Conference Transcript - AVAH 2026-09-16

Speaker 3

Thank you for joining us. Sorry for running a few minutes late here. Very pleased to have CEO and COFO from Avion Healthcare. For anyone that doesn't know about this company, I just want to point out this thing is up 1,700% since you took ownership in the end of 2022. Two, started off as a sub one. Distressed equity, almost not making payroll. Here we are, 14X with leverage. I'll get into arguably too low. This big move, at 1,700%, that's not so bad. This move has been basically been primarily moving into preferred networks, which is structurally involved for your entire company. So I guess, can you just talk about the preferred network strategy in each of the segments? And where are we in terms of innings, read segments? The thing about this, over a one, two, three, five-year window, and when it gets sort of fully penetrated and start growing typically at more, quote, unquote, market growth.

Jeff Shaner, CEO

Sounds great. And I want to take that compliment because you were one of the people who pointed out how bad we sucked on the way down from $10 back to once. So I just want to say thank you, Peto, for giving us some kudos on the other side of it, as you certainly brought up some of the realities to us back in 2021, 2022. But no, as you said, Peto, we've been on a multi-year journey. Matt and I and Debbie Stewart, our chief county officer, all kind of took our roles in early 2023. coming out of COVID, we absolutely needed a strategy that dealt with the lack of caregiver capacity in our businesses, obviously with the hyperwages that all happened through the COVID period. We're in year four now of our preferred payer strategy, government payer strategy. Both are continuing to work incredibly well. As you talked about in each one of our businesses, we underpin our growth and where our clinicians, our focus every day is to know where every one of our clinicians is going why they're going there not just the patient they're seeing but who is the payer of the patient they're seeing and is it is that payer in our preferred network um and sort of the allocation of our clinical capacity so start with our largest division um our property services division 80 of our revenue is in uh property services it's our most mature preferred payer market or segment um at the end of q2 we had 37 preferred payer arrangements roughly 64 percent of our total volumes are in one of those arrangements sets up from 57 percent the end of the year so nice movement year to date and really seven preferred payer wins in 2026 today and a couple more that we plan to announce the second half of the year so we're going to answer right now if you want oh thank you this is being webcast oh this is only live say we're sorry we're live here i'll give out the winning lottery ticket here in a few minutes But really going to end up being a great year for PDS. I'm sure we're going to get to California. We're going to talk about some of the government affairs wins as well. But really continue to be a great momentum with our PDS preferred payers. They want more. Even our very first preferred payer is still with us today. Matter of fact, I think the CEO was here this morning. You guys were talking to her. So they've been a great preferred payer for us. They're still with us. They still want more capacity from us. So our very first preferred payer, we're about 55% of their census in the specific state. We signed up first contract four years ago, and they still want us to take more. They want more nurses. They want more of our capacity because it truly is betting the total cost of care for them. So excited about where PDS goes. Put me over quickly to home health and hospice. Also really excited about where our home health and hospice teams are. We have 50 preferred payer agreements. think of those as episodic agreements, both Medicare and Medicare Advantage, but all episodic in nature. 81% of our business is aligned with an episodic contract in home health. That is, we believe it's industry-leading, certainly to the higher end of the industry, and we're growing 15, 15.5% year-over-year organically in the home health business. Really, really proud of that. Lastly, but not least, we've just finished the medical solutions modernization in 2025, five coming in early 26 and we've got our first 20 preferred payers identified we're really working that preferred payer progress process in the med solutions it's still matt when i would tell you it's in its empathy empathy stages but but proud to be bringing the preferred payer strategy to med solutions as well yeah so one of my biggest uh pushbacks in the last couple years has been your conservatism which is um you know he should be uh whipped over there and if anyone's bored I would tell you to look at Bloomberg's surprise in terms of, you know, street numbers versus action numbers, and you're beating by, you know, 80 percent or 50 percent.

Speaker 3

It's maybe guiding the street to be too low. I guess, you know, if I think about growth in 26 and growth in 27, you get sort of put out sort of long-term growth rates here. You know, I guess the thing about like this, you know, how much a percent of those long-term growth rates are coming from just overall market growth, how much is it coming from sort of market share of our preferred networks, and how much is it coming from just simplistically, you know, these sort of very sick kids that are stuck in hospitals that don't have actually a way of getting home?

