Aveanna Healthcare Holdings Inc. ($AVAH)

Good morning, and welcome to Aveanna Healthcare Holdings Fourth Quarter 2025 Earnings Call. Today's call is being recorded, and we've allocated 1 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.

Thank you, and good morning, and welcome to Aveanna's Fourth Quarter 2025 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 annual report on Form 10-K 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 Q4 and full year 2025 results and how we are moving Aveanna forward in 2026. My initial comments will briefly highlight our fourth quarter and full year '25 results, 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 updates on the recently announced Family First Homecare acquisition and how we are thinking about 2026 strategic initiatives and our full year '26 guidance before turning the call over to Matt. Now moving to highlights for the fourth quarter and full year 2025. Revenue for the fourth quarter was approximately $662 million, representing a 27.4% increase over the prior year period. Fourth quarter adjusted EBITDA was $85 million, representing a 54% increase over the prior year period, primarily due to the improved rate and volume environment and continued cost savings initiatives. Revenue for the full year 2025 was approximately $2.433 billion representing a 20.2% increase over the prior year period and full year 2025 adjusted EBITDA was $320.8 million, representing a 74.8% increase over the prior year period. As a reminder, our fourth quarter and full year 2025 results did benefit from a 53rd week due to our accounting calendar. As we sunset 2025, I think it's important to reflect on the 3-year strategic transformation that we have successfully navigated. I am proud of the Aveanna team of leaders, employees and caregivers that believe in our mission and help execute the key strategies that returned Aveanna to our current performance. As we look forward, we remain deeply committed to our preferred payer and government affair strategies that continue to drive our growth in all 3 operating divisions. 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 believe 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 create more capacity while reducing the total cost of care. Our Q4 and full year 2025 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 solid year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts with those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging environment, our preferred payer strategy supports our ability to achieve normalized growth rates in all 3 of our business segments. Since our third quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and payer partners as well as continued signs of improvement in our caregiver labor market. Specifically, as it relates to our Private Duty Services business, our government affairs strategy for 2025 was twofold. First, we advanced our legislative agenda to improve reimbursement rates in at least 10 states. And second, we continue to advocate for Medicaid rate integrity on behalf of children with complex medical conditions. Our strong advocacy presence with both federal and state legislatures as well as solid support from our governors across our national footprint provided significant value in 2025. As it relates to Private Duty Services rate updates, we achieved 10 rate enhancements in 2025, which was in line with our expectations. As we reset our legislative goals for the new year, we expect to achieve high single-digit state rate enhancements for 2026. After 3 years of meaningful rate movement in our PDS stakes, we are generally in a good place as we navigate 2026 and focus on cost of living type rate and wage adjustments moving forward. Now moving on to our preferred payer initiatives. Our goal for 2025 was to increase the number of Private Duty Services preferred pay agreements from 22 to 30. We added 8 additional preferred pay agreements in 2025, achieving our goal of 30. Aveanna's preferred payer strategy continues to gain momentum and allows us to invest in caregiver wages and recruitment efforts to accelerate hiring and staffing of nurses for our patients. As we reset our preferred payer goals for 2026, we believe there is still ample room to grow in our current geography as well as new states that we enter through acquisitions. With that in mind, our goal for 2026 is to add 8 additional agreements with a target of 38 preferred payers by the end of 2026. Additionally, our Q4 preferred pay agreements accounted for approximately 57% of our total Private Duty Services MCO volumes. This positive momentum in preferred payer volumes continues to highlight the shift in our caregiver capacity and recruitment efforts towards our preferred payer partners. We believe this important volume metric will grow to the low 60% in 2026 and as we continue to align our capacity with our payer partners. Moving to our preferred payer progress in home health. Our goal for 2025 was to maintain our episodic payer mix above 70% while returning to a more normalized growth rate. I am extremely pleased to report in Q4, our episodic mix was 78% and our total episodic volume growth was 25% compared with the prior year period. The continued investment in clinical outcomes, sales resources and a focused approach to growth is paying dividends with Q4 total admissions of 10,400 or 22.4% growth over the prior year period. We ended 2025 with 45 preferred pay agreements in home health. Our dedicated focus on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis has led to double-digit year-over-year growth in home health total episodes and improvement in our clinical and financial outcomes. As we reset expectations in Home Health & Hospice for 2026, we believe our episodic payer mix will remain above 75% with organic growth rates approaching double digits. We also expect to sign additional preferred pay agreements in home health and are now targeting more than 50 agreements by the end of 2026. Finally, as we have achieved our desired preferred payer model on Private Duty Services and Home Health & Hospice, we are proceeding with a similar strategy in our Medical Solutions business. We're in the late stages of implementing our preferred payer strategy in Med Solutions and believe it will be fully realized in 2026. At year-end 2025, we had 18 preferred payers, and we expect that number to grow with a target of 25 total agreements in 2026 as we achieve our desired preferred payer model. Our gross margins have stabilized in our desired range as we align our clinical capacity with those payers that value our services and pay us in timely fashion. I am pleased with our Q4 volume growth of approximately 92,000 unique patients served or positive 3.4% over the prior year period. As we think about Medical Solutions revenue growth in 2026, I would expect us to remain in the mid-single digits growth for the next few quarters and then returned to double-digit growth by the end of the year. We are encouraged by our rate increases, preferred pay agreements and subsequent recruiting results. Our business has demonstrated solid 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 cost-effective, high-quality alternative to higher cost care settings. Now turning to our recently announced transaction to acquire Family First Homecare, a Florida-based company with a great reputation for quality in-home pediatric care. I want to extend a warm welcome to our Family First teammates. I am thrilled to continue our acquisition growth story with great companies like Thrive Skilled Pediatrics and Family First Homecare. Both companies continue to build upon the Aveanna brand of high-quality compassionate care in the most cost-effective setting, the comfort of our patient's home. We expect the Family First transaction to close sometime in Q2 with normal regulatory approvals. I look forward to updating you on our progress over the coming quarters. Before I turn the call over to Matt, let me comment on our strategic plan and outlook for 2026. We will focus our efforts on 5 primary strategic initiatives. First, strengthening our partnerships with government partners and preferred payers to create additional capacity and growth. Second, improving clinical outcomes and customer engagement scores while lowering the total cost of care. Third, implementing high-priority artificial intelligence and automation efforts to improve operational efficiency and productivity gains. Fourth, growing through acquisitions, while improving net leverage and generating positive free cash flow. And finally, engaging our leaders and employees and delivering our Aveanna mission. Based on the strength of our fourth quarter and full year 2025 results and the continued execution of our key strategic initiatives, we anticipate 2026 revenue range of $2.54 billion to $2.56 billion and adjusted EBITDA range of $318 million to $322 million. We believe this '26 outlet provides a prudent view considering the challenges we still face with the evolving environment and does not include the impact of the Family First acquisition. In closing, I'm incredibly proud of our Aveanna team and their dedication to executing our strategic plan while holding our mission at the core of everything we do. We operate 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. With that, let me turn the call over to Matt to provide further details on the quarter and our '26 outlook. Matt?

