Earnings Call Transcript - AVAH Q2 2021

Operator, Operator

Good morning, and welcome to Aveanna Healthcare Holdings Second Quarter 2021 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 conference over to Shannon Drake, Aveanna's Chief Legal Officer and Corporate Secretary. Thank you. You may begin.

Shannon Drake, Chief Legal Officer

Thank you, operator. Good morning, everyone, and thank you for joining Aveanna Healthcare's Second Quarter 2021 Earnings Call. Speaking on today's call are Tony Strange, Aveanna's Chief Executive Officer and President; David Afshar, our Chief Financial Officer; and Jeff Shaner, Aveanna's Chief Operating Officer. We issued our second quarter earnings press release and filed our related Form 8-K and Form 10-K yesterday with the SEC. These documents are available on the Investor Relations section of our website at www.aveanna.com. We encourage you to read them. Also, a replay of this call will be available on our website until August 19, 2021. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, August 12, 2021, and these statements have not been nor will they be updated subsequent to today's call. Also today's call may contain forward-looking statements, which may be identified by words such as may, could, will, expect, intend, plan, and other similar words and expressions. All forward-looking statements made today are based on management's current expectations, assumptions, and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not plan or place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results, including those risks disclosed under the risk factor headings of our filings. Except as required by federal securities laws, Aveanna does not undertake to publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events, changing circumstances, or for any other reason. Also, in addition to our financial results reported in accordance with GAAP, we supplement our GAAP results with certain non-GAAP financial measures. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business and operating results, but they should not be relied upon to the exclusion of our financial results reported in accordance with GAAP. In addition, a reconciliation of any non-GAAP measure mentioned during our call to the most comparable GAAP measure is available in our earnings press release and 10-Q, both of which are available on our website and on the SEC's website at www.sec.gov. Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up so that we can accommodate as many callers as possible in the allotted time. With that, I will turn the call over to Aveanna's Chief Executive Officer and President, Tony Strange.

Tony Strange, CEO

Thanks, Shannon, and good morning, everyone. Thank you for joining Aveanna's second quarter earnings call. Before we get started, I'd like to welcome our new investors and say thank you for joining the Aveanna story. For our new participants, Aveanna is a highly diversified home care platform, specializing in providing both skilled and unskilled care to pediatric and senior patients in the most cost-effective setting possible at their homes. We operate in 30 states across the U.S. through 263 locations. Our clinical team focuses on providing exceptional physician-directed care to each of the 46,000 patients that we serve. It's been a busy quarter. On the call today, in addition to our operating results, we'd like to provide an overview of the reimbursement environment and update on our recent financing activities. And finally, the latest developments surrounding our M&A transactions and pipeline. So let's jump right into our results. Q2 marks another successful quarter for Aveanna as we continue to build on the momentum that we reported in Q1. Revenues for the quarter were $436 million compared to $352 million in Q2 of 2020, representing a year-over-year increase of 24% and up sequentially from $417 million in Q1. Our compounded aggregated growth rate over the last 3 years has been in excess of 17%. And we believe, as is supported by our current results, that maintaining growth rates in the mid- to high teens continues to be sustainable. Moving on to gross margins. Gross margins for the quarter were 33.6% compared to 30.3% in Q2 of 2020 and up sequentially from 31.6% in Q1 of '21. The improvements have been driven by rate improvements across our PDS segment, the mix shift driven by the growth in our Home Health & Hospice and a disciplined approach to managing labor expenses. I'm very proud of our operating teams for not only preserving but improving margins during a very difficult environment. EBITDA for the quarter was $49 million compared to $37 million in Q2 of 2020, an increase of 31% year-over-year. Adjusted earnings per diluted share for the quarter was $0.10 compared to $0.08 in Q1. These results, on top of very good cash collections, give us confidence that we can and will sustain our growth rates while continuing to protect our margin and leverage our infrastructure, therefore creating significant value for our shareholders as well as our patients and our employees. Speaking of our employees, I'd like to thank all of our caregivers, administrative staff, and our leadership team for making these results a reality. It is your dedication to our mission that makes Aveanna successful. I'd also like to welcome the employees of our most recent acquisition, Doctor's Choice, to the Aveanna family. It's great to have you on our team. Moving on to the reimbursement environment. Our government and payer relations teams have been working hand in hand with our different state legislators, state administrations as well as our managed care partners to protect and create new avenues for patients to receive care in the home. The result is that over 50% of the states that we service will increase the reimbursement rate and/or expand the covered benefit for the services that we provide. To be specific, we have or will receive rate increases in 16 of our covered states in 2021. Jeff will provide some additional color on these increases during his comments. But the net takeaway is that state Medicaid agencies and managed care plans alike are recognizing the important role that home care can play in reducing our overall health care spend. These investments into the home care benefit will allow providers to make additional investments into caregiver wages, which should accelerate growth for the industry. From a Medicare perspective, CMS has issued a proposed rule for home health and a final rule for hospice. On the home health front, we view the proposed rule as an overall positive for the industry. It appears that providers will experience approximately a 1.7% increase to reimbursement, but equally positive for us is the indication that CMS is moving forward with its commitment to evaluate value-based pricing. There are several legislative efforts underway such as Choose Home to elevate the impact that home care can play in helping post-acute care patients transition back to their homes and allowing them to age in place. We believe that the investments that we have made and are making into our clinical delivery model as well as our clinical documentation system, we are well positioned to be on the right side of value-based reimbursement. And while hospice is currently a very small portion of our business, we believe that the final rule, which provides for an approximately 2% increase in reimbursement, is a good indication of the continued value placed on home care services for end-of-life care. Overall, we believe that the reimbursement environment continues to be positive and should create tailwinds for the industry in 2022 and beyond. This brings to mind what we believe is a significant advantage for Aveanna. Across all payers, including Medicare, 36 unique state Medicaid systems and hundreds of managed care plans, Aveanna has no single payment source that represents more than approximately 11% of our overall revenues. This dynamic gives us great comfort in any downside scenario. But in the meantime, the horizon is clear, and the home care industry appears to be solidifying its relevance in the health care continuum. Turning now to another significant event for the company. In July of this year, we completed the refinancing of our remaining debt of $860 million, which significantly reduces the cost of capital for the company going forward. In addition, we put in place a $200 million revolving credit facility, which remains undrawn, as well as a delayed draw term loan for another $200 million for future M&A. Dave will provide more details related to the refinancing during his comments. In summary, this refinancing has significantly reduced interest expense while providing access to capital to continue our aggressive acquisition strategy. Our Barclays team led the financing along with our full syndicate. We'd like to say a special thank you to all of our lender partners for your continued support. On the topic of M&A, I'd also like to spend a moment updating you on our M&A activity. As a reminder, we closed on the Doctor's Choice acquisition on April 16, 2021. As a result, our Q2 numbers reflect approximately 10 weeks of Doctor's Choice activity. Doctor's Choice is a traditional Medicare-certified home health business with 16 locations across the state of Florida. At the time of the acquisition, the company was producing revenues of approximately $70 million on an annualized basis. Doctor's Choice has continued its successful growth trajectory since closing, and the integration of the business into our Home Health platform is tracking ahead of plan. Our integration management office continues to exceed expectations, both on the quality of our diligence and transactions as well as the timeliness of integration, which gives me great confidence in our ability to identify, close, and integrate acquisitions at a pace that is consistent with our model. So where are we with our M&A pipeline? The deal flow remains robust. And as a result, we have several deals at various stages of our process. Earlier this year, we disclosed that our goal was to acquire between $150 million and $200 million of revenue per year moving forward with a heavier slant toward home health assets. With the closing of Doctor's Choice in April and the robust deal flow and the various deals that we are engaged with currently, we are confident that we will meet and exceed our M&A goals for '21 and beyond. This brings me to my final topic before I turn the call over to Jeff for a deeper dive into some of our operating metrics. Recall that our previous guidance of revenues, not less than $1.745 billion and adjusted EBITDA of not less than $185 million did not contain any future M&A. While we are highly confident in our guidance and given the likelihood that we'll have additional M&A activity to announce in the second half of '21, we'll hold off on updating our guidance until that time. I'd once again like to thank all of the employees for Aveanna and the work that you do each and every day to provide great service and exceptional care to our patients, is what you do that makes these results possible. With that, Jeff, why don't you provide some additional insight into our segment results.

