AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Good afternoon. I'm Richard Close with Canaccord Genuity, covering the health care, technology and services sector. Thank you, everyone, for joining us today for the 40th Canaccord Growth Conference. So we're excited to kick off this next session. Definitely privileged today to sit down with Luke McGee, CEO of AdaptHealth; and Jason Clemens, who recently joined as CFO. So I recently initiated on Adapt, it's a relatively new publicly-traded company, but many of its businesses have been around for a long time, have a proven track record in the medical products and supply segment. And then to set the table for our discussion today, Luke, why don't I turn it over to you to just really introduce us to Adapt, give us a brief overview and how the company got to where it is today, a snapshot of the businesses?

Yes. Great. Well, thanks, Richard. It's a real pleasure, and thanks to everybody who's joining live or watches on the webcast afterwards. It's a pleasure to get to tell the AdaptHealth story. So for those of you who don't know, AdaptHealth is the second largest provider of home medical equipment and supplies in the country. We are diversified across product, payor and geography. We started the business in 2012. And as someone told us, we had last mover advantage in a relatively old line health care industry. We came in because of competitive bidding. That's the buzzword in the old DME industry. It was the big guy, bogeyman, and we decided to jump right in because of that and really build our business with a new business model that was focused on using technology to better interact with our referrals, payors and patients take labor costs out of our business. And increasingly, over the last couple of years, treat chronic disease patients in the home, helping them stay there. I think it's been very appropriate with the COVID environment. The people wanting to get health care delivered at home. We are a key piece of that. We service 1.7 million patients every year, more than half of them have a chronic disease and a chronic condition, more than half, we're actually providing more than one sort of service a year to them. So we are in these patients' homes, helping them stay at home, avoiding more costly health care settings. If you look at the overall business, sleep is our largest category, and that's the treatment of obstructive sleep apnea with machine rentals, so CPAP rentals, and then the ongoing resupply masks, tubes, filters that people need every quarter for as long as they're on the therapy. That's about 1/3 of our business. It's a very fast growth end market with just continued diagnosing of obstructive sleep apnea, somewhat closely correlated with obesity. And so as that trend, unfortunately persists, I would fully expect more people to have sleep apnea and that end market to continue to grow for us in the high single digits. More recently, we've expanded into the diabetic distribution market. And for us, that's continuous glucose monitors and, to a limited extent, insulin pumps. So it is not the old test strip business evolved. But this is sort of more modern and next-gen diabetes technology that we think it's in its infancy in terms of growth as there is a switch away from test strips as Type 2s start to use CGMs more as there's an opportunity for hybrid closed-loop systems where the pumps and the CGMs are talking to one another. We're really, really excited about that end market. There's a significant comorbidity between our sleep patient base and sort of a lot of our other patients that are getting services from us who are either pre-diabetic Type 1 or Type 2 diabetic so we're thrilled to have sort of launched into that market, and it's going to be a growth market for us. We fully expect that the overall sort of CGM market is growing 20%-plus. We put out in slides that we think our addressable piece of that is probably 10% to 12% annually as inevitably Dexcom and other out there talking about pharmacy and the pharmacy benefit, I'd be remiss if not. We have a pharmacy, and we can supply under that benefit design. But we also recognize that the retail pharmacies are going to get some of that flow. And then if you look at the rest of our business, respiratory, which is probably the oldest line and the most anonymous with the DME evolved, that's the oxygen -- home oxygen business and it's, to some extent, for us, a very small piece of noninvasive ventilation. It's an important business. Obviously, in COVID, we've seen a significant increase in demand for people needing supplemental oxygen at home. I wouldn't characterize it as a growth business for AdaptHealth. Outside of COVID, I would have said, it's a very, very low-single-digit grower. It's an important service that we provide to our referrals and our payors. People do need oxygen. It's just given where reimbursement has come down to, it's not one of the sort of more exciting businesses that we're in, but it's a necessary one. And then you look at the last 2 pieces of our pie would be supplies. And so that's a catch all, but it's incontinence, urology, wound care, ostomy, enteral nutrition. We like those businesses, particularly because there's a crossover with -- CPAP has a big resupply component and diabetes has a big resupply component. So a lot of the systems, processes that we're investing in, patient engagement tools, apps, websites, portals, just business process really is the same whether you're resupplying incontinence of diapers or the CPAP resupplies. And so we think that there's a logical crossover and certainly allows us to go to a health plan and say we can do sort of everything post-acute product into the home. And then the last piece would be HME. It's a category that, I think, a lot of our competitors ran away from in competitive bidding. The margins are lower on a dollar per order basis. It's wheelchairs, walkers, commodes, aids to daily living. Again, critical pieces of equipment to get someone from a post-acute or subacute setting -- or acute setting and the subacute setting into the home. People need it for safety, they need commodes to be able to use the facilities at home. And so these are important products. They're certainly not as tech-enabled as diabetes or the PAP devices that have modems. But again, a critical piece of our product offering, a real way for us to have close relationships with our referrals. And the different -- our difference there as -- we've approached it is, if you can get an e-prescribed order on a lower dollar margin order, you could still make money because you don't have all the friction costs to go back and forth. And that's what sets us apart from a lot of the old players in the industry.

