ADUS - NASDAQ

Good day, and welcome to the Addus HomeCare's Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Thank you. Good morning, and welcome to the Addus HomeCare Corporation second quarter 2024 earnings conference call Today's call is being recorded. To the extent, any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements, among others, regarding Addus expected quarterly and annual financial performance for 2024 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus filings with the SEC and in its second quarter 2024 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

Thank you, Dru. Good morning, and welcome to our 2024 second quarter earnings call. With me today are Brian Poff, our Chief Financial Officer; Brad Bickham, our President and Chief Operating Officer. As we do on each of our quarterly calls, I'll begin with a few overall comments and then Brian will discuss the second quarter results in more detail. Following our comments, the three of us would be happy to respond to any questions. Before I discuss our results for the second quarter of 2024, I wanted to bring you up-to-date on our recent secondary stock offering, which we completed at the end of June. As part of a review of our capital structure, pending the acquisition of the personal care operation of Gentiva management and our Board of Directors concluded that it would be prudent to proactively raise common equity which would keep our net debt leverage to just over 1x, following the close of the Gentiva transaction. With the help of both Bank of America and Jefferies, along with other of our investment banking partners, we were able to complete a successful stock offering which resulted in our raising net cash proceeds of approximately $176 million after the expenses of the stock offering. It is our intention, as we have done previously following similar stock offerings, to utilize these funds over the next 12 to 24 months to allow us to continue sourcing acquisitions of the size and type that will bring additional value to our shareholders. I want to thank our banks and shareholders that supported this offer. Our team looks forward to continuing to maintain a conservative balance sheet, while using our capital in a way that brings value to all shareholders of Addus. Now let me turn to our financial performance in the second quarter. As we announced yesterday, our total revenue for the second quarter of 2024 was $286.9 million, an increase of 10.4% as compared to $260 million for the second quarter of 2023. This revenue growth resulted in adjusted earnings per share of $1.35 as compared to adjusted earnings per share for the second quarter of 2023 of $1.07, an increase of 26.2%. Our adjusted EBITDA of $35.3 million was an increase of 24.7% over the second quarter of 2023. During the second quarter of 2024, we continued to experience consistent cash flows. That, along with our equity offering, has allowed us to pay off all of our outstanding debt and leaves us with approximately $173 million in cash on hand at quarter-end. It remains our focus to use our financial capacity to acquire strategic operations that align with our overall growth strategy of adding clinical services where we have a strong personal care presence, enhancing our existing personal care markets and adding select new personal care markets where we can enter at scale. We believe this acquisition strategy will continue to strengthen our ability to participate in value-based contracts with our payers and to adapt to potential any reimbursement changes. On June 10, 2024, we announced that we are acquiring the personal care assets of Gentiva, one of the largest providers of hospice services in the United States. We believe it is important that personal care providers have scale and broad geographic coverage in states where they operate to be successful, particularly in managed Medicaid states and as a result of the final Medicaid access rule. This scale and coverage helps facilitate the development of value-based contracting arrangement allows these providers to spread costs over a bigger revenue base and provides more opportunity for meaningful advocacy with the states in which they operate, while also promoting a more favorable hiring and retention dynamic. This belief led us to pursue this acquisition with Gentiva. Once this deal is closed, Addus will be the number one provider of personal care services in the state of Texas, which is primarily a managed Medicaid market. In addition, this transaction gives us larger presence in Arkansas, strengthens our California and Arizona private pay and Veterans Affair businesses, adds a location in Eastern Tennessee to our existing operations in the state, and provides entry into both Missouri and North Carolina. Effective last week, the required waiting period under the Hart-Scott-Rodino Antitrust Act expired in connection with this acquisition, which satisfies one of the key regulatory conditions necessary for the completion of the transaction. This was an important step toward closing. We are targeting finalization of this transaction in the fourth quarter of this year, subject to satisfaction or waiver of the remaining customary closing conditions, including regulatory approvals related to the Texas operation. We are very excited about the many new team members that will be joining Addus once this transaction is closed. This team has done a great job in growing the business and providing quality services to customers which we expect to continue as part of our company. Currently, our team is working diligently in transition planning in anticipation of closing. During the second quarter, we continued to experience solid results related to our ability to hire caregivers, especially in our personal care segment. During the second quarter of 2024, we saw our personal care hiring set a company record at 86 hires per business day, while turnover rates have remained at historically low levels. In addition to our strong hiring numbers, we have continued to see consistent momentum in our starts per business day over the past few quarters. As for our clinical segment, hiring has continued to improve and seems to be returning to a more normalized pre-COVID hiring environment. As we have over the past couple of years, we continue to utilize the funding we received from the American Rescue Plan Act, or ARPA. During the second quarter of 2024, we received an additional $2 million, bringing our total to-date to approximately $40 million, of which we have over $13 million remaining to utilize. These funds are helpful with both our personal caregiver recruitment and retention efforts. In our personal care segment, our services continue to receive favorable reimbursement support from many of the states in which we operate and we believe that our states remain in stable financial condition. We feel confident that the personal care services continue to deliver real value to state Medicaid programs as well as our managed care partners through reduction in overall cost of care. As for our clinical services, effective October 1, 2023, Medicare hospice reimbursement was increased by approximately 3.1%. Earlier this year, CMS announced a preliminary fiscal 2025 