Jeff Shaner, CEO

Let me start with why we kind of got to the long term, and Matt will jump in with the actual growth rates by segment, but, you know, you were kind enough at the end of Q1 to remind us how much we beat consensus by, And that was, you know, too much from from your professional experience. So we spent effectively May through the end of July with our board looking at re-underpinning all of our business units. And really, the key drivers was we were 15 or 16 months into the one big, beautiful bill, and we had enough experience now with 32 states, with 32 Medicaid states. And with the rate wins for 25, we knew what the rate wins for 26 were shaping up to be. We had just gotten the California news that we had gotten the California budget for 2027. That was a big deal for us, 32nd state. um and then we had we hired capstone to underwrite all 50 states the impact of obva and specifically what was the out what in their best estimation what would the output be to the private duty pediatric private duty nursing population we we had strong feelings because we're in it every day but we really needed a market validation and all of that kind of came together in the summer with the the one big beautiful bill is real and it doesn't impact Medicaid, we know that. It does not primarily target pediatric PDN, and if anything, our pediatric PDN population is incredibly well insulated. States are going to continue to invest generally into pediatric PDN care because it's a winning solution for them. The other thing that was helpful was we're big bettors on home health, adult geriatric home health, and we saw in the 25 final rule what we thought was a turn in the policy of this administration. When we saw the proposal will come out in July. It validated. We think home health has turned. We think the trough has happened and we're starting to weigh back up on home health. That was a nice validation for us to re-underwrite the growth algorithm, as Matt will talk about, really gave us confidence. And probably the best way I could give you is clarity. We felt like we had enough clarity at this point to readdress our long-term growth algorithms.

Matt Buckhalter, CFO

Yeah. And, Peto, I think there was a compliment in there somewhere with 14 consecutive quarters of beating and raising guidance. But, you know by huge amounts you know baby steps here average of 40 to 50 percent it's been impressive we've done a pretty nice job as an organization but to kind of echo jeff here a little bit with our long lrp updates that we had there was a lot of noise that came out within the obva and there was quite a bit of noise of just what is this going to mean to us is there going to be friendly fire are we going to get clipped by this is it just going to be across the board cuts that happen in Medicaid. And what we have felt since then is absolutely nothing. You know, we've had no interruptions to our authorizations, no interruptions to our start of care, no interruptions to our payment cycles. Everything has just been business as usual in the best possible way, you know, out there. And so as we were even a little bit more conservative, you know, at the beginning of the year, just as we wanted to see things, how they settled with the OBPA. And year to date, seven state rate wins, right on plan with our expectations, seven additional preferred payers getting that up to 64 of our mco volumes from preferred payer contracts themselves all that's just been more underpinning of just hey guys this is a the lowest cost setting that anybody can be in we're going to continue in the pds services and they're not impacted um by the obva and so taking our pds growth range you know lrps from three and a half three to five percent from two five six percent and as well as updating our home health and hospice from that 5% to 7% to the 8%, 10%. Even on that one, looking at a positive rate environment for the first time in six years, now that's kind of, it was nice to see a proposed rule come out and not have parentheses around it for the first time in five years. And so seeing that be 2.4%, 2.5%, that's our expectation going forward as well. And so that gave us confidence to move that up another two percentage on our growth rate. And then even on the medical solution side, you know, we kept that at that 8% to 10% range. And last quarter, we were right around 9%. We expect that to get back to its single digits or high single digits, low double digits here in the next quarter or two, just as we finish off that modernization effort and put up a prepare work on that division as well. So a lot of great work that the teams have done thoughtfully over the last few years. You can't do it all at once. You know, focus on one, focus on the next, focus on the next. We've been able to accomplish a lot and get the company to where it is right now.

Jeff Shaner, CEO

I know we'll get into M&A later, but also all of the execution of the last three and a half years has led to, you mentioned it, but a significantly improved capital structure, massive deleveraging the balance sheet, producing very nice free cash flow. So the other thing that we updated in the LRP was really the M&A update of, you know, we were effectively in the zero to 2%, and we updated that two to 4%. We've been above that the last two years with Thrive and Family First. My assumption is we'll play on the higher end of that scale, if not above that, the next few years. But we were able to also, with an improved capital structure, lean back into M&A in a more material way.

Speaker 3

You know, like if I have to write, you know, like an earnings note, 3Q of 27, so a year from now, and you get to have another big beat, you know, basically it's a different way of asking kind of, you know, where could these levels be conservatism? Would it be you keep on driving new preferred contracts? that you're driving, debt within those contracts. Is it because more states like California reprice their offerings, or is it just from the SG&A leverages? I don't think you're getting to a whole lot of margin expansion despite, you know, SG&A come down 140 basis points a year of the last couple of years.