Jeff Shaner, Chief Operating Officer

Thank you, Tony. It brings me great pleasure to share our Q2 2021 operating indicators and key metrics with you. As a reminder, I will comment on our 3 operating segments: Private Duty Services, Home Health & Hospice, and Medical Solutions. Before I get into the operating segments, I'd like to focus on our COVID-19 update and payer and government relations efforts. Throughout the COVID-19 pandemic, I have been proud of our Aveanna team's dedication to providing safe and efficient health care in our patients' homes. We have managed through the pandemic and have a well-disciplined approach to the acquisition of PPE, vaccinations of our staff, testing and tracking of COVID positive cases with staff and patients and effectively managing our business in a COVID environment. We continue to monitor the Delta variant and its impact on our communities, but feel we are well-positioned to meet the growing needs of our patients, referral sources, and payers. On a government and payer relations front, we are very pleased with our efforts and those of our state legislative and government agencies. We believe that our home care message is resonating with our key payer and government constituents through reimbursement rate increases and the expansion of covered services. We also anticipate realizing additional benefits with the FMAP funds as states submit their plans to CMS for approval. We have further aligned our Aveanna and home care industry efforts on return-to-work initiatives. A key component of our growth is focused on accelerating caregivers back into the workforce. We have found our state governments willing to partner with us to provide an appropriate transition from unemployment benefits back to meaningful employment. As most states are phasing down unemployment benefits this summer, we are experiencing a renewed interest from our caregivers to reenter the workforce and get back to providing high-quality care in the home. In summary, our payer and government relations teams have been instrumental in many rate wins, expansion of covered services, and supporting the return-to-work initiatives. Now on to the Private Duty Services segment results. During Q2, we produced $349.7 million of revenue or 11.3% year-over-year growth. Revenue was driven by 9.92 million hours of care provided during the quarter, or 10.1% growth over Q2 of 2020. This growth rate is consistent with our strategy to grow PDS with both organic and M&A activity. We expect to continue to see solid PDS volume growth rates throughout 2021. Our revenue per hour of $35.25 was up $0.39 from Q2 of 2020. This was primarily driven by reimbursement rate improvements and a stabilization of our business mix between skilled and unskilled services. We continue to anticipate that this rate trend will improve in the second half of 2021 with the expected return of schools in the fall. Turning to our cost of labor and gross margin metrics, we continue to experience improvement in gross margin with $105.8 million in Q2 or 30.3%. This equates to a growth of 17.4% year-over-year in gross margin dollars. Gross margin improvement was driven by our PDS cost per hour of $24.59, down $0.27 per hour from Q2 of 2020. Private Duty Services cost per hour is benefiting from the unskilled mix shift and strong labor oversight. Lastly, our spread per hour, an important metric balancing revenue and labor cost for the Private Duty Services segment improved to $10.66 per hour. Spread per hour will continue to improve as we balance the numerous rate increases against the strategic investments in caregiver wages in an effort to accelerate the growth of our PDS business. As we discussed in Q1, we expect our school private duty nursing business to return to an in-person setting this fall. Most of our school business typically returns by Labor Day and is a key component in higher acuity skilled nursing volumes as well as providing the necessary childcare for our nurses to return to work full time. We are encouraged by the commitment of our school systems to provide a safe and rewarding environment for our patients and caregivers to thrive in. Lastly, our PDS teams have fought diligently through the pandemic to continue to bring families home from the PICU and NICU setting to the comforts of their homes, many for the first time ever. I am in awe of our Aveanna team's commitment to our families to providing high-quality, cost-effective, and compassionate care. Now moving on to our Home Health & Hospice segment for Q2, where we continue to experience substantial growth. With the addition of Doctor's Choice Home Health, our Home Health & Hospice division has expanded to 11.5% of our Q2 revenue. Home Health & Hospice continues to be a significant focus of our future growth and has been a point of emphasis for us as we work to expand our national home health presence. Home Health derives approximately 95% of the revenues of the Home Health & Hospice segment and is our key focus moving forward. With the Five Points and Recover Health integrations complete, we are efficiently moving through the Doctor's Choice integration. Our dedicated IMO office is leading the way as we methodically integrate Doctor's into the Aveanna Home Health & Hospice family. I believe Doctor's will be one of the best acquisitions we have completed to date and will act as a model we emulate as we move forward in our Home Health & Hospice M&A strategy. Now on to Home Health & Hospice indicators for Q2 2021. This is our second full quarter reporting Home Health & Hospice metrics. Therefore, we plan to report sequential quarterly growth throughout the remainder of 2021. During the quarter, we produced $50.1 million in revenue, a 59% increase over Q1 2021. This was driven by 11,700 total admissions, approximately 61% being episodic admissions and 10,300 total episodes of care. Episodic admissions grew 87%, while total episodes of care grew 81% over Q1 2021, primarily due to the impact of the Doctor's Choice acquisition and a strong organic growth from the Recover Health and Five Points businesses. I am pleased with the organic growth rates of our home health business and believe we will remain a double-digit admission growth segment for the remainder of 2021. Lastly, revenue per episode for Q2 was $2,894 per episode and in line with our expectations. From a cost and margin perspective, gross margins were 48.5% for the quarter, up 350 basis points from Q1 2021. The primary driver of gross margin improvement was the Doctor's Choice business, along with the continued focus on payer mix. Our Home Health & Hospice division team is complete and actively implementing the best practices from all 3 acquired businesses. I have great confidence in our continued execution of the business and its overall growth impact on Aveanna. Lastly, we are pleased with the recent Home Health & Hospice proposed and final rules and rate improvements for fiscal year 2022. We believe that Aveanna Home Health & Hospice is well positioned to capitalize on the ever-evolving home health landscape as we look forward to partnering with our payers, referral sources, and CMS on value-based strategies. Now to our Aveanna Medical Solutions segment results for Q2. Our Medical Solutions business provides enteral nutrition and other medical supplies directly to our patients' homes. During Q2, we produced $36.4 million of revenue or 11.1% year-over-year growth. Revenue was driven by 78,000 unique patients served during the quarter or 5.4% year-over-year volume growth. Although we had a very strong unique patients served comparable from Q2 2020, I'm proud of the 6.8% sequential growth UPS growth over Q1 of 2021. This growth profile is consistent with our strategy to grow Medical Solutions with both strong organic and de novo activities. We are currently servicing over 26,000 patients per month in our Medical Solutions business with plenty of geography for continued growth. Our revenue per UPS was $466.17, up 5.7% from Q2 2020, primarily driven by product mix shift. I expect both volume growth and revenue to continue to benefit from the growth of our PDS and Home Health & Hospice segments. On a payer front, we've had some recent Medical Solutions Medicaid rate wins tied to our overall payer strategy. We also recently renegotiated a national Medical Solutions contract that will allow us to expand to all states we serve and access a greater patient base, however, at a lower revenue per UPS. In concert with this change, we are leveraging improved cost of goods and reducing overhead to maintain margins in line with our medical solutions business model. Turning to cost of goods and gross margin metrics. We continue to experience great stability in gross margins with $16.5 million in Q2 or 45.4%. This equates to a year-over-year growth of 90 basis points in gross margin percentage. Gross margin improvement was driven by product mix shift and overall efficiencies in our delivery model. I expect gross margins to remain in the 44% to 45% range. I'm proud of our Medical Solutions team and their demonstrated ability to scale the enteral nutrition business on a national basis. In summary, all 3 Aveanna business segments have been performing at or above expectations. As we continue throughout 2021, we are well positioned for organic and acquired growth, efficient margin controls and excellence in clinical outcomes, value-based reimbursement strategies, and customer satisfaction. I look forward to updating you again at the end of Q3 on our continued progress. With that, I'd like to turn the call over to David Afshar, our CFO. Dave?

