Q3 2022 Addus Homecare Corp Earnings Call
Good day and welcome to the added Homecare third 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 third quarter 2022 earnings Conference call today's call is being recorded.
Any non-GAAP financial measure is discussed in today's call. You'll also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.
This conference call May also contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements among others regarding out as expected quarterly and annual financial performance for 2022 or beyond for this purpose any statements made during this call.
<unk> 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.
Hereby cautioned that these statements maybe affected by important factors among others set forth in <unk> filings with the Securities and Exchange Commission and in its third quarter 2022 news release, and 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.
At this time I would 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 third quarter earnings call.
With me today are Brian Poff, our Chief Financial Officer, Brad Bickham, our President and Chief operating Officer.
As we do on each of these earning calls I will begin with a few overall comments and then Brian will discuss our third quarter results in more detail.
Following our comments the three of us would be happy to respond to any questions.
To begin I want to highlight a few items from our third quarter performance.
Even with the continuing labor challenges, we are seeing in parts of our industry.
Our team grew revenue, 11% to $245 million for the third quarter of 2022 as compared to $216.7 million for the.
The third quarter 2021.
This resulted in adjusted earnings per share of 94 cents.
As we saw in our second quarter of this year, we had strong cash flow from operations in our third quarter totaling $18.3 million.
This reduced our net leverage position to less than one times adjusted EBITDA.
We are proud of our conservative balance sheet and believe our disciplined approach has put us in a strong position to take advantage of future acquisition opportunities that may occur in spite the current economic environment.
I'm very pleased with not only our third quarter performance, but also with our results year to date, especially in light of the Covid Spike we experienced during the first two months of the year and to a lesser extent at the beginning of the third quarter.
Our team has continued to perform and provide excellent patient care. Despite these reoccurring challenges.
As we discussed last quarter.
The labor environment remains a challenge however, as we started to see in the second quarter, we did experienced improved hiring and our personal care segment with cars per business day for the third quarter of 2022.
Increasing approximately 3% as compared to our harsh per business day in the second quarter of this year.
Cars per business day in the third quarter of 2022 were up approximately 14% over our harsh per business day in the third quarter of 2021.
We are seeing this improved hiring trend in October with cars per business day running ahead of our third quarter of two 2022 performance.
As previously mentioned, we are investing in technology that will help us to further improve our sourcing hiring and on boarding process to increase our personal care hiring numbers to meet the robust robust demand of our services.
While hiring in our clinical segment is more challenging than in our personal care segment. We are seeing improvement over the last few months with an increased ability to hire new clinicians as well as a modest reduction in our clinical turnover numbers overall.
Overall, we feel the trend in both hiring and turnover is moving in a positive direction in all segments of our business, which should help us serve more consumers and patients.
During our third quarter. The funding we received from the American Rescue Plan Act or ARPA has allowed us to begin to increase caregiver wages.
They sign on and retention bonuses or provide onetime bonuses to current caregivers depending on the state program.
This has been helpful with our recruitment efforts over the past quarter and should help our hiring and retention efforts as we have a significant portion of these dollars still to be utilized.
That's for Illinois, our largest state of operations on July 1st minimum wage increased by approximately 40 cents per hour for our Chicago area personal care workforce.
This negatively impacted our gross margin in the state during the third quarter.
However, we will receive a 70 70 cents per hour statewide rate increase effective January one 2023.
Once we received the statewide rate increase we will likewise suggests wages for our remaining Illinois employees, which we believe will help with caregiver recruitment while positively impacting our gross margin profile in Illinois.
Now, let me discuss our same store revenue growth for the third quarter of 2022.
For our personal care segment exclusive of the New York Consumer directed program, our CD path.
And ARPA Barnes, our same store revenue growth was 7% when compared to the third quarter 2021.
From a same store growth of 2.5% for our second quarter of this year is as we expected.
We experienced increasing personal care admissions in August and September with this positive momentum continuing into October .
I just don't want to give a brief update on recent developments regarding our participation in the New York City Pap program.
As you know the state initiated a request for offer process in 2019.
