Earnings Call Transcript - AVAH Q1 2024

Operator, Operator

Good morning, and welcome to Aveanna Healthcare Holdings' First Quarter 2024 Earnings Conference Call. Today's call is being recorded, and we have allocated one 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.

Debbie Stewart, Chief Accounting Officer

Good morning, and welcome to Aveanna's first quarter 2024 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 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 2024 results and how we are moving Aveanna forward in 2024 and beyond. My initial comments will briefly highlight our first quarter 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 insight on how we are thinking about year two of our strategic transformation and our enhanced outlook for 2024 prior to turning the call over to Matt to provide further details in the quarter and our refreshed outlook. In addition, I would like to take a moment and welcome Jerry Perchik, our new Chief Legal Officer to Aveanna. Jerry has spent the last two decades dedicated to high-quality healthcare in the home setting. Jerry brings a wealth of experience in regulatory and legal affairs, mergers and acquisitions, and general corporate law. We feel blessed to have Jerry join our Aveanna team. Now moving to the highlights for the first quarter. Revenue for the first quarter was approximately $491 million, representing a 5.2% increase over the prior year period. First quarter adjusted EBITDA was $34.9 million, representing a 22.5% increase over the prior year period, primarily due to the improved payer rate environment as well as cost reduction efforts. 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 believed 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 can create more capacity. 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 year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts to those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging labor and inflationary environment, our preferred payer strategy allows us to return to a more normalized growth rate in 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 preferred payers as well as the continued signs of improvement in the caregiver labor market. Specifically, as it relates to our private duty services business, our goal for 2024 is to continue to execute on our legislative strategy to improve reimbursement rates in our various states with particular emphasis on Georgia, Massachusetts, and California, which represent approximately 15% of our PDS revenue. As a reminder, we achieved rate increases in 19 states in 2023. While we are pleased that our PDS legislative messaging has been well received by state legislatures, we still have much work to do. As an example of the work ahead, our PDN rate request was not included in the California Governor's proposed budget. We believe that we made significant strides with the governor, Medical Department, and the California legislature demonstrating the importance of PDN rate investments and how they support an overall lower healthcare cost, improved patient satisfaction, and quality outcomes. However, we need to further accelerate our preferred payer strategy and government affairs efforts to continue to advocate for children with complex medical conditions. We have a proven track record of expanding our preferred payment programs and will enhance our efforts in California, similar to our approach in other states. As we look at our preferred payer initiatives in other states, our goal for 2024 is to increase the number of PDS preferred payer agreements from 14 to 22. In the first quarter, we added four additional preferred payer agreements, increasing our total to 18. I am very proud of our payer relations team as they continue to develop partnerships with managed care organizations to find solutions for children with complex medical conditions. Aveanna's preferred payer strategy is gaining momentum and allowing us to invest in caregiver wages and recruitment efforts to accelerate hiring and staffing of nurses for our patients. Additionally, we are introducing a new PDS volume indicator that demonstrates how we think about our momentum with our PDS preferred payers. Some of our PDS states, like Colorado, for example, are predominantly Medicaid reimbursed with little to no managed care penetration. For this reason, we will report our PDS preferred payer volumes against the total MCO opportunity. Our 18 current PDS preferred payer agreements account for just over 40% of the total PDS MCO volumes as defined above. This updated metric defines the opportunity for Aveanna to continue shifting our capacity and efforts towards our payer partners. Now moving to our preferred payer progress in home health. Our goal for 2024 is to maintain our episodic payer mix above 70% while returning to a more normalized growth rate. In Q1, our episodic mix was 75% and we achieved positive total episode growth of 1.7% over the prior year period. Q1 marked the first time we've had sequential and year-over-year episodic growth since we entered the home health market. We also signed two additional episodic agreements within the quarter. I am so proud of our home health and hospice leadership team and their commitment to driving positive clinical outcomes, episodic growth, and profitability. We will continue to remain focused on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis and focus on improved clinical and financial outcomes. We are encouraged by our early 2024 rate increases, preferred payer agreements, and subsequent recruiting results. Our business is demonstrating signs of recovery as we achieve our rate goals previously discussed. Home and community-based care will continue to grow and Aveanna is a comprehensive platform with a diverse payer base, providing a cost-effective, high-quality alternative to higher-cost care settings. And most importantly, we provide this care in the most desirable setting, the comfort of the patient's home. Before I turn the call over to Matt, let me comment on our strategic plan and refreshed outlook for 2024. As we enter year two of our strategic transformation, we remain highly focused on those initiatives that create a positive momentum in 2023. We will continue to focus our efforts on four primary strategic initiatives. Number one, enhancing partnerships with government and preferred payers to create additional caregiver capacity; number two, identifying cost efficiencies and synergies that allow us to leverage our growth; number three, managing our capital structure and collecting our cash while producing positive free cash flow; and fourth, engaging our leaders and employees in delivering our Aveanna mission. Based on the strength of our first quarter results and the continued execution of our key strategic initiatives, we now expect full year 2024 revenue to be greater than $1.97 billion and adjusted EBITDA to be greater than $150 million. We believe our revised outlook provides a prudent view considering the challenges we still face with the evolving labor environment. And hopefully, it proves to be conservative as we continue to execute throughout the year. In closing, I am very proud of our Aveanna team. We offer a cost-effective, patient-preferred, and clinically sophisticated solution for our patients and families. Furthermore, we are the right solution for our payers, referral sources, and government partners. By partnering with preferred payers, we can and will move reimbursement rate and wage metrics in meaningful ways that support our growth. This strategy allows us to hire, retain, and engage more caregivers in providing the mission of Aveanna every day. With that, let me turn the call over to Matt to provide further details on the quarter and our 2024 outlook.