Matt Buckhalter, CFO

Yeah, I would tell you it's growth. I mean, growth is going to be the main driver of that one. And we've done a great job. And I imagine we'll get into California here in a little bit. But California was the last state to kind of move 32 for 32. And we can now just compete in every single state that we're in pedo. Like there was the black sheep over there that we just couldn't do anything with. We couldn't hire caregivers. We couldn't provide good clinical outcomes. You know, families are upset. Kids are stuck in the hospital. With the one-one-go-live of that one, that'll help California. And now in every single state, we're in 39 states, 32 in the PDS division, we can compete. It's never easy. It's never going to be easy. You know, caregivers are in high demand. There's a lack of caregivers out there. It's also the reason why the preferred payer strategy also works in there. But I think if there is a beat that comes out there, it'll continue to be on the volume side of things, less on the rate side, just because there continues to be that pent-up demand for our services.

Jeff Shaner, CEO

I would also say just more of the same. So a year from now, with the exception of a little bit more meaningful M&A, I would tell you more of the same, that we're going to continue doing the things that have been incredibly successful for the last three and a half years, being very effective and efficient in the back office, to your point, getting SG&A less. leverage um removing some of our ai and automation from the back office building collections to the front front facing and scheduling and some other dictation type exercises that are actually in the branch in the homes that'll bring some efficiencies to us in the future out years in the branches but continuing to prepare strategy i agree with matt we we've solved the 32 states we'll be back to the table with eight or ten additional states next year looking for colo level adjustments meaning anywhere from 2% to, I call it, 10%. And we have about a third of our states every year that we're winning some form of rate. But I think at this point that those are going to be smaller rate enhancements. And we're okay with that. That works in our growth algorithm. And I just think doubling down on home health. I mean, we are living so far above what the industry is living today from a growth standpoint, a margin, a clinical outcomes.

Speaker 3

We need to double down on that business with our team. um okay so so california you know obviously pretty pretty big sort of shift there and frankly i'm a little you know amazed that that that it came through you know the economic savings the state is so high you know you guys have talked about for 10 million you know we modeled sort of like low 20s as you think about like the timing of sort of how california comes in the size of california And then also, I think you talked about sort of giving rates ahead of time. And I think about 4Q26 versus 4Q27.

Jeff Shaner, CEO

Let me start with just the work that was done. And Matt will talk about the wage pass-through side of it. But to your point, we're five years into advocating and lobbying for this rate increase. We've had a 40%. There's one PDN rate in the entire state, which is simplistic. It doesn't necessarily make sense for the wage metrics of the other state. But one PDN rate of $44.12. sense. We have asked for 40%. The industry has been asking for a 40% PDN rate increase now for almost five years. I think part of the story is just how if you stay at the table, you keep talking, you keep advocating. We don't leave states when we don't get rate increases, right? We stay at the table. We fight for our families. And so I think there's a story here of just staying at it, being committed to the outcome of these families. And ultimately, the last four and a half years, our California business was just slowly dying on a vine with no rate lift, very, very few MCO opportunities in the state. Most of our children are still on the Medi-Cal program. The business went from relevant five years ago, last rate increase was eight and a half years ago, to irrelevant or unrelevant for our business model in 25 and 26. So as a company has been accelerating and growing, California is slowly dying behind the scenes. Clearly that's about to change, you know, in a material way. So we're excited to be able to put California back on the map, be relevant. We're one of the two largest providers in the state. We cover the entire state, which is great. So the infrastructure is there to be able to go execute. Matt would tell us more about our Q4 plans and how we grow in 2027.

Matt Buckhalter, CFO

Yeah, really excited for our patients and our families, most importantly. I mean, it's been eight years, you know, eight and a half years since our last rate increase there. And in that time period, COVID happened, hyperinflation, and nurse caregiver inflation, it's been a tough, tough environment for the last five years out there. In Q4, we're actually going to front run this wage pass through a little bit. And so we're going to invest a couple million dollars in Q4 to continue the ramp up period. And it's going to think about it in kind of three stages, pedo. The first stage is our current caregivers who are working for us at this time, and maybe they were their second job because they had to go work a different position that was paying more in an assisted living facility or skilled nursing facility. But when we're able to move their wages, five bucks an hour, six bucks an hour, seven dollars an hour, they're going to want to pick up more shifts for us. And that will focus on our patients themselves and getting their fill rates up from their authorized hours. Next step is going to be the caregivers who used to work for us. They love home care. They love the one-on-one patient experience. They love the patients, the families. They love also being two and a half miles down the road from them instead of driving 25 miles into the city to provide care. Those are going to be the next ones that we pull over. They're already up on compliance. They probably have open shifts on the families that they previously worked. And they also, once again, love that home care. We can get them reengaged relatively quickly. Those are probably your two first big jumps that happen on a volume standpoint itself.

Jeff Shaner, CEO

And we'll do that with our cash flow, our expense, our risk. It's the right thing to do.

Matt Buckhalter, CFO

It's a good investment.

