Q2 2022 Addus Homecare Corp Earnings Call
Good day and welcome to the <unk> Homecare second quarter 2022 earnings conference call.
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I'd now like to turn the conference over to drew Anderson. Please go ahead.
Thank you good morning, and welcome to the Atmos Homecare Corporation second quarter 2022 earnings Conference call.
Today's call is being recorded.
To the extent any non-GAAP financial measure is discussed in today's call. You will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.
This conference call May also contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements.
Regarding attis expected quarterly and annual financial performance for 2022 or beyond.
For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements without limiting the foregoing discussions of forecast estimates targets plans beliefs expectations and the like are intended to identify forward looking statements.
You are hereby cautioned that these statements may be affected by important factors among others set forth in <unk> filings with the Securities and Exchange Commission and then its second quarter 2022 games release, Consequently, actual operations and results may differ materially from the results discussed in the forward looking statements.
The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead Sir.
Thank you drew.
Good morning, and welcome to our 2022 second quarter earnings call.
With me today are Brian Poff, our Chief Financial Officer, and Brad Bickham, our President and Chief operating Officer.
As we do on each of our earnings calls I will begin with a few overall comments and then Brian will discuss the second quarter results more detail.
Following our comments the three of us would be happy to respond to any questions.
While Brian will give you a more detailed review of our financial results I wanted to highlight a couple of items from our second quarter performance.
First even with the labor challenges, we are seeing in parts of our industry. Our team grew revenue eight 7% to $236 $9 million for the second quarter of 2022 as compared to the second quarter of 2021.
This resulted in sequential adjusted earnings per share growth to 91 cents as compared to 77 cents for the omicron impacted first quarter of this year.
Second we had a strong cash flow from operations of $56 $5 million, this quarter, which reduced our net leverage position to less than one times EBITDA.
While we expect our results to return while we expect our results to return to a more normal level. Following the decrease driven by the first quarter I'm a cron surge. It is nice to see our team actively manage the challenge and make it a reality.
I am very pleased overall with our second quarter performance with favorable trends beginning around mid February continuing each month for the ended the quarter and further through July .
Even with the growing prevalence of the most recent omicron Sudbury and our team has continued to perform.
Let me discuss the slightest COVID-19 sub variant.
We have started to see.
Throughout most of the second quarter, we saw little effect from the Covid virus.
During April and May we saw continued decline in the number of patients and caregivers who were in quarantine from the first quarter I'm a con way.
However during June we saw an increased effects of the new omicron sub variant primarily in our personal care segment.
This newest wave has resulted in a slight increase in our consumer and employee quarantines, which so far has had a minimum impact on our financial results as total quarantines remained significantly below those we saw with the Delta and original Omicron waves, we continue to monitor quarantine.
Rates closely but believe that we will be able to successfully worked through these ongoing searches as we have historically.
As we discussed last quarter.
Labor environment remains one of our most challenging issues.
While we are still facing this issue across our company. We are starting to see improvements in our personal care segment with hires per business day for the second quarter of 2022, increasing approximately 21% over the second quarter of 2021 and approximately 9% on a.
Quench them basis over the first quarter of this year.
It's improving our hiring trend has continued into July with hires per business day running slightly ahead of our second quarter of 2022 performance.
As we previously discussed we are constantly evaluating our sourcing.
Barring an on boarding processes to further improve our personal care hiring numbers to meet the continued demand for our services.
While hiring in the hospice and home health business remains a challenge we did see improvement over the last couple of quarters with an increasing ability to hire new clinicians as well as a modest reduction in our clinical turnover numbers.
Overall, we feel the trend in both hiring and turnover is moving in a positive direction and all segments of our business.
Okay.
During this quarter, we started to receive more substantial funding from our states as they implement their plans to deploy funds provided to them under the America Rescue plan Act or ARPA.
With respect to our three largest states.
Illinois use the funding to accelerate last year's rate increased by two months.
As well as fund the upcoming statewide rate increase which will be effective January one 2023.
New Mexico, and New York have provided funding for direct payments to providers to be used primarily to assist in recruitment and retention of caregivers.
Several other states heavy given either temporary or permanent rate increases, which should help us hire and retain more caregivers as the majority of these funds are to be passed along to our employees and wage increases.