Matt Buckhalter, Chief Financial Officer

Thanks, Jeff, and good morning. I'll first talk about our first quarter financial results and liquidity before providing additional details on our refreshed outlook for 2024. Starting with the top line, we saw revenues rise 5.2% over the prior year period to $491 million. We experienced revenue growth in two of our operating divisions, led by Private Duty Services and Medical Solutions segment, which grew by 5.9% and 9.9% compared to the prior year quarter. Consolidated gross margin was $145.9 million or approximately 30%, representing a 1% increase over the prior year period. Consolidated adjusted EBITDA was $34.9 million, a 22.5% increase as compared to the prior year, reflecting the improved payer rating environment as well as cost reduction efforts. Now, taking a deeper look into each of our segments. Starting with private duty services. Revenue for the quarter was approximately $395 million, a 5.9% increase, and was driven by approximately 10.3 million hours of care, a volume increase of 4.9% over the prior year. While volumes have improved over the prior year, we continue to be constrained in our top line growth due to the shortage of available caregivers, although we are continuing to see signs of improvement in the labor markets. Q1 revenue per hour of $38.48 was up $0.36 or 1% as compared to the prior year quarter. 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 $100.1 million of gross margin or 25.4%, a 3.9% decrease from the prior year quarter, primarily driven by some timing-related items and overall strengthening of our PDS reserve. The cost of revenue rate of $28.73 in Q1 was influenced by payroll taxes. Despite the ongoing wage pressures in the labor markets, our Q1 spread per hour was $9.75. We expect spread per hour to normalize to the $10 to $10.50 range beginning in Q2 and continue to improve in the second half of 2024. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $54.6 million, a 2.7% decrease over the prior year. Revenue was driven by 10,100 total admissions with approximately 75% being episodic and 12,100 total episodes of care, up 7% sequentially from Q4. Medicare revenue per episode for the quarter was $3,070, up 3.4% 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 have achieved our goal of rightsizing our margin profile and enhancing our clinical offerings. As we navigate 2024, we believe our admission growth will normalize in the 3% to 5% range. We are committed to a disciplined approach to growth while shifting our capacity to those payers who value our clinical resources. We are pleased with our Q1 gross margin of 53.1%, up 15.8% over the prior year period and representing a continued focus on cost initiatives to achieve our targeted margin profile. Q1 gross margins benefited from some timing-related entries and should normalize in the 49% to 51% range moving forward. Our Home Health & 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 $41 million, a 9.9% increase over the prior year. Revenue was driven by approximately 92,000 unique patients served with an 8.2% increase over the prior year period, and revenue per UPS of approximately $446. Gross margins were $17 million or 40.8% for the quarter, up 9.8% over the prior year period and in line with our targeted margin profile for Medical Solutions. We continue to implement initiatives to be more effective and efficient in our operations to leverage our overhead as we continue to grow. We are accelerating our preferred payer strategy in Medical Solutions by aligning our capacity with those payers that value our services and appropriately reimburse us for the care we provide. As we expand our national presence and solidify our position as the leading provider of enteral nutrition in the country, we plan to refine our partnerships with payers to better support our growth. In summary, we continue to fight through a difficult labor 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 partnerships is the path forward at Aveanna. As Jeff stated, our primary challenge continues to be reimbursement rates. With the positive momentum we experienced in Q1, we remain optimistic that such trends will continue throughout 2024. As we continue to make progress with the rate environment, we will pass through wage improvements and other benefits to our caregivers in the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity. At the end of the first quarter, we had liquidity in excess of $220 million, representing cash on hand of approximately $42.6 million, $10 million of availability under our securitization facility, and approximately $168 million of availability on our revolver, which was undrawn as of the end of the quarter. Lastly, we had $32 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 of our variable rate debt is hedged. Our interest rate swaps extend through June 2026 and our interest rate caps extended February 2027. One last item I will mention related to our debt is that we have no material term loan maturities until July of 2028. Looking at cash flow, cash provided by operating activities was negative $12 million for the quarter, and free cash flow was negative approximately $12.7 million. Q1 is traditionally our highest cash outflow for the year, and we continue to expect to be a positive operating cash flow company in 2024. We also expect to see continued cash flow benefits as our top line and cost management initiatives come to fruition. Before I hand the call over to the operator for Q&A, let me take a moment to address our revised outlook for 2024. As Jeff mentioned, we currently expect full year revenue to be greater than $1.97 billion and adjusted EBITDA to be greater than $150 million. As we think about seasonality, we expect our revenues to grow as rate increases are implemented throughout the year and as our volumes grow. Accordingly, we expect approximately 47% to 48% of our full year guided adjusted EBITDA to be recognized in the first half of 2024. As most of our annual rate increases typically become effective in the second half of the year, we expect our adjusted EBITDA to ramp as we use these increases to attract and retain more caregivers and drive volumes. Our EBITDA will also accelerate as we realize the benefits of our continued cost saving initiatives. In closing, I'm proud of all of our Aveanna team members and our hard work in achieving our Q1 results. I look forward to our continued execution of our 2024 strategic plan and updating you further at the end of Q2. With that, let me turn the call over to the operator.