Good. That's helpful. So before we get into the nitty-gritty on growth, the various growth rates and whatnot, just curious, as we think bigger picture or the macro, in terms of the foundation for the growth, you hit on it on the chronic conditions and chronic care management. Obviously, there's a demographic play here that everyone always calls out for health care, the aging of the baby boomers and whatnot. And then you have the transition to the lower cost setting, which you hit on a little bit in some of your comments. What would you hang your head on and say, if we were to look at one thing that's really driving our growth, it would be that?

If I have to distill it down to one thing, it's going to be the chronic diseases and the sort of continued incidence of those diseases and the need for care. Just to have any hope of reducing health care costs in this country, we need to do a better job of treating chronic care and identifying before an exacerbation. We don't have the capacity that continue to push these people into emergency rooms and acute settings and unmanaged diabetic asleep patient who isn't using their CPAP. There's so much that can be done to lower health care costs. I think diabetes, there's been just tremendous amount of sort of research and literature put out about the ability to lower A1c levels and the correlation of that with health care costs. I believe that, that, to a lesser extent, but it's also true on a managed sleep patient over time. So that is certainly the one if I had to pick it. But you do -- I also want to make sure I stress. The demographics help. I mean, we'll take the 2% to 3% sort of geriatric aging trend population. And then one thing that we haven't talked about, I'm sure we will, Richard, is we have an active M&A funnel, and we've been acquisitive. This isn't something that we hope to do. We've done something like 80 deals life to date. We have a target of doing $100 million in revenue acquired. And so we all know that organic growth is more valuable, and we strive to make sure we're accomplishing that. But we don't want to make sure that -- or we want to make sure people don't miss that there is $100 million plus of acquired revenue to be out there and gotten for AdaptHealth.

Okay. So on organic, obviously, pretty solid there. You're targeting -- I think, it's 7% to 10% annually, and that's a slight uptick with adding in diabetes, which you mentioned. So as you look at organic growth, there's 2 components, the same-store and then market share gains. How do you lay that out in terms of how sustainable each same-store is and market share gains?

So yes, no, I think that if we look across product categories, the same-store for oxygen and for DME and probably supplies, it's in the low-single-digits. These aren't sort of super high-growth end markets. We believe that the sort of prescribing trends on PAP and diabetes lend themselves to same-store potential in that sort of high-single-digits, potentially low-double-digit sort of basis. And then as you mentioned, we have the ability to take a broader basket of product into different geographies. For example, the Northeast is where we started, the mid-Atlantic, call it, New York, New Jersey, Pennsylvania, Delaware, Maryland. And that's really where we spent the first 3 years of building our company. And so we have the most mature product portfolio. But even there, we don't do very many supplies in diabetes. And so there's opportunity to pull those products into that market, pull things like wheelchairs, walkers, orthopedic bracing, working with different referrals like a home health agency or rehab company, doing more consignment bracing. And so we're saying that, that's 1% to 2%, but there is relatively a lot of ways where we could achieve that and beyond, if any big opportunity were to hit.

That's helpful. And just a clarification. I think, in the past, organic growth targeted was 6% to 8%. And now with the diabetes that ratchets it up a little bit.

That's right. And we're seeing it. I mean, if you look at the Solara, which was the diabetes business that we acquired in July, if you looked at that, the business that we own have owned since the beginning of the year on CGM, we are seeing just spectacular growth. We had great months, July, highest restarts ever even in the middle of COVID. And obviously, in some respects, some of the COVID impact is wearing off as certainly the country that hasn't gotten it under control, but there are sort of more people saying their doctor and more people going and seeking out health care treatments. But we're incredibly proud that like our diabetes business had a record view start month in July.