As for Illinois, our largest state of operation, we will receive a 70 cents per hour statewide rate increase effective January one 2023.
However on July 1st of this year, we saw an approximate 40 cents per hour minimum wage cost of living increase for our Chicago area personal care caregivers, which will have a slight negative effect on our margins over the next two quarters until the upcoming rate increase occurs.
Once we receive the statewide rate increase we expect to be able to adjust wages for our remaining Illinois employees, which we believe will continue to help with caregiver recruitment.
Now, let me discuss our same store revenue growth for the second quarter of 2022.
For our personal care segment exclusive of New York City Pap programming ARPA funds, our same store revenue growth was two 5% when compared to the second quarter of 2021.
However, while our personal care hours were down year over year, we did see the first sequential growth in hours and a number of quarters.
Our second quarter personal care hours were up three 8% over the first quarter of this year as we continue to see improved hiring and lower quarantine levels.
We have seen sequential growth each month this year since January and personal care starts of care employees worked in clients served.
Turning to our clinical care operations, our home Health segment same store revenue was up 24, 6% from the prior year and 36, 4% sequentially.
We continue to see improving home health admissions, which were up 25, 2% over the second quarter of 2021.
We are excited about our home health operation as it complements our personal care services, particularly where we participate in value based contracting models.
We will continue to focus our efforts on expanding these services into our existing personal care markets.
As we anticipated on our last call our hospice same store revenue increased two 5% over the second quarter in 2021.
We also saw a sequential increase in our average daily census, as our medium length of stay improved to 23 days in the second quarter as compared to 17 days for the second quarter of 2021, and 20 days for the first quarter of this year.
Overall, our hospice ADC increased to 3333 for the second quarter of 2022 as compared to an ADC of 2000 and 460 for the second quarter of 2021 inclusive of the ADC attributable to our journey care acquisition, which closed.
Those down every worry one this year.
As for our development efforts over the past quarter. Most of our deal flow has consisted of smaller acquisition opportunities across all three levels of care.
We continue to have conversations with brokers and other third parties and based on the feedback. We've received we expect to see an increase in potentially larger transactions in late 2022 in early 2023.
I do want to mention that with the proposed rate cut by CMS in home health, we are seeing an overhang related to differing price expectations from buyers and sellers.
We have seen some home health deal process is being put on hold while waiting for the publication of the final rule in late October .
We expect there to be a lower level of transaction activity in the skilled home health sector.
Reimbursement is finalized.
Once the final home health rule is published we expect to see activity in this sector increase and believe we are well positioned to take advantage of these opportunities.
Our skilled home health activity may be slower in the short term, we're still very optimistic on our M&A outlook and we'll continue to build a pipeline focusing primarily on personal care and home health.
We continue to believe that the act that acquisitions will remain an important part of achieving our 10% minimum annual revenue growth target, which we have exceeded for the past few years.
So we had previously discussed we are starting to see additional momentum in our value based care efforts.
Currently we have for value based contracts, which are now in three of our states.
These contracts are focused on helping our patients avoid.
Unnecessary emergency room visits and hospital admissions and.
As well as Readmissions at various Timeframes following hospital discharge.
These programs currently cover approximately 4700 of our personal care clients.
An important component of each of these contracts is a focus on care quality measures and metrics, we feel best quality focus fits well with our overall mission at Atlas.
To date, we have been able to show measurable improvements in these targeted gold, which is what we believed would occur as our personal care and clinical staff are able to closely follow these patients.
To help us with data collection and analysis of our patient outcomes, we plan to invest an additional software tools, which will help us as we continue to scale. These type of arrangements.
While the revenue generated from our value based efforts are relatively immaterial today, we continue to expect them to grow to a more meaningful amount over the next few years.
While the Covid virus continues to be difficult for everyone. Our team has been able to prove the value of taking care of the elderly and disabled consumers and patients in their homes.
The home remains one of the safest and most cost effective places to receive care and is also the place where most elderly individuals and their families prefer it to be.
We believe the heightened awareness of the value of home based care is favorable for our industry and will continue to be a growth opportunity for our company.
As I mentioned on our last earnings call, we understand and appreciate that our apo.
Operations and growth are dependent on our dedicated caregivers, who worked so incredibly hard providing outstanding care and support to our consumers patients and their families.