Operator, Operator

Our first question is from Ben Hendrix with RBC Capital Markets.

Ben Hendrix, Analyst

Thank you, guys. Congratulations on the quarter. I appreciate the new stats on your payer arrangements as a percentage of the overall managed care opportunity. I just wanted to get your thoughts on how you expect that to pace from the current 40% range. And then geographically, kind of how that's progressing and where the next opportunities are? I know you've made good progress in Texas. California is a little bit of a different environment. But kind of where is the low-hanging fruit? And how should we think about that pacing? Thanks.

Jeff Shaner, Chief Executive Officer

Ben, good morning. Thanks for the question. This indicator highlights the significant potential opportunity we have with the states that have transitioned from traditional Medicaid to Medicaid MCO states. Having 40% of our total volume shows that we're making good progress in this process. We're a couple of years into implementing our preferred payer strategy, and some of the largest payers in the bigger states are included among the first 14 preferred payers we identified at the end of last year. Moving forward, I expect the percentage to change gradually, likely in small increments of 1% or 2% per quarter. While I believe this number could surpass 50% in one or two years, don't expect major jumps like 5% or 10% each quarter. In Q1, our team signed four additional preferred payer contracts, which is a strong start even though some of these contracts contribute relatively small volumes. However, they are crucial in their respective states. For example, the majority of California PDM patients are still on the traditional Medi-Cal fee for service, but we've partnered with various whole child models and MCOs in the state as families transition into those programs, which will help boost our volume there. Overall, we are seeing positive momentum with our preferred payer strategy within the PDS division. I'm proud of how both the government affairs team and the preferred payer teams are executing our strategy, and I believe this momentum will continue into 2024 and 2025.

Ben Hendrix, Analyst

Great. Thank you very much.

Operator, Operator

Our next question is from Scott Fidel with Stephens.