Ultimately we were not selected as a winner in that process along with many other providers in the market.
We set this quickly appealed this decision as we believe the criteria used to select the winning providers lacked transparency.
Recently, the state has rescinded they arent, though and has allowed all providers of a certain size to continue indefinitely and the state Medicaid program, which eliminates overhang of potential transfer of our existing state Medicaid C Pap clients to other providers.
In order to qualify provider simply need to respond with an attestation, which we will submit before November 29 2022 deadline.
Separately the state made reimbursement changes under the Medicaid C. D back program that made an appropriate level of profitability challenging.
As a result of both of these actions we continue to serve our existing C. D back clients under the state Medicaid program, but ceased taking any new referrals.
While we now have clarity on the future of our existing clients. We are evaluating the current reimbursement environment under the state Medicaid C. Pap program to determine whether we will resume accepting inbound referrals for that program.
In the meantime, we and other providers are also lobby extensively and are hopeful the stage well make the necessary adjustments to return providers participating in the state Medicaid C. D path program to a more manageable margin and allowed the resumption of services, but that was a neat.
As a reminder, we continue to operate as normal with our managed long term care plan partners and the New York market.
Turning to our clinical care operations, while our home health segment same store revenue was flat when compared to the prior year. We we did see a 15, 1% increase in same store admissions over the third quarter of 2021.
This quarter, we saw a shift in our mix of patients towards non episodic care.
Our operations team is working to improve this mix to a more historical level.
We are also in discussions with our Medicare advantage payers concerning adjustments to our contract rates.
In addition, Brad and his operations team are working on our staffing mix as we expand our presence in home health. We are excited about our home health operation as it complements our personal care services, particularly where we participate in value based contracting models.
While our hospice same store revenue was flat when compared to the third quarter in 2020. One we did see an increase of one 2% and our average daily census, as compared to the third quarter 2021 and.
And a sequential increase of one 5% as compared to our second quarter of this year.
While we had similar admissions to what we saw in the second quarter of this year starting in late August we did experience higher than normal discharge rate.
During October we started to see higher admissions volumes, while our discharge has started to return to a more normal level, which we believe should grow our a D C.
Our medium length of stay improved to 28 days in the third quarter as compared to 2023 days for the second quarter of 2022, bringing our mini and length of stay back in line with pre pandemic levels. Although part of this increase was due to the elevated discharge rate in the quarter.
Our hospice ADC increased to 3280 for the third quarter of 2022 as compared to an ADC of 2000 and 629 for the third quarter of 2021.
Closer of the ADC attributable to our journey create care acquisition, which closed on February one of this year.
On October one of this year, we closed our acquisition of Apple home Health care, a Chicago based skilled home health provider.
Apple home Health care serves approximately 480 patients in the 11 County Metro area in and around Chicago.
This acquisition furthers our strategy of building out both home health and hospice services in markets, where we have a strong personal care presence.
With three clinical care acquisitions in 2022, and our largest personal care market in Chicago, we have strengthened our ability to serve patients, while allowing us to work more closely with M. C o's, including Medicare Medicare advantage plans I want to welcome all the Apple home health care team.
The <unk> family.
As for our ongoing development efforts, we are pleased with the level of activity in our pipeline as we look for acquisitions that meet our strategic criteria.
Our deal flow over the last two quarters has consisted of a number of smaller acquisition opportunities across all three levels of care.
We are now starting to see a number of larger assets being brought to market and we expect to see more of these scale opportunities in the coming months.
We were excited by the CMS announcement yesterday about slide 0.7% increase for 2023.
This increase is smaller than we would like to see we are appreciative of the change by CMS moving away from the decrease of four 2%.
We expect to be able to take advantage of more home health care acquisition opportunities that should occur now that the final rule has been published as we remain well.
Capitalized.
As far our value based care efforts.
We are seeing positive results from our various valued managed care contracts.
As a reminder, we currently have for value based care contracts and three of our states.
These contracts are focused on helping our patients avoid.
Unnecessary emergency room visits and hospital admissions.
As well as Readmissions at various time frames following a hospital discharge.