David Afshar, CFO

Thank you, Jeff. I'll go ahead and provide some more details on results of operations, adjusted EBITDA, liquidity, recent events in Q2 and Q3 and 2021 guidance. As Tony said earlier, revenue was $436.1 million for Q2 of 2021 as compared to $351.6 million for Q2 of 2020, an increase of $84.5 million or 24%. This increase was driven by growth across our key segments, including a $35.5 million or 11.3% increase in PDS revenue, a $45.4 million or 975% increase in Home Health & Hospice revenue, and a $3.6 million or 11.1% increase in Medical Solutions revenue. We're pleased with our overall volume growth, particularly from the Home Health & Hospice segment and our most recent acquisition, Doctor's Choice, which is a great acquisition for us. With respect to rate, our PDS revenue rate increased 1.2% on balance due to the rate increases mentioned earlier, net of the change in business mix between skilled and unskilled services. We view the PDS reimbursement rate environment as a tailwind for all the reasons we talked about earlier. Revenue rate in our Medical Solutions business also increased 5.7% from the year-ago quarter. Before turning to gross margin, I'd like to quickly highlight the revenue impact of the Doctor's Choice acquisition. Aveanna revenues for the first 6 months of 2021 were $853.3 million, an increase of $146.5 million or 20.7% from the first 6 months of 2020. Including Doctor's Choice revenue of $22.9 million for the period in 2021 prior to when we acquired Doctor's, pro forma Aveanna revenue for the first 6 months of 2021 would have been $876.2 million, which represents a 24% increase over the first 6 months of 2020. Now turning to gross margin. Our gross margin was $146.6 million or 33.6% of revenue for Q2 of 2021 as compared to $106.6 million or 30.3% of revenue for Q2 of 2020. The 37.5% growth in our Q2 gross margin compares favorably to our revenue growth of 24% from the year-ago quarter. We are very happy with the consistency and stability of the gross margin percentages that our PDS segment has delivered over time, which have increased recently in our quarter-over-quarter and year-to-date comparable periods. I want to emphasize that on a consolidated basis, our gross margin percentage increased 330 basis points in the current quarter compared to the year-ago quarter. As a result of a number of factors, including the higher gross margins delivered by our Home Health & Hospice segment, the rate increases we've received in our PDS segment, and also a reduction in COVID-related compensation costs in the current quarter compared to the year-ago quarter. Operating income was $30.3 million for the second quarter of 2021 or 6.9% of revenue compared to an operating loss of $52 million for Q2 of 2020, an increase of $82.3 million. Bear in mind that the driver of the operating loss last year was a $75.7 million goodwill impairment charge that we recorded in Q2 of 2020. Operating income for Q2 of 2021 was positively impacted by an increase of $17.4 million or 33.7% in Field contribution compared to Q2 of 2020. The $17.4 million increase in Field contribution was delivered by our $84.5 million or 24% increase in consolidated revenue combined with a 110 basis point improvement in our Field contribution margin to 15.8% for Q2 of 2021 from 14.7% in the year-ago quarter, which also represents sequential improvement from Q1 of 2021. Field contribution and Field contribution margin are important metrics because they help us assess and make decisions about the operating performance of our core field operations prior to corporate and other costs not directly related to our field operations. Offsetting some of the Q2 improvement in our Field contribution margin over the prior year quarter was an increase in our corporate expenses as a percentage of revenue, growing to 7.4% of revenue from 6.5% of revenue in Q2 of 2020. The primary reason for the 90 basis point increase was the $3.4 million corporate portion, $4.2 million in share-based compensation charges that we recorded in Q2 related to performance vesting options as further discussed in the footnotes to our financial statements and our MD&A. Note, however, that adjusted corporate expenses as a percentage of revenue decreased to 5% in Q2 of 2021 compared to 5.2% in Q2 of 2020. Wrapping up with operating income. Operating income as a percentage of revenue improved to 6.9% in Q2 of '21 from a loss of 14.8% of revenue in the year-ago quarter. Moving on to net income. Net income was $1.3 million for Q2 of 2021, an increase of $78.8 million from Q2 of 2020, with the primary driver of the increase again being the $75.7 million goodwill impairment charge that we recorded in Q2 of 2020, as I mentioned earlier. Adjusted EBITDA was $48.8 million for Q2 of 2021 which represents $5.1 million of sequential growth from Q1 of 2021 and an $11.4 million increase from Q2 of 2020. We're pleased to see expansion in our adjusted EBITDA