AVAH - NASDAQ

Good morning, and welcome to Aveanna Healthcare Holdings' First Quarter 2024 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the call over to Debbie Stewart, Aveanna's Chief Accounting Officer. Thank you. You may begin.

Good morning, and welcome to Aveanna's first quarter 2024 earnings call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeff Shaner, our Chief Executive Officer; and Matt Buckhalter, our Chief Financial Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release, which is posted on our website, aveanna.com, and in our most recent quarterly report on Form 10-Q when filed. With that, I will turn the call over to Aveanna's Chief Executive Officer, Jeff Shaner. Jeff?

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

Thanks, Jeff, and good morning. I'll first talk about our first quarter financial results and liquidity before providing additional details on our refreshed outlook for 2024. Starting with the top line. We saw revenues rise 5.2% over the prior year period to $491 million. We experienced revenue growth in two of our operating divisions, led by Private Duty Services and Medical Solutions segment, which grew by 5.9% and 9.9% compared to the prior year quarter. Consolidated gross margin was $145.9 million or approximately 30%, representing a 1% increase over the prior year period. Consolidated adjusted EBITDA was $34.9 million, a 22.5% increase as compared to the prior year reflecting the improved payer rating environment as well as cost reduction efforts taking hold. Now taking a deeper look into each of our segments. Starting with private duty services. Revenue for the quarter was approximately $395 million, a 5.9% increase and was driven by approximately 10.3 million hours of care, a volume increase of 4.9% over the prior year. While volumes have improved over the prior year, we continue to be constrained in our top line growth due to the shortage of available caregivers, although we are continuing to see signs of improvement in the labor markets. Q1 revenue per hour of $38.48 was up $0.36 or 1% as compared to the prior year quarter. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $100.1 million of gross margin or 25.4%, a 3.9% decrease from the prior year quarter, primarily driven by some timing-related items and overall strengthening of our PDS reserve. The cost of revenue rate of $28.73 in Q1 was influenced by payroll taxes. Despite the ongoing wage pressures in the labor markets, our Q1 spread per hour was $9.75. We expect spread per hour to normalize to the $10 to $10.50 range beginning in Q2 and continue to improve in the second half of 2024. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $54.6 million, a 2.7% decrease over the prior year. Revenue was driven by 10,100 total emissions with approximately 75% being episodic and 12,100 total episodes of care, up 7% sequentially from Q4. Medicare revenue per episode for the quarter was $3,070, up 3.4% from the prior year quarter. We continue to focus on rightsizing our approach to growth in the near term by focusing on preferred payers that reimburse us on an episodic basis. This episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic emissions well over 70%, we have achieved our goal of rightsizing our margin profile and enhancing our clinical offerings. As we navigate 2024, we believe our emission growth will normalize in the 3% to 5% range. We are committed to a disciplined approach to growth while shifting our capacity to those payers who value our clinical resources. We are pleased with our Q1 gross margin of 53.1%, up 15.8% over the prior year period and representing a continued focus on cost initiatives to achieve our targeted margin profile. Q1 gross margins benefited from some timing-related entries and should normalize in the 49% to 51% range moving forward. Our Home Health & Hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care. Now to our Medical Solutions segment results for Q1. During the quarter, we produced revenue of $41 million, a 9.9% increase over the prior year. Revenue was driven by approximately 92,000 unique patients served with an 8.2% increase over the prior year period, and revenue per UPS of approximately $446. Gross margins were $17 million or 40.8% for the quarter, up 9.8% over the prior year period and in line with our targeted margin profile for Medical Solutions. We continue to implement initiatives to be more effective and efficient in our operations to leverage our overhead as we continue to grow. We are accelerating our preferred payer strategy in Medical Solutions by aligning our capacity with those payers that value our services and appropriately reimburse us for the care we provide. As we expand our national intra presence and solidify our position as the leading provider of enteral nutrition in the country, we plan to refine our partnerships with payers to better support our growth. In summary, we continue to fight through a difficult labor environment while keeping our patients care at the center of everything we do. It is clear to us that shifting caregiver capacity to those preferred payers who value our partnerships is the path forward at Aveanna. As Jeff stated, our primary challenge continues to be reimbursement rates. With the positive momentum we experienced in Q1, we remain optimistic that such trends will continue throughout 2024. As we continue to make progress with the rate environment, we will pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity. At the end of the first quarter, we had liquidity in excess of $220 million, representing cash on hand of approximately $42.6 million, $10 million of availability under our securitization facility, and approximately $168 million of availability on our revolver, which was undrawn as of the end of the quarter. Lastly, we had $32 million in outstanding letters of credit at the end of Q1. On the debt service front, we had approximately $1.48 billion of variable rate debt at the end of Q1. Of this amount, $520 million is hedged with fixed rate swaps and $880 million is subject to an interest rate cap, which limits further exposure to increases in SOFR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026 and our interest rate caps extended February 2027. One last item I will mention related to our debt is that we have no material term loan maturities until July of 2028. Looking at cash flow. Cash provided by operating activities was negative $12 million for the quarter, and free cash flow was negative approximately $12.7 million. Q1 is traditionally our highest cash outflow for the year, and we continue to expect to be a positive operating cash flow company in 2024. We also expect to see continued cash flow benefits as our top line and cost management initiatives come to fruition. Before I hand the call over to the operator for Q&A, let me take a moment to address our revised outlook for 2024. As Jeff mentioned, we currently expect full year revenue to be greater than $1.97 billion and adjusted EBITDA to be greater than $150 million. As we think about seasonality, we expect our revenues to grow as rate increases are implemented throughout the year and as our volumes grow. Accordingly, we expect approximately 47% to 48% of our full year guided adjusted EBITDA to be recognized in the first half of 2024. As most of our annual rate increases typically become effective in the second half of the year, we expect our adjusted EBITDA to ramp as we use these increases to attract and retain more caregivers and drive volumes. Our EBITDA will also accelerate as we realize the benefits of our continued cost saving initiatives. In closing, I'm proud of all of our Aveanna team members and our hard work in achieving our Q1 results. I look forward to our continued execution of our 2024 strategic plan and updating you further at the end of Q2. With that, let me turn the call over to the operator.