We have recently received positive feedback from our value based care partners as our personal care and home health teams had improved patient results.
In addition to our four current contracts we are working on two new opportunities, which should start early in 2023.
We are also in negotiations with a number of additional M C o's and acos for potential contracts around value based care.
As we have previously mentioned our value based efforts are relatively immaterial today, we expect them to grow to a more meaningful amount over the next few years.
I am so proud of our team for the care, they are providing to our elderly and disabled consumers and patients.
Our home remains one of the safest and most cost effective places to receive care and it's also the place where most elderly individuals and their families prefer to be.
We believe the heightened awareness of the value of home based care is favorable for our industry and will be a growth opportunity for our company.
We understand and appreciate that our 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 want to thank each of our team members and tell you how proud I am in the job you've done in the past and continue to do each day it.
It is important that we always focus on our mission, putting our consumers and patients first with that let me turn the call over to Brian .
Thank you Dirk and good morning, everyone I just had another solid financial and operating performance for the third quarter. Our top line growth reflects positive same store growth trends in all three segments compared with the third quarter last year, particularly in personal care, which is 7% was above our normal expected range of 3% to 5%.
We are still facing a challenging labor market in our clinical services, our hiring and turnover trends in personal care continued to improve in the third quarter.
Our home health business had a strong volume quarter boosted by the addition of two acquisitions, we completed in 2021 Armada home health and some at home health.
We are also pleased to see more stable trends for our hospice business with continued improvement in median length of stay.
As Derek noted total net service revenues for the third quarter were $245 million. The revenue breakdown is as follows.
Personal care revenues were $179 $2 million or 74, 5% of revenue.
Just care revenues were $51 $4 million or 21, 4% of revenue.
When compared to the third quarter last year Hospice care revenues include. The addition of the Hospice Division nowhere motto, which closed on October August one 2021.
Acquired hospice operations, a journey here, which closed on February one 2022.
Home health revenues were $10 million or four 1% of revenue.
As noted these results include operations of two acquisitions, the home Health Division of Armada and summit home Health, which closed first 2021.
We have continued to actively pursue acquisition opportunities that complement our organic growth and acquisitions remain an important part of our growth strategy with the recent addition of Apple home Health care on October one and the journey care acquisition in February we have added approximately $65 million of annualized revenue to date in 2022.
We continue to evaluate and pursue other acquisition opportunities and have a robust pipeline of potential transactions that meet our criteria.
With the announcement of the final home health rule, we anticipate the overhang. This has caused on the home health M&A landscapes dissipate and allow acceleration of this portion of our pipeline.
We look forward to becoming more active on the acquisitions and remain well capitalized to take advantage of these opportunities as they arise.
Other financial results for the third quarter of 2022 include the following.
Our gross margin percentage was 31, 3% compared with 39% for the third quarter of 'twenty 'twenty. One is overall, we continued to benefit from a higher percentage of clinical services.
However, this was partially offset by the negative impact of the July one 2022 minimum wage increase in Chicago, one of our largest markets. We are scheduled to receive a statewide reimbursement increase in Illinois.
January one 2023, which will offset the minimum wage increase.
As expected, we also experienced a negative impact in the third quarter of the final phase into a Medicare sequestration effective July one.
However, we expect our gross margin in the fourth quarter of 2022 to benefit from the October one 2022 hospice rate adjustments, which should contribute approximately 50 basis points based on current volumes.
G&A expense was 22, 5% of revenue slightly higher than 21, 4% of revenue a year ago, primarily due to a larger percentage of clinical services with a higher G&A profile as well as higher acquisition and stock compensation expenses.
Adjusted G&A expense was 26% for the third quarter of 2022, an increase over the prior year of $19, 5%, but a decrease sequentially from 21, 3% in the second quarter.
The company's adjusted EBITDA increased to $25 $7 million compared to $24 $9 million a year ago.
Adjusted EBITDA margin in the third quarter was 10, 7% compared with 11, 5% for the third quarter of 2021.
Adjusted net income per diluted share was <unk> 94, compared with 91 for the third quarter of 2021.
The adjusted per share results for the third quarter of 2022 exclude the following.
