Aveanna Healthcare Holdings Inc. (AVAH) Earnings Call Transcript & Summary

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Good morning, and welcome to Aviana's second quarter 2026 earnings call. I am Debbie Stewart, the company's chief accounting officer. With me today is Jeff Shainer, 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, Aviana.com, and in our most recent quarterly report on Form 10-Q when filed. With that, I will turn the call over to Aviana's Chief Executive Officer, Jeff Shainer. 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 Q2 results and how we are moving Aviana forward in 2026. My initial comments will briefly highlight our second quarter 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 Family First integration, how we are progressing with our 2026 strategic initiatives, our enhanced 2026 guidance, and updated long-term growth outlook before turning the call over to Matt. Let's move to the highlights of the second quarter. Revenue for the second quarter was approximately $670 million, representing a 13.7% increase over the prior year period. Second quarter adjusted EBITDA was $95.4 million, representing an 8% increase over the prior year period, primarily due to the improved rate and volume environment and continued operational efficiencies. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aviano 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 create more capacity while reducing the total cost of care. Thank you. Our Q2 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 all three of our business segments. 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 accelerated growth rates in all three of our business segments. Since our first 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 payer partners, as well as continued signs of improvement in the caregiver labor market. Specifically, as it relates to our private duty services business, our government affairs strategy for 2026 was twofold. First, we wanted to expand our strong advocacy presence with both federal and state legislatures across our national footprint and enhancing our value proposition. And second, we expected to achieve mid-single-digit state rate enhancements. As of Q2, we have achieved seven state rate enhancements and believe we will add a few additional states as they complete their budget process in Q3. Most importantly, after four years of dedicated advocacy and focus on the state of California, I am proud to announce the 2027 California budget includes a significant investment in pediatric private duty nursing rates effective January 1st, 2027. While we are awaiting the final details from the Medi-Cal Department, we believe the investment represents a meaningful increase in California's private duty nursing rates. This achievement on behalf of the California medically fragile pediatric patients and families is monumental in nature as the private duty nursing rates and as a result, the nursing wages had fallen far behind the competitive market in California. We believe the California PDN rate increase will improve our ability to attract and retain nurses as well as support efficient discharges from the children's hospitals. and to proactively address nurse wages this fall in anticipation of the rate increase on January 1, 2027. As I reflect on the significance of the California private duty nursing rate increase, I think it's important to comment on the success of our government affairs strategy. Roughly four years ago, we set out on a deliberate strategy to address the reimbursement rates and caregiver wages in all 32 private duty service estates in which we operate. California represented the final state in our goal to achieve enhanced PDN rates and caregiver wages across our national footprint. While our work is never done, we believe the disconnect that existed between reimbursement rates and caregiver wages has finally been addressed in every Aviana state, and we can now focus on cost of living and inflation. enhancement with our government partners. I am proud of our government affairs teams and the advocacy work of our employees, caregivers, patients, and families that have made this a reality. Now, moving on to our Private Duty Services Preferred Payer Initiatives. Our Preferred Payer goal for 2026 was to achieve 8 additional agreements for a total of 38 Preferred Payers. We signed three additional Preferred Pay Agreements in Q2 and now have 37 agreements in total. We expect to exceed our 2026 Privacy Services Preferred Payer Goal of 38 as we navigate the second half of 2026. Aviana'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 payer partners. Additionally, our Q2 preferred payer agreements accounted for approximately 64% of our total private duty services MCO volumes, up from 60% at the end of Q1. This positive momentum in preferred payer volumes continues to highlight the shift in our caregiver capacity and recruitment efforts towards our preferred payer partners. Moving to a preferred payor progress in home health. Our goal for 2026 was to maintain our episodic mix above 75% while returning to a more normalized growth rate. I am and pleased to report in Q2, our episodic mix was approximately 81% our total episodic volume growth was 18.5% compared with the prior year period. Further, we exited 2025 with 45 preferred pay agreements in home health and expected to add five agreements in 2026 for a total of 50. Pleased to report in Q2, we have achieved our goal of 50 preferred payers year to date. 