Jeff Shaner, CEO

And think of, I think we've talked publicly, think of what should be between an 80 and 85 percent ideal fill rate in California is somewhere closer to 50 percent or sub-50 percent over the last four years. And to Matt's point, our goal is to reconnect that with the first two groups that you just talked about over the next three to six months. As soon as the rate table is published by the medical department, we'll start that pass through with the intention to start to reconnect quickly 50 to 55 to 60 percent, and eventually back to 80, 85 percent, all, and that said, all with our current patients.

Matt Buckhalter, CFO

Yeah, and the next step will be just new hires, new patients. So, obviously, the NICU-PICUs are full in California. There's more than 10 children hospital in the state itself. So, how do we get those beds empty? How do we get those patients home that have been sitting there for six months post-discharge day, eight months post-discharge day, who just don't have nursing care? And that's the reason the state made the investment, because those are the hard dollars that they can recognize very quickly and the hard savings they can recognize very quickly. we also don't want to take them home until we take care of our current patient base that have stuck with us the entire time too. So there'll be new caregivers, new hires, new starter cares, new admissions. That'll take time. So the first one will be quicker. The next one will be pretty quick. The next one will take 12, 18, 24 months before you kind of see that actual impact for what this rate is for us. And it's a little bit of the upfront investment that California has to make to get to the savings they desire as well.

Jeff Shaner, CEO

We saw this in Georgia three years ago. There's one children's hospital in Georgia, so it was easier, but it took about 120 days to pull 50 or so families out of the hospital and get them home for good. California will be that times 10. So I agree with Matt, this is going to take us and us and our peers probably close to a year to fully bake in, getting an efficient stream of patients out of the hospital. If you think about two to four nurses for every patient we take home from the hospital, you think about how many patients you got to hire to basically MD the chronic medically fragile children out of 10 children's hospitals in the state of California. So it's a great growth algorithm for 27, but it's also a growth algorithm all the way through 28.

Speaker 3

I mean, does, you know, you talk about all those tensile houses in California, and there are other hospitals where kids are being capitalized as tensile hospitals. And obviously with their rate increases for five years, can you quantify the number of, in California, you know, of kids, you know, obviously use this for asking the government for money because you're going to quantify, you know, how many kids are currently in California stuck? As I think about your other states that you exist in, how big is that number? And I think about the states you aren't in today, sort of how big is that number?

Jeff Shaner, CEO

And this is not about like market share, it's just about how many kids sort of in those three buckets are still stuck in hospitals today. about your highest security patient yeah and it's in my way there's no perfect answer because there's no perfect report but the best we can tell in california this is information we've shared with the governor's office and the head of the department of health and human services over the last four years is four thousand roughly four thousand children in california should be receiving at home private duty nursing daily um in in california they only qualify if they have a vent or trach or both so it's pretty high level compared to most of those states um the best we can tell the number of kids being serviced is somewhere below 3 000. it's hard to tell at this point but but somewhere sub 3 000 um in in factor aviana and one of our national peers are the two largest provider only providers that cover the entire state um so think of the opportunity being you know somewhere around a thousand or 1400 kids who who just who's either parents are providing the care daily or are stuck in a hospital somewhere or have been in some kind of long-term institutional care waiting to get home now that's a lot of children that that would take us normally five six seven eight years to admit that many thankfully we have peers in the market but it just shows you the unlock in california is that significant um the idea for us to take a couple of a couple of hundred of new patients home in the state is a big deal in the course of the year so you know i think we see the growth algorithm in California being a two to three year growth, eventually the new rate will run its course over probably a three year period. But for the next year to two years, we see a clear path to being able to eat into that unlock. And Matt said it, but I want to go back to, if you're a parent of a child who's got to be seen 24 hours a day and you only have like 50 hours of nursing care a week, that's the only time you can sleep. That's the only time you can actually eat or go out of the house. So the idea that you could get, you know, and your authorization might be up to 24 hours a day, seven days a week, or $168 a week. The idea that you get nursing up to that and be a human being again is so monumental for these families. So I say that to say it's a huge deal for the families in California. It's a big deal for Aviana. As you know, we've been talking about it for, I was just done talking to you about it. I mean, at some point I was just, I was hiding from you about California. So like you, I'm glad to have it now be fact and we'll be more excited as we get into 27 where it's in print and we're actually out executing. Outside of that, we've talked about seven states that we're not in that we want to be in in Medicaid. Think of, I'm not picking on the Big Ten here, but think of Michigan, Ohio, West Virginia, Kentucky, Tennessee, Missouri, Arkansas, kind of the seven states we're not in in pds that we feel like we need to round out our large peers payer peers are asking us to go to some of these states specifically tennessee and ohio so it that's a nice fill-in for us these are large medicaid systems you know large mature medicaid systems not the highest pdn rates but but good mature medicaid systems so good medicaid systems good population that's there they have labor force labor you can actually hire as well and i think echo one thing you said, Jeff, our preferred payers are asking us to be there.