Thank you, Jeff, and good morning. I'll first talk about our fourth quarter and full year 2025 financial results and liquidity before providing additional details on our outlook for 2026. Starting with the top line. We saw revenues rise 27.4% over the prior year period to $662.5 million. We achieved year-over-year revenue growth in all 3 of our operating divisions, led by our Private Duty Services, Home Health & Hospice and Medical Solutions divisions, which grew by 28.1%, 27.3% and 21.3% compared to the prior year quarter. Consolidated gross margin was $213.3 million or 32.2%. Consolidated adjusted EBITDA was $85 million, a 54% increase as compared to the prior year. This growth reflects an improved rate environment, increased volumes as well as enhanced operational efficiencies. As Jeff mentioned, this year's fourth quarter included an additional 53rd week, which had a positive impact on both revenue and earnings. As a result, the current fiscal year reflects an extra week of business activity compared to a typical year. Now taking a deeper look into each of our segments. Starting with Private Duty Services. Revenue for the quarter was approximately $541 million, a 28.1% increase and was driven by approximately 12.4 million hours of care, a volume increase of 17.9% over the prior year. Q4 revenue per hour of $43.74 was up 10.2% compared to the prior year quarter, primarily driven by preferred payer volume growth and the rate enhancements previously discussed. 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 $149.9 million of gross margin or 27.7%. The cost of revenue rate of $31.62 in Q4 was up $3.15 or 13% from the prior year period. Our Q4 spread per hour was $12.12 and reflecting continued normalization as we make ongoing adjustments to caregiver wages to support higher volumes and improve clinical outcomes. Moving on to our Home Health & Hospice segment. Revenue for the quarter was approximately $69.3 million, a 27.3% increase over the prior year. Revenue was driven by 10,400 total admissions with approximately 78% being episodic and 14,000 total episodes of care, up 25% from the prior year quarter. Medicare revenue per episode was $3,223, up 3% 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 achieved our goal of rightsizing our margin profile and enhancing our clinical offerings, we are pleased with our Q4 gross margin of 53.7%, representing our continued focus on cost initiatives to achieve our targeted operating model. 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 Q4. During the quarter, we produced revenue of $52.5 million, up 21.3% over the prior year period. Revenue was driven by approximately 92,000 unique patients served and revenue per UPS of approximately $570, up 17.9% over the prior year period. Gross margin was approximately $26.2 million or 50% for the quarter. Medical Solutions Q4 revenue, gross margin and reimbursement rate benefited from a reserve release driven by stronger-than-expected cash collections on claims we have previously estimated as uncollectible. We expect results to normalize in Q1 with gross margins returning to the 43% to 45% range. As Jeff mentioned, we continue to implement initiatives to be more effective and efficient in our operations to achieve our targeted operating model. We're accelerating our preferred payer strategy and Medical Solutions by aligning our capacity with those payers that value our resources and appropriately reimburse us for the services we provide. We expect margins to normalize and UPS to accelerate its growth as we implement our targeted operating model. While I'm pleased with the integration efforts to date, we are entering the final push to complete our efficiency efforts and return to a sustained year-over-year volume growth in Medical Solutions. In summary, we continue to fight through a difficult environment while keeping our patients care at the center of everything we do. It's clear that aligning caregiver capacity with preferred payers who value our partnership is the right path forward at Aveanna with a strong momentum from Q4 and throughout 2025, we're optimistic these trends will continue into 2026. We will continue to 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 fourth quarter, we had liquidity of approximately $529 million representing cash on hand of approximately $193 million, $110 million of availability under our securitization facility and approximately $226 million of availability on our revolver which was undrawn as of the end of the quarter. We had $24.5 million in outstanding letters of credit at the end of Q4. On the debt service front, we had approximately $1.49 billion of variable rate debt at the end of Q4. 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 extend through February 2027. Looking at cash flow. Cash generated by operating activities was $125.9 million, and free cash flow was $131 million. We are encouraged by our strong cash collections and cost efficiency efforts, which drove solid operating and free cash flow in 2025. We expect similar cash flow performance in 2026. As a reminder, the first quarter is typically our seasonal low point for both operating and free cash flow with improvement expected throughout the rest of the year. But before I hand the call over to the operator for Q&A, let me take a moment to address our outlook for 2026. As Jeff mentioned, we expect full year 2026 revenue range of $2.54 billion to $2.56 billion, an adjusted EBITDA range of $318 million to $322 million. This guidance does not include any impact from the Family First acquisition, which we expect to close in late Q2. As outlined in our recent 8-K, we were paying $175.5 million in consideration or approximately 7.5x post-synergy EBITDA. We plan to fund the transaction and related fees with cash on hand and our securitization facility. As we reflect on our Q4 results, I'd like to take a moment to express my sincere gratitude to all of our Aveanna teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I'm excited for the continued execution of our 2026 strategic plan and look forward to providing you with further updates at the end of Q1. With that, let me turn the call over to the operator.

