AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Okay. So we'll get going now. This is Anton Hie with RBC Equity Research. And with us today is Luke McGee, CEO from AdaptHealth. I think we could start off with a quick sort of reminder about what the company does. We probably have a lot of listeners that are not that familiar with it. So Luke, if you could just give us a little quick intro, and then we'll get into some questions.

Yes, sure. Thanks, Anton. So Luke McGee, CEO of AdaptHealth. We are the third largest provider of home medical equipment and supplies in the United States, physical locations in 37 states. We ship into all 50 broadly diversified business across product categories and payers on the product side. Biggest category for us is sleep, which is primarily CPAP machines and related supplies. Second biggest category, respiratory, which includes home oxygen and ventilation. And then from there, we bucket into supplies, which includes incontinence, urology, wound care, ostomy, and a growing book of continuous glucose monitoring distribution. We have a general HME segment, which is a broad mix of wheelchairs, walkers, commodes, crutches, hospital beds. And then we have a small other segment, and that would include things like breast pumps, orthotic bracing, intra-nutrition. We also do complex rehab therapy, high-end wheel chairs. On the payer side, we're pretty diversified across government payers. A little bit less than 1/3 of our revenue mix broadly contracted nationally across commercial payers, whether it be from the large national ones to local and regional blue plans to smaller plans in network with more than 1,000 different insurers. On the commercial side, no individual commercial insurer makes up more than 10% of our revenue. And then we do have a patient pay component, which is primarily financial responsibility resulting from a coinsurance or a deductible, very little direct patient pay, although we do see some of it on like the CPAP accessory side. Our business has grown since 2012. We entered into this business knowing that rate pressure was going to happen because of competitive bidding. And we've been very mindful of how we've built our company sort of to succeed in a post-competitively bid and a more competitive reimbursement environment. And so it's been a big focus on technology, making sure that we could take labor out of the business; efficiently in take an order from a referral, make sure it qualified process and get it delivered, get it bill, get the cash collected. And so in some respects, we had last-mover advantage in an industry that's been around a long time. We're certainly the newest entrant of the national providers. This has been an M&A story. And so we've done almost 70 transactions over the last 8 years. I think it's important to note in any roll up, we've been very mindful to get everything on a single system. And so we do use a single technology platform for the way we sort of intake orders, the way we bill claims, which is critically important to our success.

Okay. Well, that's great. Obviously, strong growth story here. I believe the typical top line target that you've given is around 68% organic growth. Can you talk about what are really the kind of primary drivers underlying that?

Yes. So I mean I think that the growth we have just very strong underlying from market or demographic growth. An aging population and obese population are people who need our equipment. And it does break out by segment. So you have the sleep segment. And that is really characterized by above-demographic growth as more obstructive sleep apnea is diagnosed. And I think there's a thought that up to 80% of patients who suffer from OSA or CSA, central sleep apnea, haven't been yet diagnosed. So we think that there's lots of tailwinds, high single-digit market growth. And if we can continue to take a little bit of share, it's a very exciting segment for us to be in. Then you go to a broad swath of our business, really just -- should just grow at aging and geriatric demographic trends, 2 to 3 percentage points per year in government statistics. That's things like walkers, wheelchairs, beds, the generally aging population, ones who need it. Pre-COVID, I would have said oxygen was a 0 growth segment for us. There hasn't been much growth in utilization for home oxygen. That's obviously changed dramatically in the last 2 months. And I have, for one, believe that there's actually been a long-term shift in the need, which in even recovered COVID patients, likely have some percentage of them, have diminished respiratory and pulmonary function and maybe needing a supplementary oxygen for years, if not the rest of their lives. So we think that there's a possibility that there's hundreds of thousands of additional users of home oxygen over the long term. That's still very early. As you -- as everyone on the call knows, we're pretty early in this crisis. But a large way to say, I think that there is higher growth segments like sleep. There's segments that are slower growth, pre-COVID oxygen, and then a big piece of our business, which should just benefit from aging demographic trends. And then one piece of the business, it's new, it's small today, but it is a big focus area is something like as diabetes product shifts from test chips to continuous glucose, we think that, that's an exciting growth market that we can play a bigger role in over time.