Matt Buckhalter, CFO

They're asking us to go to Tennessee. They're asking us to go to Ohio. They've got problems. And so that's an area that we want to focus on getting there sooner than later.

Jeff Shaner, CEO

And to your point, all new geography, all new preferred payer opportunities. And for us, a diversification of a Medicaid portfolio makes a ton of sense. We've seen it with the 32 states. We've really benefited from being in that and taking 32 closer to 40 long-term to us makes a ton of sense.

Speaker 3

So, I mean, sir, you know, I guess the same California question is the thing about, you know, Tennessee and Ohio, you know, what percent of those orders are getting filled?

Jeff Shaner, CEO

Just not by you guys. Much more robust. I mean, I would tell you the best of our knowledge in those seven states, six of the seven or seven of seven have appropriate rate structures where the rate's not broken. So it's not a California like for us to Matt's point. it's the payer saying we want you to go there and we have a preferred rate already in place for you and we want you to help take solve some of our problems ohio's michigan ohio probably the two biggest medicaid states in those seven states we listed that you know those are very very large medicaid states so um but they're just important for us as we round out our portfolio you talked about 27 but as we think about 28 29 30 us being around a 40 state 40 41 state medicaid provider is probably the ideal i know you'd like us to be in montana for personal reasons and maybe idaho places like that where the fishing is good you know that the hunting is good but but and eventually

Speaker 3

we'll get there um but right now we're got some more focus where where our partners are asking us really fill in the core states and then and then we can start doing my hunting so you know so matt just to bring you onto this you know we've seen ar reserve tailings for the last two consecutive years can you keep this going like is this you know like how much more is there you know because there to do here and then more in all seriousness you know there's been a lot of you know besides rates and preferred networks and ebitda growth with the cash flows and a lot of these things happening like you know crank it down reserves kind of can you sort of talk about the other benefits you've seen in terms of this new operational structure in the last couple years

Matt Buckhalter, CFO

That's exactly what it's been, you know, and this is a surprise we didn't necessarily expect when we rolled out the preferred payer agreements, the preferred payer contracts. You know, they cause us to meet with our preferred payers monthly, quarterly, and you're sitting across the table with them at any given time. And in those conversations, you're working on hospitalization rates. You're talking about, you know, HBR scores and your cohort of patient base and where we're currently sitting at. And you're asking them, hey, what problems do you have? And like, hey, these five patients are really difficult for us. There's been rehospitalizations three times. Can you lean into this one? And in that conversation, they also return the favor and say, what issues are you having? And it's like, well, I've got this AR that's locked up from 2023. It's fully reserved. It's gone through a waterfall process. It's all accounted for. But in this XYZ paperwork, can we get that taken care of? And like, yeah, sure, of course. You provided the care. You did what you asked. Like, yeah, no problem. That never happened prior to this one. probably because we didn't have somebody to call you know previously we're calling a 1-800 number or you know hotline to try to get somebody not yet no thanks and it was really the relationships that we've built out there with the preferred payer network that we're getting paid faster we're resolving issues quicker and it's just working together as a partner it's really the easiest simplest way to put it to your point we've had some tailwinds here with some of that aged ar pickups out there um those won't last you know we've picked up five million dollars here, $6 million there, but our reserve rates have never been lower in all three of our divisions, not beyond a history, in the history of it. So between all three of them, our reserve that we're actually booking is the lowest it has ever, ever been. A lot of that is through some automation we've put into place. We've acquired two companies over the last two years. We added zero to our RCM. We've been able to stop backfills and positions as we've had some turnover occur. And we put some automation and some AI technology in there that's really helped us just leverage that piece and he alluded to our sgna leverage leverage our entire sgna uh platform as well we're going to start pulling that across in 2027 to more of being a forward-facing but we've done a really nice job on sgna front with it too as a good cfo he's told me every quarter there's no more reserve left right he's telling me the same thing whenever i push him on these you know close earnings calls and the point i just i just don't buy it anymore i will validate prices are good It is such a nice partnership when your payer partner wants to help you solve a claims issue.