Acquisitions and de Novo expenses of eight cents restructure and other nonrecurring costs of one son and stock based compensation expense of 14 for us.
The adjusted per share results for the third quarter of 2021 exclude the following.
Acquisitions, and other expenses of eight cents and stock based compensation expense of 11 cents.
Our tax rate for the third quarter of 2022 was 23, 7% slightly lower than expectation and primarily due to higher work opportunity tax credits as we see our personal care hiring numbers continue to improve.
For calendar 2022, we expect our effective tax rate to remain in the 25% to 26% range.
Dsos were $46 two days at the end of the third quarter of 2022 relatively flat compared with $45 nine days at the end of second quarter of 2022, we have experienced strong cash collections 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 DSO for the Illinois Department of aging for the third quarter were $35 four days compared with 43 days at the end of the second quarter of this year and are at an all time low in <unk> history.
While continuing to be a strong supporter of our services in the state. We also appreciate the consistent payment trends, we have experienced in Illinois over the past few years.
Our third quarter net cash provided by operations was $18 $3 million, including a net $4 $4 million in ARPA funding and was in line with our normal expectation.
Exclusive of ARPA funding, our cash provided by operations totaled $63 $8 million year to date are ahead of our normal conversion rate, primarily as a result of our strong cash collections.
As a result, we have been able to pay down a net $93 million on our revolver over the past two quarters with a reduction of $33 million during the third quarter of 2022.
As of September 32022, the company had cash of $105 $6 million with capacity and availability under our revolver of $375 $5 million and $205 million respectively.
In this economic environment, we are well positioned with a capital structure that continues to support our growth initiatives and acquisition strategy as our net leverage ratio is just under one times.
As a result, we anticipate the ability to be active in the M&A markets further our geographic concentration and enhance our service offerings and look forward to the opportunities that lie ahead.
This concludes our prepared comments this morning, and thank you for being with us.
Ask the operator to please open the line for your questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Julianna <unk> with Bank of America. Please go ahead.
Hey, good morning. Thanks, so much for taking the question. So I guess first on them.
Chunk pricing in personal care.
Can you help us break it into pieces.
Once the ARPA, starting in Q3, and how much of a benefit at the pricing of it all and it does itself either examples of rate increases that you have experienced in terms of trying to quantify that and Martin you deduct this increases and I guess and then you know trying to just understand going forward.
I'll have to think about it I think into next year, obviously, we know about the July Oh, sorry January one.
Illinois, but I mean are there states here would be pointing out to us to understand the outlook for pricing into next year.
Hey, Duane this is Brian I think I can provide a little color on that.
Just to quantify the ARPA funding doesn't factor into our revenue per hour or pricing all of that as we kind of discussed previously most of that flows through the balance sheet. So as Dirk kind of discussed in his comments typically that comes through and it's basically a pass through to caregivers or retention bonuses sign on bonuses enhanced wages. So it doesn't actually impact our revenue per hour.
Sure, but all the rate front I think we've actually been very well supported by you know most of our states. I think took early you know, Illinois is the probably the Best example, our largest market. We got a rate increase at the end of last year will get another rate increase coming up January one 'twenty. Three this year I think you know in the current period.
New Mexico, which is our second largest market. We received a rate increase that affected Q3. It was helpful to offset some new sick wage of enhancements that they put in place in the state. So that's kind of an offset again. So historically as we've discussed we've done very well in getting reimbursement offsets for kind of increases in costs.
There'll be a minimum wage sick time or the like so I think that's kind of the overall landscape that you've seen over the last year and expect you are going into 2023.
[laughter].
Okay. That's helpful. In terms of other states are looking at the increases any any states we should be watching.
Well I think in 'twenty three the primary is again is gonna be Illinois is going to be the largest material impact that'll be effective January 1st I think some of the smaller states have been you know held holding in Mexico has also been very supportive as well. So we get you know rate increases from our two largest markets. Obviously, it's meaningful and does help us on a revenue per hour.
Okay, great. Thank you and I guess, just thinking about I know you don't give guidance, but when you think about heading into next year are good.