[Operator Instructions] Our first question is from Ben Hendrix with RBC Capital Markets.

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

Ben, good morning. Thanks for the question. Yes, I think, first of all, this indicator makes a lot more sense on the potential opportunity that we have out there with the states that have migrated away from pure Medicaid to Medicaid MCO states. And having 40% of our total volume, I think tells the reader that we're pretty far along in this process, right? We're a couple of years into this preferred payer strategy. Some of the largest payers in the larger states are in that -- in the first -- what we call the first 14 preferred payers at the end of last year. I think we've mentioned that before on calls. And I think 40 -- low 40s percentage points, we'll probably move quarter-by-quarter in very small increments from this point forward. It will take us landing numerous preferred payer agreements to kind of get the basis to move materially. If I looked out a year or two, Ben, do I think that this number could be over 50%. And I think the answer is yes, that we believe we'll get over 50% of our total volumes and continue to progress. But I wouldn't expect this to move by 5% or 10% per quarter. I would expect it to move in small increments of 1% or 2%. But I think if we use Q1 as an example, our team executed four additional preferred payer contracts in the first quarter. We're off to a nice start. Some of these are pretty small in volume, but are very important in the states that they're in. And I think we use California, to your point, as an example, the majority of California PDM patients are still on the traditional Medi-Cal fee for service, but we're able to partner with some of the whole child models and some of the MCOs that are in the state and as families move into those programs, we have preferred payer agreements with them. So that will help accelerate our volume in states like California that are still primarily a Medicaid product but I guess I'll close with, at the end of the day, you read it right, Ben, really nice continued momentum on the preferred payer strategy inside the PDS division. Really proud of how both the government affairs team and the preferred payer teams are working to execute our strategy and I think our momentum will continue in that as we think about '24 and '25.

Great. Thank you very much.

Thanks Ben.

Our next question is from Scott Fidel with Stephens.