hospice rate increase of 2.6%, which will be effective on October 1, 2024. On July 30, the hospice rate increase was finalized at 2.9%. Consistent with recent years, we were pleased to see an incremental positive adjustment in the final hospice rate as compared to the original proposal, which may bode well for the pending finalization of the proposed home health rule due later this year. On January 1 of this year, home health Medicaid reimbursement was increased by approximately 0.8%. In late June of this year, CMS announced the preliminary rate for home health that would be effective on January 1, 2025, resulting in a reduction of approximately 1.7% if finalized as proposed. We believe that the final rate for home health may improve slightly based on the increase of the hospice rate between the proposed and final hospice rate rule and consistent with what we have seen over the past few years. It is disappointing that CMS continues to pursue reimbursement reductions for home health providers, which we believe limits patient access to this valuable and much needed service. Although, the current Medicare home rate environment remains challenging, we continue to believe that traditional Medicare home health reimbursement pressures are likely to moderate over the next few years. Now, let me discuss our same-store revenue growth for the second quarter of 2024. For our personal care segment, our same-store revenue growth was 8.8% when compared to the second quarter of 2023. During the second quarter of 2024, we saw personal care same-store hours increased by 0.7% as compared to the same period in 2023 and 2.1% as compared to the first quarter of this year. Helping us with this growth is our record 86 hires per business day, which I mentioned previously. We also saw continued improvement in our percentage of hours served compared to authorized hours, which also has helped our growth. While we are pleased to see continued positive momentum in our personal care volume trends, at the same time, we have seen a slight slowdown in the speed at which new consumers are authorized for care. In a few of our personal care markets, the Medicaid redetermination process appears to have diverted some state resources from the initial enrollment process, leading to this temporary slowness in qualifying new consumers. We anticipate a return to more normal processes as redeterminations are completed in each state. Turning to our clinical operations, our hospice same-store revenue increased 6.3% when compared to the same quarter in 2023. Our same-store average daily census increased 1.7% when compared to the same quarter last year and was up 3.6% sequentially. At the end of the second quarter of 2024, our hospice medium length of stay, exclusive of our JourneyCare and recently acquired Tennessee quality care operations was 29 days as compared to 27 days for the first quarter of 2024. As we have done previously, we exclude our JourneyCare operation as it is a higher proportion of shorter length of stay patients due to our inpatient units in the Chicago area. We are pleased by the steady improvement in our hospice segment this year and anticipate those favorable trends continuing into the second half of 2024. Our home health segment saw same-store revenue increase of 1.6% when compared to the same quarter of 2023, and we saw a same-store total volume increase of 2.1% on a sequential quarterly basis. As most home health providers have experienced, we continue to be affected by the movement of Medicare beneficiaries from Medicare fee-for-service to Medicare Advantage. However, we have seen steady volume improvement sequentially over the past four quarters and our episodic to non-episodic mix seems to have stabilized over the past several quarters. We are continuing to work with our Medicare Advantage partners on near-term per visit rate increases as we discuss moving to longer term episodic reimbursement methodologies. As we have demonstrated by our recent announced Gentiva transaction, acquisitions continue to be an important part of our growth strategy at Addus. Our targeted minimum annual revenue growth of 10% remains our goal, even with the added size of our revenue base. For us to meet or exceed this goal, we will continue to be focused on using our capital to find additional acquisition targets that meet our strategic criteria. While we await the closing of the Gentiva transaction, we will be looking for potential acquisitions for both our Personal Care and Skilled segments, particularly Home Health. Over the past couple of years, the acquisition opportunities that meet our strategic opportunities have been somewhat limited due to some unfavorable general market conditions. Our team continues to review opportunities which would strengthen all three of our segments and markets where we currently operate. However, the flow of potential deals continues to be slower than we saw three or four years ago. Even with the slower flow of potential deals, we still believe we will be able to complete strategic acquisitions in our markets that will allow us to meet our growth objectives and we continue to maintain a capital structure that will allow us to take advantage of acquisition opportunities that arise similar to the Gentiva acquisition. As for our value-based care efforts, I noted last quarter that we continue to gather data which demonstrates material reductions in both emergency room visits as well as the percentage of patients readmitted to the hospital at various post discharge intervals. We continue to believe our excess is due to our ability to provide both non-clinical personal care services to identify changes in condition and clinical resources as needed for specific skilled patient care interventions. We are now using this information as part of our conversations with various Medicare Advantage and commercial payers to demonstrate how Addus can be an integral part of providing quality, cost effective care to plan members that can reduce the overall medical loss ratio, while simultaneously improving overall quality of care. With our recently announced acquisition of Gentiva Personal Care Operations, we will now have the opportunity to enter into Texas with value-based care. This is an important market for our growth in value-based care as we have strong relationships with the managed care payers in the Texas Medicaid program. We expect to be able to work with certain of these payers in a value based approach once the transaction closes. Before I close my remarks, I want to thank our team for the care they are providing to our elderly and disabled consumers and patients. These last few years have shown that the vast majority of our case to clients and patients want to receive care at home, which remains one of the safest and most cost effective places to receive this care. We believe the heightened awareness of the value of home-based care is favorable for our industry and will continue to be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on both our dedicated caregivers and other employees who work so incredibly hard providing outstanding care and support to our clients, patients and their families. With that, let me turn the call over to Brian.