Okay. I'm sure we'll come back and touch on that in a little bit. But just kind of bouncing off your comments on COVID, I mean Adapt was one of the very few health care companies we saw to actually not only not withdraw, but to maintain the fiscal '20 guidance with the first quarter earnings result. Kind of what do you attribute your ability to really navigate through this uncertainty? And then I guess off that it also begs the question, kind of what is your overall experience been during the pandemic? And can you highlight some of the steps you've taken on the supply side to really ensure no disruptions? And then maybe any incremental costs that you've incurred?

Yes. And so what I'd say is COVID, it's been a period where I've been incredibly proud of the way our staff and all of our employees have really stepped up and helped the health care ecosystem. And we've got 3,500 employees. We transitioned 75% of them to work from home in 2 weeks in early March. Really before any of the shelter-in-place orders were in place, I think we saw, given our experience in New York and some of the early COVID -- New York and Washington state, some of the early COVID markets, we were a bit ahead of the -- at least formal orders to get workers going home, and we had the technology in place to get those employees there. We've had frontline employees, drivers, liaisons in hospitals, in patients' homes, and I think we've helped throughout this crisis. So that's been really grateful -- or gratifying to see, and I'm grateful for it. I think on the -- there's definitely debits and credits or puts and takes. I think the negative impacts are fairly sort of obvious, which is we do get the patients home from elective surgeries, from an acute care or subacute facility and ambulatory surgery center into the home with a wheelchair, with a walker, commode. So that business has certainly slowed down, depending on market, 30% to 50%. We've seen a slowdown in our orthotic bracing business, similar quantums. That is really discharges out of elective surgeries, people who need braces or people leaving an emergency room who sprained an ankle, broke an arm and need some type of bracing. Those have been the hardest-hit pieces of business for us, really market dependent, New York being the most sort of acutely affected. But even with sort of shelter-in-place and stay-at-home orders, some of that bracing business is down pretty significantly. Additionally, our CPAP set-ups sort of new patients, new scripts to set people up on CPAP are tied to people going to their sleep dock and going in and maybe doing an overnight sleep test or a home sleep test. There was a disruption in late March and April from people not being able to see their doctor or not being willing to go in. Certainly, with telemedicine becoming more prevalent and sort of doctors be getting more comfortable prescribing home sleep test, we've seen a bounce back already at least from the lows on CPAP new starts. But those have been the preponderance of the negative business trends. Certainly, we've had increased costs. We did offer an incentive -- retention incentive for all of our patient-facing employees. We bought lots of PPE. And then we stocked up on inventory, actually started stocking up in February as we were hearing things out of China and making sure that anything coming in from China or really sort of anywhere in Asia, that we had extra inventory available. I think that, that turned out to be a prescient sort of call as we got increased demand. So those are all the negatives. But as you said, we weighed all those and are very sort of sanguine that the bounce back to sort of normal is going to take a long time, particularly for some of those activity-based businesses like the ortho bracing. At the same time, we've been the beneficiary of helping hospitals get patients home on COVID. So oxygen is up fairly significantly for us at the end of March into April and May. In New York, almost up 100% for the month, just getting these patients into the home, so they weren't sort of either occupying space or beds in acute care facilities. Oxygen tends to be a rental business. So there is a compounding effect to that census build. It certainly helps, a big benefit from an increase in need for resupply. It wasn't intuitive to me at the start, but it is -- when I think about it, our resupply business is largely driven by us calling and reminding patients that the manufacturer recommend they replace their supplies and that they should get them. In shelter-in-place times, people at home, they pick up the phone. And so we've seen a nice increase in reorder volume over the last 60 days. It is sustaining. So that is a nice sort of offset. And then you add sort of things like we've had -- and we have a deep supply chain and ability to procure lots of sort of medical equipment. And so we saw sort of nontraditional demand from hospital systems. We continue to see it on different products even here into mid-May of can we help them get pulse oximeters, thermometers, blood pressure cuffs. Those aren't things that we would naturally be sort of a big B2B distributor out, but we've been meeting the ask and meeting the demand and stepping up for our hospital system partners. So when we weigh the oxygen increase, the resupply to increase some of the B2B business, we are comfortable reiterating our guide. And that's a short-term thing. 2020, it's obviously -- I think we're proud to be out there saying we're comfortable we're going to hit our number. But I think the bigger long-term trend is a recognition that care in the home is patient-preferred, is safe. It's less costly. And I think there's a lot of people who are valuable members of a home care ecosystem, the home health guys certainly, as hospitals rethink their ability to deliver care in the home. But what we are is unique in that a national -- nationwide fulfillment network that touches 1.7 million patients a year, hopefully more than that sort of next year, and provides equipment and connected equipment and has the ability to monitor connected equipment. We think that makes us stand out as someone who can continue to be a more valuable member of the health care ecosystem going forward.