Jeff Shaner, CEO

Many times it's just adjudication of claims that is tough. And Matt said it. The fact that our payer partners are wanting to help us solve these issues, it goes against everything that people hear. It's anecdotal, but sometimes people ask me, what are you doing? I said, I'm in health care. And they're like, oh, you don't UnitedHealthcare. I'm like, yeah, I know you're not. I know they suck. I'm like, they actually don't suck. They're actually good human beings. they actually try really hard to work with their partners and take care of their beneficiaries. I always ask people, do you have United as a coverage? No, I don't. They just suck. I'm like, okay, we work with them every day. They're actually great people and they do a great job. And they hold you a high level of accountability as a provider. They expect high things from you. All of our preferred payers expect high quality from us. But when you treat them as a business partner, they will treat you as a business partner. And we have found that to be, to your point, and accounts receivable and collections, just a win-win.

Speaker 3

So if I want to put a negative hat on here, this is one of the big debates that always happens. If you roll into recession, states are required to balance their budget by law, which means all of a sudden tax revenues go down and typically costs go up, and therefore the question around Medicaid rates is always there.

Jeff Shaner, CEO

You know, what happens in your states, whether it's Medicare fee-for-service or managed Medicaid, if we roll into recession, tax revenues collapse, they're looking for savings do they really realize enough how much your area is savings or you guys just got caught caught up in just the mass cuts that that seem to happen every recession let's give you two examples of it because i think i think both is the answer um so many of our states are managed medicaid medicaid now like texas as an example we don't see we don't care for any i say any it may be less than one percent of our business is actually medicaid reimbursed in Texas because 99% of our business is paid through the MCOs, which means the MCOs are at risk, right? They are the capitated risk in that scenario. And I would tell you in that scenario, they absolutely understand the cost savings, and they would push us harder for even more savings. Now, they may not give us rate increases, but they would push us harder and harder for lower the HPR percentage in our contract, save us more money. We like that. We like where the answer is the mco is the is the person who's responsible for not balancing the budget but ultimately is the is the outsourced medicaid product um most medicaid systems like georgia now like california they understand the value proposition so we've seen it play through and material rate increases we have one example of and it's colorado of a state that has a global medicaid issue and they've come across with a two percent a temporary rate rate decrease right and we're part of that that's been in place now it's two last last fiscal year in this fiscal year um and you know in colorado they kind of ran off the tracks of medicaid unfortunately they kind of covered everything not just pdm but everything under the sun and eventually just just disconnected you know rate reimbursement and expenses disconnected we are actually um i hate to say pleased we understand what colorado has to go through we're one of the largest providers of pdn colorado and we're going to be there on the other side of colorado's fixing their medicaid product um and so i'd use that as an example of like 32 states well diversified colorado's a big state for us and we're proud to be there and you know we're fighting through a two percent you know temporary rate rate cut there but it's the it's one of 32 states that's implemented that and when it's all said and done our growth algorithm doesn't change because colorado put a two percent rate decrease we don't like it but we will be one of the companies that survives while some of the mama pops and even some of our competitors ultimately cannot be efficient enough to make it through that yeah colorado also had 10 years in a row that's fair that's great increases every single year too so and with a pop in there of a 20 percent one time as well so they've been a great state to operate in and will continue to be a great state operate in.

Matt Buckhalter, CFO

But I think the diversity of our 39 states that we're in is the real big winner there. I'd also say, Peto, kind of totally shifting away from the reimbursement structure. If that situation that occurred, which nobody likes to whisper out loud, we are an area that the workforce can come back to. Our demand for services is always going to be there. And so if an LPN or an RN needs to get back in the workforce, maybe they left for a period of time, and went to go take care of their own children as they aged and grew up. We are an opportunity for them to re-engage into the workforce quickly and to get a paycheck very quickly as well. So there's actually a positive on the labor front for us as well because of the demand for the services. But I understand where you're getting at on the reimbursement side. We also think just being the lowest cost setting is always going to win out at the end of the day. Like the moment you're a 10x savings as opposed to a acute care setting, people are going to pay attention to you.

Jeff Shaner, CEO

And that's where we finally got this this summer with the one big beautiful bill was all of the noise about Minnesota, all the noise about California. Both states implemented a PDN rate increase over the last 18 months, both states north of 30 percent PDN rate increase. They didn't do it to be to be wasteful. They didn't do it to be despiteful to CMS. And by the way, CMS will have had to approve both of those rates and they approved in Minnesota. We know that we expect them to approve to California with no drama. So even CMS is saying, yes, this is a good place to invest in rate to save total cost of care. Almost all of it, if not all of our value-based contracts and our PDAs, we have 15 value-based contracts. I think it's true to say, but almost all of them are underpinned by a total cost of care. So the only way we earn a bonus is if we are lowering the total cost of care, which I think is a great – we love that. because now we've got the higher rate, we're paying the higher wage. Now, quarter by quarter, we're looking at our cohort of patients and think of that cohort being between 100 patients and maybe 500 patients for the specific payer. And if we don't beat the HBR percentage in that cohort, we don't get paid a bonus.