Thank you, Dirk and good morning everyone. Addus had another solid financial and operating performance for the second quarter as we saw positive momentum across all three segments of our business. Our results were driven by favorable demand trends for our services with positive year-over-year and sequential revenue growth in all business lines. For the second quarter of 2024, our personal care organic growth was 8.8%, continuing to be well above our normal expected range of 3% to 5%. This impressive growth reflects continued favorable rate support for personal care services in some of our larger markets as well as a higher volume of hours. Billable hours per business day were higher by 0.7% over the same quarter last year and we saw sequential growth in the first quarter of 1.9%. While we expect our overall growth from reimbursement increases to moderate as we move through the second half of 2024, we were pleased to see Illinois include another reimbursement increase for our services in their final 2025 state budget. Effective January 1, 2025, our reimbursement rate in the state will increase by approximately 5.5% and will support a minimum wage for our caregivers of $18 per hour. This will translate into approximately $23 million in annualized revenue with a margin in the low 20s consistent with the 77% rule in the state. We saw further steady improvement in our hospice business in the second quarter with 6.3% year-over-year organic revenue growth and higher admissions, average daily census, patient days and revenue per patient a day compared with the second quarter last year, including the results of the acquired operations of Tennessee Quality Care, a provider of home health, hospice and private duty nursing services as of August 1, 2023. Our same-store average daily census grew 1.7% over the second quarter of 2023 and our total average daily census grew by 3.5% sequentially from the first quarter of 2024. We were also pleased to see the announcement of the 2025 final hospice reimbursement rate increase of 2.9%, up from the proposed 2.6%. Based on the geographic and level of care mix in our hospice business, we expect the impact for our hospice operations to be an overall increase of approximately 3.2% or $6.8 million in annual revenue effective October 1, 2024. Same-store revenue for our home health services, which is our smallest segment, returned to positive growth trends with 1.6% organic revenue growth and higher admissions and volumes compared to the second quarter last year. We also experienced an increase of 1.9% in total volume sequentially from the first quarter of 2024 and maintained a generally consistent sequential mix of episodic service business, which includes both traditional Medicare and episodic Medicare Advantage volume. As Dirk noted, total net service revenues for the second quarter were $286.9 million. The revenue breakdown is as follows: Personal care revenues were $212.8 million, or 74.2% of revenue, hospice care revenues were $56 million or 19.5% of revenue and home health revenues were $18.1 million or 6.3% of revenue. With acquisitions an important part of our growth strategy, we continue to focus on markets where we can leverage our strong personal care presence and add clinical services so we can offer all three levels of home based care. As Dirk noted, we are excited about our pending acquisition of the Gentiva Personal Care Operations with coverage in seven states including Texas and Missouri, two new states for Addus. With our size and scale and the support of a strong balance sheet, we are well positioned to continue executing our acquisition strategy. Other financial results for the second quarter of 2024 include the following: Our gross margin percentage was 32.5% compared with 31.7% for the second quarter of 2023. This increase is primarily due to a higher mix of clinical services as well as a favorable experience in our implicit price concession requirement as we have continued to see strong cash collections from a majority of our payers. Looking ahead to the second half of 2024, we expect to see our implicit price concession return closer to historical levels with a related slight compression impacts to our gross margin percentage on a sequential basis in the third quarter. However, with the recently announced final hospice reimbursement update, we will see the benefit in the fourth quarter from this increase and anticipate some margin expansion in the fourth quarter as a result. G&A expenses were 22.2% of revenue, fairly consistent with 22.1% of revenue for the second quarter a year ago and up slightly from 21.8% from the first quarter of 2024. Adjusted G&A expense for the second quarter of 2024 was 20.2%, a decrease from 20.4% in the comparable prior year quarter. As a result of the agreement to divest our New York operations, we will bear certain costs in order to effectuate the transfer of the net economic benefit to the buyer under the terms of the agreement. As these costs are recorded in our G&A expenses, we saw an increase of 30 basis points in the second quarter of 2024. Under the purchase agreement structure, the transfer is staged while we await full regulatory approval with any final transfer to occur at closing following such approval. We anticipate the transaction may qualify for sale treatment under GAAP prior to closing. As such, we expect to see a total negative impact of approximately 60 basis points in each full quarter going forward until either the transaction qualifies for sale treatment or closing occurs following full regulatory approval. The Company’s adjusted EBITDA increased 24.7% to $35.3 million, compared with $28.3 million a year ago. Adjusted EBITDA margin was 12.3% compared with 10.9% for the second quarter of 2023 and was up sequentially from 11.6% in the first quarter of 2024. While we anticipate some slight sequential margin compression, primarily in the third quarter, as I discussed, we continue to expect our full year 2024 adjusted EBITDA margin percentage to remain in the high 11% to 12% range. Adjusted net income per diluted share was $1.35 compared with $1.07 for the second quarter of 2023, an increase of 26.2%. The adjusted per share results for the second quarter of 2024 exclude the following: Acquisition expenses of $0.13 and non-cash stock-based compensation expense of $0.12, the adjusted per share results for the second quarter of 2023 exclude the following: The impact of the retroactive New York rate increase of $0.05, acquisition expenses of $0.08 and non-cash stock-based compensation expense of $0.13. Our tax rate for the second quarter of 2024 was 26.3%, within our expectation. For calendar 2024, we continue to expect our tax rate to remain in the mid 20% range. DSOs were 36 days at the end of the second quarter of 2024 compared with 34.6 days at the end of the first quarter of 2024 as we have continued to experience consistent cash collections from the majority of our payers. Our DSOs for the Illinois Department of Aging returned to a more historical level for the second quarter at 37.3 days compared with 30.2 days at the end of the first quarter. As we anticipated, we saw the timing differences in our receivable payments reflect in our working capital, resulting in net cash flow from operations of $18.8 million for the second quarter with $57.5 million for the six months ended June 30, 2024. We received approximately $2 million in ARPA funding during the quarter, partially offset by a $2.4 million in ARPA funds utilized and as of the end of the second quarter, we still have approximately $13.1 million in ARPA funds outstanding to be utilized. On June 28, 2024, we completed a public offering of 1,725,000 shares of common stock at an offering price of $108 per share. The net proceeds from the offering to Addus after deducting underwriting discounts, commissions and estimated offering expenses were $176.1 million. We used approximately $81.4 million of the net proceeds for the repayment of all indebtedness outstanding under our credit facility and the remainder will be used for general corporate purposes, including funding the Gentiva acquisition and any future acquisitions or investments. As of June 30, 2024, the company had cash of $173.3 million with capacity and availability under our revolver of $504.4 million and $496.4 million respectively. We have a solid foundation and the financial flexibility to continue to invest in our business and pursue our strategic growth initiatives, including acquisitions. As mentioned, we will continue to selectively pursue acquisitions that align with our strategy while at the same time being disciplined with our capital spending and managing our net leverage ratio. We look forward to the opportunities ahead for Addus and for our shareholders. This concludes our prepared comments this morning. I would like to thank you for being with us. I’ll now ask the operator to please open the line for your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tao Qiu with Macquarie. Please go ahead.