That's great. Now you touched a little bit on some of the new kind of B2B interactions. Can you talk about maybe how those relationships might -- how that has improved through those interactions going forward?

Yes. So I mean I think as things truly normalize, I think we recognize that there's a chance that we can play a role in a hospital supply chain process. But more than likely, things may revert to sort of old relationships. And if someone won't look to us as a B2B distributor, we're comfortable with that. I think that we're, again, proud that we've been able to be there and build those relationships. We got frantic phone calls, particularly from our hospital system partners in New York in mid-March, all the way through mid-April and including throughout, we got a call today. And unlike a lot of people who sort of -- I don't want to say take advantage, but sort of try to run it and say, "Hey, we can help." We've actually been able to help. We haven't just said, "We could help." We've had access to product. We've been able to deliver same day, next day, the day after that, whereas I think a lot of these hospitals and municipalities have seen people offer and say, "Hey, we can do that," only really to be a broker or an intermediary, whereas it is our natural supply chain, we, as an ordinary course of business, take possession of ventilators, oxygen, hospital beds, pulse oximeters, thermometers. These are things that are very natural to us. And I think that we've just deepened relationships. And it might right now be just in the supply chain folks, but I think as the crisis subsides, people are going to look to see who delivered for them, who is reliable. And I'm hopeful that, that leads to longer-term conversations of, hey, listen, we used to be just your fee-for-service discharge DME provider. We helped you out in this crisis. We were there for you. We delivered. Hey, and now we'd like to have a conversation of how we can continue to do that and maybe not selling you stuff. But when you're discharging the patient, do you need to monitor that patient in the home? Can we help you put a connected device in there? Maybe you're not really set up to monitor that connected device, whether it be a pulse ox, a scale, a thermometer, blood pressure cuff, CPAP machine continuous glucose, it becomes very natural. We spun up a 24/7 respiratory therapists hotline that was available to any health care practitioner, mostly advertised in New York and across the country. And those are the types of things and relationships that we have that I think are probably underappreciated even by our current customers, and we intend to highlight that going forward.

That's great. And then if we could -- I know you drew down some of the revolver in March, but you went ahead and repaid some of that in April. Can you talk a little bit about maybe, I guess, some of the help that you got from the CARES Act as well as just your ongoing comfort level with liquidity and the cash flow that you're continuing to generate through the business? And then are you seeing any changes in the collectibility of your AR?

Yes. So we did receive a substantial CARES Act payment as well as we did request the Medicare advance payment. Certainly, the receipt of the Medicare advance payment gave us comfort to repay our revolver. We disclosed when we announced earnings that we were sitting on current liquidity of about $90 million, which is significantly in excess of levels that we're comfortable with. And we also have access to about $100 million of undrawn capacity from our lending partners. On the CARES Act, we continue to await guidance on exactly how we should be submitting and justifying the sort of the applicability of those things for us. Certainly, we've had to have increased costs, PPE, retention incentives. We've had significant reduced volumes in orthotics and CPAP new setups. And so we're working with counsel to make sure that we are entitled to keep all of the funds. We believe so, but we're working through that. And so I'm sure it will -- that thinking on that will evolve over time. We're grateful from the government, the need to provide stimulus funds to the health care ecosystem, and we're committed to making sure that we are a good partner, not only to our governmental payers, but all of our hospital system partners. I think -- sorry, what was the second part of your question? I thought I lost my train of thought there.

Sorry, Luke, I was asking about just the overall continued collectability for your AR.

Yes. And so we were worried, frankly, in March with payers also having to get their staff working from home and would they be able to adjudicate and pay claims. We haven't seen a significant slowdown at all, some smaller payers struggling more than the larger payers. Obviously, Medicare making the advanced payment. It took a lot of sort of burden off on just near-term cash flow. And I think the one area of potential weakness is patient financial responsibility. As we go into a potentially recessionary environment, we recognize that patients are going to be consumers and be very cognizant about what they're paying for. We do have a pretty disciplined process. When we put out a piece of equipment either on a rental or a sale, we do -- if the patient doesn't have 100% insurance coverage, we do ask for a credit card to secure that obligation. Given that we're through deductible season this year, we don't expect to see a big impact on collectibility of AR, but it is a reminder that as we go into next year and even with insurance -- 100% coverage with significant deductibles, we need to be mindful that we should be getting a credit card on almost all of our orders to the extent that orders for truly discretionary purchases slow down, and we may see some small impact. But most of the products that we distribute, people don't choose to want a wheelchair a walker, be on home oxygen. They don't want to be on their CPAP machine, but they recognize that once they're on them, they do -- they can be life-changing, life-enabling devices. So a long way to say I don't think we see much risk on the collectibility of AR.