I am thankful for each of our team members and I'm proud of the job they have done in the past and continue to do each day.
It is important that we all focus on achieving our mission by putting our consumers and patients first.
With that let me turn the call over to Brian .
Okay.
Thank you Dirk and good morning, everyone.
I just had a solid financial performance for the second quarter. Our results reflect positive same store growth trends in all three segments compared to the second quarter last year.
We also benefited from our hiring and retention efforts and an improving labor market for our personal care business segment compared to prior quarters.
Our home health business continues to expand and reflects the addition of the two acquisitions, we completed in 2021 Armada home health and hospice and some of the home health.
We're also pleased to see more historically normalized trends for our hospice business.
We experienced strong cash flows during the quarter and remain well positioned in the current inflationary environment.
As Derek noted total net service revenues for the second quarter were $236 $9 million.
Revenue breakdown is as follows.
Personal care revenues were $174 3 million or <unk> 73, 6% of revenue.
<unk> revenues were $52 $1 million or 22% of revenue.
When compared to the second quarter last year Hospice care revenues include. The addition of the Hospice Division of Armada, which closed on August one 2021, and the first full quarter of the acquired hospice operations, a journey here, which closed on February one 2022.
Home health revenues were $10 5 million or four 4% of revenue.
As noted these results include the operations of two acquisitions, the home Health Division of Armada, which closed on August one 2021, and some of them health, which closed on October one 2021.
We have a strong business model in place across our homecare continuum and believe we are well positioned in all our operating segments. In addition to our strong organic growth. We have added $55 million in revenue to date in 2022 with the acquisition of a journey here.
We continue to evaluate and pursue other acquisition opportunities and have a robust pipeline of potential transactions that meet our criteria.
As Dirk mentioned the overhang from the proposed reimbursement changes in home health and lack of visibility on the ultimate financial impact on potential acquisition targets is delayed the transaction process with respect to some potentially larger acquisitions and skull we.
We expect this to be a timing issue on rate information that will largely be resolved in the fourth quarter and we continue to actively pursue other strategic acquisitions that meet our criteria.
Other financial results for the second quarter of 2022 include the following.
Our gross margin percentage was 31, 9% compared with 31, 6% for the second quarter of 2021, as we continue to see the benefit from a higher proportion of clinical services.
However, we were negatively impacted by approximately 20 basis points during the second quarter from the initial reinstatement of Medicare sequestration with a 1% cut effective April <unk>.
We expect to see an additional 20 basis point impact in the third quarter with the additional 1%.
Got it.
Additionally, we will have a short term headwind from the July one 2022 minimum wage cost of living and increase in our Chicago market, which will have a negative impact of approximately 30 basis points through the end of the year.
We are scheduled to receive a statewide reimbursement increase in Illinois effective January one 2023 that will offset this most recent minimum wage increase.
We were pleased to see the recent announcement regarding the upcoming hospice rate adjustment with some recognition of the current inflationary market.
This increase will be effective on October one 2022, and will benefit our consolidated gross margin by approximately 50 basis points.
Like others in the industry, we continue to advocate against the proposed home health rule, although our exposure is minimal as whole belt constitutes less than 5% of our consolidated revenues.
G&A expense was 23, 3% of revenue slightly higher than 22, 1% of revenue a year ago, primarily due to a larger percentage of clinical services with a higher G&A profile.
So includes the first full quarter of our journey to your acquisition, which closed on February one 2022.
Adjusted G&A expense was 21, 3% of revenue for the second quarter compared to 24% for the same period last year and up slightly sequentially from 21, 1% in the first quarter.
The company's adjusted EBITDA increased to $25 1 million compared to $24 $3 million a year ago adjusted.
Adjusted EBITDA margin in the second quarter was 10, 6% compared with 11, 2% for the second quarter of 2021.
Adjusted net income per diluted share was <unk> 91, compared with 90 for the second quarter of 2021.
The adjusted per share results for the second quarter of 2022 exclude the following.
Acquisition and de Novo expenses, and noncash stock based compensation expense of 13 cents.
The adjusted per share results for the second quarter of 2021 and exclude the following.
The impact of the retroactive, Illinois rate increase of seven <unk>.
Acquisitions and de Novo expenses of 11 cents restructure and other nonrecurring costs of <unk> and noncash stock based compensation of 12 sets.