margins from 10.6% in Q2 of 2020 to 11.2% in Q2 of 2021 as the quality of our adjusted EBITDA continues to improve. On a year-to-date basis, adjusted EBITDA increased to $92.6 million for the 6 months ended Q2, which represents a 10.9% margin from $67.2 million in the first 6 months of 2020 or a 9.5% margin. On the liquidity front, we had very strong liquidity as of July 3, 2021, with cash on the balance sheet of $107 million and available borrowing capacity under our revolving credit facility of $180 million, resulting in total liquidity of $287 million at the end of the quarter. And this is after returning $29.4 million of provider relief and stimulus funds to federal and state agencies in Q1 of 2021. With respect to our cash collections and DSO, our DSO was 41.6 days for Q2 of 2021 as compared to 39.8 days for Q2 of 2020. We expect our DSO to increase over time as we grow our Home Health & Hospice business as these businesses generally have longer collection cycles. With that said, our revenue cycle and operations teams worked tirelessly to collect every dollar we're entitled to receive, and we continue to make improvements every day to what we do. Excellence in cash collections is one of our 5 Cs, and we work hard at it every day. One of the results of that hard work is an improvement in revenue realization that we've seen across our comparable year-to-date periods. I can't say how pleased I am with the collaborative nature and all the hard work that our revenue cycle and operations teams put into collections every day. Capital expenditures for the first 6 months of 2021 were 0.7% of revenue as compared to 1.5% of revenue in the first 6 months of 2020. We typically view our CapEx in the range of 1% to 1.2% of revenue. Our CapEx in the first 6 months of 2020 was lower than normal due to the deferral of various projects, which we expect to incur in the future and was higher than normal in the first half of 2020 due to a data center project we completed during that time. And before we finish with our liquidity discussion, I also want to cover our recent amendment to our credit facility that Tony mentioned earlier and which significantly reduced our debt service costs and provides for incremental acquisition financing capacity. As you recall, in May, we repaid $307 million of second lien debt, which allowed us to terminate our second lien facility and also repaid $100 million of first lien debt, all with proceeds from the IPO. Then on July 15, we refinanced our remaining outstanding first lien term loans, combining them into a new 7-year first lien term loan. You will see this described in our documents as the 2021 extended term loan. Combining the 3 former first lien loans, all of which had different interest rates into 1 new term loan simplifies our loan structure, and we also reduced our interest rate under the new term loan to LIBOR plus 3.75% with a LIBOR floor of 0.5%. You'll see a table in our press release that provides these calculations, and holding all other factors the same based on current interest rates, we expect to save $13 million of annual cash interest on our outstanding $860 million first lien term loan as a result of this refinancing. I want to emphasize that, that doesn't include the cash interest savings we'll realize as a result of our debt paydown with IPO proceeds, which will drive further cash interest savings as compared to the cash interest paid that you see in the first 6 months of 2021. If you look at our cash interest trend, our cash paid for interest in Q1 of this year was $20 million, which decreased to $16 million in Q2 and which will continue to decrease in Q3. On July 15, we also added a $200 million delayed draw term loan to provide for future acquisition financing. We incur no interest on undrawn amounts of the delayed draw term loan for 45 days after the July 15 amendment date. Then for the next 45 days, we pay interest at 50% of our LIBOR margin rate, and then we incur the full LIBOR margin beginning at 90 days, which would be on or about October 15. And turning to our full year 2021 guidance, we're affirming our expectation that revenue will be at least $1.745 billion. We're also affirming our expectation that adjusted EBITDA will be at least $185 million. And for the reasons outlined in the press release, we are not providing guidance at this time on net income. To summarize and wrap up here, we're pleased to have continued our positive earnings momentum in Q2 and with the capital structure improvement we've achieved through paydown of debt with IPO proceeds and the subsequent refinancing of our credit facility in July to reduce cash interest costs, we expect to drive improved operating cash flow in the future. We're well-positioned from a liquidity and credit perspective to execute on future M&A and look forward to all the bright opportunities in front of Aveanna. And with that, operator, we're ready to open up the call for questions.