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 admissions and episodes, as well as improvement in our clinical and financial outcomes. Also, we're pleased with CMS's proposed home health rule published on July 1st, as well as the final hospice rule published on August 6th. The 2027 proposed home health rate shows positive movement by CMS aligned with a strong collaboration from the National Alliance for Care at Home. While there still is work to be done addressing the temporary adjustment and its impact on the annual home health rate, we have come a long way as an industry. We believe the stability of the home health and hospice rates are important as we continue to meet the increasing demand for America's aging population, cared for in the comfort of their home. Finally, as we have achieved our desired preferred payer model in private duty services and home health and hospice, we are continuing with a similar strategy in our medical solutions business. As we exited 2025, we had 18 preferred payer agreements, and expect that number to grow to 25 by the end of 2026. As of Q2, we have a total of 20 preferred payer agreements. 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 a timely fashion. I am pleased with our Q2 volume growth of approximately 95,000 unique patients served or positive 4.4% over the prior year period. As we think about MedSolutions revenue growth in 2026, I still expect us to remain in the high single digits for the next few quarters and then return to double-digit growth by the beginning of 2027. Thank you. We are encouraged by our rate increases, preferred payer agreements, and subsequent growth in our businesses. Our company has demonstrated a stable return to organic growth as we achieve our rate goals previously discussed. Home and community-based care will continue to grow, and Aviana is a comprehensive platform with a diverse payer base, providing cost-effective, high-quality alternatives to higher cost care settings. Now, turning to our recently announced acquisition of Family First Home Care, a Florida-based company with a great reputation for quality in-home pediatric care. We closed the Family First acquisition in early June and are progressing nicely in the early stages of integration. our leadership teams continue to focus on exceptional clinical care and supporting our branches as we navigate the necessary back office integrations. I expect us to wrap up the majority of the Family First integration efforts by late Q4. I believe the Family First team has already made a positive impact on Aviana and is a welcome addition to our family. Additionally, let me comment on our strategic plan and enhanced outlook for 2026. We will continue to focus our efforts on five 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. implementing high-priority artificial intelligence and automation efforts to improve operational efficiency and productivity gains. Fourth, growing through acquisitions while improving net leverage and free cash flow. And finally, engaging our leaders and employees in delivering our Aviana mission. Based on the strength of our second quarter results and the continued execution of our key strategic initiatives, we are increasing our full-year revenue and adjusted EBITDA guidance to a revenue range greater than $2.6 billion and adjusted EBITDA greater than $365 million. As I reflect on the strong start to 2026 and the improved visibility with state and federal reimbursement rates a year after the one big beautiful bill act was passed into legislation. We are now poised to update our long-term core organic growth rates in private duty services and home health and hospice. Specifically, we are adjusting our long-term private duty services organic growth rate from a range of 3% to 5% to now 5% to 6%, primarily driven by the improved state government affairs and continued preferred payer execution. Also, we are updating our long-term home health and hospice organic growth rate range from 5 to 7 percent to now 8 to 10 percent, primarily driven by the improved federal government affairs and preferred payer results. We remain consistent with our current growth rates in medical solutions of 8% to 10%. With the durability of our organic growth rates and thoughtful M&A activity, we believe Aviana is well positioned to achieve double-digit revenue growth on an annual basis. Aviana has a strong value proposition to our federal and state government partners, as well as to our MCO preferred payers, and these important relationships are underpinning our enhanced view on our future organic growth rates and our core business segments. We look forward to updating you on our continued execution of our business plans as we navigate the back half of 2026. With that, let me turn the call over to Matt to provide further details on the quarter and our improved capital structure. Matt?.