Uh huh.
This weekend.
And how to win.
I understand Oh, you mean no rate.
Waiting fees, but also any other color you can give us in terms of volume or or I guess, a wage inflation that you would assume for next year. Thank you.
Yeah, I mean, Brian you want to yes, so when youre looking at kind of wage inflation.
Seen that.
A little bit of moderation of late as far as particularly on the clinical side I think is helpful. So that's encouraging.
You will still see some increases related to the CBA, Illinois as an example, where when we get the 70 cent increase Jan one will be increasing wages down in the southern and the areas outside of Chicago, So youll see a little bit of pressure there, but when you think about on the personal care side in particular on the wage front. So many of our employees.
Our subject to the CBA. So those rates are set.
And they are in place and so we don't see yearly inflation. There we may see some inflation pressures in some of our smaller markets, but again I think a lot of those have been kind of a dress really in Q3 and are really this year. So I don't anticipate any significant increases in 2023.
Any out there are you know year over year.
I had one that lets you should think about Oh when it comes to next year.
Yeah.
No I mean, I think the mature ones, we've talked about so I think with the hospice rate increase coming into play obviously, we got clarity on the home health rule now little impact for next year sequestration is fully baked in L. A so those are kind of the more material moving pieces for us going into 'twenty three.
Alright, Thank you I'll go back to the kitchen.
The next question comes from Brian <unk> with Jefferies.
Please go ahead.
Hi, Good morning, you've got Kashi on for Brian . Thanks for taking my question. So just circling back to your value based programs and your efforts around that just wondering maybe if you can talk about how youre envisioning Medicare advantage and how that will play into your efforts moving down the road. Thank you.
Well are our value based care program is something we started a little over a year ago really focusing on our ability to try to help with the cost of care for certain of the patients we have under personal care, our home health and our new Mexico.
Exco, Mark and that's with three managed Medicaid programs that we deal with out there, but what we're learning is we do have the ability to affect positively the readmit rates from hospitalization.
The initial hospitalization rates and mercy room visits and so the whole goal of those pilots out there.
One of the goals, besides really being able to keep good care under these contracts was the ability to take the information we learned over a period of a year or more and be able to move that into other areas of the country, where we have particularly personal care and home health and as we move around the country and some of our.
Strong markets, that's where you're going to see our ability to interface with Medicare advantage.
So we're excited about that process we're doing.
Contract in Illinois, and we're looking at other markets, where we can add that now long term. We believe Medicare advantage is a really large opportunity for our industry as value based care and particularly for add us where we stand, but we're not quite there what are you seeing meaningful relationships. When a company has grown to the size of it is it takes a lot of.
Moving on our revenue line.
Really.
The material for our company, but we do believe over the next two or three years as per our plans that we should see that become a much more material part of our business.
Thank you.
The next question comes from Scott Fidel with.
Please go ahead.
Hi, Thanks, and good morning.
What's the first question, Doug I was just hoping maybe you could flesh out a little bit more the updated commentary on the deal pipeline, particularly when you talked about some of the bigger deals.
Youre looking at now.
I know you've talked to you guys talked about the home health and personal care being the focus area for deal. So just interested in how those bigger deals may break out between those two segments and then multiples.
That you're willing to pay.
At this point for <unk> for home health and personal care clearly got some visibility on the home health rates, but obviously you still flat.
It's flat right now not op and CMS also still talking about maybe continuing to what did behavioral adjustment and.
The rest of it into 2024 and beyond so just interested in how you guys are factoring that into your your valuation expectations for <unk> for home health deals.
Yeah, I'll talk about kind of what we're looking at and the sizes of deals in the segments and Ron I'll. Let you talk about we're willing to pay you know I think from our standpoint some of the bigger deals. We have started to see are in the home health market now.
Honestly a couple we were working on got delayed as he was waiting for the final rule and you know when Youre looking at a 4% reduction that's obviously a material factor that most sellers are and kind of want to.
Make sure they understand before they consider whether they're going to go through what the process I think now that the rule is out it's basically fad at flattish you said.
I think that will encourage folks to go ahead with the process and we think it's very important as we look at these deals larger deals included.