[Operator Instructions]. Our first question comes from A.J. Rice with UBS.

Hi, everybody. Congratulations on the Family First acquisition. Obviously, that's a decent-sized deal for you guys. And I think you've said you're going to fund that with cash and short-term borrowings. How should we think about the impact that's likely to have on leverage? And can you give us any early read on whether there's accretion there or the trajectory on the margin contribution over time?

Yes, A.J., we're really excited to welcome the Family First team and to the Aveanna family. They have really strong clinical outcomes, really disciplined operation and makes them a really nice cultural fit and operational fit in to our family. We value this transaction, as I said in the script, about 7.5x post-synergy EBITDA. You could see that on a very short-term basis, having a very, very minimal impact on our leverage profile. But with the generated free cash flow that we will produce in 2026, you should see us slightly flat to slightly down as the year progresses on a pro forma basis with both of those pieces taken into consideration. We still plan on deleveraging in 2026. However, slightly not the large jumps that you've seen in the past 2 years. Jeff, anything else?

Yes. I think, A.J., it's as Matt as well said, we've gotten leverage down to just right at 4x. As Matt said, we should end 2026 in that range with the Family First addition. And it's just another nice transaction. Thrive was a great transaction for us. It densified our services, allowed us to be better payer partners, thrive mainly in Texas. This is a Florida-focused deal for us. And it just -- it's a nice merger of 2 great companies. We got clear some regulatory hurdles over the next month or 2 and excited to get through those and get on to doing business with Family First team, but a really nice acquisition for us to start the year.

Okay. Just maybe as a follow-up on the preferred provider arrangements that you're doing. At this point, do you have a pretty good geographic coverage across your footprint? Or are there still major geographies where you do not yet have it? And is the idea that the incremental 8 that you did last year, the incremental 8 this year, is that more density, multiple managed care Medicaid programs that you're contracting with in a given geography or is it still just trying to get the broad coverage?

It's a great question. The 8 we won in '25 and the additional 8 that we're anticipating for '26 are in the current geographies that we have. I'll say current geographies post the Thrive acquisition because we added New Mexico in Kansas as our -- as 2 additional Medicaid states. So as we think about executing on 38 goal for this year, it is still densifying our current geographies. I would tell you, at this point, we've landed most of the major payers in the major markets. So we're rounding out some of our payer partnerships. And then I think the next steps for us, as you think about like what's next for Aveanna from a Medicaid standpoint, we still want to fill in the states like Ohio, West Virginia, Kentucky, Tennessee, that's still -- that's an open area today where we don't have any Medicaid services. So those 4, 5 states and kind of the, call it, the Heartland, we really want to fill in -- that's how we think about additional M&A in the back half of 2026 and going in '27 on the Medicaid side of the business. Thanks, A.J.

Our next question is from Brian Tanquilut with Jefferies Group.