Speaker 3

Shipping to home health a little bit here, it's been a challenging sector the last five years. Several companies have gone poof. how do you see the emma markets today you know what do you look for how good are the assets and where are the multiples and almost more importantly what do you see the competition sort of throughout the country now that these large public company acquirers have our guard going how much how much white space has been created i'd say it's a lot but first of all we're we're robust on home health um by the way we love hospice too we just we're just not buyers at 13 15 times so uh in that base space excuse me but we love home health and hospice uh we've been doing as you know for almost 30 years um the space looks different it is you know i'm

Jeff Shaner, CEO

i tell matt you know you've been doing this for 27 years one day you're young and the next day you wake up and you realize where'd everybody go um and most of them most of them retired or had moved on. But you look around and the large players, the Emeticists, the LHCGs, the Gentivas, the Inhabits, the Encompasses, the companies we all knew in this space are effectively all gone somewhere, most of them to payers, right, or private. So I do think it's created this opportunity for the next up, the next groups that are building up the regional home health and hospice providers, as well as building national networks. And we want to be one of those. We want to be the next whether it's gentile or medicine one be one of the next you know you know semi uh national and eventually national home health and hospice providers we're we're about 70s you know three-fourths home health one-fourth hospice in our in our home health and hospice segment so 300 million we're you know we're three-fourths home health so we'll be more of a home health acquirer um and matt matt loves doting on our team we just got an amazing team we've known this team for almost three decades you know they're growing organically 15 and a half percent year-over-year 53 54 gross margin four and a half stars um on the phone tps scores come on keep going value-based tps score winners episodic emission so it just is a win-win for us we need to give them more geography they are hungry for more they have fixed everything we've given them they've found everything we've given them we need to give them more jack both in a tuck tuck in format a small regional platform and eventually something larger in nature.

Speaker 3

If I think about your preferred payer deals and home health, historically, home health has been known as area where providers really optimize visits in order to optimize revenues and EBITDA. Do you guys show up with all of a sudden sort of different models here? I mean, how much does this structurally shift the entire market as payers look for a segment that historically was, we'll say, politely highly optimized?

Matt Buckhalter, CFO

Yeah, and we think managing utilization is not the way to go. Like trying to manage somebody's care, like provide the right amount of care and the perfect amount of care. And we have 50 preferred payers in that division, and that's up from 45 beginning this year. And we've really seen that flip. One of those is Medicare. You know, the other 49 are MA payers out there, and we've been able to flip those MA payers from pay-per-visit models to episodic models because they're getting the savings at the end of the day here, Peto. And we talk about the great, you know, financial results we're seeing out there, but the reason we're getting it is the clinical results and the savings at the end of the day. You know, our star rating, our TPS scores are going up. We're getting rate increases from TPS scores every single year. That's where we're seeing it. And people are realizing paying $3,000 over a 60-day period to prevent a hospitalization is really, really worth it. And it saves on the administrative side as well. I mean, our caregivers in our back office isn't having to run down another authorization after they did four PT visits when they needed to do 16 and a combination of visits that are going there as well. And so we're seeing it all kind of relates down to an access to care issue and, you know, payers trying to get to that lowest cost settings that I talked about previously. but we're not seeing that slow down at all at 81 percent episodic emissions it could be a little hot we would tell you that a really good company does 70 a great company does 75 and us at 81 like all right that could be a little bit hot out there if it slowly kind of trailed back down but we still grew at 15 16 organically we'd be more than happy with that as well but i agree with matt this is the model this is the model we're not we're not bending from it our peers are coming around we're the only one doing this model at this point about 80 percent episodic and the payers are getting more and more comfortable with adjudicating claims on an episodic arrangement they tried for 10 15

Jeff Shaner, CEO

years to beat down the pay-per-visit fee-for-service and just drive down utilization i don't think it worked i think at the end day it just created this huge fight between providers and payers we just said no so many times that people eventually needed us back in their network and they they signed but i think we can grow this i think we can grow this you know we we would like significant more geography over time so i think i think these trends can continue in in home health and hospice so for a offensive question here is you know sgna margin you know sgna leverage again i'm gonna come back this one again if you're guiding long-term margins 14 15 you've been getting the last bunch of years 100 plus 140 base points of you know sgna leverage you're

Speaker 3

talking earlier about you know using ai for billing like all these create potential leverage i'm not talking about about margins within the three segments but simply as you guys keep on scaling here what why should you guys not be sort of 30 50 basis point margin expansion annually i think there's a combination there right now if you actually look at our lrps for a gross margin we're on the higher end about every single one of those you know in home health and hospice we to 52-ish percent.