Operator, Operator

And our first question is from Matt Borsch with BMO Capital Markets.

Matt Borsch, Analyst

Yes, I was hoping maybe you could talk a little bit more about the environment for labor recruitment and retention, staff recruitment and retention in the various areas of the business. Some other companies have struggled with that. Just wondering the extent to which you might see pressures in any area on that front and potential wage pressures in particular?

Tony Strange, CEO

Well, first of all, thank you for the question, Matt. I'll start and then Jeff, why don't you jump in? I guess what I'd like to do is go back prior to the pandemic. We are in the business of recruiting nurses, and recruiting nurses has always been difficult. So there are not enough nurses to meet the demand of our growing seniors, the medically fragile children population. And so we live in an environment where this is the reality that we have. Now with that said, the pandemic has made it harder, but I'll give our team credit. We have some innovative ideas that Jeff and the operating team have been working on, which I think are industry leading. But Jeff, why don't you give him a little bit of color about some of the initiatives that we have and the success we've been having?

Jeff Shaner, Chief Operating Officer

Yes, thanks, Tony. Matt, we’ve had to be more creative, innovative, and flexible in our recruiting approaches. I want to commend our recruitment head and the PDS clinical operations teams for introducing a virtual orientation process that starts the day before we place a nurse in a branch. We’ve had to adapt and innovate in this challenging environment. We fully recognize the labor pressures and have observed a decrease in the number of nurses applying for an increasing number of jobs. This situation has pushed us to be more innovative and flexible. As we discussed, we've focused our payer and government relations teams on securing rate increases that we can strategically reinvest in our caregivers. As Tony noted, we achieved rate increases in 16 states, and we are investing those funds into recruiting new nurses and retaining our current staff. We anticipate this will continue throughout the remainder of 2021 and into 2022.