Congrats on this acquisition. Maybe, Matt, as I think about, to start, when I think of Family First, any other color you can share with us in terms of how we should be thinking about revenues then I guess we go back to the EBITDA contribution. But just any KPIs, any metrics that you can share with us? And then kind of related to that, Jeff, I mean, is this one of those deals where clearly you're densifying in Florida with a deal? Is this one that's been kind of like supported or encouraged by the payers where they've asked you in the past to go into new markets?

Awesome questions, Brian. And obviously, on 2026, financials themselves, the impact will depend on the timing of closing of this, obviously. That said, we really expect this to be a really smooth and efficient integration consistent on how the team successfully integrated the Thrive acquisition and brought that team onto the Aveanna platform. On a revenue side of it, it's in the ballpark of $120 million of revenue, and then you can run the math for the 7.5x based upon purchase price. All that depending on a pro forma basis. 2026, we'll see how that really lands just based upon closing timing. Jeff, do you want to add on the...

Yes. Brian, I think Matt hit it. Thrive was right down the middle of the fairway, helped us densify our payer needs in Texas. This one is primarily Florida focused. Both companies have great reputations in the Florida market today is well respected by the MCO payers. Florida is an MCO market, right? So our MCO payers are incredibly important to us. But this acquisition helps us round out the areas in Florida that we were not in geographically. So it does give us a geographic expansion within Florida. It allows us to service effectively every county in the state of Florida. And again, our payer partners are very supportive of our growth. And so I think this one is right down the middle of the fairway just like Thrive. And again, excited to kind of get through the regulatory approvals here in Q1 and Q2 and get this thing closed up in the latter half of Q2.

No, that makes sense. And then, Matt, any chance you can help us bridge the 2026 EBITDA given I think you have like almost roughly $20 million of one-timers and '25 there's an extra week and then there's Thrive in there. So just try to get that bridge in the guidance from '25 actuals.

Yes. So on the EBITDA, Brian, take that roughly $320 million. We came out earlier this year and talked about, hey, bridge that back down to the $300 million based upon the retro rate increases, the cash collections in that 53rd week itself. So really kind of your jumping off point should be around that $300 million going up to that range of about $320 million as we currently sit organically without any M&A inclusive in there. On the revenue side of things, the 53rd week and Thrive kind of do a really nice offset to one another within 20 basis points themselves. And so we're still going to be in that 5-plus percent organic revenue growth as we currently sit today, but that's back in line with our normal expectations, that 5% to 7% range on revenue and a high single digit -- or medium to high single digits on EBITDA. So back into a normalized idea of Aveanna.

And Brian, one thing I'll add to that is what Will (Sic) [ Matt ] said is the EBITDA growth implied about 7%, just under 7%. Again, we tried to -- in my comments, layout that we expect our government -- our PDS government rate wins to kind of be sub-10 this year. Last year, we landed right at 10%, and that's a net number from positive and negative increases. So we expect that number to kind of land between -- somewhere between 6 and 8 state rate increases in this year, and we expect them to be more cost of living oriented. So I'll call it kind of the 1% to 5% Medicaid rate win. So less number of total wins, less percentage per win, and that's really what we're factoring into our guidance as we start the year. I think as we get to May, close Q1, close Family First, we'll have a much better feel for how the year plays out, especially with our legislative efforts being in session right now in the first half of the year.

Our next question comes from Raj Kumar with Stephens.

Maybe just kind of focusing on the preferred payer arrangements and kind of thinking about the Home Health & Hospice book. I guess maybe kind of you see an episodic mix trending above 75%. And I think you've previously highlighted you wouldn't be surprised if it got as high as 80%. So maybe just kind of thinking about what's embedded into 2026. And then maybe just any framing around any membership impacts, just given how volatile the membership was during AEP on the Medicare Advantage side? Just any color on that would be helpful.

Yes. Raj, great question. And I'm going to take that as a complement to our -- what we call our Triple H business. Like you, we're incredibly proud of their results. I think we mentioned it pushing 25% organic year-over-year admission and episodic growth is, I would tell you, first class, best class results and they've done it from just blocking and tackling. They've done it from just being really, really, really good at providing great clinical outcomes and the right level of care to the right payers and the right patients. So we're really robust. Now that we've got a more a clear path from a federal home health rate standpoint. We continue to lean in. This is an area that we want to grow through both organic and inorganic M&A-related activities in this year. But clinical outcomes are almost 4.5 stars on average for our home health locations. I think it's 4.3 stars where we sit today, gross margins in the 54% -- 53%, 54%, great cash collections. As you said, episodic mix approaching 80%, and we're growing in the north of 10% year-over-year right now 20%. We're off to a great start to the year in Q1. These guys are having a great start to the year. So I think everything we would say is we're going to continue to lean into both Home Health & Hospice and continue to grow it. And am I concerned with the trends of managed Medicare? No. I think we're doing our playbook in this business, and our team's just kicking butt and taking names right now. So really excited about where we are and as we ended '25 and equally important as we sit here kind of halfway through Q1, really excited what these guys have done for the business model.