Matt Buckhalter, CFO

And medical solutions are 42 to 44. We're sitting at 44 percent. And PDS, we're at 26 to 28. We're sitting at 29. So we're doing that because there's a little bit of wage pass-through that's still playing. It's still driving our volume. It's still driving our volume north of that 6 percent because of that. And so I think as that kind of matures and comes down a little bit, it just settles and normalizes out. Plus some of those AR benefits you talked about, PETO, are beneficial to my gross margin as well, one time in nature. We'll still continue to leverage. We will continue to leverage that SG&A as size, scale, density, automation continue to play out. Our team does a really good job of looking for it every single day. So as that just kind of settles a little bit, we'll see the expansion or the reduction in SG&A still and kind of end up at that same 14 and change number. And we feel really comfortable being a services company right there.

Jeff Shaner, CEO

The more we get into home health and hospice, the more you have to get comfortable with the picks, the U-picks, the Z-picks. That's just a part of that business that in Medicaid, it's very infrequent that you're getting audits at that pace. In home health and hospice, you're getting those every day. So there is a cost of that that you've got to backfactor in. But I think your point, being a Medicaid-driven company, we're still 80% plus Medicaid, being a Medicaid-driven company at roughly a north of 14% EBITDA feels very, very good to us, comfortable you know we don't try to gain the gross margin line our payers want to know that this is going to the employee going to the caregivers so we focus on driving gross gross margin almost down sounds crazy but it's really passing the way to the caregiver and then being as efficient as we possibly can could we hit 15 percent EBITDA of course I mean that I'm sure it's going to happen but I think I think we in this this we use the guide to kind of 12 to 14 we're comfortably at 14 now i think you'll see us between high 13s and and kind of mid to high

Speaker 3

14s for the foreseeable future yeah i mean you know the one thing is to credit you guys have been very transparent about is as these rates come through you know you're simply saying like it's coming down it's coming down it's coming down just to help drive it and then the crash numbers again so it's a different conversation um all right we're running time here so i'm going to ask a couple questions balance sheet again one of the parts of the balance sheet is is that before it was terrible, and now it's great. Lots of things fix that, and EBITDA doubling somehow does a good job on leverage ratios as just generating cash. What is the right leverage ratio to be running this business at in the long term? And at some point, I know that there's M&A, and I know that things are going, but EBITDA is big, and you keep on growing with these deals. at some point do you just draw a line in the sand and say hey this is the right level the x and y but at x we'll never go below x because we'll just do share repo and that gives you enough scale that you need to buy the bigger deals you're having a one-turn range in there you can buy a lot of deals for or for for that and the pro forma you can buy a lot of big ones without that's breaking that band i'm really proud and obviously theta from what we've been able to do on the leverage profile i I mean, when Jeff and I took our positions, it was double digits at that point in time.

Matt Buckhalter, CFO

And so, like, we've done a lot of work since there.

Speaker 3

And going up.

Matt Buckhalter, CFO

Yeah, yeah. Taking cost out, taking cost out all three of our divisions. And even on corporate, you know, so I drove our EBITDA up as well. The efficiencies we put in the preferred payer model, all the things that we listed here earlier. We've done a nice job getting it down to, you know, right around four times, just sub four times leverage. And there's still work to do, though. Like, and we know there's work to do. We have really nice line of sight to get that to a sub three times. And that's our goal. We want to be a sub three times leveraged company. We think that's the right balance to be out there long-term itself. I think Family First is a great example of like, don't be foolish though, and don't have your blinders on just for anything at any given time. We closed Family First in Q2. We had one month of results in our financials itself. We spent, round up with fees, $180 million of cash on hand from free cash flow and cash generated. Awesome to be able to do so. And we went up 0.2 turns on that leverage. you know so like that means we still grew even organically we still produce 75 million dollars free cash flow in q2 so we did everything else to be able to go get that deal done create density in four states that we really want to create density kind of put a bow on those states at the same time so i think it's just the thoughtfulness of being conscious about your leverage and having a goal to get to sub three times but don't put your blinders on too much that inhibits your growth whether it be an organic growth driver or an inorganic growth driver I agree.

Speaker 3

So 275, that's a point where if it goes below that, I'm going to come yell at you and say, just start playing.

Jeff Shaner, CEO

Go do something. Certainly 25, 2.5. But I agree, Matt. We've had a clear goal of being sub three for now for two years, and we're on that march. We can see it in mid to late 27. Exactly what Matt said, I agree with. We will absolutely do a deal slightly lever to D lever right afterwards. And our answer would be, let's do both. At the end of the day, let's keep growing. Let's keep driving the company north of double digits. you have your growth and be able to deliver at the same time perfect that's it we're out of time guys thank you so much uh and thank you guys for being with us thanks so much appreciate you guys thank you