Hey, good morning. Congrats on a strong quarter. I just want to clarify on two comments earlier. I think, Dirk, I heard you mention there’s some slowdown in new consumer growth in personal care services in certain states where Medicaid determination is having effect. Could you quantify the volume implications for the second half? And Brian, I think you mentioned the return of price concession leading to margin compression in the third quarter and possibly expansion in the fourth quarter. How do you think your overall margin profile compared to the first half? Thanks.

Yes, I’ll talk about what we’re seeing with the redeterminations and slowdown. It’s not all over our business, it’s in specific markets. Some states seem to have difficulty with the resources that have been allocated and the amount of redeterminations needed during this kind of unusual process going on. It appears that a lot of those states are near the end or at the end of those, that particular process. What we have seen during that timeframe and you’ll notice it in our hours growth being a little smaller than maybe we would expect at times. And that is that some of the same individuals that would normally look at new consumers and qualify them with authorizations for care, they’re being delayed a little bit because the individuals that would do that are still working on finalizing the redetermination process going on. So while it’s been immaterial, we have noticed it in a couple of markets, but we do believe, as I said, that it returned very quickly to a more normalized state.

Yes. And Tao, just the second part of your question on implicit price concession, I think kind of the gap that we would see going back to more kind of normal historical levels is probably going to be probably the 40 to 50 basis points range. So we would expect to see that impact Q2 into Q3 to get back into that kind of normal historical pattern.

Great. And then on the labor trend, we saw a favorable payroll report last Friday in terms of weakening in the broader economy but stronger hiring in healthcare, particularly home health. Are you seeing any further hiring, retention improvement in the third quarter? And are there any meaningful differences between clinical labor and attendant care? Thanks.

Yes. From a hiring standpoint, I mean, Q3 seems to be consistent with what we saw in Q2, which was record hiring for us. Certainly on the PCS side, we’ve had – on the personal care side, we’ve had strong hiring numbers for the past year plus the clinical service line has really consistently improved since probably mid-year last year.

Great. Thanks for the time.

The next question is from Scott Fidel with Stephens. Please go ahead.

Hi. Thanks. Good morning. First question, just would be interested on the home health side, if you wanted to walk us through what percentage of your contracts would you estimate at this point had been repriced onto the preferred contracts? And just thinking about sort of looking at the overall business, sort of how much do you think is sort of baseline now on rates where you could look to grow volumes in that business? And then how much of it is still in that bucket where you’re effectively not allocating as much resources due to not getting sufficient rates from your payer partners?