Got it. And then maybe just on the Medical Solutions business. 2025 was a year of kind of optimization and around preferred payer strategies. As we kind of think about 2026 and given with the reimbursement dynamics was any kind of framing around what would be in a kind of appropriate run rate when we kind of ex out the reserve dynamics favorability in the quarter?

Debbie, why don't you take us through the reserve impact itself and then we can lay the bigger picture here?

So Raj, you called it out that during the quarter, gross margin and the revenue reimbursement rate were elevated, and that was really from a reserve release that we recorded driven by improved cash collections on previously reserved claims. Now without the inclusion of that reserve release, the Medical Solutions gross margin was slightly elevated compared to our guide. But we do expect it to normalize in Q1 getting back to that 43% to 45% range.

Yes. Will said, Debbie, I think to put the dollars in there themselves, this contribute -- the contribution of that was $2.5 million to $3 million that we're talking about, Raj, of additional revenue and EBITDA in the quarter. So not overly material to earnings, but it shows up in the Medical Solutions metrics in gross margin just due to its size. On the modernization, the efforts, though, Raj, we're really excited about what the team has been able to do and what they've been accomplished so far. As we move into '26, we expect to see preferred payer numbers really significantly increase. Currently, we're sitting at 18%. We expect that to continue to grow as we become better aligned. And put our capacity with those who support us. There's a little bit of work to do at the same time. So we plan on wrapping this up in the front half of 2026 and that's when you'll see us return back to a double-digit growth number organically in this business and gross margins, as Debbie pointed out, sustaining in that 43% to 45% range.

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

This is Drew Sterrett on for Ben Hendrix. You've previously mentioned continued wage pass-through into 2026. Can you quantify the magnitude and timing of these increases?

Yes. Drew, I think the way to look at it is that spread rate that we talk about a lot. Q4 was at $12.12 which is coming back down in line. But we've continued to push through wages. As we've talked about the entire year in 2025 we had some initiatives in place to really drive our volumes, and you see it impacting and really growing our volumes. This really came down, and you can see it in our gross margins. We settled in that 28% range, which is on the higher end range that we give for that business and in line with our expectations. Looking ahead, we'll continue to actively manage spread as we do every single day, to meet the needs of our preferred payers and our payer partners.

Our next question comes from Benjamin Rossi with JPMorgan.

Appreciate the earlier comments regarding your state contracting. I guess just shifting focus to California, which still seems to be the outlier here on home-based nursing rates. What do you think is the realistic 2026, 2027 scenario for California here between, call it, like no change, a cost of living type increase in that 1% to 5% range or maybe a structural reset? And then under each of those scenarios, do you have any kind of commentary on impact to your PDS spread rate per hour or maybe your broader market share strategy given your stance to not exit California?

Yes. Thanks, Ben. We met with the Governor of California as early as last week. We are not in the budget. There's no PDN rate increase in the '26, '27 budget for California as it exists today. we're still lobbying and advocating to be in the May -- what's called the May revised budget. If I'm scoring that as a handicap, I'd say it's less than 10% or 15% that PDN makes it in any shape, way or form in the California budget. We're certainly not expecting and we've not modeled that. And over time, I hate to say it, but over time, as our other markets have just grown at the 20%, 22%, 25% year-over-year growth rate in PDS, California is unfortunately just gotten smaller and smaller from a materiality for the company. So we still care deeply about our California patients. We still care deeply about shoveling operations. We advocate very hard. Like I said, we met with the governor last week and we continue to meet with his staff and push forward. But today, as it sits today, I'm not expecting any material change both stop gap, cost of living is potential, but I would say it's unlikely. So there's nothing baked in our guidance that California has a change in heart in 2026.

Understood. Thanks for the additional comments there. I guess just as a follow-up, we've heard some other -- some other health care facilities names regarding a spillover impact from some of the delayed respiratory season and then some of the additive weather-related pressures from some of the winter storms. Just when you think about your 2026 outlook, how are you factoring any of the respiratory or weather-related impacts during 1Q?

No, I mean, definitely that's well said. We didn't put it in our prepared remarks, but we have had to fight through like all of our peers mainly snow and significant snow throughout the entire country. I'd love to say the Northeast, but via Texas all the way up through Maine. So -- but our teams do a good job fighting that through. We have a no-excuse mentality here at Aveanna. We just fight through everything that comes our way and so I don't think -- we didn't certainly change our guidance based on weather. But like our peers, we've had to fight through 2 or 3 weeks of weather in the first 10 weeks of the year. So again, I won't say it was nothing, but it's just something we handle. We move on. And we're glad whether for the most part is behind us at this point in the year and back to business. So I don't think you'll have any material impact. Matt mentioned in his prepared comments as a reminder, Q1 is our largest payroll tax quarter. So keep in mind, as you think about guidance, Q1 is seasonally low for our margin mainly driven by the payroll tax on our labor cost.