We build out our markets personal care home health, particularly while we will continue to look in the hospice market for small deals.
In markets, where we currently have hospice opportunities our hospice operations.
You should see most of our focus over the next 12 to 24 months to be around.
Either a larger personal care and personal care or we'd like to see a larger house a home health deal that we can put on top of our personal care.
Want to talk about the multiples we're seeing.
Yeah, Scott I think in ARPA.
Why don't I know, we've talked about it previously I think you know this year, particularly off of the last couple I think multiples have definitely come more back into a reasonable line from our perspective, So I think with the home health rule coming out I think our expectation is that that doesn't necessarily in a handful or so I think that would stay pretty consistent.
And it obviously down from what we've seen in the last couple of years, Although we think there could be activity I think it alleviates kind of at least trying to model in a 4% cut but a flat rate with kind of that potential still out there still needs to be considered and I think probably keeps those multiples still fairly tempered.
Personal care I think nothing has really changed in that market. So I think our view there is still there.
Those are sub 10 things of larger size or more strategic coverage for us.
In the past, we paid seven five to eight times, but for smaller deals it's been as low as you know four to five times I think that's still consistent with our thinking today and Scott Let me let me just mentioned an add on to what Brian said.
If we're looking at a home health deal, that's very strategic to our company and in our personal care markets, where we can add value.
Value based care and other services, where we're gonna be we're going to still be willing to do those deals even with the potential of <unk>.
Production out there because as we saw this year, sometimes those reductions don't come through so while we always try to be somewhat conservative in our approach towards deals if it's a true strategic deal.
We're gonna be interested in trying to get that to the close.
Okay, Great and then just my follow up question just wanted to go back over to Medicare advantage. It just talk could you talk about.
Sort of the opportunity just on selling the personal care services and M&A. Obviously, it's been you know so.
There's a big opportunity theoretically for several years and we've seen more in MA plans theoretically.
Offering these benefits, but I know that the the number of authorized hours has remained relatively paltry, which is really sort of mitigated or minimize that that opportunity.
Can you talk about what Youre seeing for 2023. It did look like in the landscape data that you know a lot more plans.
And offering the benefits, but it's harder to tease out what the what the authorized hours or look at my ex out how are you. How are you looking at the M&A opportunity for 2023.
Yes, Scott this is Brad.
It's very similar to 2022 truthfully you are seeing more plans offer those hours, but again are there more kind of respite type benefits. So hours are significantly lower than what our typical Medicaid P. C. S client would receive so I don't see any material changes in the landscape.
For 2023, I think the big opportunity again is when we start looking down the road and start.
Pushing the value based.
Care model to the MA plans, where it's more of a self funded benefit and I think there will be a little more aggressive on the number of hours that they can provide and also provide us with some potential upside benefit.
Just on those value based contracts down the road, but again 2023, I don't see a material change in the kind of the current landscape of what those plans are offering and part of that honestly is is on us we need to take the results that we're getting from these pilots and we need to develop an opportunity to develop a program.
To move in with these Medicare advantage plans and show them as Brad said, how it can be a self funding plan. So that's what we're working on for 2023.
Okay. Thank you.
The next question comes from Paul Quinn with Stifel. Please go ahead.
Hey, Good morning. My first question is could you remind us what should you know should you start, Michigan and New York City, Paas hope and what kind of impact would that have on the personal care volume sites.
Yeah, you know, we we haven't fully kind of baked that into our measured a there is a tremendous opportunity from the standpoint that we get a lot of calls, but I think it's all.
Contingent on are the right sufficient for us to be able to make a a gross margin that makes sense and that's what we're still evaluating we've gotten some recent.
Increases related to the $2 increase in minimum wage for the personal care in New York, which is was a very encouraging it funds that but what we're still lacking is a little more clarity on what the kind of.
<unk> kind of cost base rates are we're still waiting for some clarification from the state. There. So once we have an opportunity to assess that we'll be able to provide more information regarding the volume central there. Yeah. So just one thing to piggyback on that just looking back you know where our program was you know before the ARPA started if you wanted to maybe use that as a way to potentially frame.