Our effective tax rate for the second quarter of 2022 was 25, 1% within the range of our expectation.
For full calendar 2022, we expect our tax rate to remain in the 25% to 26% range.
Dsos were $45 nine days at the end of the second quarter of 2022, compared with 52 four days at the end of the first quarter of 2022.
We continue to see consistent payments from the majority of our payers across all of our operating segments and expect to see this trend continue, especially in our key markets, where the states currently have budget surpluses and a focused approach to payments.
Our dsos for the Illinois Department of aging for the second quarter were consistent with the first quarter at 43 days.
Our second quarter net cash provided by operations was very strong totaling $56 $5 million inclusive of a net $14 $2 million in ARPA and.
Based primarily on our strong collection activity.
As a result during the quarter, we were able to pay down approximately $60 million on our revolver, reducing the outstanding debt balance to $196 $3 million and reducing our exposure to rising interest rates.
As of June 32022, the company had cash of $129 million with capacity and availability under our revolver of $376 $4 million and $168 $4 million respectively.
While we remain focused on pursuing our acquisition strategy, we will continue to be opportunistic further reducing our already low net leverage which is currently just under one times.
This concludes our prepared comments this morning, we'd like to thank you for being with us.
As the operator to please open the line for your questions.
Yeah.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing me Keith.
Is it any time your question has been addressed and he would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Yeah.
The first question comes from Brian <unk> with Jefferies. Please go ahead.
Hey, good morning, guys. Thanks for all the discussion on the value based progress.
Progress that you're making but maybe if you can help us.
Understand what youre seeing there in terms of the economics or maybe the margin growth holiday youre getting out of that business and then your thoughts on how that can be scaled and what it would take for greater adoption with some of the managed care managed Medicaid plans in your Medicare advantage plans that are looking to employ more personal care going forward.
Yeah.
Interesting, Brian with the value based care, it's something that we have seen continually become more important over the last few quarters and as we see today we've got.
Poor contracts they now expanded into three of our states. The important part what we see is that we having personal care with clinical services is very important to these contracts and so you know our ability.
T.
Two depending on the contract and there is so much structured differently, depending on who that's with.
Our margin profile is basically consistent with.
What we've seen in the past in some contracts, we get paid for our personal care service plus savings.
In others, it's more.
The payment for our personal care services, and then certain bonus payments based on what we're able to help.
Accomplish that that particular payer wants to accomplish so.
Again today, we've been in.
Couple of our contracts over a year, we're starting to develop outcome data, which I think is extremely important as we try to scale this up in the future.
So I believe over the next two or three years, you will continue to see this grow to be a more material part of our business and one in which honestly we spend some money and we're going to continue to invest some dollars as we look to them, we're going to help develop some off where software to help us with analytics.
And looking at what we have from outcomes coming from our patients. So generic we're very excited about again not material today, but we think in the next two or three years will become more so.
I appreciate that and then I think just about organic growth in the quarter, you did two and a half which that same store Rev growth. Your long term guidance is all it has been 3% to 5% for a long time now so just wanted to hear your thoughts on the opportunity to accelerate growth I know, you're still winding down to see the paas business in New York, but.
Maybe you know without going into guidance just your thoughts on organic growth for the back half of the year and into next year.
Well you know three 5% as you say has been our target for a long time and it's we've come through a very interesting time, Brian as you know with Covid environment over the last two plus years.
We have been able in most quarters to hit that 3% to 5% range largely.
Due to rate increases over the last couple of years, it's not been as much focused on volume as it has been in the historical part of our business. If you look back historically over our business operation we.
We were excited to see this quarter personal care hours start to grow from the first quarter. That's exciting you know again part of what we've been facing is not just us hiring and caregivers.
Help us with this growth, but also some of our states and others being able to hire personnel to actually get through the authorization process to allow US then to have those hours to serve our clients. So as this continues to move forward and if we continue to see the trend of growth that we've seen over the last few months.
<unk>.
We expect that 3% to 5%.
To be a solid number and you know hopefully we would believe we could get towards the higher end of that.
Towards that.
The next couple three quarters, especially as you see again the rate increase we're going to get from Illinois, and the first part of the year, which will be very helpful.
Gotcha. Thank you Sir.