Our next question comes from Andrew Mok with Barclays Bank.

Given the recent increase in oil prices, can you remind us how much -- how travel is reimbursed for your caregivers and how much fuel represents as a percentage of total revenue and total cost?

Great question. 80% of our revenues are driven off of shift care in the home where we don't reimburse any form of mileage or gas or fuel. And it's primarily because our nurse goes from his or her home right to the home of the patient. They're there for 8 or 10 or 12 hours and they go home. So the vast, vast, vast majority of the business at Aveanna has 0 tied to gas prices and from a reimbursement standpoint, our Med Solutions has some impact on a minimum amount from our drivers. And then the business that it does impact is our Home Health & Hospice business, and that's about 12% of our total revenue. So it's not a nothing impact for us. But thankfully, with the size and scale that we are and the diversity of our payer mix and our business mix, it's not as meaningful as it would be to some of our large Home Health & Hospice peers.

Got it. Maybe just as a follow-up, can you provide a little bit more color on just the pace of pass-through to caregivers on PDS and how you expect the spread to the spread to materialize throughout the year?

Yes, Andrew, I would go back to the gross margin line item here, 27.7% in Q4, a little bit of PTO utilization holiday pay, et cetera, that occurs in Q4, a little bit of extra compression in there. But our range should be in that 27%, 28% gross margin for the Private Duty Services segment. So we're close to it now. But as we continue to drive reimbursement rates, as Jeff mentioned, single -- high single digits on the governor fair side as we continue to add 8 more preferred payers. And as we continue to organically grow our preferred payers, we'll take those rate wins and be able to continue to push them down to our caregivers still aligning to that 27%, 28% gross margin.

Our next question comes from Pito Chickering with Deutsche Bank.

1 If I think about the PDS business model, like the preferred payer strategy makes a ton of sense just due to the pretty large savings for managed Medicaid and it's obviously -- it's sort of more of a niche market. But if you think about home health, it's a huge market with a lot of nurses employed. So can you just walk us through why you can replicate the preferred payer strategy in the home health segment?

Pita, I think, one, our discipline around episodic payer mix, I think a year or 2 ago, people questioned whether or not being above 70% was attainable long term. I would say at this point, we've now put that behind us and said being above 75% is our long-term strategy. And over time, payers have come around. I mean at first payers did not like the episode of conversation 3, 4, 5 years ago. But when you don't bend your backbone and you keep your clinical capacity focused on the right payer base, meaning episodic payers. Eventually, we have found that our payers do come back around. Now clinical outcomes drive the story, right? So great clinical outcomes lead to good financial outcomes. So I think in our Home Health & Hospice business, specifically home health, we've been able to stand behind great clinical outcomes. But I just think that when you look at -- I got 8 quarters in a row here, we've been above 75% 8 quarters in a row and we're approaching 80% now on an episodic basis. At this point, this is the business model. We're not moving from it. and our payers have kind of caught up to us. And by the way, I want to give a shout to our payer team. We've got a world-class payer team and our Home Health & Hospice payer leader has done a fantastic job. She has been amazing. So kudos to our payer team for -- they're out every day, continuing to beat the drum, but they will not take fee-for-service, low dollar contracts because of how valuable caregivers and clinicians are in today's world. But thank you for noticing, by the way.

Okay, fair enough. And then one more on Family First. How much of the $120 million of revenues are in Florida versus the other 6 states? And how fast can you roll out the preferred payer strategy in Florida sort of in those new markets? And is thinking about the opportunity there? I assume it's more acceleration of the $120 million of revenues versus sort of around the 20% margin business that the business has today.

Yes. So think of -- I think of the revenue base being kind of 2/3 Florida, 1/3 everywhere else. Certainly, Florida is the state that we focused on. They do have meaningful business in other states outside of Florida, but Florida is where we focused on all and what made the most strategic rationale. They have -- we believe they have really good relationships in the state of Florida today from a payer standpoint. We have very good relationships as well. I think the feedback we've gotten early from the payers is very supportive and congratulatory on the standpoint of providing more cost-effective patient preferred win-win-type scenarios. But at the end of the day, these are 2 great companies, both providing great care. So it's not like Aveanna is superior in its service. Family First has a really, really nice job providing care in their 7 states. So again, we think this is good for patients. We think this is good for employees. This is good for payers. And it'll take us a little bit time as we saw with Thrive. It takes us about a half a year or so to kind of get through the integration-related efforts, systems, back office benefits to then really get to the expansion back to the expansion of care, and we think Family First should be similar close, hopefully, close some point in mid-to-late Q2. And by the end of the year, we're wrapping up Family First. And I think I just want to head on again. We are committed to growing our Home Health & Hospice business through accretive M&A. So I think you'll see us get back to the home health focused, both de novo and tuck-in M&A.

Our next question comes from Sean Dodge with BMO Capital Markets.