Thank you, Jeff, and good morning. I will first discuss our second quarter financial results and liquidity before providing additional details on our refreshed outlook for 2026. Starting with the top line, we saw revenues rise 13.7% over the prior year period to $670.5 million. We achieved year-over-year revenue growth in all three of our operating divisions, led by our home health and hospice, private duty services, and medical solutions divisions, which grew by 14.8%, 14.0%, and 9.4% compared to the prior year period. Consolidated gross margin was $218.5 million, or 32.6%. Consolidated adjusted EBITDA was $95.4 million, an 8% increase as compared to the prior year period. This growth reflects an improved rate environment, increased volumes, as well as enhanced operational efficiencies. Now taking a deeper look into each of our segments. starting with private duty services, revenue for the quarter was approximately Q2 revenue per hour of $44.62, was up 1.7% compared to the prior year quarter, primarily driven by growth and preferred payer volume and updated reimbursement agreements. We remain optimistic about our ability to attract caregivers and address market demands for our services when we and we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics, achieved $159.9 million of gross margin, or 28.9%. The cost of revenue rate of $31.74 in Q2 was up $2.06, or 7.8% from the prior year period. Our Q2 spread per hour was $12.88. reflecting continued normalization driven in part by ongoing caregiver wage adjustments supporting higher volumes, and improving clinical outcomes. As a reminder, Q2 2025 included approximately 9 million of non-recurring, favorable items in our PDS division. primarily driven by the timing of rate enhancements and favorable revenue reserve adjustments. Moving on to our home health and hospice segment. Revenue for the quarter was approximately $69 million, a 14.8% increase over the prior year. Revenue was driven by 10,500 total admissions. with approximately 81% being episodic, and 14,700 total episodes of care, up 18.5% from the prior year quarter. Medicare revenue per episode was $3,202 for the quarter. Our episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic emissions well over 75%, we have achieved our goal of right-sizing our margin profile and enhancing our clinical offerings. We are pleased with our Q2 gross margin of 53.9%, representing our continued focus on cost initiatives to achieve our targeted margin profile. Our home health and 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 Q2. During the quarter, we produced revenue of $47.5 million, up 9.4% over the prior year period. Revenue was driven by approximately 95,000 unique patients served. Revenue per UPS of approximately $500, up 5% over the prior year period. The gross margin was approximately $21.4 million, or 45.1% for the quarter. As Jeff mentioned, we are in the final stages of our preferred payer strategy in Medical Solutions. by aligning our capacity with those payers that value our resources and appropriately reimburse us for the services we provide. to continue to accelerate its growth in the back half of 2026. In summary, we remain focused on keeping our patients' care at the center of everything we do. It is clear that aligning caregiver capacity with preferred payers who value our partnership the right path forward at Aviano. With a strong momentum through Q2, we are optimistic these trends will continue throughout 2026. We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now, turning to our balance sheet and liquidity. During the quarter, we were pleased to receive credit rating upgrades from all three major rating agencies, reflecting the continued strength in our financial profile and the consistent execution of our long-term strategy. At the end of the second quarter, we had liquidity of approximately $433 million, and in cash on hand of approximately $97 million, $110 million of availability under our securitization facility, and approximately $226 million of availability on a 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 Q2. As a reminder, we funded the Family First acquisition and associated closing costs during Q2 using exclusively cash on hand. On the debt service front, we had approximately $1.48 billion of variable rate debt at the end of Q2. Of this amount, $1.4 billion is hedged with interest rate caps, which limits exposure to increases in SOFR. Accordingly, substantially all of our variable rate debt is hedged. Additionally, during the second quarter, we successfully repriced our term loan, reducing our interest rate by 75 basis points. This refinancing will lower our annual interest expense by approximately $10 million. The repricing reflects our continued strong operational performance and the ongoing support and confidence of our lending partners. Looking at year-to-date cash flow, cash generated by operating activities was $85.3 million and free cash flow was positive $75.4 million. encouraged by our strong cash collections and the cost efficiency efforts which has driven solid operating and free cash flow in 2026. We expect similar cash flow performance in the back half of the year. Before I hand the call over to the operator for Q&A, let me take a moment to address our enhanced outlook for 2026. As Jeff mentioned, we expect full-year revenue to be greater than $2.68 billion, adjusted EBITDA greater than 365 million. This improved guidance reflects continued strength in our underlying business, supported by strong organic growth and sustained demand for our services. As we reflect on our Q2 results, I would like to take a moment to express my sincere gratitude to our Aviana teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I'm excited. excited for the continued execution of our 2026 strategic plan and look forward to providing you with further updates at the end of Q3. With that, let me turn the call over to the operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. We ask that analysts limit themselves to one question and a follow-up so that others have the opportunity to do so as well. moment please while we poll for questions. Our first question comes from Brian Tanculute with Jefferies. Please proceed with your question.