Yes, I mean, we’ve actually – we’ve had some pretty nice wins of late where we’ve at least moved some payers to kind of closer to LUPA rates, maybe not necessarily episodic, but that’s nice wins in a couple of markets. One and in particular actually involved a Medicaid managed provider that in a market that that’s a fairly significant payer for us. So we’re continuing to work that I would say as far as the contracts that we’re not able to service because of rates. I mean, that’s – they’re still in a couple of markets, we have a handful of those, but it has certainly improved over the past couple of quarters.

Okay. And I know it’s something we haven’t talked as much about since there really hasn’t been a lot of change. It feels like the last several quarters or frankly, couple of years, I guess. But just – interested just if you wanted to give us an update on the Medicare Advantage side, just as it relates to personal care and separate from value-based contracting, but just thinking more about the benefits that Medicare Advantage providers are authorizing in the trends there. I know that it’s been pretty slow to ramp, particularly around authorized hours and just interested in sort of what type of feedback you’re seeing for 2025. Clearly, it’s been a pretty challenged environment in Medicare Advantage in terms of utilization and then reimbursement for MA plans. So just interested how much of a gating factor you think that’s going to be on the 2025 trends as it relates to trying to get more, frankly, reasonable sort of levels of hours authorized for personal care services.

Yes. I mean, when you look at the supplemental benefit, it came in several years ago when that came into being. And what we noted back then was that the number of hours authorized, very low compared to what our main book of business is on the personal care side. They tend to be more challenging to staff, infrequent low hours, even low hours per shift, which makes it challenging to find staff for that. We really don’t do much of that, I think outside of maybe about one state that we really had any kind of – and I wouldn’t even call it, it’s certainly not material from the supplemental benefit, but I wouldn’t – 2025 is such a small piece of our business. You do see some plans cutting back on that, but we really don’t have enough business for that to really make a difference for us.

Yes, Scott, I think we’ve been hoping that Medicare Advantage, we’d be able to move from this respite type care to a more traditional personal care. We believe that it has a lot of advantages in the data we’re gathering, can lead that direction, but it hadn’t gathered a lot of momentum at this point in time, so it’s still some time away. I think the one thing that our numbers do show is that it really solidifies the partnership we have with the Medicaid payers that we have today. They see the benefit of our ability to lower medical loss ratios. So we hope over time this will move over to the Medicare Advantage, but to date, it’s not done much.

Yes, I mean, as Dirk mentioned, I mean, we really kind of focusing on the value-based side of it rather than looking at the supplemental benefit portion, because as we said, that’s not a big opportunity there.

Got it. So bottom line the soft benefits, clearly not much tailwind for 2025, but not much headwind either, since there’s just limited amount of revenues from that in the base.

Yes, that’s a great way to summarize it.

Okay, got it. Thanks.

The next question is from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, guys, and congrats on the quarter. Maybe Dirk, as you see the recruiting success that you’re experiencing right now, and the increase in the number of hires per day, are you seeing any signs that this is the countercyclical impact of the economy? And then maybe if we could dig deeper into how you’re thinking about the defensiveness of your business, if that has changed post-COVID.

And by the way, thanks. We appreciate it, Brian. As it relates to any kind of recessionary environment we operate in, historically over the last 30, 40 years, when that has occurred, Addus has done very well. If you think in terms of our caregivers, it’s a minimum wage type caregivers, part time hours. And so what that allows us to do is in those times when maybe people are struggling a bit and they’re looking for additional hours of work, maybe you have folks that want to come into the work environment. They have not been in it for a while. We have the ability to offer them employment or expanded hours, because in our business, our demand is pretty recessionary proof. People still need the care. Our reimbursement comes from Medicaid or Medicare in some of the aspects. And so, really, from that standpoint, it’s really somewhat defensive in the recessionary environment doesn’t affect us. And in the times, it really helps our ability to hire caregivers, which should drive continued growth in a personal care business, particularly.

Okay, that makes sense. And then maybe, Brian, as I think about just the dynamics on interest expense or interest income for Q3, Q4, I know a lot of that depends on when the Gentiva deal closes. Just curious how you’re thinking about that?

Yes. I mean, obviously, we paid off all of our revolvers, so we’ve invested a large portion of our cash on hand and just money market interest bearing accounts. So I think you’ll see a pretty nice return on interest income over the next couple quarters until we get to the Gentiva closing and when we use those proceeds. So I would say today we have probably $130 million, $135 million of our cash on hand is invested in money market interest accounts.

Any rate you could share with us Brian on that, just curious.

Yes, I think our weighted average rate is probably close to 5%.

All right, got it. Awesome. Thank you.

The next question is from Jason – excuse me, Jared Haase with William Blair. Please go ahead.

Good morning, and thanks for taking all the questions. Maybe just two clarifications on the redeterminations impact and I get – this is fairly immaterial to the overall volume trends, but I'm just curious, just with the delays in care authorizations, is there a risk that you end up missing out on those individuals or is it truly just a sort of delay in terms of when they get approved and you can start providing services and then from a bigger picture perspective, is there anything in your control in terms of working with the states to kind of get through that approval process a little more efficiently?