It's [ Chris Carlson ] on for Sean. You've mentioned greater adoption of value-based add-ons from some of your earlier preferred partners, particularly in private duty. Can you walk us through what a typical time line looks like from when a preferred payer is initially signed to when value-based arrangements might start contributing to revenue? And then how much visibility do you have into the incremental growth on the value-based side in 2026?

Great question, Chris. So I think as we ended the year with 30 preferred payers and just over 10 value-based agreements, right? So about 1/3 of our preferred payers in PDS had a value-based agreement attached to it and think of that being over the course of 3 years, right? We're now starting year 4. So there's definitely a lag, and we think of the lag anywhere between half a year to about 18 months, about 6 months from the time we sign a preferred payer which just means enhanced rates and enhanced wages for the caregiver, it's between half a year and about 18 months later that we expect to then add a value-based agreement. We certainly want the value agreement from day 1, but it takes time to work through that with the said payer. So as you think of 30 going to 38 this year, we'll guide to the value-based agreements. But I would think of somewhere from 10 going to 14 or 15 this year. And again, our payer team does a great job of continuing to remind the payer, the more we're aligned on outcomes and cost savings, the better we can do as a payer partner. So I'll also point out, remember, Q2 is the quarter where we do our annual true-ups from the previous year, and we called that out in prior years as well. But I think of that nature of -- we ended the year just over 10%, and we'll probably end this year somewhere in the 14% to 15% range.

Okay. That's helpful. And then maybe going back to talking about entering new states and private duty as well. You've been successful in driving great increases across nearly all your PDS states. How has the rates been progressing in other states where you're not currently operating? And how does this maybe impact your approach when you're considering entering new markets over the coming years and 2026?

Yes. And it's -- let me start with it's not always right, right? So we look at a market and look at size and scale of the Medicaid population, number of PDN patients, pediatric population in that state. So when I say Ohio, there's a difference between Ohio and Wyoming, right? And Wyoming, I'm just picking this randomly may have a higher PDN rate, but may only have 75 PDN patients in the entire state where Ohio has 2000. So again, there's other factors where we're looking at then just rate we feel confident that as we enter a state or grow in a state, we can work through both our government affairs team, working directly with the governor and the legislatures as well as our preferred payers and our MCO partners to appropriately address wage and rate. And again, it's not just rate for the sake of rate. It's rate for the sake of the right wage rate for the caregivers to attract caregivers into the home. So again, we think over time in any state, including I think Ben, who brought up California. Eventually, we're going to get California flipped. I mean, that's the one state say today, we've not been able get flipped to appropriate wage rate and appropriate reimbursement rate. But eventually, we'll get California. So we think every state, if you look at it over a macro period of 5 or 10 years, every state, any and every payer over time, we think we can get to move to appropriate reimbursement rate, which means an appropriate wage rate.

Our next question comes from Jared Haase with William Blair.

Maybe I want to drill back into the 2026 outlook and specifically thinking about the volume growth opportunity for private duty. So I think we saw you benefit a little bit from sort of the elevated growth on an organic basis throughout 2025, just given all the rate and preferred payer activity that you were able to achieve last year. Now as we think about you getting more and more caught up on wages, I'm wondering, I guess, if there's any way to sort of contextualize how you're thinking about the runway for volume growth and opportunities to potentially sustain elevated levels of growth over the next handful of quarters?

Yes, Jared. We're really excited about the momentum heading into 2026 and really expect a more normalized growth rate as we enter 2026 as well. To your point, we've had those elevated rates that have been able to drive our volume forward. But we anticipate kind of that organic in that 5% to 7% range as we've guided to additional M&A add-ons like Family First incorporate -- or adding on top of that as well. EBITDA growing in that high single digits after you adjust out that $20 million of normalization that we backed everybody into -- in January. But overall, great momentum in 2025 and continue that momentum into 2026, though more -- on a more normalized basis.

And I think, Jared, as we called out, we just don't expect to get the 30%, 40%, 50% PDS Medicaid rate increases, we're really thinking these are more in the 2% to 4% of the 3% to 5% range. And I think we've talked before, we've been in the teens state rate wins, we think this year is probably 6%, 7%, 8%, maybe 9%. If we hit 10 this year, we'd be very pleased on a net basis. So with all that baked in, I think Matt's point of PDS getting back to mid-single-digit volume and rate year-over-year is probably where we think the back half of this year lands. And that's what we guide to long term in our investment thesis.

And then, Jeff, I think you mentioned in the prepared remarks some of the -- or one of the core initiatives you're focusing on here is just some of the high priority AI and automation efforts. So would love to hear a little bit more about just where you're seeing some of the biggest opportunities leveraging those tools. And then I guess maybe the fine point I'd put on it is how quickly might we you start to see those initiatives ramping in terms of impacting either the cost structure or margin profile?