Okay. Good. And then I guess just to shift away from COVID for a little bit. To start off the year, you started a -- you've offered a pretty good large acquisition of an underperforming business from McKesson PCS. Can you talk about kind of how that turnaround is progressing? And maybe what you see as the biggest long-term opportunities with PCS?

Yes. And so maybe I'll answer the first part -- last -- the latter part first. That business, it was a way for us to get into supply categories in scale and diversify our business and get into categories, the supply categories that have a resupply or recurring element which we love. It's like our CPAP resupply business. And when you combine our rental business plus our resupply business to an existing patient base, it's almost 85% of our revenue currently. So we love the persistence and the month-over-month nature of that type of revenue. And so there's an opportunity for us to expand into ostomy; urology; incontinence; and as I said, continuous glucose monitors that we think really mimic a lot of the process flow we used for CPAP, resupply a lot of the systems. It allows us to use that scale to continue to invest in better technology. So we were excited about doing that. Obviously, it was an underperforming business. It was a small division within the large McKesson infrastructure. McKesson had multiple touch points into sort of the health care providers, and the PCS business was just one of those and maybe not always the most important one. And so taking the business outside of McKesson and allowing us to focus really just on that sort of provision of the supplies to the patient in the home and making sure we get appropriate documentation from other health care practitioners. So that is what we do every day in our core business. It's what we're good at. It's also what's core to us. And as I said, it wasn't necessarily core to McKesson. The business was overstaffed coming into the year. I think that leadership of McKesson likely recognized that. And given that it was noncore, it didn't really feel the need to make the changes. And so we worked with McKesson after we signed the purchase agreement and got to the closing on January 2. We did make some labor changes. We've continued to sort of assess the labor and staffing situation in that business. We're optimistic. Buying a big business, an underperforming business and then having COVID happen, that's not how you draw it up. But at the same time, we have been able to run ahead of plan. We continue to run ahead of plan. We sort of set out there when we bought the business, we were paying $50 million in cash and basically signing up for $15 million of investment over the first year to get it turned around. I'm optimistic we won't need the full $15 million that we set aside and then we'll get there faster. One way that we'll do that likely is -- and it shouldn't come as a surprise to anyone, given that we've done 70 acquisitions is we are always looking for ways to add scale, and we're very comfortable in our ability to execute doing that through acquisition. And so I think that there's a natural opportunity for us to look at other supply providers and add density in categories like continuous glucose, incontinence, urology and then integrate those and accelerate some of the plans for PCS.

Great. And then what about the other 2 acquisitions that you completed thus far this year, kind of just a quick reminder on where you are on those?

Yes. No, those were -- so we bought the HME division of a company called Advanced Home Care, a leading provider in North Carolina, about $85 million in revenue. We closed on that on March 1. Interesting, it was part of a nonprofit business that had integrated home health, HME and fusion, and it was owned by 13 hospital systems. So a complicated transaction. I think we feel very fortunate that we were able to take a lot of the existing management. The good gentleman who is running the business has joined AdaptHealth as our Chief People Officer, Joel Mills, local leadership on the ground state. And we were able to supplement them transitioning onto our systems day 1. So again, not the way you draw up a big asset purchase, where you have lots of systems conversions happening March 1. The team has done an amazing job whether it be Tina Godfrey on the ground, Tony Gonzales helping shepherd integration for us. It's running ahead of plan. We're thrilled to have a bigger presence in the Southeast. It's a market that we'll look to continue to add density to. But it's nice. They were on our systems day 1, running ahead of plan, great acquisition. And if anything, we inherited some really good human capital that's going to help us move even faster. Likewise, bought a business health line down in Texas. We think the best HME in Texas. Certainly the fastest growing by any score that we can track are just really, really doing a nice job of growing an organic presence in the respiratory categories. Primarily Barb and the team at [ Health Science ]. Barb Dwayne and those guys have done an amazing job for us. They were already using Brightree, which is our billing system. And so we took our time, about 45 days, to get them switched over to our Brightree platform. And so even though they were using Brightree, we still migrate any acquisition onto "our Brightree and our systems." But that was completed by the end of April. And we're thrilled about that business. Again, I think it's a platform to grow in Texas. It's an enormous market. It's somewhere we're underpenetrated. And if anything, the success and the rapid success of those 2 acquisitions and the human capital that we brought on probably will embolden us to move even faster throughout the rest of the year. We've got a great pipeline. And despite COVID or maybe because of COVID, we feel like it's the time to be aggressive.