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

Absolutely, Scott. Thank you. Yes, I think as you think about PDS rate, we did over 10 million hours per quarter at this point. So it takes a lot of new rate to lift the basis, I think Matt used the growth rate of PDS kind of in that 3% to 5%, both between volume and rate the last few quarters. Obviously, we're in the high end of that in the last, I don't know, last two, three quarters, which we're really proud of. I mean to talk about 5% volume and rate lift for our -- for $10 million a quarter is a huge accomplishment to our team. But, yes. I think you think of it generally correct that we'll be in the higher end of that 3% to 5% range volume is 3% to 4% of it, rate is 1% to 1.5% of it as we move forward. And ultimately, we think that will moderate back to more like more like 3% volume, 2% rate or 3.5% volume. But in the environment we're in today, we're kind of in that 4% volume, 1% rate, and that's probably the right way to think of it. Then on the cost side, Matt and I will give you kind of thoughts about our spread and how we think of Q2 and the rest of the year.

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

I think it's fair to say, Scott, to Matt's comment, we'll -- our Q1 gross margin will be probably -- will most likely be the low for the quarter -- sorry, for the year, not the quarter, but for the year, and I think it's fair to expect us to be above 26% moving forward. I think Matt said it well. We'll be in that $10 million to $10.50 range even in Q2 as we move forward.

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

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

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

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

Appreciate it. So first off, great 2023 cash flow year. First year over $12 million of free cash flow for Aveanna, really proud of our teams and then being able to achieve it. We did have a little benefit of some timing items in 2023 that were a little bit of a headwind in 2024, specifically in Q1. Q1 was actually a pretty darn good quarter for us. We're expecting a more significant headwind there, but through some cash management through great operations, and through our adjustments are getting so much cleaner as well, we've been able to drop some of that cash flow through. Q2 will probably be a similar concept to Q1 as well just as we have some of our timing items come through, specifically related to when revenue is -- or when cash comes in from revenue. TPL season is always a headwind for us at the very beginning of the year that starts to subside in the back half of Q2 and really jumps up into Q3. So I would think about it sequentially, roughly the same in Q2, and this is all ballpark that we're talking about, but really starting to compound and get there in Q3, getting us back to being a positive free cash flow, operating cash flow company in 2024. As you think about the out years, our team has done such a great job, one with cash collections, two with operations but even just our EBITDA is such a healthier, cleaner EBITDA as well. I think a lot of that is starting to drop through. And you're seeing that play out through our cash flow, and we'll continue to see that. We do have some costs coming out this year. We are doing some items to remove cost out. So I'm not saying those are going to be zero going forward, but we're doing the things right now to be benefit in the long run for organization and will benefit us in 2024 and 2025.

And Scott, it's a great springboard to Matt's point, from operating cash flow to really your last point of question on really profitability and I think Matt laid out the last four, five quarters that we were committed to taking thoughtful cost out of the company as we scale the company. And I think you see that and you saw it at the end of '23, you see it in our Q1 results, you'll see it again in Q2 and moving forward. I may have gotten ahead of myself last earnings call when I said 10% by the end of the year, that was probably a bit aggressive. But I think you think of us on a march back to $200 million a year in EBITDA. And our goals are set on doing the right things to get there. And I think we've been in the 7% EBITDA -- adjusted EBITDA margins, we're approaching 8% as we speak. But the most -- I think the exciting part for us is we see that clear path over '24, '25 and '26 and really marching the company back to being a double-digit EBITDA company. And none of it's easy, it's all hard work and it's thoughtful work. I think Matt said it well. Our teams have embraced this idea being efficient and effective as we grow the company and we've moved, last year was Home Health & Hospice. This year, we're focused on our PDS division, continue to focus on corporate, both last year and this year. But we're -- we've taken a meaningful cost out of the company in '23. We're taking additional meaningful cost of the company in '24 and already thinking about 25%. So we're really excited about how that relates to both improved adjusted EBITDA margin, but also to your point, being a cash-generating company moving forward and kudos to our teams for all the work that they've done to get us there.

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

Thank you.

Our next question is from Pito Chickering with Deutsche Bank.