Yes. I think we certainly started in the back office. So we're a couple of years into RCM automation with our RCM partners and want to continue to accelerate that. And I think part of the cash collections and the onetime and timing-related revenue enhancements last year where were related to just great collections and part of that was tied to some of our AI partnerships that helped us collect our cash and more effectively and efficiently. So I think, think of that being the long pole in the tent, meaning what we've started with and are continuing to drive and Matt and Debbie and James, who leads our CM just does a fantastic job with that. We're also pivoting now to the front office. And so we're in the piloting stages of thinking of caregiver engagement also in shift fulfillment and really how we schedule and think of engaging with our caregiver and using -- sorry, automation and AI related opportunities there. So -- and there's more. There's more on the AMS business. There's nuances we use for fax automation and some of the back office stuff that just makes the back office more efficient. So I'd think of us being back office focused for the last, I'll call it, 2-plus years. That will continue. And then at the end of '25, going '26, we kind of pivoted to more field-facing, front office facing tied to our -- how we think of scheduling engagement of our caregivers.

Our next question is from John Ransom with Raymond James.

So we think about the core EBIT growth this year being just below 70% on a consolidated basis, 30% to [ 320-ish]. How does that look by segment? What are the highest growth segments versus the lowest growth segments of you 3 as we think about modeling in [indiscernible].

Yes. So historically, Medical Solutions and Home Health & Hospice has been our highest organic growth sections over there, John. So we've got Medical Solutions going through its modernization efforts at this time. And so we talked about still in that low single digits growth in the front half of 2026 by returning to that high single -- or high single digits to double-digit growth in the back half of 2026. And so there's a little bit of mutedness in that happening in H1 compared to H2. I'll tell you, Home Health & Hospice hitting out of the gate strong just as they finish the year strong. So that will continue to be high single digits to double digits growth. But we think PDS returned back into more normalization 3.5%, 4% volume growth, adding 1 point to 1.5 points of rate growth in there, getting back to your 5% to 7% kind of range itself or 3% to 5% and on the upper end of that one. That's how we kind of have it modeled out and how we're thinking about it into '26 and beyond.

And John, just being cost effective and efficient in the back office, corporate office. I mean I think we're down to 4.5%, corporate costs as a percentage of revenue. We think we can make that get even a little better there. So -- and then you were about to bring this up, so I want to highlight generating a meaningful amount of cash flow. So I appreciate you highlighting that great point that $131 million of free cash flow last year was well, well beyond our expectations. And really kudos to Matt and Debbie and the team for executing on that. generating that kind of cash moving forward just gives us optionality to continue to do deals like Family First and to use cash. So we're excited about the opportunity to do that. And thanks for asking.

You're welcome. The other question is just the PDS rate outlook. I mean, you're adding 8 preferred payers, but you're only calling for 1.5%, 1%, 2% rate. Is that conservative? Or are we missing something?

I just think it shows how far along the spectrum we are in the strategy, meaning when we first started, we were getting 10% of volume or 15% of volume. Some of these now we're tucking in, are smaller in nature. They're still niche oriented. They're really important, even a 1% volume mover if we can move into a preferred payer matters. But think of us being just further along the maturity spectrum in the preferred payers, which is why we love the idea of additional states because it opens up new markets for us. So as we think of Thrive, the New Mexico and the Kansas was so important because it opened up to brand new MCO markets for us. So -- but no, I think just as we think about the preferred payers going from 30% to 38%, we're just continuing to round out some of those final tweaks in our current markets and really focused on new expansion.

Last one for me. I know we're a little over time. If we think about the -- clearly, there's synergy between the Nutrition segment and the pediatric segment. But if I think about home care hospice and personal care, I think the market is kind of mixed. -- there's really that much synergy between the 3 businesses. And so does it help you with payer? Does it help you with nurse recruiting? What is the synergy? And I guess where I'm going with hospice multiples, M&A multiples being in the theme, if somebody came to you with a 15x multiple offer for your hospices, is that something you would consider? Or do you really think you want to knit all these pieces together indefinitely?

Yes. First of all, it's a very thoughtful question. I'll say this. Yes, obviously, the intra nutrition business is incredibly synergistic to the PDN business. They do -- they operate as a referral entity incredibly well together. We have a lot of crossover in the referral source, the payer conversations between those 2 businesses. The opposite is true between our PDS and our HHH business. There's very little synergies from a referral source standpoint. Even a payer standpoint, a very different conversation, as you know. I think why we love being in both businesses, one, the diversification. As we see right now, the last 3 years, Medicaid has been the darling, right now, it's being back to Medicare being more of a darling. We like the idea of being larger in both of these businesses, and we'd like to be larger in the HHH business over time. But no, I think we think of it as growth rates that these businesses, like Home Health & Hospice can grow in double-digit year-over-year organic growth. We like that from a growth algorithm. So we're committed to all 3 segments, excited about all 3 segments and again, I just want to get back to block and tackling this year and being really good at executing our business plan.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jeff Shaner for closing comments.

Thank you, operator. And just thank you for your attention and look forward to catching up in mid-May on our Q1 and 2026 results. Thank you, and have a wonderful day.

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