Matt Borsch, Analyst

And if I could ask a follow-up on that. Just as you look out over the next few years, how do you see the supply and availability trending? Is it just going to get a bit tougher here given some of the demographics and retirements?

Tony Strange, CEO

Yes. I don't think there is a simple solution to the nursing shortage. As the pandemic eases and more nurses and others return to work, things may stabilize somewhat. However, for the past 15 years, we have not had enough nurses to care for patients, and with 10,000 people turning 65 each day, the demand for our services will keep growing. Companies will need to be creative and innovative in how we attract, pay, recruit, and onboard staff. The team has effectively implemented creative strategies to recruit and onboard nurses from home. The concept of daily pay is something we wouldn’t have considered ten years ago. Companies, including Aveanna, must continue to find creative and innovative solutions to address this ongoing issue.

Operator, Operator

And our next question is from Lisa Gill with JPMorgan.

Lisa Gill, Analyst

Just back to your comments around home health around value-based care. I agree with everything that you're saying from that perspective. Do you have contracts in place today around value-based care? And what is the outlook for that, number one? And number two, how do you think the reimbursement would work there? Would you think about taking some element of risk in those contracts?

Tony Strange, CEO

Well, so first of all, thanks for the question, Lisa. And today, if you think about back to 2021, CMS was working with value-based reimbursement in roughly 7 states. We were participating in 2 of those. So we are very comfortable with the process. We have had success in the 2 states that we're operating in. And we applaud CMS for moving forward with value-based pricing. We believe that companies should be rewarded for the clinical care that we deliver. And we're going to continue to focus on making sure that our care is delivered at the highest standard, and we believe that the recognition that you're willing to pay more for great outcomes is something that we think is good for the industry. So we are very supportive of moving forward and taking risk where appropriate.

Lisa Gill, Analyst

Tony, when I think about paying for a better outcome, are you seeing more upside opportunities with less downside? Additionally, as you consider those two states, how are they evaluating the outcomes? I understand it was primarily a pilot program. Do you believe they will implement it on a larger scale as we move into 2022?

Tony Strange, CEO

So I think you asked there was 3 or 4 different questions there. I think the answer is yes. We are equally excited about the opportunity for upside in reimbursement. But we also are accepting of the risk of downside. And so I think that companies are going to have to get comfortable with taking that risk that unless they perform, reimbursement can go down. Now we look at it where the glass is half full saying we have the opportunity to be paid for the extra effort that we do, and I think we'll enjoy some success under that program.

Operator, Operator

Our next question is from A.J. Rice with Credit Suisse.

A.J. Rice, Analyst

First of all, following up on your comments about pricing in the 16 covered states where you are getting rate increases, I wanted to know if there are any significant states that are still open. Could you also provide an idea of the blended average rate increase you expect to see in the PDS business as we head into next year? Additionally, what time frame do you anticipate for those rate increases to reflect in the numbers?

Tony Strange, CEO

So Jeff, I'll start and then you can provide some insights about the FMAP program. A.J., as we have mentioned, we do not share specific information about individual states. However, in our top seven states where we have significant volume, we have seen either rate increases or benefit expansions in about five of those states. Therefore, the rate increases I mentioned are not limited to states where we have minimal business, but are widespread. We have participation from small, large, and medium states alike. I want to commend Jeff and the government and payer relations team for their outstanding work during this challenging environment. They have been proactive in engaging with our constituents and demonstrating that we can be part of the solution rather than a problem. Our states are looking to us for assistance in addressing these challenges and in helping to transition patients out of the hospital. With that, Jeff, please share some details about the specific programs.

Jeff Shaner, Chief Operating Officer

Yes. A.J., as Tony mentioned, we would typically have wrapped up our work for the year by now, with all states completing their annual or biannual legislative processes. This year is notably different because most states have not yet submitted their FMAP plans to CMS and are doing so in the upcoming months. We've already shifted from our usual legislative process that included the 16 wins. Now, we are actively engaging with states as they reconvene to determine how they will utilize their FMAP funds and what their proposals might be. We remain optimistic about the potential to secure additional rate increases through the FMAP process. Additionally, as Tony discussed, it’s not just about winning more rates; it's about strategically assisting states in reinvesting that money into caregiver retention, development, and clinical orientation systems. Therefore, we anticipate further rate wins in the second half of 2021 leading into 2022 that were not originally planned.

Tony Strange, CEO

Jeff mentioned in his prepared remarks that when we analyze the rate wins on a state-by-state basis, we are not viewing this as a boost in profitability. Instead, it represents an opportunity to strategically reinvest those resources back into caregivers. By doing this, we can attract more caregivers back into the workforce, which ultimately benefits the industry and accelerates its growth. Currently, the industry is experiencing a slight slowdown as we need to get more people back to work. I believe the states are aware of this, and through the state Medicaid systems, they can respond more quickly than some federal programs by allocating funds to bring workers back, which will ultimately lead to an acceleration in our growth rates.

A.J. Rice, Analyst

Okay. Maybe just my follow-up then would be you mentioned the Choose Home and we're hearing others comment about what that could mean and other legislation around the infrastructure package perhaps helping the bigger infrastructure package, if that goes anywhere perhaps helping on the personal care side. How are you thinking about these? And would you pivot on your strategy in any way if any of this gets passed?