Scott Fidel, Analyst

Hi, thanks. Good morning. First question, just a two-parter just on the PDS in terms of some of the modeling. First, on the revenue rate. So it looks like that's been up around 1% year-over-year in each of the last two quarters. Just wondering whether that's a good run rate now for the balance of the year on the revenue rate or whether you do expect that to move higher at all. And then just the second part would be on the gross margin in PDS. Matt had talked about some timing items, I guess, affecting in the first quarter as well as adding to the reserve, if you could maybe elaborate on that and then just talk about how you see gross margins for PDS tracking over the balance of the year.

Jeff Shaner, Chief Executive Officer

Thank you, Scott. Regarding the PDS rate, we have exceeded 10 million hours per quarter at this point. It requires a significant increase in the rate to impact the base. Matt mentioned that the PDS growth rate has been around 3% to 5% over the last few quarters in terms of both volume and rate. We've performed at the higher end of that range recently, which we are very proud of. Achieving a 5% increase in both volume and rate for $10 million a quarter is a major accomplishment for our team. Moving forward, we expect to remain at the higher end of the 3% to 5% range, with volume making up 3% to 4% of that and rate contributing 1% to 1.5%. Ultimately, we believe this will stabilize back to around 3% for volume and 2% for rate, or possibly 3.5% for volume. In our current environment, we are looking at approximately 4% volume and 1% rate. That’s likely the best way to consider it. As for costs, Matt and I will share our insights about our spread and our outlook for Q2 and the rest of the year.

Matt Buckhalter, Chief Financial Officer

Yes, Scott. Q1 is a temporary headwind always with just higher payroll taxes that significantly impact us being a labor company. So that right off the bat. Had a little bit of headwind temporarily in nature with some of our reserves. And we did the right thing of increasing reserves to make sure that we're in a solid position kind of moving forward as well. Expect us to be in that $10 to $10.50 spread range in Q2 and Q3 and Q4, we're pretty confident and comfortable with where that's currently sitting and probably will land there for the entire year as well.

Jeff Shaner, Chief Executive Officer

I think it's fair to say, Scott, in response to Matt's comment, that our Q1 gross margin will likely be the lowest for the year. Moving forward, we can expect to be above 26%. Matt mentioned it effectively. We anticipate being in the $10 to $10.50 range in Q2 as we progress.

Matt Buckhalter, Chief Financial Officer

26%, 28% range as our go-forward range for PDS, good business. We're able to drive volume growth with that spread or with that gross margin as well. And so as we continue to win the preferred payer contracts have government affairs wins that come in, we'll continue to pass through those wage improvements to our caregivers. So you won't see expansion there from those rate increases necessarily, but more solidifying in it in a solid spot.

Scott Fidel, Analyst

Okay. Got it. Then just my follow-up question. I just wanted to ask around operating cash flow and was negative in the first quarter, but you had guided for that. Maybe if you can help us walk through your thoughts on operating cash flow for the second quarter. And then I know you expect to be positive for the full year. Could you put a number around that in terms of a range and then last part on the operating cash flow will be. I'm not sure about necessarily this year, but if you continue to sort of normalize margins, how you guys are thinking about let's call it, over the next year or 2, maybe sort of settling out on what you think your EBITDA to cash flow conversion can look like.

Matt Buckhalter, Chief Financial Officer

All right, Scott, I'm going to unpack this one. So let me stumble through and you come back and catch me up or...

Scott Fidel, Analyst

I'll help you, Matt if you need any of the pieces of that, I'm happy to help.

Matt Buckhalter, Chief Financial Officer

Thank you. First, I'd like to highlight that 2023 was an excellent year for cash flow, marking our first year with over $12 million in free cash flow for Aveanna, and I'm very proud of our teams for achieving this. We did experience some timing benefits in 2023 that will present challenges in 2024, particularly in the first quarter. The first quarter was actually very strong for us, but we expect greater challenges ahead. However, through effective cash management and improved operations, we have been able to maintain our cash flow. The second quarter is likely to mirror the first quarter, as we have timing issues, especially concerning when cash is received from revenue. The TPL season tends to be a headwind for us early in the year, but this usually eases in the second half of the second quarter and then increases into the third quarter. So, I foresee a similar situation in the second quarter, but we will really start to see progress in the third quarter, which should bring us back to being a positive free cash flow and operating cash flow company in 2024. Looking ahead, our team has excelled in cash collections and operations, and our EBITDA has become much healthier and cleaner. This is beginning to reflect positively in our cash flow, which we expect to continue. We are also working on reducing some costs this year. While I am not implying that costs will be eliminated completely moving forward, we are taking the right steps now to benefit the organization in the long run, which will pay off in 2024 and 2025.