Good morning. This is Megan Holtzahn for Bryant & Quillett. Congrats on the quarter, guys, and the full-year guidance raise and the California rate increase. I know that's been in the works for a while. I guess starting on your LRPs that you raised for the business segments, given that you're raising the revenue rate, should we be thinking about corresponding margin increase in those segments as well? Yes.

Yep, and thank you, Megan, and good morning. You know, we're excited now that we've kind of 15, 16 months after the OBBA has settled in, we have more clarity, more visibility in how our state rate setting process works. It has played through and will play through. We also have more confidence, as we talked about, in both our home health and our hospice rate setting and rule-making process. As we think of the long-term revenue growth, to your comment, I think Matt and I would lead you to continue to think about wage pass-through being a key component of our story. From a gross margin standpoint, I would think about the gross margin percentage staying pretty consistent. Clearly, gross margin dollars will increase as revenue accelerates and revenue dollars accelerate. But I think you're seeing that even in our results today. So really focused on continuing to grow the business at accelerated rates as well as continuing.

our caregiver pass through both on a government basis and a preferred payer basis. Matt, you wanna add to that? No, I think you said it really well, Jeff, but I think gross margins came right in line with our expectations in Q2. Obviously, 2025 had a little bit of timing-related items for PDS segment, and people are able to normalize that out and understand what that is, but we believe Q2 really does the results represent, and specifically in the PDS business, but everywhere else, where we expect gross margins to remain going forward.

Thank you. And then on the California state rate increase, is there any additional color you guys can provide on the expected benefit as we think about 2027? I know it's a little early. And then you mentioned passing through the wages prior to the rate going into place in the back half of this year. How should we be thinking about that? Thanks.

Thanks, Megan. Probably not the last California question we're going to get this morning. Really excited to your point, because if you think about the last rate increase in California was July 1st of 2018. So, I mean, we're coming up on almost nine years, eight and a half years. We've been advocating with our peers, industry peers, and the California Home Care Association now for almost five years. So, really pleased that the legislature and the governor both saw the value in investing in the private duty nursing rate. We're in a process now that the legislature and the governor have allocated specific dollars to the Medi-Cal department. We're in the process now of the Medi-Cal department now updating its fee-for-service schedule. And as you said, we'll have to remain a little bit patient over the next few weeks as they do their normal process. We would expect by the end of September for the Medi-Cal department to have updated 2027 rate schedule to include the updated investment from the legislators. So, it'll be a few more weeks, probably a month before we see the final rates for the PDN rate increase in 2027. Matt, with that, you want to talk about the wage pass-through? Yes, Megan, we've done this in the past and we've had a lot of great success, but we'll be proactive.

once things settle to Jeff's point on passing through wages to really pull those patients out of the hospital. It's been, like I said, eight years going on, nine years since the last rate increase in the state of California, and there's so much pent up demand for services. So we will be thoughtful on our approach to that and kind of the back half of Q3, really in Q4 about starting pass through some of those wages proactively, even before the rate goes live, so that we can pull that census out of the hospital, get our staffing rates and percentages up, and really hire those caregivers to provide that care.

Thank you, Megan. Our next question comes from Raj Kumar with Stevens. Please proceed with your question.

Hey, good morning. Maybe just on 2026 guidance. I know you guys, IntraQuarter, increased it for the family first acquisition, but maybe comment. kind of thinking about the new enhanced guidance. Is there any increased contributions there from families first or should we just be all thinking about the raise being solely driven by the kind of core organic business?.

You nailed it there, Raj, and good question. So, we did previously increase our guidance for the Family First impact, kind of within the quarter itself. So that's already contemplated into our previous guidance that we provided earlier. So what you're really seeing now is just driven by strong operational performance in the core Aviana business. So all three divisions continuing to perform at very high levels give us the confidence to increase our revenue and our EBITDA guidance for 2026.

Got it. And then as my follow up, looking at the long term outlook, you guys also increased the contributions from M&A. And so as I kind of think about that, maybe kind of just discuss your appetite across private duty nursing and home health and hospice. kind of where do you feel comfortable with the leverage profile as you kind of approach,.

think about doing these deals? Great question and great catch, Raj. Yes, I think as I said in our prepared remarks, thoughtful M&A is continuing to be where we see the opportunity to grow. And to your point, as Matt talked about, free cash flow generation, first half of the year was right around $75 million. I think Matt talked about similar expectations in the back half of the year. So, you know, the $150, $150 plus million of free cash flow generation, we saw with Family First, we were able to pay. for Family First and its closing costs with all cash on the balance sheet, cash on hand, we're quickly regenerating that cash flow. Matt would want me to point out that although temporary leverage went up, that the story will continue to be deleveraging between now and the end of the year. And so the ability to accelerate our model now using cash flow,.

cash flow and cash generation and certainly being thoughtful. I know Matt wanted to talk about leverage just to hammer home that point. Yes, our M&A pipeline continues to be very robust out there, but we're going to remain focused, Raj. Just acquisitions that fit our culture, of course, create long-term value for Aviana, of course, and the shareholders at Aviana. We're going to remain disciplined around the valuation of these acquisitions. as well, though, and keeping leverage at our top of mind. So I think you could see us, like you said, increasing that a little bit, but also continuing to deleverage the organization to really get to our long-term goal of being a sub-three times leverage company. I think that's a point.