And do you think that COVID really accelerates the opportunities on the seller side? Or do you think that even may drive up multiples, maybe as HME providers see some sort of increased relevancy in this environment?

I think I was asked that question a couple of weeks ago, and I would have said, and I did say that I didn't think it was accelerating much of the sell side. That may have even changed. We've gotten a lot of inbound phone calls. I think it's a reminder for, this is still a "mom-and-pop industry." But you've had people who built phenomenal businesses and created sort of wealth for their families. And you have a guy or a gal who's built a $10 million, $20 million business, and that's worth millions of dollars. I think the COVID is a reminder that life can change very quickly. And so some of those sellers who have made it through competitive bidding have built really nice businesses. I think this is a reminder that maybe you take the bird in hand, and it's time to either retire or join on a bigger platform. I don't think ours is the only phone that's ringing. We're cognizant that sellers have other options, although it's not -- in our industry, there's not 20 people you call. There's 3 or 4 who are the likely buyers. And in terms of pricing, yes, listen, good assets. We'll continue to command a relative premium price. Our goal is to be in the 4 to 6x our cash flow. If we have to pay another turn or 2 on top of that to buy a great asset, we're going to do that.

All right. And you just touched on competitive bidding just shortly, but I wanted to see -- I know there was some relief in the CARES Act on that. Can you talk about whether that can still be a catalyst to drive some more disruption and maybe share gain opportunities?

Yes. So the CARES Act, in particular, we just offered some relief in nonrural areas, and we're grateful for that relief. It's not permanent. And so we're certainly not making any fundamental business changes because of that, but it's nice to get -- nice to see Washington recognizing the value of the industry that's been so beat up over the last 8 years. CMS also took noninvasive ventilation out of bidding, which we're grateful for. It's not really a category that lends itself to. We're aware that there may be some rate reduction based on CMS just changing the fee schedule for a product that carries margin but also carries a significant amount of complexity. It's not a huge business for us. We've intentionally sort of been relevant and reluctant to expand significantly in that category. And so it coming out of bidding, not a huge impact on our prospects for 2021, but we're, again, grateful that CMS is recognizing the value the industry can provide. There are some talk about taking respiratory out of competitive bidding for this round, respiratory being: oxygen, PAP and nebulizers. We are big advocates of that. If there has been a secular shift in demand from oxygen, as we believed, now is not the time to run a bidding process that constrains supply. But we are planning as if it's going to happen. It's scheduled to happen. Rates will come out later this summer and go effective January 1. We know that there are areas of our business like CPAP supply that are exposed, and we're likely to see some rate reduction. I think we're optimistic that there are other parts of our business, wheelchairs, beds, commodes, walkers, where there's a decent chance of rate increase. To your point about does it drive further consolidation? I think if rates go down, yes, of course, I think it becomes even harder for a small provider who doesn't have the technology investments that we have, doesn't have the scale of the manufacturers. And so in a weird way, we want the industry to be healthy. We want rates to go up. We want to all win, and I think we can start disproportionately when. If there is a sort of worse-than-expected rate outcome to your point, all that does is drive more buying opportunity for us.

Okay. That's great. It's very helpful. It looks like we're about at the end of our time here, Luke, but I just want to give you a chance if there's anything you think the investment community may be missing or kind of misunderstanding about the AdaptHealth story right now.

No. I mean I think that we're grateful to be in the public markets and had to have people listening to the call. So thank you, everyone, for their time. I mean this industry has changed. The last time there were public companies, Lincare, Rotec and Apria, the industry was fundamentally different. Government rates were 50% to 60% higher. And so I think we're asking investors to take the blinders off from that perspective and look at it for what it is, which is it's an industry that provides care into the home. It provides care to chronic disease patients. And we're on the other side of the reimbursement rate pressure, we believe. And so now is a great time to invest in HME.

Great. Thanks very much for talking with us today. And that wraps it up.

Thanks so much, Anton. Appreciate it.

Bye.