Jeff Shaner, Chief Executive Officer

Scott, this is a great segue into Matt's earlier point regarding operating cash flow and your last question about profitability. Matt highlighted that over the past several quarters, we have been committed to carefully reducing costs as we scale the company. You can see this reflected in our Q1 results, and it will continue to be evident in Q2 and beyond. I may have been a bit ambitious last earnings call when I mentioned achieving a 10% margin by the end of the year, but we are focused on returning to $200 million a year in EBITDA. We are aiming to accomplish that through strategic actions. Currently, our adjusted EBITDA margins have been around 7%, and we are approaching 8%. The most exciting aspect is that we see a clear path through 2024, 2025, and 2026 to transition the company back to a double-digit EBITDA venture. This is no easy task; it involves hard and careful work. Our teams have embraced the goal of being efficient and effective as we grow. Last year, our efforts were centered on Home Health & Hospice, and this year, we are concentrating on our PDS division while also focusing on corporate efficiency. We significantly reduced costs in 2023 and are planning to implement additional meaningful cost reductions in 2024, with thoughts even extending to 2025. We are enthusiastic about how these actions will enhance our adjusted EBITDA margin and ensure we remain a cash-generating company moving forward, and we appreciate our teams' hard work in achieving these goals.

Scott Fidel, Analyst

Thanks. Helpful to get those intermediate term of bogeys you just added in, so appreciate that.

Operator, Operator

Our next question is from Pito Chickering with Deutsche Bank.

Pito Chickering, Analyst

Hi, good morning, guys, and thanks for taking my questions. On the preferred payer strategy, I guess what percent of all PDS volume today is handled by managed Medicaid versus Medicaid fee-for-service?

Matt Buckhalter, Chief Financial Officer

Pito, we don't necessarily give that metric on the volume standpoint. We do obviously give a breakout on the revenues. So you can kind of back into it a little bit on Matt's standpoint from it. Going back to that 40%, we're really proud of our teams for achieving that and I'll say our operations teams for providing that care and reaching out to our clinical teams for leaning into those patients. But obviously, our payer relations team is on top of it as well. You'll see that continue to grow, as Jeff stated earlier, organically, just as patients are coming out of the hospital and bringing into it, but also as we continue to sign new preferred payer agreements, we've got to go out there for '22 this year. We saw a nice jump up in Q1, and we'll continue to see that throughout the year. So that will add to it. I guess the only negative headwind to it wouldn't be on a volume standpoint. It'll actually be a positive because it would give us more opportunity if that states continue to migrate on a Medicaid system over to an MCO. We'll work our best to see if we can get out in front of some of those conversations on those MCO payers, but I guess that could actually bring it down temporarily in nature, but open up the population for us to even drive that and have meaningful conversations as well.

Jeff Shaner, Chief Executive Officer

Yes. Pito, regarding the 40%, let's separate the two aspects. Our government affairs team is primarily focused on influencing Medicaid fee-for-service rates, particularly in states like Georgia, Massachusetts, and California this year. Those three are still largely oriented towards government affairs. Now, concerning that 40% indicator, it represents our preferred payer strategy team. This accounts for 40% of our overall opportunity to engage with MCO payer partners and national commercial partners in the Medicaid arena. This means we are almost halfway toward our total opportunity with this preferred payer strategy. However, as Matt mentioned, I don't want to overlook our efforts in Georgia and Massachusetts; we still have a government affairs strategy in place there. We have previously discussed our government affairs strategy concerning Oklahoma and other states like it. We are actively pursuing both approaches, and I am pleased to say that we are achieving more victories than setbacks on either front. Our work is ongoing, and California serves as an important reminder that we must continue our efforts. We need to ensure that PDN is effectively implemented in California long term to assist families in bringing their children home and ensuring they stay at home.