I think that's a very important point. We've had a long-term target now for a couple of years to get the company under three times leverage. That continues to be our target. The path gets clearer and clearer every quarter. Certainly today's announcements on our growth rates gives us even more confidence on being able to achieve that in 2027. Thanks, Rod.

Thank you very much. Great, thank you. Our next question comes from Pito Chikering with Deutsche Bank. Please proceed with your question.

Hey, good morning guys, and thanks for taking my questions. Nice job again here. Going back to that long-term guidance change in PBS and home health and hospice, on the corporate level, my back-to-back math here is about 150 base points revenue raised to law long-term guidance. So a pretty big jump from 4.6 to 6.1 assuming my math is right. But can you talk about the margin leverage you can get on the EBITDA line from this revenue raise and does it mean EBITDA should not be growing long-term in like the 7, 8 plus percent range?.

First of all, kudos on your math, Peter. As always, your math is very tight. That's roughly 6% from a core organic standpoint is where we landed on a forward-looking basis. I think I want to be careful as we are touching 14%, EBITDA at this point, I think we've kind of got it that that 13 to 14% is where we thought we would land as a primary Medicaid-driven organization. I think I will say, as you think of our forward-looking growth rates, our geriatric business, although it's smaller in nature today, is what will be our fastest-growing business. And I think as you think of M&A, think of us leaning in deeper into the home health side of the M&A picture. So I do think... what you'll see from our growth rates as we're leaning into the faster growing part of our business and the business where we have the most opportunity to fill in geographically across America. With that said, we want to be crystal clear. Our job is to hire more nurses and put more caregivers to work. To do that, we've got to continue. And I think California, as Matt said, is a great example of that. You know, our rate increase won't begin until January 1st of 27. We'll start passing wages through some point early to mid-October. And to Matt's point, we will be ramped up. So by the time we hit, at the end of December in California. We want to be running at full speed And we'll invest those dollars ahead of time to get ahead. All of that is in the spirit of continuing to do the right thing for our families and grow our business. So I don't know that I would try to sell that our 14% EBITDA target is changing materially. Matt, any comments just on leverage? No, I think, you know, you've obviously seen it over the last few years where gross margin has been pretty consistent.

but our SG&A leverage has been really, really impressive. We've done it through a lot of ways, just being more effective and efficient, throwing in some automation technology as well. 14% is a pretty good spot. Maybe that sneaks up to 15% as we continue to develop and get better with some of those growth rates, but I wouldn't bake on it being much higher than that.

Yes, yes. It does much more about obviously SG&A leverage than it was about gross margin, because obviously that's a bit more of a pass through. So the follow-up question here is looking at the spread sort of in 2Q, I guess, in PDS. I guess, how should we think about that in the back half of the year? And then the hour growth was incredibly impressive in the second quarter. And as the spread's maybe compressed in the back half of the year, kind of what should we be thinking about?.

the PDS hourly growth rate for the back-end. Thanks. Yes, I'm going to continue to pull you back to a gross margin comment each time. So 28.9% gross margin on a PDS segment, really impressed with where it came in at, and right where we expected it to come in at. We've guided to that 26 to 28. We said publicly that, hey, we'll be north of that here in 2026, and we expect the remainder of the year to be right in line with that 28 and change 29% gross margin. So that's our business model. As we continue to win state rate increases, assign additional preferred payers, we'll continue to pass those dollars down, but keeping that 28, 29% gross margin atop of mind.

Thanks, Peter. Our next question comes from Benjamin Rossi with JPMorgan Chase. Please proceed with your question.

