

And the other thing — I know you do not guide for Family First, but assuming we put that in our model, how should we think about 3Q and 4Q EBITDA contribution from that deal?

Matthew Buckhalter, Chief Financial Officer

Great question. We're excited about Family First — a Florida-based company focused on pediatric care with strong operational discipline, a great cultural fit. We valued the transaction at about 7.5x post-synergy EBITDA, so you can back into the math based on closing date. Revenue has been around the $120 million mark. Depending on closing timing, we will update guidance accordingly, but we left it out for now without knowing the exact date.

John Ransom, Analyst

But I presume that post-synergy EBITDA is not realized right off the bat. How should we think about the timeline to get to that post-synergy EBITDA number?

Matthew Buckhalter, Chief Financial Officer

We are pretty quick on it. It takes us about six months to get to a full run rate basis; we start bringing the company in on day one, tuck them onto our systems, platforms, payroll processes, and operating model. That transition takes about 180 days, and then there is a lag of AR that runs down, but full synergy recognition typically occurs within that 180-day period.

Jeffrey Shaner, Chief Executive Officer

Using Thrive from last year as a reference: we closed Thrive on June 1-2 and were effectively integrated by Thanksgiving; by December 1 we were largely done, with AR still running off. We expect a similar timeline for Family First if we close around June/July: integrated by December, with AR running off through much of 2027. This is a great company with a strong culture and an easy fit for Aveanna.

John Ransom, Analyst

One last clarifying question: are the rates that you have versus the rates they might have captured immediately, or do you have to go through a contracting cycle?

Jeffrey Shaner, Chief Executive Officer

We tend to stay out of rate arbitrage and focus on the operational fit. Our assumptions are not built on rate arbitrage. The acquisition fills gaps in density and geography — for example, adding presence in Florida where we were less dense. That was the main strategic rationale rather than immediate rate changes. We are excited about the acquisition and the cultural and operational fit.

Operator, Operator

Our next question comes from the line of Andrew Malk with Barclays. Please proceed with your question.

Andrew Malk, Analyst

Hi, good morning. Your home health episodic mix was north of 80% in the quarter and well above the 75% target. Can you help us understand the trends underneath that? How much of this positive trend is driven by Medicare Advantage versus traditional Medicare? And to the extent this is driven by Medicare Advantage, why would this number not sustain at these levels or tick higher as you target more preferred payer agreements? Thanks.

Jeffrey Shaner, Chief Executive Officer

Thanks for noticing. We've been in the high seventies for about four quarters now and flirted with 80% toward the end of last year. We thought 80% was around the peak. More Medicare Advantage payers are getting comfortable with the episodic model; some episodic contracts are Medicare minus a percentage, not full Medicare episodic rates. As they become more comfortable, growth works for us. In Q1 we added four new contracts, the majority Medicare Advantage and episodic. We see this number staying in the high seventies; we haven't adjusted our target to 80% or above at this point. We expect to remain steady as we sign more Medicare Advantage contracts.

Andrew Malk, Analyst

Great. Maybe a follow-up: capital expenditures increased to $4.5 million in the quarter, which is more than double typical spend. Can you provide more color on the nature of that and how it will track for the balance of the year? Thanks.

Matthew Buckhalter, Chief Financial Officer

That Q1 purchase was related to a refresh we had planned, primarily a one-time purchase of laptops. That trend will not continue through the rest of the year. It was a one-time refresh.

Jeffrey Shaner, Chief Executive Officer

It was related to employee feedback — one of the highest feedback items was employees wanted new laptops. Good catch, Andrew.

Operator, Operator

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

Pito Chickering, Analyst

Hey. Good morning, guys, and thanks for taking my questions. On PDS, I want to make sure I understand the economics: you won four preferred contracts in Q1, expect to win another four during the year, and you are guiding to rates being fairly consistent throughout the year. Would we not see some increase as more preferred come online? Going back to 2024, it looks like spread grew at the same level as rates. Is it reasonable to think that if rates grow at X percent, the spread should grow at the same level?

Jeffrey Shaner, Chief Executive Officer

Yes, Pito, great question. We expect to receive less state government rate wins and more preferred contracts. The preferred contracts are offsetting the more moderated state government wins, which is why we don't see rate changing materially — maybe a percentage point or two. We think gross margin will stay in the 28% range, and spread per hour will remain north of $12. We will continue to pass wage through to the agreements we sign, and we are in the process of passing wage through to those nurses and caregivers as we speak.

Pito Chickering, Analyst

Great. With 60% of PDS revenues coming from preferred payers, can you talk about the mechanics of how annual price increases are set on those preferred contracts? How much clarity do you have on what price increases should be by nature of the preferred contracts you already have?