Pito Chickering, Analyst

Okay. So just as for half way there if we take a 5-year plus view here. If you move 100% of your managed Medicaid into a preferred, that would be about 80% of our volumes handled by managed Medicaid and 20% handled by Medicare fee-for-services. Is that a ballpark number?

Jeff Shaner, Chief Executive Officer

That's probably a bit strong. There are still some large states that are primarily fee-for-service, like California and Colorado, which are quite different. However, most states are shifting towards a managed care organization strategy. Over the last seven years and the next five, we expect most states to transition to a Medicaid MCO through the PDM product. Based on our experience with states like Texas, this transition takes three to four years. It's a careful and deliberate process due to the sensitivity of our patient population. We see great opportunities on both fronts, engaging different customers and utilizing both government affairs and the preferred payer strategy, depending on the state's situation.

Pito Chickering, Analyst

Okay. That's impressive, and congratulations on such an achievement. Your hourly growth this quarter is strong, and even comparing to last year, it's quite notable. Can you provide some insight into how much you're growing organically within the preferred provider networks compared to other areas? Is there a significant difference in the return on equity growth rate between these two segments?

Jeff Shaner, Chief Executive Officer

There really is, Pito. I'll relate it back to hiring the actual nurse. It is still the haves and have nots. The good news is that over the last two years, we've reduced the number of states and payers we work with that don't have acceptable rates for hiring. We've either stopped working with those payers or shifted our capacity and attention to those who are willing to engage with us. For states with very low rates, we've increased those rates significantly. This year's primary focus is on Georgia, Massachusetts, and California, as we need to improve those rates. The Medicaid rates in those states are not attractive for hiring RNs or LPNs. If you were to ask one of our operators about the volume generated by non-preferred payers, in most cases, the answer would be negative. With non-preferred payers, we are not even flat; we are moving backwards, purposefully shifting our caregiver capacity. Our recruitment efforts are focused on markets like Texas for our payer partners, who are compensating us with accelerated rates and value-based agreements, expecting us to deliver nurses and capacity in return. So this is your opportunity. Pito, I can't believe you didn't touch on Home Health and Home Health gross margins and how proud you are of our team.

Pito Chickering, Analyst

There’s a lot to consider here. Looking ahead, I want to focus on PDS for a moment since it’s a significant strategy for you all. Could you start sharing the organic growth rate for preferred? That would help us as we work on our models going forward. Regarding Home Health, we clearly observed strong episodic growth. As you transition away from commissions, is this the right level of gross margin to consider going forward? Additionally, as we enter the latter half of the year and move past payroll taxes, should we expect to see an expansion in gross margins from the current 53%?

Jeff Shaner, Chief Executive Officer

So, as Matt mentioned, 53% was a bit high for us and was influenced by some one-time items. We consider it more in the range of 49% to 51%. Given our current position and the robust performance with our episodic percentage exceeding 70%, we anticipate being a business with over 50% gross margin in Home Health & Hospice for most of this year. This achievement reflects 18 months of effort from our Home Health & Hospice leadership team. We take pride in finally achieving positive year-over-year and sequential growth. Q1 is our peak season, particularly in Florida, where our business tends to perform better. This quarter marks our first positive episodic year-over-year comparisons in almost three years, showing a 1.7% growth. Our team is confident that they can achieve organic growth of 1% to 3% moving forward, maintaining a gross margin of approximately 50%. The home health industry is facing challenges, so our success is a testament to our team's diligence. Looking ahead, we believe the AMS business will begin to reflect similar positive trends as the Home Health & Hospice division as we roll out our preferred payer strategy across Medical Solutions. We expect to stay within the 49% to 51% gross margin range and anticipate positive year-over-year growth in total episodes for the rest of the year.

Pito Chickering, Analyst

Awesome. And then one last super quick question, just a follow-up on Scott's question on cash flow from ops. You said 2Q be negative, back half, you'd be positive, getting positive cash flow from ops. Should we be modeling $24 million cash flow from ops in the same range as last year? Is that a good ballpark range? Or just any color on how we should be modeling that? Thanks so much.

Matt Buckhalter, Chief Financial Officer

Yes, Pito. I think I would hinder that a little bit. I would say, take it back a little bit. We had a really good year last year, but as I mentioned, we benefited from some timing-related items that came through. So I would just say, hey, positive is a good year for us on top of this one, if we're a little bit north of that, awesome. But really in 2025 is when you see the big jump up. It's really to the diligence of our teams of just good clean operations and growing our business organically.