The next question comes from Julian I got Duke with Bank of America. Please go ahead.
Yes. Thank you.
So I guess.
Two follow ups.
One is you've mentioned that improved hiring Ah interesting. Okay. So can you give us a little more color there in terms of what's driving that that improvement.
And I guess and how would you contrast, this with what what do you see in hospice.
In home health.
Hey, Joanna this is Brad bickham, our with on the personal care side, we have seen a nice trend and increase in hiring per business day, which is a metric that we follow I think from a you know kind of the reasons behind that I think one you've seen the federal stimulus money kind of play out.
And it's kind of at the end of last.
Last year, the unemployment benefits went down are you.
SAP also seen kind of a higher inflationary environment I think people need to work more hours.
And also potentially in other than looking for maybe a second a second job and that's something that personal care is set up for very well, but we have quite a bit of a.
Part time employees I mean, that's primarily what our workforces based on.
And it allows people that if they just need to pick up some extra hours. They can do that readily when you contrast that on the home health and hospice side.
We've seen it certainly a more challenging environment than we have on the personal care that being said we've seen some kind of improvement there are still certain markets that are a little tighter than others, where we have more challenges that are.
To retain staff and to recruit new staff, but it does seem to be improving a little bit, but just not as.
Readily available.
As the personal care side, where we've seen a nice pickup in hiring.
No definitely I think it was to hear about that.
And then just follow up talking.
Talking about our value based care I guess, we're now asking your opinion on.
And I guess, how meaningful this could be cause I wanted to say a couple of weeks ago, where do you like CMS published the first quasi measure set for home and community based services, but they try to encourage the use of some sort of consistent quality measures within and you know of course different states that participate in the program. So what are the <unk>.
Locations for you and.
So would this be helping with the value based care and kind of a shift towards value based care.
Yeah. This is a kind.
It's something that we've been pushing forward.
I think the industry has as well to have some standards out there on the personal care side.
If we look at.
One value based contract in particular actually track some of those same metrics that CMS is looking to implement so I think our value based contracting that we have today is going to position us well for when those metrics are if and when those get formally adopted but it's certainly something that I think the industry as a whole and <unk> in particular, we've been.
Kind of pushing on.
It should be a helpful for us going forward.
Thank you.
Next question comes from Scott Fidel with Stephens. Please go ahead.
Hi, Thanks, good morning.
First question just wanted to follow up on the cash flows and really maybe get some some feedback or or guidance from you on thinking about modeling operating cash flow for the back half of the year.
Obviously, a really strong print on cash flow in the second quarter, Brian you called out some of those ARPA funds that did contribute to that show maybe it would be helpful.
How youre thinking about I guess, the ARPA fund flow through <unk>.
In the back half of the year and then any other.
Sort of notable working capital items that you would call out for the back half of the year.
Yes, Scott I think it was definitely a great quarter for US I think as we noted our first quarter call. We had some timing differences with payroll and some of those items that we normally would see I think we got some benefit from a working cap perspective in the second quarter or just off of that timing, but the Agra funding is now at about $14 2 million I think we're still expecting to get additional funds.
Later this year, we have not received all the all the funding that we had been scheduled to receive yet so you'll still see some of that come through.
$56 5 million for the quarter you back out the $14 2 million of net ARPA were right at $42 million for the quarter I think it's 48 million net of ARPA year to date.
You know our expectation just thinking about kind of our full year projection our conversion rate from an adjusted EBITDA perspective, as you know in the upper <unk> close to 70% so that would put us in that kind of mid to upper sixties range for our full year target and we're tracking at $48 million.
Year to date through the second quarter. So so nicely ahead, I think we've gotten definitely seeing dsos come down was a big contributor during the quarter. Obviously, you wouldn't expect to see continued movement in that regard you go get it out into the <unk>, but you know I think definitely we've seen strong collections year to date and would expect to see consistent payments going forward.
Got it and then just my follow up question just wanted to revisit on the M&A dynamic that was helpful sort of framing that dark given just around some of the dynamics with the proposed home health rule I guess, if I had to just sort of follow up questions on that the first one would be just you had.
Some of the larger deals getting deferred maybe to later this year into next year I just wanted to confirm it that specifically in home health because of.
The uncertainty around the proposed home health rate or where was that in some of the other markets as well like personal care.