Tony Strange, CEO

I'll answer your last question first. I don't believe we need to pivot at all. The activity happening in D.C. right now aligns with our strategy, and we will continue moving forward. Regarding how we feel about it and the likelihood of it passing, your prediction is just as valid as mine. The process involves the Senate and then the House, and I can't predict the outcome. However, what's crucial to me is that there is a growing conversation in D.C. about home care and its role in the solution. Whether specific bills pass or not, the positive takeaway for the industry is that federal and state leaders in the Medicaid system are acknowledging the value of home care. They understand that home care contributes positively to healthcare spending, and that's encouraging to see.

Operator, Operator

Our next question is from Sarah James with Barclays.

Sarah James, Analyst

And congrats on a strong quarter. Recruitment and retention has been an area of strength driving above industry average growth rates for you guys, and now you have this strong rate environment, maybe some funding expansion. I was hoping you can give us some insight into how sensitive recruitment is and retention to wage increases. So do you have any examples in markets where you've seen a correlation between hourly wages and what's going on on the recruitment side? And then if you can walk us through any non-wage-related items that you're working on for either recruitment or labor efficiency?

Tony Strange, CEO

Thank you for the question, Sarah. While my example is a bit old, we experienced a significant rate increase in California in 2018. Following that increase, our growth rate accelerated as clinicians returned to work, allowing us to pass on a considerable portion of the rate increase. We reinvested that into our clinicians' wages, leading to an uptick in staffed hours and admissions. California's approach proved effective, enabling patients to leave the hospital sooner. I believe we will see similar outcomes in other states that have chosen to reinvest in their businesses. Increased rates correlate with growth, and we have consistently demonstrated this. That said, summer is typically our slowest season due to nurses being on vacation and schools being closed. However, we expect schools to be fully operational this year, which should positively impact our rates. Jeff, could you elaborate for Sarah on how school systems affect our business?

Jeff Shaner, Chief Operating Officer

Yes, Tony. I think Tony said it well, Sarah, this is we're on the eve of our schools going back into in-person. And we are monitoring it very closely with the Delta variant. Proud to say every school and every school district that we currently service is planning to be either in-person, has either gone back or is going back over the next 3 weeks. We're monitoring that every week to make sure that, that continues in a safe and effective manner. But as Tony talked about, it's an important recruitment tool for us. It's an important step for us as many of our caregivers are also parents. And if their kids are home, they've got to have some kind of childcare, daycare. And so the in-person school setting is a big step for us to get back in the fall and to get that workforce back to work. And I think as Tony talked about, we've now got some incremental dollars to go strategically back and invest in those and make the wage rates more appealing to those nurses to come back in the workforce. And I think as we said earlier, we have found our state legislators to be incredibly understanding and focused on getting people back to work. And I think we have found that to be very refreshing that they're not fighting against the idea of getting their constituents back to work. They really do want unemployment to ramp back down and to help people get back into meaningful employment. And I think we're a great market and a great opportunity for that to happen.

Sarah James, Analyst

And just a follow-up. I know this is in the weeds, so happy to follow up offline. But back in that California example in 2018, do you have any numbers that can help us frame up what the result in recruitment volume was?

Tony Strange, CEO

Yes, Sarah, we would be happy to take that offline and go over it with you.

Jeff Shaner, Chief Operating Officer

But I think as Tony said, it's a great example of how we strategically invest at a 30,000-foot, we didn't keep that money and just increase margins. We strategically invested that into the caregivers over a multiyear period to really effectively do it what the California legislature wanted, which was to go staff more cases.

Operator, Operator

And our next question is from Joanna Gajuk with Bank of America.

Courtney Fondufe, Analyst

This is actually Courtney Fondufe on for Joanna. So I guess just one on the deal pipeline. I mean, you guys called out that the pipeline remains robust and you reiterated that you'd be able to hit your acquired revenue target for the year, which is great. But just curious, are you seeing multiples increase for Home Health & Hospice assets because you mentioned the M&A is really going to skew in that direction? I'm just wondering, are you seeing increased competition for these assets?

Tony Strange, CEO

Thank you for the question. Regarding our pipeline, we have over $600 million in transactions at any given time. I want to emphasize that we have a very disciplined approach, often passing on many more deals than we pursue. We are selective in the transactions we take on. Some deals are conducted as one-off transactions, while others are highly competitive. When we identify a transaction that fits well with our company, where integration will be smooth and synergies can be realized, we commit to closing that deal. Our Chairman, Rod, who has nearly 40 years of experience in home care and transactions, leads this effort. A recent example is Doctor's Choice, which Jeff mentioned; it is likely to be one of our most successful transactions despite being part of a competitive process. We offer synergies and maintain a disciplined approach to achieving them. When necessary, we are willing to increase our offers because, in the long term, it leads to cost-effective transactions. Although it is a competitive environment, we believe we have the capital, infrastructure, and IMO team to succeed when needed.

Courtney Fondufe, Analyst

That's very helpful. Moving on to my follow-up about Doctor's Choice, you mentioned it is performing better than expected in terms of timeliness and is one of the best acquisitions your team has made. Can you elaborate on the integration process and the specific synergies you are experiencing that support this view?