Although again you know a lot of things have changed since then we've reduced revenue on that program, but I think $20 million to $25 million on an annual basis I'm kind of over the last couple of years as we've not taken new clients.
So we were running that much higher.
Three years ago before kind of all of this process started so I don't know if that's helpful or not.
Yeah that's helpful.
My follow up question is and I heard your earlier comments about you assessing kind of larger personal care investment and larger than our home health deals out. There you know I used to do targeting the $100 million revenue acquired per year targets and also secondarily. You know if you think about the rest of that to up to $1 billion of payment on 'twenty.
80, 21, it sounds like you still willing to pursue this but how would you build that risk if any into your underwriting process.
Yeah, I can start and let the guys kind of got away on the risk component I think you know 100 million in acquired revenue for US I think we still think thats definitely achievable at attainable I think we were on pace for that this year until the proposed rule came out with some of the things in our pipeline.
So I think we still feel with with where we are and it is well capitalized as we are acquiring 100 100 plus million in acquired revenue. Each year is definitely there is an opportunity for that so I think that's still a good a good proxy for us, but I'll, let Bert you want to weigh in on just kind of just how we're thinking about the potential risk of the.
The additional adjustments down the road yeah, I mean, it's certainly something that we have to look at on a particularly a chunkier home health assets. So that's something that would go into our pricing model and might.
Impact, we're just kind of the multiple.
Multiple of EBITDA that we're willing to pay.
Got you. Thank you.
The next question comes from Matt <unk> with William Blair. Please go ahead.
Hi, This is madeline moment on for Matt Larew, I'm going off of the M&A questions.
Because you've made to paying down debt kind of a priority and I know you said your leverage level was below one.
How do you consider that when you are looking at deals is there a specific leverage level that you would go up to be willing to go up to if you found the right deal and then sort of building on that.
Has the way you look for assets changed as the macro environment has evolved for example, its profitability you're more of a priority versus something like journey care, which was a nonprofit conversion just wanted to see like if the macro environment has changed your approach to M&A at all.
Yeah. This is Brian I think it just thinking about it from a leverage perspective, I think we've obviously got a focused effort on paying down debt raising.
Of rising interest rates over the over the year and just in the absence of not having deals that we've been completing but definitely would prefer to use those proceeds and that revolver in the M&A arena. So I think that we have more opportunities coming up as we would anticipate hopefully be able to put some more of that back to work, but paying down in the interim so I think from a leverage perspective.
I think we've said historically you know we're very comfortable.
Two two and a half even to three times gone up on an ongoing basis, we'd be willing to stretch higher than that three and a half plus for the right strategic deal. If we saw a way to pay that back down free cash flow I'm. You know I think we've taken an approach over the past several years of maintaining conservative leverage, which as you know different than than some I think definitely has paid benefits.
For us this year being in that position and given us a good opportunity to be active in the market still so I'm just thinking about think about it that way I think that's that's how we anticipate when we went into 2023, but as far as the macro environment I think for us when we target deals again were looking at you know where is the <unk>.
Right geography concentration of services, how does it fit into the three segments that we have today, but primarily focused as Dirk said earlier on home health and personal care I think journey carrier was a little bit different I think when we look at deals is really we we understand from the gross margin line you know what reimbursement is what the wage structure is what some of those calls.
Costs are so for us, it's really paid more attention there in the market that they're in and the environment in that particular market going forward, what does that look like from a reimbursement support and depending on the segment in the future, but we kind of you know we have a lot of control on the SG&A. So I think journey was a little unique experience, where we knew we could make some of those changes.
Get it to a normal level of what we consider to be profitability in our hospice segment, and we had full clarity and control over that process. So I don't think I really think the macro environment is typically changed our strategy on where we're looking at how we're trying to source and look at deals.
Great. Thank you and then just speaking of the interest rate environment can you talk a little bit about your interest rate exposure do you have any swaps or hedges or anything to offset interest rate rising interest rates.
We have not so we have no swaps hedges currently in place. They are effective rate today is just a little over 5%, but still if it goes up a little bit more I think we still have a little bit of exposure there.