In hospice, so that'd be the first part and then Dirk just when you had mentioned some of the differentials between buyers and sellers on valuation.
That just that the salaries are actually still wanting the same values. Despite the proposed home health rule or is it just simply too hard to determine intrinsic value right now until we get those final 2023 home health rates.
Yeah, Scott as part of the first part what we've mainly seen in the larger transactions that we've been a part of it had been home health.
Realistically as we've talked about in the last couple of quarters.
We're focused more on home health and personal care acquisitions. Today, then hospice doesn't mean, we wouldn't look at the heart, specifically was appropriate and in markets, where we had a strong personal care coverage.
But so far this year, we've really focused more of our efforts in the other two segments.
And some of the processes couple of processes, we we're in we're well underway.
And when the proposed rule came out and at that point in time.
They went into a holding pattern waiting for the publishing of the final rule later on this year as we would talk about.
Someone's overhang because of the differences in valuation between buyers and sellers I think it really goes.
Most of what we're talking about there.
As in our home health.
I think the sellers believe.
That the rule is not really going to be a big deal and that we should be willing to pay.
Hey value, regardless, I think buyers are looking and saying.
Great that if that's the way it works out and in October November when the published rule comes out we will fine I think that that understanding comes out the same way then the value between buyers and seller in home health I don't think is is really that much of a disconnect I do think there's still somewhat of a disconnect.
Between sellers of hospice programs and buyers.
The markets seem to have come down the public multiples have come down I don't think all of the sellers thought process quite come down to that level, and then to personal care and great thing about personal care. It stays pretty consistent you know smaller deals as Brian has said in the past you know or you know windows.
6% six seven times range larger deals maybe eight nine.
Large deal that's very strategic might be 10, but those are all very reasonable multiples that we I think could agree with so.
Realistically the rule is probably the biggest.
Impediment right now to signing deals in the home health market.
Helpful color okay. Thanks.
The next question comes from Paul Chew with Stifel. Please go ahead.
Hey, Good morning. This is Seth <unk> on for Tayo I just had a question on the personal care you know you earlier the improvement in the hiring and the labor improvement there but.
The volumes were a little bit lighter than we had expected how much of an impact as labor still having on personal care volume and you know as.
As a as a labor force continues to improve how much acceleration could we see into the second half of 'twenty two.
Yes, Seth as Brad I think really what you saw and you know we experienced a pickup in the COVID-19 corn teams really that last weekend may carrying over into June.
Dampened our June results and I think that's what.
I had kind of a more of an impact on the numbers rather than the hiring numbers are high numbers like I say, we're been very robust and so we expect as we're still seeing some pace. Our case counts that are still a little elevated but again nothing like we experienced in Q1 or in Bakken.
The fall with the Delta variance, so optimistic that those numbers should start coming back up for us and we should see some better volume numbers towards the back half of the year.
Great. Thanks for that color and then my last question was just on the American rescue and funding I think you guys received $14 million in the second quarter do you still expect to receive the full $20 million or so in benefits funding that you alluded to last quarter and if so when should you expect to receive the remaining.
Funds.
We still expect to receive the additional amount that schedule I think it's just timing of when we're receiving those funding from the state, but I think we expect to see most of that money to be honest through the third quarter.
Great. Thanks for taking my questions.
Yeah.
The next question comes from Matt Borsch with BMO capital markets. Please go ahead.
Thank you.
Could you just touch on <unk>.
As you talked about potential acquisitions.
What do you think is motivating sellers here.
Is it retirement of the the key owner or.
It's some perhaps sense that they are at a scale disadvantage on I don't know if you know that motor.
Motivation, but also if you just combine with that question on how high you'd be willing to go on your debt leverage to do a larger acquisitions.
Let me talk about what we're seeing what some of the sellers I believe and then Brian will talk about our leverage.
But I think if you look at the two particular deals we've been looking at this year that have now been placed on a whole I think the motivation of the seller.
It might be two fold, one one I think and.
And a lot of cases, the last couple of years of operating through the Covid environment has been very tough it's been a difficult environment and I think some of the owners of these companies as they've gotten towards really towards the end hopefully the major effect.
Fact of the Covid surge is on business.
An opportunity to say look at it it may be time that we ought to see if we can get some value out of the business I think.