Tony Strange, CEO

I believe this will be one of our better transactions. The Premier Health transaction we completed in 2018 was highly successful, focusing more on private duty, while Doctor's Choice is centered on home health. I consider both equally beneficial. We've observed that they provide a quality service and have strong market presence throughout Florida, a state that is in high demand for senior services. I genuinely think this will be a fantastic transaction for us. We haven't shared the exact synergies we anticipate from this acquisition yet. However, I previously mentioned our highly leverageable infrastructure, which encompasses HR, payroll, accounting, finance, tax, recruitment, and some billing and collections services. These functions are very efficiently utilized. Therefore, in a situation where we encounter overlapping payroll and financial roles, we've been able to take a strong position, and Doctor's Choice is no exception. We have no doubts about achieving all the expected synergies with Doctor's Choice.

Operator, Operator

Our next question is from Pito Chickering with Deutsche Bank.

Pito Chickering, Analyst

I have a couple of quick questions. For Home Health, can you provide any information on what the pro forma organic growth rate was? Most of the growth in the quarter came from M&A compared to last year, but it would be useful to understand the organic growth rate excluding those acquisitions. Additionally, assuming no further deals are closed, aside from a bit more revenue from Doctor's Choice, can you share how Home Health revenues performed towards the end of the year?

Jeff Shaner, Chief Operating Officer

Yes, this is Jeff. In our prepared remarks, although we didn't own Recover and Five Points this time last year, we are really pleased with their year-over-year performance. We are in line with the industry with a double-digit growth rate, particularly in admissions, which continues to be a primary focus for growth. I'm happy with how both businesses have performed as we've integrated them since Q4 of 2020, completing integration in Q2 of 2021. Both businesses are growing at over 10%, definitely in the double digits. As Tony mentioned in response to Courtney's last question, one aspect we appreciate about Doctor's is its growth during integration. It has strong market presence in Florida and is also growing in double digits. We are pleased with our business development efforts. We are experiencing labor pressures in Home Health, although they are not as severe as those in the PDS segment. Our main focus in Home Health right now is on recruiting and retaining more nurses, similar to our approach in other areas. To answer your question, the organic admission growth remains consistently in double digits across all three of the former companies.

Pito Chickering, Analyst

All right. Perfect. And then actually a follow-up to Courtney's question, and I have two quick modeling questions after that one. But are we seeing the public company home health multiples compress pretty substantially sort of this year? Just curious how does that impact the private markets? Did sellers adjust expectations or the deals pause a bit as we have this sort of disconnect between lower public company valuations and maybe some high private company expectations?

Tony Strange, CEO

I don't believe the market has come to a standstill; we're experiencing as much deal activity today as we did a year ago, and in some cases, it might even be higher. There are various factors at play, including discussions around changes to capital gains taxes that could influence someone who might have been willing to sell in the past to reconsider now. The pipeline remains strong, and I anticipate it will continue this way. Over time, I expect the lower valuations of some public companies will impact deals in the future, and sellers may need to adjust their expectations. However, for now, I'm not observing any compression at all.

David Afshar, CFO

Thank you for the question, Pito. In our press release, we disclosed that we expect to save $13 million annually. When comparing our previous term debt costs to those immediately after the transaction, if we consider the annual interest of $36 million to $37 million on our extended term loan, there are additional factors to account for, such as fees from undrawn portions of our revolver, costs associated with our letters of credit, and the amortization of deferred financing costs. When you consider all these elements together, you might expect GAAP interest expense to be in the $41 million to $42 million range. However, this estimate does not include any interest from the delayed draw term loan we discussed, and we will evaluate that as it relates to our M&A activities.

Operator, Operator

And our final question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut, Analyst

I have one question for you. As we consider the resurgence of COVID, could you share your experience from last year? How did it affect your business and your patients in terms of their willingness to allow you in? I'm curious to understand how we should anticipate the impact of COVID moving forward.

Tony Strange, CEO

So Jeff, I'll begin, and then feel free to jump in. It’s important to share what patients are experiencing. Brian, at our lowest point last year, our volumes were down about 10%, around April and May. Since then, we've seen improvements for the rest of 2020. Currently, we're experiencing a decline in volumes again due to the Delta variant. However, unlike last year, I believe our families have become more accustomed to managing COVID while caring for their children at home. Jeff, could you share more insights with Brian about what we're hearing from families?

Jeff Shaner, Chief Operating Officer

Yes. And as well said, Brian, in the home environment, where we put 1 nurse with 1 patient in the home, I think we're still very well protected. And as Tony said, none of our patients haven't heard with and dealt with COVID now for over a year. The Delta variant has our attention, has all of our health providers attention, and we're monitoring it appropriately. I don't think it's going to have a long-term impact or a significant impact on how our families feel about having the nurse in their home. I think the nurse likes that one-on-one setting, the family understands, it's 1 or 2 nurses. I think our families are really focused on keeping them out of the hospital. So the families don't want to go back into the hospital for an emergent revisit. They never do, but they certainly don't right now. And I think as we said, a pivot to schools, we're really partnering. I give our schools credit, our school leaders credit. They're really trying to be thoughtful on how they can do in-person. They know how important that is for the kids, and it just rolls downhill to us. It's really an important aspect of maintaining that through the Delta variant and I think our school systems have been very thoughtful about how they're planning on doing it as well.

Operator, Operator

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

Tony Strange, CEO

Thanks, operator. And again, thank you for your interest in the Aveanna story. We look forward to updating you on our continued progress as we go. And operator, that concludes our call.

Operator, Operator

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