Great. Thank you.
The next question comes from Ben Hendrix with RBC. Please go ahead.
Hey, Thank you for taking the questions. Just a quick question on the CMS final rule clearly better than expected, but it looks like you know the definitely the underlying methodology, a rigor around the behavioral assumptions and budget neutrality seem to kind of stay in place do you think that this a better than expected.
That rule.
<unk> final rule takes any of the steam out of any legislative stay efforts are for the end of the year and I'll just start with that one.
Yeah. This is Brad I don't think it.
It takes the steam out of the legislative efforts because the you know the fact that they left the you know the potential for future cuts based on the methodology that they've put out in the final rule.
It certainly was better than what we had anticipated.
But it still doesn't address the real big elephant in the room, which is how do you handle the behavioral adjustment and I think that's something that Ah I think theres still a lot of interest.
Capitol Hill to address going forward. So we'll work with our you know our industry stakeholders and associations and pushing that a legislative fix as well.
Great and just as a follow up as the M&A market opens up a little bit now are you still primarily focused on those core, Illinois, and new Mexico markets have you identified other markets.
In the very near term are to layer on more P C or I'm, sorry, more our home health and hospice assets to current P. C platforms.
Yeah.
Illinois is probably the most attractive market just because of the size.
[noise] annoy, we've done a pretty good job of adding clinical services up in the northern part of the state and it was essentially the Chicago Metro area. We've got some really big programs throughout the state of Illinois will be looking to expand or looking for the right opportunities on the clinical services, particularly home health down are in the rest of the state of Illinois Other state.
You look at you know.
Where we have good geographic presence you know in Ohio, and Pennsylvania, Michigan. Those are all very attractive states. If we can find something in Tennessee, where we also have good geographic us.
Coverage on the personal care side is another state that would certainly be interested in a you've got some C. O M that you have to navigate in a few.
Thank you.
As a reminder, if you have a question. Please press star then one can be joined into the queue.
Next question comes from.
Paul with Sidoti. Please go ahead.
Yes, hi, good morning, Thanks for taking the questions just a couple for me Firstly just curious.
If you are seeing any incremental benefits from the strategy of providing all three services in a particular state in terms of driving better partnerships and increased.
Arguments across your segments.
Certainly when we look at new Mexico, which is the most mature market, where we have all three levels of service, we have seen a nice kind of a benefit of having all three service lines with referrals from one service line to the other with our value based contracting that we have in there we have seen the benefit.
Having clients referred to home health or hospice or even our house calls division. So certainly seeing the benefits of the strategy that we're focused on and adding clinical services in those personal care markets and anticipate you know, we're having you know kind of kind of too early to really see a big numbers, but Illinois.
We certainly have seen already somebody you know cross referrals from the different service lines, there and I think a lot of opportunity to expand that in that market.
Okay. No that's great and then just curious we were hearing talk about this could be a rough flu season still some variant of Covid, maybe having an impact I'm just wondering if you're seeing that I'm, having any being an issue for you in the caregivers.
Well you know, it's always a bit yeah, yeah, yeah. So we've been through a lot of waves with COVID-19.
Now there is talk that the flu season, maybe a little worse than the historically because I think people are out more maybe I'm not wearing mask as much as they have in the past. We certainly continue to provide our employees with the necessary PPE to keep them safe we encourage vaccinations.
But don't require them unless it's a mandated by the state or local government or federal government in the case of the skilled lines, but you know that something that you know I think it was just with us.
Going forward and we've not seen any kind of uptick right now I mean, the numbers are that we've seen or actually have gone down we had a little bit of a surge in early July I think that Dirk mentioned in his comments at the opening of the call but.
I think it's kind of hard to just plan that you know this is kind of business as usual now lack of a better term.
No no it's okay.
Thanks for taking the questions Thats it for me.
Okay great.
This concludes our question and answer session I would like to turn the conference back over to Dirk Allison for any closing remarks.
Thank you operator I want to thank you all for your interest in <unk> and for being part of our earnings call. Today I Hope you have a great week.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.