The other are the other motivation is some of these.
Sellers are at.
At a point in their life, where they're looking to do other things, whether that'd be retirement or other businesses and it's time for them to see about monetizing what they put in to.
The companies or a number of years. So that's really I think the motivation we've seen so far.
Yeah, I'd, just add to that quickly, but I think beyond that skilled side, particularly I think obviously you know private equity has been very active in putting the assets together with a return in mind with the markets. The way they've been the last couple of years have done very well.
So we've seen quite a bit of those instances, where private equity you would buy a platform put together. Several acquisitions. Then you don't get those things integrated I'll look to sell those we see more of that on the home health and hospice side that the personal care side is where we see more of what Dirk was alluding to with more individual proprietors are better run those businesses are looking for an exit strategy. So.
I think on leverage I think obviously, we're very well capitalized today you know I think we've said historically been in the past we'd be very comfortable the two and a half.
Half the three times range, we'd be willing to go higher than that for the right deals that made a lot of strategic sense for us. If we saw a path to kind of bring that leverage down through cash flow on the other side and I think that's pretty consistent with our thinking today. If we can find the deals that could put us into that range.
Thank you. Thank you that's helpful.
The next question comes from John Ransom with Raymond James. Please go ahead.
Hey, good morning.
So you.
You know the home health.
Companies have been struggling with this transition to Medicare advantage and you know one of the big companies and it's been publicly talking about.
Changing the economics, it's something more of a case rate.
Versus a per visit.
And.
So my question I know this is like a hypothetical on top of a hypothetical but as you look at our home health asset.
Do you think you know you you're big enough you'd you'd be big enough to go.
And to see Unitedhealthcare, Humana, Aetna, and say gosh, guys I'd like to be paid differently. On this book of business or is that something that you would just have to fight through that.
Transition to per visit and at a lower margin and put that in the valuation.
John This is Brad I think we were thinking about Medicare advantage and trying to migrate from a per visit or more of a case rate or episodic type payment.
I think a couple of factors one when you think about size, we're not that large in home health, yet, but we're certainly intending to grow that platform and get more scale, but we do have a very large personal care components and most of those payers have.
Medicaid plans and so I think we have the ability to leverage the personal care size and scale.
Have those conversations with a united or an aetna.
And then secondly, I think you also have to look at you know it's no. One thing you need to have scale nationally, but probably even more relevant as having scale in a regional or localized markets.
I think is important and that's where we you know kind of our philosophy as you know we're not looking to put our hands on in all the states are having.
Having locations, we're really more focused about giving a density in specific geographic areas, which I think it would help us with those negotiations.
Okay, and then just as a follow up this might be unfair, but once you're in Chicago a rate goes into effect.
And we look at kind of a <unk> 23.
How does your.
Rate per day compare to say 2019 versus your cost per day. Once once everything is kind of normalized out I'm just thinking about the business over the Covid valley. Thank you.
Hey, Joe This is Brian I think if you look at where we are you know this quarter compared to last year and maybe that's a good proxy on average across our personal care business. Our bill rates are up a little over 5% year over year. Most of our states are increases over the prior year wage rates I think have slightly outpaced that growth with some of the <unk>.
Inflationary pressures and things that we've seen this year I think going into 'twenty three sans any further activity in things that we don't expect from a COVID-19 perspective et cetera, I think with the next with Illinois rate increase I would just still being our largest market.
That's going to bring us probably between items $10 million of additional kind of new annualized revenue starting Jan one out of kind of our normal margin would you say that you know probably upper 20% range is going to be very helpful. I think it seems that that dynamic. The last couple of years I think we're going to see another benefit in early 'twenty three from that that will be impactful, but I think our expectation.
Going forward as we should see those level off where youre not going to see wage rates continue to outpace reimbursement.
It was more the back of what we've seen over the last year, but we would not expect to see that going into 2023.
Thanks, so much.
Okay.
The next question comes from Matt <unk> with William Blair. Please go ahead.
Hi, This is madeline moment on for Matt Larew circling back to M&A I know that you said right now you're having some trouble finding a common ground with salaries, but wondering in general after a couple of years.
Higher funding levels higher reimbursement the sequestration suspension would you expect home health valuations to come down as separate from the CMS rule I see sequestration seasons back in like what do you expect long term for.