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

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

Yes. And Pito, I guess, think of the 40 -- so separate the two, government affairs, primarily still focused on moving Medicaid fee-for-service rates, take Oklahoma last year. Obviously, we shifted our focus this year to specifically Georgia, Massachusetts and California. Think of those three primarily still government affairs oriented and then go back to that 40% indicator, that's our preferred payer strategy team, right? That is 40% of the total opportunity for us to execute on MCO payer partners and national commercial partners on the Medicaid space. So think of us almost halfway there from a total opportunity standpoint on a preferred payer strategy. But I don't -- Matt said, I don't want to take away from in Georgia, we still have a government affairs strategy in Massachusetts. We sold a government affairs strategy. We talked about last year, Oklahoma and other states like that. So we're doing both. And I'm proud to say we're winning more than we're losing on both sides of that equation. Our work is never done. California is a perfect example to remind us all our work is never done. We need to move the PDN right in California long term, just to help the families be able to get their children home and keep their children's homes.

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

That's probably a bit strong. There's still some large states that are still -- I'll use two examples. California and Colorado are still primarily fee-for-service states and both are very different. But I think Matt said it well. Over time, Pito, most states are -- as you already know, most states are moving to an MCO strategy. So I think in our lifetime here, the last seven years and the next five years, the majority of the states through the PDM product, will move to a Medicaid MCO. Now as we've learned with states like Texas, it takes three or four years. I mean it's a very thoughtful process. So it's not a fast flip. It's a very thoughtful process because of the fragility of our patient population. But think of us having great opportunity on both sides, different customers that we're selling to and talking to, but both the government affairs and the preferred payer strategy, both can work depending on what the state is.

Okay. Fair enough. And then just looking at that sort of 40% number, I mean, that's extraordinary and what an accomplishment for you guys. I guess, as you look at your hourly growth is pretty strong in the quarter, and obviously, you just comped to the year, but still pretty strong hourly growth rate. Any color on actually how much you're growing organically in the provider in the preferred provider networks versus everyone else? Is there a -- is there a structurally different ROE growth rate between those two?

There really is, Pito. And I'll relate it back to like hiring the actual nurse. It is still the haves and have nots, right? So the good news is over the last two years, we've eliminated a number of -- we've reduced the number of states and payers that we work with who don't have acceptable rates to higher nurses, right? So we've either stopped working with those payers and shifted our capacity and time attention to the payers who are willing to engage with us, or we've taken the states who had very low rates, and we've eliminated that by increasing the rate significantly. Again, primary focus this year, Georgia, Massachusetts and California because we need to move those rates. Those are still Medicaid rates that really are not attractive from a reimbursement to be able to hire RNs or LPNs but yes, if you saw within the business or if you said to one of our operators, non-preferred payers, how much volume are you generating? In most cases, the answer would be negative. That in a non-preferred payer, we're not even flat, we're moving backwards and it's not on accident. It is we are shifting our caregiver capacity. We're putting all of our recruitment efforts in said market like Texas to our payer partners. And honestly, Pito, it's what they're paying us to do. I mean, they're giving us accelerated rates and value-based agreements with the intent that we're going to live through with that and give them our nurses and give them our capacity. So it's your opportunity. Pito, I can't believe you didn't touch on Home Health and Home Health gross margins and how proud you are of our team.

Just to throw it out well, there's so much to unpack here I guess. I guess going forward, just because sticking to PDS for one second. So because it's such a huge strategy for you guys. Can you guys begin disclosing what the organic growth rate is on preferred just so as we look at our excel models, we actually help sort of model this as team is going forward. And then to point on Home Health, obviously, we saw strong episodic growth. Obviously, we commission as you're sort of shifting away. I guess, is this the right gross margin level that you should think about going forward? Or -- and as you roll into the back half of the year as we move past payroll taxes, are we actually expanding gross margins from these levels of 53%?