Yes. With respect to, I mean, you're not going to miss out on the clients. It's really just more of a delay in the start of care. With respect to new clients coming on board, there's kind of limited what we can do other than kind of get those individuals in touch with the appropriate individuals who are the case managers and who are doing the qualification work on those cases. It's really kind of a staffing challenge on the state side or whoever they're utilizing, if it's a third-party, case managers is they have to kind of work through redeterminations, but then also they have this client, new client workload and they have kind of a due date to get through the redetermination process that is taking up some of their time. But again, as Dirk pointed out, we've seen it just in a couple of markets, and I'll tell you, I mean, frankly, it seems like that in those markets is starting to get better. We're starting to see volume, new client volume, actually get back towards kind of normalized levels.

Okay, that's great. And then I guess a somewhat similar question here, but I also wanted to follow up on the improvement in the sort of conversion of hours served versus authorized hours. How much of that is related to things that you've done operationally over the last few years? Obviously, a lot on the staffing and retention side that I'm sure drives that. And then, how much more opportunity for improvement do you see there and how much of that is also just a function of external factors like weather?

Yes, I mean, if you look at, I think it's – if you look at our hiring initiatives, the things that we've done on the front end to make the hiring process smoother, cut down on the delays in getting somebody hired in their first start of care or billable hours, I think that certainly has helped. We've done some things from a scheduling and kind of IT standpoint to make it easier for service coordinators to schedule and identify where they have open shifts and where they have caregivers that have availability. I think there's still some opportunity to make some incremental improvements there, but we've made some pretty significant advances over the past year or so. I think the improvements going forward will be more incremental.

Okay, that's great. Thank you.

The next question is from Joanna Gajuk with Bank of America. Please go ahead.

Hi, thank you so much. This is Joanna Gajuk here. So I guess, first clarification question from the – so the EBITDA margins this quarter where it was better, and your outlook calls for higher margins compared to your prior comments because you kind of talk about above 11, but now you're talking about high 11 to 12. So I guess, could you – maybe I miss it, but could you frame for us, what drove that? What's driving this better EBITDA margin because it sounds like embedded in this is some headwinds you're seeing from the New York market also transitioning still. So excluding that, what's driving that better EBITDA margin?

Hi, Joanna, I think just sequentially, I think we obviously get relief as move through the year from payroll taxes. First quarter is usually low for us. So there's some impact there. I think we expected implicit price concession as we talked about to kind of come back to more historical. And it stayed pretty low still in Q2. But we expect that to come back up. But I think our comments around our bottom line EBITDA, right now include the operations of New York, but with no EBITDA contribution from them. So keep in mind, under that terms of that agreement, we're still recording all of the revenue and normal costs on the gross margin line, all normal SG&A New York is still in our numbers. At some point if we were to receive sale consideration or we get the regulatory approvals that we close that transaction that should have a positive impact on our bottom line EBITDA margins at that time with that business being low margin to begin with. But like I mentioned in my comments, we have a mechanism where essentially we have zero EBITDA from that business affected with the signing of that agreement, which was kind of mid-May. So we'll see the first full quarter of that in Q3, which we think will again impact us slightly because you'll have a little bit of that further EBITDA aggression in that quarter. But when it comes out to your point, yes, it will have a positive impact on EBITDA margin percentages bottom line.

All right, so yes, so that's in the future. So you're not – the comment about full year margins being close to 12%. That does not reflect the New York exits. That's what it's getting at. Like it sounds like maybe these price concessions were better in this quarter, was there anything else? I mean, sounds like volumes are in personal care services actually doing pretty well based on the hiring commentary. And that's despite some, I guess, issues around getting people authorized for care. So was there anything else, what would drive the better margin in the quarter?

No, those are the two kind of primary drivers. I mean, always mix of our business is going to be impactful. So, hospice is performing well, up over year-over-year over 6%. So that's a bigger piece. And we talked about in Q4, with the rate increase, that's going to be impactful in a positive manner, in our EBITDA margin as well, from health has started to perform a little better. We do have some fixed – a small segment for us, but we do have some fixed costs in home health, so as volumes improve there, we should get some leverage off of those fixed costs as well. But nothing else that I would say is really material or worth mentioning.

And so what was your personal care segment margin in the quarter, sorry?

Our personal care margin in the quarter?

Yes. EBITDA margin, or operating margin. Yes, the segment margin.

EBITDA margin in personal care, I think, was close to 20%.

Okay, great. So that's optimized.

Keep in mind, that's before any kind of corporate allocation. That's just personal care.

Right. Yes, exactly. And it was nicely up versus last year. So that's helping here. All right. And then on hospice so, yes, you mentioned hospice also did better in the quarter and census, same-store census been positive. So that's good. So I guess, would you actually put your improvement there? And I guess, is that sustainable? How should we think about the rest of the year for hospice when it comes to census and margins? Thank you.

I think with respect to census growth, I mean, we've had a nice some favorable trends there. I think you should continue to look at census growing in that 2% to 3% year-over-year. When you look at throwing the rate increase on top of that you're kind of in that 5% to 7%.

Great. Thank you so much. Thanks for taking the question.

The next question is from John Ransom with Raymond James. Please go ahead.

