Aveanna Healthcare Holdings Inc. (AVAH) Earnings

Management highlights

- Core Business Strategy: Alignment of caregiver capacity with preferred payers and government partners willing to provide adequate reimbursement, focused on meeting strong market demand for home and community-based care while reducing total system healthcare costs. - Execution: 7 state PDS rate enhancements secured year-to-date, with the landmark 2027 California budget including a significant PDN rate increase (effective January 1, 2027), closing out the company's 4-year multi-state effort to fix historical reimbursement-wage disconnect across all 32 operating PDS states. - Preferred Payer progress: PDS now has 37 total preferred payer agreements (on track to exceed 2026 full-year target of 38), with preferred payers accounting for 64% of total PDS MCO volumes (up from 60% at end-Q1). Home health reached its 2026 target of 50 preferred payer agreements year-to-date, with episodic mix hitting 81% (above the 75% target). Medical Solutions has 20 total preferred payer agreements, on track to reach 25 by end-2026, with gross margins stabilized in the target range. - Acquisition and Integration: The Family First Home Care acquisition closed in early June 2006, and integration is progressing on schedule. The majority of integration work is expected to be completed by late Q4 2026, strengthening Aviana's position in Florida and select Midwest markets. - Strategic Initiatives: The company is focused on 5 core 2026 priorities: (1) strengthening government and preferred payer partnerships to expand capacity; (2) improving clinical outcomes and customer engagement while reducing total care costs; (3) deploying AI and automation to boost operational efficiency; (4) growing through disciplined M&A while improving net leverage and free cash flow; (5) engaging leadership and employees to deliver the company mission. - Capital Structure and Liquidity: All three major rating agencies issued credit rating upgrades in Q2. Total liquidity at quarter-end was $433 million, with $1.48 billion in variable rate debt, 95% of which is hedged with interest rate caps to limit SOFR exposure. The term loan was successfully repriced, cutting annual interest expense by $10 million. Year-to-date 2026 operating cash flow was $85.3 million, with positive free cash flow of $75.4 million.

Guidance

- Full-year 2026 guidance was upwardly revised: Management now expects full-year revenue greater than $2.68 billion (previously guided lower) and adjusted EBITDA greater than $365 million. The guidance increase is driven entirely by strong organic performance in the core business; the impact of the Family First acquisition was already incorporated into prior guidance. - Long-term organic growth guidance was updated for all segments: - PDS: Raised from 3-5% to 5-6%, driven by completed state rate enhancements and continued preferred payer execution. - Home Health and Hospice: Raised from 5-7% to 8-10%, driven by improved federal regulatory clarity and strong preferred payer results. - Medical Solutions: Maintained prior guidance of 8-10% organic growth. Management expects the segment to grow at high single digits through the end of 2026 and return to double-digit growth by early 2027. - With the updated organic growth outlook and disciplined M&A, Aviana expects to achieve annual double-digit consolidated revenue growth long-term. Management reaffirmed the long-term target of reaching net leverage below 3x, with growing confidence this will be achieved in 2027.

Segment performance

1. Private Duty Services (PDS): Revenue contributed ~$554 million to the consolidated Q2 total, representing 14.0% year-over-year growth. Revenue per hour was $44.62, up 1.7% YoY. Gross margin was $159.9 million, equal to 28.9% of segment revenue. Q2 2025 included $9 million in non-recurring favorable adjustments that are not present in 2026 results. This segment accounts for approximately 82.6% of total consolidated revenue. 2. Home Health and Hospice: Revenue was $69 million, a 14.8% year-over-year increase. The segment recorded 10,500 total admissions (81% episodic) and 14,700 total episodes of care, representing 18.5% YoY episode growth. Medicare revenue per episode was $3,202. Gross margin was 53.9% of segment revenue. This segment accounts for approximately 10.3% of total consolidated revenue. 3. Medical Solutions: Revenue was $47.5 million, a 9.4% year-over-year increase. Volume grew 4.4% YoY to 95,000 unique patients served, with revenue per unique patient up 5% YoY to approximately $500. Gross margin was $21.4 million, equal to 45.1% of segment revenue. This segment accounts for approximately 7.1% of total consolidated revenue. Consolidated results: Total Q2 2026 revenue was $670.5 million, up 13.7% YoY; consolidated gross margin was 32.6%; adjusted EBITDA was $95.4 million, up 8% YoY.

Risks & headwinds

- The tight labor market remains the primary operational challenge, requiring continued reimbursement rate increases to fund competitive caregiver wages that allow the company to meet existing unmet demand. - Final details of the 2027 California PDN rate increase are still pending from the Medi-Cal department, with final rates not expected until late September 2026, creating near-term visibility uncertainty. - M&A activity may temporarily increase leverage, though management commits to continued deleveraging to hit the long-term 3x leverage target. Execution risk remains for back-office and EMR integration for acquired businesses like Family First. - State budgets remain constrained, creating uncertainty for future cost-of-living rate adjustments across the company's operating footprint.

Analyst Q&A

• Q: With the upward revision to long-term segment revenue growth rates, should investors also expect corresponding segment margin increases? /

  A: Management expects gross margin percentages to remain largely stable at current levels, as the majority of incremental revenue from rate increases will be passed through to caregivers as higher wages to drive volume growth. Gross margin dollars will grow alongside higher revenue, but percentage margins will not change materially. Q2 2026 PDS gross margins came in exactly in line with expectations, after normalizing for 2025 non-recurring items, and this margin level is the expected baseline going forward.

• Q: Is the 2026 guidance increase driven by the Family First acquisition or core organic performance, and what is the company's M&A appetite and leverage target going forward? /

  A: All of the guidance increase comes from strong core organic performance across all three segments; the Family First impact was already incorporated into prior guidance. M&A pipeline remains robust, but management will remain disciplined on valuation and only pursue acquisitions that fit the company culture and create long-term shareholder value. The long-term leverage target of below 3x remains in place, and management is increasingly confident of hitting this target in 2027, with continued deleveraging expected through the second half of 2026. Strong free cash flow generation allows the company to fund acquisitions with cash on hand while continuing to deleverage.

• Q: What is the long-term target for PDS preferred payer MCO mix, and is the current 81% home health episodic mix sustainable long-term? /

  A: Management expects PDS preferred payer MCO mix to continue growing 4-7% per year, reaching the mid-80s to high-80s range long-term (3-5 years out), with 90-95% of current new PDS admissions already coming from preferred payers. For home health, episodic mix has stabilized around 80% for multiple quarters, and management is comfortable with mix staying in the high 70s to low 80s range long-term. Episodic contracting has become far more common among payers, supporting continued stable high episodic mix going forward.

• Q: What is the opportunity from the California PDN rate increase, and is additional infrastructure needed to support growth in the state? /

  A: California's PDN rates have not increased in 9 years, leading to lagging wages, low fill rates, and stagnant volume. The rate increase will first allow the company to increase wages for existing caregivers so they can work more hours, then unlock unnecessary hospital stays for patients waiting to be discharged home, and finally serve families that currently provide unpaid care due to a lack of available nurses. All required operational infrastructure is already in place in California; the existing team and operating model are ready to support growth once rates take effect.