Jeffrey Shaner, Chief Executive Officer

Most of our contracts are annual and evergreen. We review them every year and meet with payers quarterly, even though contracts aren't quarterly. That provides opportunity for rate enhancement and value-based agreements each year. Value-based agreements typically take between nine and 18 months after signing the preferred pay agreement for the payer to get comfortable adding upside bonuses to us. Very few of our agreements have automatic COLA or cost-of-living increases built in; those are annual conversations. The tail on this plays out over years on the value-based side, and we continue to work the relationships every year.

Operator, Operator

Thank you. Our next question comes from the line of AJ Rice with UBS. Please proceed with your question.

Albert (AJ) Rice, Analyst

Hi, everybody. First: you commented that caregiver hiring and retention is solid. Is that primarily a function of the rate environment you are seeing? Or is there any underlying trend with clinician candidates that suggests things are stabilizing or improving somewhat?

Jeffrey Shaner, Chief Executive Officer

You hit it right, AJ. It is being driven by rate and wage, which are moving in unison. As our rate goes up, our wage goes up and we are able to hire more caregivers. I would not say it is getting easier, but it is not getting harder over the last six months. The wins and growth are tied to the rate and wage pass-through, leading to higher hiring and employment of caregivers.

Albert (AJ) Rice, Analyst

Wanted to ask about Medical Solutions: you are guiding to mid-single-digit growth near term, but double-digit by year end. What will drive that acceleration? Is cross-sell from acquisitions part of it? And is gross margin stable or is there improvement potential?

Matthew Buckhalter, Chief Financial Officer

On gross margin, the 44% range is where we expect it to be. What you are seeing is the benefits from the modernization efforts taking hold. As we complete modernization in Q2, the 7.4% growth will continue to accelerate to the high single digits and then low double digits in the back half of the year. There is cross-sell opportunity among our businesses and with Family First, but much of this is organic growth — the team is ready to drive it.

Jeffrey Shaner, Chief Executive Officer

Automation and AI are big parts of this. For example, Medical Solutions receives thousands of e-faxes per week; the more we can use automation and AI to pull through the referral process and follow up on physician orders, the more growth we can achieve. Q1's 4.5% growth is organic and shows the business is beginning to act like the other two segments. We expect high single digits by Q4 and low double digits by the first half of next year.

Operator, Operator

Thank you. Our next question comes from the line of Jared Hess with William Blair. Please proceed with your question.

Jared Hess, Analyst

Morning. I'll stick to one: on the home health side, you referenced clinical offerings and success. Any color or data points to illustrate what you mean by improvements in clinical outcomes since that seems to be underpinning operational performance? When you say clinical investment, is that more around star ratings and performance, or developing specific programs based on patient and referral partner needs?

Jeffrey Shaner, Chief Executive Officer

Great question, Jared. We are into the second full year of TPS scores. We were a net winner last year in terms of value-based payments from Medicare because of our star rankings, and we are on pace to be a net winner this year as well. TPS and 5-star scoring tells you whether you're a net winner or loser in value-based payments, and we've mitigated some rate decreases through strong TPS scores. We have no 3-star agencies in home health or hospice; on average we are 4.5 stars in home health and 21 out of 22 hospice locations are 5-star branches. We've also rolled out a cardio program that was CHAP approved. So the team has invested in clinical programs and protocols that differentiate us. The net takeaway is the team has delivered great outcomes and patient satisfaction in both businesses, and we've learned you cannot have great financial outcomes without great clinical outcomes.

Operator, Operator

Thank you. Our next question comes from the line of Grayson McAlister with Truist Securities. Please proceed with your question.

Grayson McAlister, Analyst

Hey, this is Grayson on for David. One for me: on capital allocation — after Family First — how are you thinking about tuck-ins and home health given the regulatory backdrop versus adding density in PES states you've called out like Ohio or Tennessee? And is it still right to think about leverage somewhere around 4x ending the year?

Matthew Buckhalter, Chief Financial Officer

Great question. On cash flow and leverage: we are proud of our start to 2026 and continue to position Aveanna as a strong free cash flow generator. In 2025 we had about $131 million of free cash flow, reflecting commitment to clinical quality and cash collections. We expect similar momentum into 2026. On leverage, we've done a lot — taking leverage down from double digits to 3.8x net leverage on an LTM basis in Q1. We're not done; our goal is to get to at or below 3x net leverage while continuing to grow organically and inorganically. There is still free cash flow available for small tuck-in acquisitions, but beyond Family First this year, probably nothing monumental.

Jeffrey Shaner, Chief Executive Officer

I agree with Matthew. The goal is to do both: grow through tuck-ins and continue to delever. Matthew and Debbie have done great work reducing leverage, and we want to continue to keep leverage top of mind while pursuing growth. Thanks, Grayson.

Operator, Operator

We have reached the end of the question-and-answer session. I would like to turn the floor back to Jeffrey Shaner for closing remarks.

Jeffrey Shaner, Chief Executive Officer

Awesome. Thank you, operator, and thank you so much for your interest in our company and our Aveanna story. We look forward to catching up with you after the end of Q2 in August. Thank you. Have a great day.

Operator, Operator

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.