So I think as Matt laid it out, 53% was a little hot for us and was helped by some onetime items. We think of it more in the 49% to 51%. I think based on where we are and the strength we've had with our episodic percentage being well north of 70%, we're probably a 50% plus gross margin business in Home Health & Hospice for the majority of this year. And as you know, that's 18 months of work by our Home Health & Hospice leadership team to get there. I think the thing that we're most proud of in that is now we have finally overlapped our comps to where we're actually generating positive -- generating a positive year-over-year and sequential growth. Now Q1 is our season. We have a decent Florida business. So Q1 is a better season for us in our Florida business. But being at that 1.7% positive growth, it's the first time we had positive episodic year-over-year comps in almost three years. And I think our team is really set on the fact that they can generate somewhere between 1% and 3% organic growth moving forward at a roughly 50% gross margin. You know the industry well. It's tough days in home health right now. The fact that we're able to do this is just an incredible amount of diligence by our team. So we're excited about that. And honestly, as we look forward, we think the AMS business will start to show similar trends as the Home Health & Hospice division has been as we continue to implement our preferred payer strategy throughout Medical Solutions. But yes, we'll be in that 49% to 51% gross margin and I believe will be a positive year-over-year growth of total episodes from this point forward for the rest of the year.

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

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

Thanks guys.

Thanks Pito.

Our next question is from Brian Tanquilut with Jefferies.

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

Yes. I'm going to start with kind of the sequential part of it. As we talked Taji, the last three or four quarters, this was an absolute focus of ours knowing that gross margin is very hard to move in this business, that being effective and efficient was key to us. I think the best part of the story is we talked -- we really focused the last 15 months on Home Health & Hospice and corporate. We've pivoted this year to focusing on our largest business unit, which is Private Duty Services. We're being thoughtful about it, right, because we have a very large PDS business. But I think as you think probably more importantly about '25, million, we see the opportunity to continue to be efficient and effective in our business. Matt, do you want to touch just on the quarterly run rate?

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

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

Yes. It's a very thoughtful question, Taji, and thank you. We're 2-plus years straight of working on California and needing -- knowing that we needed to lift the rate and again, we represent the families of the complex medical children in the state. So it's less about Aveanna. It's more about how do we help the families. And I think we've learned in California that even a great story and a difficult budget time is difficult to get through, right? And so the governor has been very open to understanding our plight and the plight of our families. Dr. Vale, who runs HHS has been very open. But they've also been very open for the fact that they're in a significant deficit situation, and it's difficult to optically pass through a meaningful rate increase while you're cutting many, many, many other programs. And I think we just got caught up in that kind of prop wash. I know this for us, it's not an if, it's a win, meaning as the largest provider of PDN services in state of California, we have to just keep fighting the good fight. And to your point, learned from what worked and what maybe didn't work and refine our efforts. We continue to partner with both the current governor's team, Dr. [Ghaly] and many legislatures with our peers and the families we're not expecting to be in this year's budget. The May revised budget is due out any time now probably in the next two weeks. We're not expecting PDN to be in that. I think it's highly unlikely we'll be in the final budget. There's just not the appetite for rate improvements. We asked for a 40%. We were not asking for 2% or 3% rate increase, we're asking for 40%. And 40% is the right number to move the needle. I think the part of this that we have learned, though, over the last, call it, six, eight months is more families are voting in California with their need to get services. And so what we are seeing is one by one by one, families moving away from the Medi-Cal fee per service program and moving into either the whole child model programs, which there are a few in California or finding themselves to a payer like Kaiser or someone like Kaiser, who does have either commercial or an MCO carve-out in the state. And those MCOs and whole child models programs have partnered with companies like Aveanna at enhanced rates, which is great. So we can we can staff their cases, we can bring their children home. So if we look at the MCO companies in California, they would tell us exactly what the rate is for PDN and the state and we've shared that with the current governor's team in current legislature because it's -- there's no magic behind it. It just takes the right rate to pay the right wage. But if you said to me, looking at a crystal ball, how long will it take in California. My gut is it's a few more years, that it's -- we continue to help families transition out to the MCO plans but it's a very slow movement, 1%, 2%, 3% movement at a time and that we continue to partner for another year or two with the California governor, maybe even the next governor and legislature to ultimately get it done. I think when we look back after five years, California will raise the PDN rate meaningfully because they have to, not because they want to, because they have to. And so we'll be proud that we were part of that process. But it will take two or three times as long as we thought and probably take two or three times as much money as we thought. So -- but we're committed to it. We work on behalf of the families we serve. And so we won't rest until our work is done.

Great. Thank you.

Thank you, Taji.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jeff Shaner for closing remarks.

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