Hey, good morning. Maybe this one's for Dirk. When you look at the landscape now, personal care, home health, and hospice, how do you see sort of the supply/demand of transactions and where trading multiples have gone? And when you look at a personal care deal, how are you thinking about the 20% rule, either staying or going away, and how you factor that into what you pay for these businesses? Thanks.

As we look at out on the market in all three levels of care, as I mentioned in my comments, things have been a little slower the last three or four years. We have been able to see opportunities like Gentiva, which is a great opportunity for us, and that's why we kept our balance sheet as we did. So we can take advantage of that. We continue to look for those type opportunities that may come along over the next little bit. I would say, probably right now what we're seeing are smaller deals than Gentiva, the multiples. Again, smaller deals. Obviously we see less cost associated on our EBITDA multiple than the bigger deals. But for us, realistically, the only thing that's really changed over the last couple of years, valuations have made somewhat steady is the fact that we're just not seeing as many of the smaller deals that maybe we saw before, and we're hopeful that that comes back as the market kind of solidifies over the next six to 12 months. As it relates to, what was?

80/20.

Yes, the 80/20. I'm sorry. As it relates to 80/20, what we're thinking of, it really doesn't matter to us. We have decided that because of our size and our strategy, that we'll be able to operate in markets and be extremely well taken care of from a standpoint of profitability and taking care of our consumers in those markets, regardless whether 80/20 remains or not. I think if you think of the overall rule itself, it's still six years away. We have a very interesting election coming up right now. It can go either way for us as we look at what it means for the 80/20 rule. We still think long-term, there's going to be states that are not going to want to participate in this and will be looking from a legal aspect of how they can make changes. So we really don't see any real change today with that. We're going to look at deals, particularly the large deals, and we're going to understand that regardless whether 80/20 stays or goes, we'll be able to be very successful. And as long as it's strategic as for our company, then we will look at those deals and we'll make the appropriate decision on valuation based on those thoughts.

And just as a follow up, do you think things will shake loose a little bit from private equity, especially if rates start to come down. And are there some opportunities there or is this going to be more? And the second thing is like, who are the strategic buyers now that you compete with, or the Medicare or the managed care plans? Are they aggressive or is it private equity? Is there strategic private backed companies? I'm curious, who's buying and selling now?

Realistically, over the last 12 to 18 months, we've not seen a lot of competition out there. There's been the occasional smaller strategic player that's bought a few deals on a localized basis. From a P/E standpoint, it's really been very slow as far as competition for the last bit. Now, obviously, if rates come down in September, as everybody's expecting, there'll be a point where P/E will come back in and that's fine. It's been a market in which up until the last year or so, we've always operated with competition from those folks. So we believe that long-term, as long as we stay with our strategy and as long as we've focus in the markets where we have strong personal care coverage or in markets where we can enter like we have what we do with Texas with strong presence, that will be fine regardless who our competitors are.

Okay, thank you very much.

The next question comes from Andrew Mok with Barclays. Please go ahead.

Hi, good morning. Just wanted to follow up on the Gentiva deal, I think that would be your largest acquisition to-date. So just hoping you could provide a little bit more details around the diligence process for that deal. How did it come about? What gets you comfortable with an acquisition that large and where do you see the greatest opportunity for synergies? Thanks.

Yes, the way the deal came around is obviously strategically, we looked out as a company at folks that might have a larger person care presence that maybe would be interested in talking to us. It came about that Gentiva was willing to visit with us. We went through a substantial due diligence process with them. We certainly appreciate all the efforts they put involved with that, along with our team members, everybody spent a lot of time. It took many months to look through and make sure that this worked for both sides, and it's fortunate that it did. And so from our standpoint, the process of Gentiva, even though it was larger than what we've done in the past, the process really didn't change. For us, it was make sure that strategically it fit, make sure our team felt from a due diligence standpoint, we could handle bringing it on in a manner and staged in such that made sense for us as far as when we take over certain aspects of the care that is currently underway right now, our team meets weekly. We're having conversations with the other side. We're preparing for whenever this closes. Right now, while we don't have a definitive timeframe, we're hoping that it will be in the fourth quarter as we get through the state regulatory approvals that are necessary. So we believe we're in good shape. And while it is bigger, we're not concerned that we won't be able to handle it. Our team has done a great job in planning, and I have all the confidence in the world that we'll be able to bring it on board as we have the others over the last few years.

Great. And if I could just follow up on the slowing M&A pipeline comment that you made over the last few years, I was just curious, is that comment specific to personal care? And as you look to deploy capital from here, how would you prioritize the different segments? Are you looking to diversify exposure or lean into your expertise on the personal care side? Thanks.