Taji Phillips, Analyst

Good morning. You've got Taji on for Brian. Thanks for taking my question. So looking at the margins, I know that you guys have provided some really great detail on the gross margin. But thinking about the OpEx in the business, obviously, even with gross margin stepping down sequentially, you were able to extract a good amount of cost out of the P&L. Just curious, is that the right jumping point that we should be thinking about for this year? How much more juice is there to squeeze within that line item?

Jeff Shaner, Chief Executive Officer

I'm going to begin with the sequential aspect of our performance. Over the last three or four quarters, we have been intensely focused on managing gross margin, understanding that it's challenging to shift in this industry. Efficiency has been critical for us. The positive aspect of our strategy is that we've dedicated the last 15 months to Home Health & Hospice and corporate efforts. This year, however, we have shifted our focus to our largest business unit, which is Private Duty Services. We're approaching this carefully, considering the significant size of our PDS business. Looking ahead to 2025, we believe there is still a strong opportunity for us to maintain efficiency and effectiveness in our operations. Matt, would you like to discuss the quarterly run rate?

Matt Buckhalter, Chief Financial Officer

Yes. And just on gross margin stuff, Q1 is a compressed gross margins as being that labor business, Taji, that we talked about, and state taxes are significant for us. We see a sequential jump up just immediately as those roll off into Q2. And then as well as we continue to focus on this and take meaningful cost out of OpEx, but also do the right thing on the gross margin line and making sure that we're paying people the appropriate amount of money and being very diligent in there. I think you'll see it expand throughout the year. Q1 historically, as I said, our lowest quarter out of the entire year on a GM basis. But Q2, Q3, and Q4, I think you'll see minimal sequential step-up.

Taji Phillips, Analyst

Great. That's really helpful. And then just back to the commentary on California. I know you guys had expressed disappointment by not being included in the rate budget. But obviously, you're still taking this enhanced effort towards driving rate increases, the two-pronged rate increases. But thinking about the state budget itself, right, and your continued efforts to try and get rate increases. Maybe can you just talk about your learnings from prior efforts and how you're incorporating this into your continued efforts towards getting included in state budget? And I know there's some moving pieces that are out of your control, right, like deficit, etc. But just curious to hear your learnings and how you're going to take this revitalized approach to portraying your value prop and the need for rate increases within your business essentially.

Jeff Shaner, Chief Executive Officer

Thank you for your insightful question, Taji. We have been working in California for over two years now, and it's clear that we need to increase the rates. Our focus is on helping families with complex medical needs. In California, even a strong case can be hard to make during tough budget times. The governor and Dr. Vale from HHS have been understanding, but the state is facing a significant deficit, making it challenging to pass a meaningful rate increase while cutting various programs. We feel we've been caught in this situation. For us, it's not about if we will succeed but when. As the largest provider of PDN services in California, we are committed to this cause and learning from both our successes and failures to improve our strategies. Currently, we are collaborating with the governor's office and various legislators, although we do not expect PDN services to be included in this year's budget. The May revised budget is coming out soon, and it's improbable that we will see any rate improvements, despite our request for a 40% increase, which we believe is necessary. We have noticed that more families in California are seeking services elsewhere, leaving the Medi-Cal fee-for-service program for options like whole child model programs or payers such as Kaiser, who offer enhanced rates. The MCOs in California have provided us with the rates for PDN, which we have shared with the current administration, as the right rate is essential for the right wages. Looking ahead, I suspect it will take several more years to secure these changes in California. It’s a gradual process, with families transferring to MCO plans slowly, and we anticipate needing to work with the current and potentially future governors and legislators over the next few years to achieve our goals. I believe that in five years, California will have to raise the PDN rate meaningfully because of necessity, not desire. We are determined to be part of that journey, even if it takes longer and requires more resources than initially expected. We will continue to advocate for the families we serve until we achieve our goals.

Taji Phillips, Analyst

Great. Thank you.

Jeff Shaner, Chief Executive Officer

Thank you, David, and thank you, everyone, for your interest in our Aveanna story. We look forward to updating you on our continued progress at the end of Q2. With that, have a great day.

Operator, Operator

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