Hey, good morning all. Appreciate you taking my questions here. Following up on PDS preferred payer mix, you highlighted that 400 basis point sequential step up during 2Q to 54% of mix covered by these preferred payers. Do you expect that figure to remain largely flat through the remainder of the year and then step up on Jan 1 when the new California rates take effect? Or how are you thinking about forward cadence?.

as we head into 2027 with that notable state set to come through. Yes, and let me separate those two, Ben, because remember the 64% is MCO volumes, and the majority of California is still Medicaid reimbursed, so we don't count that and the PDS per payer MCO volume. So think of 60, I think we talked earlier in the year, we kind of ended last year, we we were mid to high 50s percent. We thought we would kind of hit mid 60s this year. I think from where we sit today, we probably tell you we'll be a little bit north, probably still shy of 70% in 2026. So probably another couple of percentage points on the current 64%, but not too far. a whole lot more this year pivoting to back that California comment the majority of our California business is as I mentioned is still a medical reimbursed Again, it'll mimic more of what preferred payer rates look like once this rate is, we think, is applied through. We do have a small portion of our business in California, we talked about before, which is preferred payer in nature, and we're excited for those rates to remaining contacts. So long story short, I think we'll end the year kind of slightly above what we said from a preferred payer PDS volume standpoint and excited clearly now with the California 2027 kind of bulkhead leading us in. We're excited about the momentum it'll take in 27.

Great. Appreciate that clarification. Just a follow-up on capacity within PDS. Obviously, demand seems to remain elevated there. Where are you seeing the greatest opportunity to add capacity? Do you think it's through these new payer wins in existing states or entering or expanding in the new white space geographies? And do you think the California rate unlock maybe opens up some new.

market opportunities there thanks yes Ben California is obviously lagged the last few years it's been pretty significant that it's been nine years since the last rate increase itself and so the amount of our fill rate and our volumes in California has really become less significant to Aviana over the last few years with the implementation of it we will be able to grow this one actively and really hire those caregivers and onboard those caregivers to provide additional care. There are some opportunities for geography that we still want to fill in, specifically in PDS, really that middle of America, the Ohio's, the Kentucky's, the West Virginia's. Those are attractive markets for us to continue to grow inorganically, but still organically there's a lot lot of opportunity out there, whether it's in the states that we currently provide services to, or just the continued high demand for our services in every single one of our markets is there. So there's a lot of meat left on this bone. There's a lot of opportunity out there for it, but we're going to work with our state legislators and our preferred payers to continue to fill that demand. And I think it's been.

Then, as we said in the prepared remarks, it's nice to now put California to bed to where we can really focus on cost-of-living type adjustments, inflation types. We don't want to go nine years with California to do another rate adjustment. We want 24 months later to be in a COLA type or a cost-of-living. And that's what we're in the seven rate wins outside of California. we're seeing more cost of living type adjustments, which is great. That's the world we want to live in moving forward versus this catch-up process we've been in. So it's nice to put that part to bed. Thanks, Ben.

Thanks. Our next question comes from AJ Rice with UBS. Please proceed with your question.

Hi, everybody. Just to lean into California a little more, obviously, if you haven't had a rate increase for that long a period of time, it probably hasn't been a growth vehicle for you. So what is the percent of your business that's in California today? And when you think about the opportunity that this rate update is going to present, I know you're saying you'll lean into giving caregivers the salary increases they need to start attracting them later this year. Do you need to put any infrastructure of any sort to be able to address a state of that size fully given now it's going to become a growth area as opposed to sort of a maintenance of what you already had type of situation?.

Great question, AJ. I'll start with a different perspective. We've had a lot of people ask us over the last two years why we stayed in California. Like, why don't you just pack up and leave? The rates don't work. Your business has been lethargic in the state. And I think this is the reason why we don't leave states. This is the lesson that you have to learn in this business is stay focused on the long term, stay focused on the advocacy for these patients. So yes to your point, as the company has accelerated over the last three years, California has been doing, our California business has been doing the opposite. It's been lethargic, lagging, fill rates have dropped almost 30% or a third, meaning, our ability to fill the hours that are already authorized. So the very first thing that we want to do is get the caregivers who are working to work more hours on the shifts, on the patients that they currently have. So the first part of our growth is just getting our caregivers who already are working more engaged by paying them more. As Matt talked about, the next two steps that get exciting is really unlocking the unnecessary hospital days and that's where the savings come is as we start pulling through the patients that have been just sitting in hospitals waiting to come home. And then the third group is really the families that have been doing the jobs themselves, meaning you have parents that are providing basically high-level nursing care in their home because they can't hire a nurse anywhere. And so even though they're not in a hospital today, certainly giving those families that have medically-affected children, that may be the mother and the father, neither of which work because they're providing full-time care for the patient, is just a third opportunity for us. So As you think of all of that, it will take some time to solve number two and number three, but the very first thing we want to do that we can start solving even before we get to January 1st is getting the current caregivers more engaged, filling more hours. So the short-term and long-term growth that Unlocked says is very exciting for us. But the most important part is we get to actually.