Hey, Andrew. This is Brad. I think we've seen kind of across all three segments, the last couple of years has been a little tougher. I think the last two years specifically, there's been a lot of folks that have expected more consolidation in the home health market, especially with some of the pressures. I think some of the market conditions and some of that pressure, honestly has kind of prohibited. Certain of those assets will come in the market. But I think it's kind of across all three segments. But I think we continue to be creative in the ways that we source in the absence, kind of the normal kind of brokered processes. I think Gentiva is a good example of that because that was not a broken process. So we'll continue to pursue similar type transactions as we move forward, even with the market hopefully starting to lighten up a little bit. But I think as far as just priorities and kind of what we're looking for across all three, I think we've been pretty consistent. I think personal care is our largest business, and we continue to be focused on building density in markets where we have personal care operations today, maybe select new markets. Texas was a great one for us to add Missouri out of this most recent deal. We'll continue to look for things like that. I think secondary to that is just adding clinical services where we have personal care, probably a little more slanted toward, more skilled home health. I think that typically probably helps us a little more. We think about the value-based type arrangements that we do, but I think if there are hospice opportunities, that tends to be the more expensive of the three segments we operate in from an acquisition perspective. But if there are good opportunities that are nice fits, those are things that we would also look at.

Great. Thanks for all the color.

The next question is from Ben Hendrix with RBC Capital Markets. Please go ahead.

Thank you very much. Just a quick question on follow up on Gentiva acquisition with some of the newer markets and expansion into Texas, I was wondering if you could have any comments on or offer any comments on the minimum wage trends in those states and those markets, and also overall receptivity of state legislatures to rate adjustments. Thanks.

Yes. Well, let me start first with the rate adjustment question. Over the last three or four years, we've had great support from our states with rate adjustments, and that has continued into this year. I think the question you might have is, as we go forward towards any kind of potential 80/20 environment, will states be willing to discuss that? I think it's a little early to be able to say yes or no, but our belief is this. These programs are very valuable to the states. As we've indicated before, and we talked with states, our business allows these individuals stay at home as opposed to going to, say a SNF, where the costs are much higher for the state. So I think the states see the benefit of the plan. The question is, how will they respond if we get near to an 80/20 again, because that's six years away. There's a lot of lawsuits that will probably happen between them. It is our belief that the sites will continue to believe in the plan and hopefully will support that. We believe they will over that period of time. I think the real question is with the minimum wage like Texas last year gave a nice price increase effective October 1. In that increase, they set some guidelines as to the minimum wage that you would pay to caregivers, and we think this is exactly the way it should work. We believe the state should be the driver of setting minimum wage rates for their health care workers. And by the way, we support that. We've been a big supporter of minimum wage rate increases. Illinois is a perfect example. We're up to about 18 – we'll be up to $18 come this coming January. The state has been very supportive along with the providers as we've been able to raise both rates on the reimbursement side as well as rates we're able to pay caregivers, which helps with our being able to attract caregivers overall. So as the – I think as the federal government has wanted, what CMS goal is, is to increase the ability to provide this service across the states. We disagree with the way they did it by setting a minimum 80%. We believe the way to do it is encourage the states to set higher minimum wages and in doing so, give rate reimbursements to keep the providers whole. And so we're very excited about the states that seem to be operating that way. We believe all states will eventually realize that whether or not there's a minimum wage or not, there's a rate we need to pay caregivers, which needs to be supported by appropriate reimbursement rates. So we're very excited about the long-term potential of the personal care market.

Great. Thank you. Just finally, any early thoughts on the implications to the regulatory backdrop from the Chevron ruling, whether it be to the 80/20 or maybe in home health with regard to the rate setting methodology from CMS? Thanks.

Well, I mean, I think there's certainly a lot of eyes around that decision. I think it does raise some opportunities, and you're starting to see it in other administrative actions where courts have, I think, felt that the administrative departments have gotten kind of taken advantage of kind of a blank check to do what they need to do without having congressional action supported. So I think that does raise some opportunities, new ones, for the associations to push back on the home health rules.

Thank you.

[Operator Instructions] The next question is from Ryan Langston with Cowen. Please go ahead.

Hey, good morning. Thanks for squeezing me in. Brian, I think I heard in the prepared remarks you said, we'd see some gross margin expansion in the fourth quarter. Just want to make sure that's compared to the third quarter. Or were you talking about to the second quarter? And then just on the New York state sale, it sounds like this could drag on for a couple of quarters, maybe potentially longer if I heard it right. I guess, why does this deal in particular take so long to finalize? Is that just a state issue or is something else going on there? Thanks.

Yes. Right. Just to clarify, on the margin expansion in the fourth quarter. Yes, my comments were sequential from the third quarter. So just thinking about it, Q2, Q3, we would expect to see a little bit of compression, and then sequentially Q3 and Q4, some expansion from the hospice rate increase. And then keep in mind, traditionally in the fourth quarter is typically our lowest quarter for impacts from payroll taxes, we usually get a little step up there as well. So that should benefit the fourth quarter. And then just on the New York front, it’s a little unique transaction. I would say, in general, yes. New York regulatory approval is historically been a long process. So nothing that's going to be different as far as the steel that we have in place today. So that kind of drives some of our commentary. It might take a little bit of time for us to get either sale consideration or actually get the full regulatory approval for all the assets that we're divesting.

All right, thanks.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Dirk Allison for any closing remarks.

Thank you, operator. I again want to thank everybody for your interest today and for being with us as part of our call. We hope we all have a great week. Thank you.