For home health multiples.
Yeah, I think this year, our expectation that we wanted to talk about it. The last couple of calls as you know valuations in home health with some of those pressures we expected to see be a more rational market I'm coming to this year I think a lot of us have been kind of waiting for more the influx of smaller organizations.
Organizations come into market I think the things you mentioned just kind of get some of those guys are blue but to your point those things have come to an end sequestration coming in you know in Q2 now in Q3 than it put more pressure and I think when there was some more clarity on the rule and how that's going to impact I think that definitely is going to probably help rationalize margins a little bit as well depending on how that turns out.
I think our view is like Rick mentioned some of the larger processes, they've kind of put themselves in a holding pattern.
Some of the smaller processes, where maybe the proposed rule wouldnt be as impactful I think were still willing to have conversations and trade. So I think we still got some opportunities there, but I think overall, our expectation is that the home health multiples probably little bit lower on the other side of this that what we saw maybe a couple of years ago.
Yeah.
It is a I think when we got into this project with homecare Homebase.
I don't know if they fully realize the complexity of personal care and you know when I say the complexity as compared to the skilled side, where your Medicare as a predominant player.
Personal care is a totally different animal from the standpoint that you're dealing with multiple states different.
Types of programs within those states. So the reimbursement codes all that sort of thing is a lot more complicated all that being said you know we've.
Been pleased with the progress we anticipate you know.
So we've been able to rollout some pilot sites kind of Q1 of next year.
But you know it's gonna be a you know the main thing is we want to make sure that we have a product that are.
But we're satisfied with that before we go forward with it.
I think they've been they've certainly indicated their willingness to put those resources to develop that product.
And as far as integration.
And just to add just the second part of the question regarding integration with homecare Homebase. The clinical side. So just think about it from the standpoint that all of those patient records will be in one system that will be able to access through and so we think that that's really kind of one of the.
An important component of really recognizing the benefits of the value based contracting potential in the personal care side and then also just when you think about referrals coming from personal care to home health hospice really helping facilitate that on a larger scale.
Great. Thank you so much for the color.
As a reminder, if you would like to ask a question. Please press Star then one to be joining us in the queue.
The next question comes from Mitchell Randgold, Paul with Sidoti. Please go ahead.
Yes, hi, thanks for taking the questions I was just wondering if you could provide some additional color in terms of the new hiring and retention strategies to combat the tight labor market you are seeing especially on the clinical side.
Yes, so if you think about on the clinical side we've.
It's it's really putting more recruiting resources to the to the clinical side.
Again, that's a little more challenging if you think about personal care versus the skilled components as kind of a different recruiting environment.
Have you don't have a corporate recruiters that focus on filling positions on the clinical side plus that kind of your general administrative positions, whereas our recruitment efforts are predominantly on the Pcs side or at the branch level.
But.
It's certainly on the clinical side of challenging environment, you know when you look at personal care.
<unk> got the ARPA funds that are you know really we haven't.
Tapped into in a meaningful way, yet I mean, those programs and retention programs that we're putting in place to both help us keep caregivers encourage caregivers to work more hours and.
I also will help with our recruitment efforts that is really just getting started on the PCF side.
Okay. Thanks, that's great and then Brian there was a significant debt reduction in the quarter I was just curious in terms of the capital allocation priority. If it's more a question of.
Trying to overcome the higher interest rate environment versus maybe a shift in focus priorities.
Yes, I don't I don't think it was a shift in priorities I think we still prefer to use that capital towards M&A windows that are available I think in the absence of that and some of the overhang currently particularly in the home health side. I think you guys probably heard US talk on our last call you know more of our pipeline was slanted that direction.
So during that period of kind of call. It a delay we try to be opportunistic and at least limited our exposure to rising interest rates, but I think there's going to be meaningful savings in interest expense for us. So I think we'll continue to do that until we see M&A pick up and then with the excess of being full revolver now not a term loan you know we have that ability to draw.
And use that you know at the time that we needed so that'll be kind of our focus over the next couple of quarters.
Okay. That's great. Thanks for taking the questions.
Sure.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Dirk Allison Chairman and CEO for any closing remarks.
Yeah.
Thank you operator.
I want to thank you for your interest in <unk> and for you being a part of our earnings call today and hope you have a great week.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.