Great. So one of the things that we were attracted to as we dug into the business and, obviously, fairly new to us, relatively speaking. But what was attractive was the recurring nature of your revenue stream? Obviously, sleep and now diabetes, I think it's about 86% of your revenue pro forma. Can you talk a little bit about that in terms of what comprises of that recurring revenue? And is there opportunities to increase that from the 86% level or wherever it is now?

So yes. I mean, so, in general, we don't target -- at the end of the day, the end number matters more than the percentage breakdown. And so if we see opportunities to increase the 14%, which are one-off transactions, we'll do that. And so I wouldn't necessarily say we're trying to focus on getting that higher, but I'll tell you how that might drive higher and how it might drive lower. Even the 14%, I think, is a little bit of a misnomer because that one-off sale is really a sale to a hospital that's sending us. If they sent us 100 orders in June, they're sending us 100 orders in July, and we're characterizing that as a one-off sale because it's a unique sale to the patient. I'm giving Richard a walker, and I'm probably not going to do anything else with Richard. But if I saw Richard in June and Jason in July, and they both came out of NYU, there is a recurring nature there. And so it's probably more than 80% -- or 86% is truly recurring in nature. If you think a little bit more expansively to the referral. But to answer your question more directly, so 86%, we have a rental business. And so that is, whether it be a wheelchair, a bed, oxygen and ventilation, those are rental models. And so very, very sensus-driven, recurring in nature, easy to predict, very stable quarter-over-quarter. And then the bulk of that 86% is the resupply sales to chronic disease patients, so it's PAP supply, diabetic supply, incontinence, urology, ventral nutrition. These are patients that -- they're not discretionary. They need this stuff. Diabetic who's on CGM, needs to get their sensors, whether they're on the Libre, Libre 2 or on the Dexcom G6, they need their sensors every month. A CPAP patient needs to replace their mask and tubing recommended by the manufacturers when it's a quarter. Some of those on enteral nutrition definitionally needs their food to survive. So these are not patients that can sort of say, "Hey, I'm just not going to get my stuff this quarter." And so again, highly, highly predictable and recurring.

Okay, great. So on the resupply, when we first talked back in the late winter or in the spring, I think you said that like with certain acquisitions, you're able to go in and get a bump in terms of some of your processes, in terms of increasing the resupply rates and whatnot or number of times during a year. So -- and you talked a lot about your technology platform at the company. Maybe you could spend a little bit time on that, the technologies that you're using to improve workflow, supply chain revenue cycle and whatnot in terms of like down to resupplies?

Yes. So I'd say the last couple of years have really been focused on deploying technology, mostly internally facing or facing with the health care practitioner to make the initial order a little more seamless, eliminate where we can the fax machine and the back and forth. That's amazing, this industry faxes. Industry-wide, I'd say 70% of orders are still transmitted over a fax machine. It's shocking that we're keeping those things in business. And I know that that's true in lots of pieces of health care. So it's not necessarily unique to HME. But a lot of our technology and focus on trying to use e-prescribing to interface with the clinician to get the order. And then sort of internally to use, have our drivers have tablets to make sure that we're routing efficiently, getting paperwork electronically signed by the patient so we can bill it quickly, using algorithms to figure out how to collect our money faster, which claims you have to bill and make sure they're clean. But I think that the next frontier is, as you mentioned, on the resupply and where we're focused. Right now, it's a little bit -- we're just a little bit better than most of the companies we buy, but that doesn't mean that we're anywhere near where we will be and are going, which is, this industry is like the biggest sleep patient. They're supposed to replace their mask every quarter. But just like -- I don't know about all of you, but there's a lot of things I'm supposed to do every quarter that I forget to do. And so the industry for a while, like would mail postcards, and that was like the light going on, "Oh, well you get more orders, you send post cards." And it turns out, probably not the best mechanism. Then it was IVR. Well, we're going to use sort of telephone IVR, and that will work. Now, I don't know how many of you have relatives who are 80-plus. They don't want to talk to an IVR. And so we, through acquisitions, figured out earlier than most that you got to talk to the patient. And so we have our callers, and we have call centers down in North Carolina and Tennessee, the nicest people in the world, calling and doing outbound. And we're using technology to make that really efficient when we call, make sure we call Jason, the 90th day and all of that. And so we do -- just with that technology alone, we do better than a lot of the companies that we acquire. And so there's a nice little revenue bump from just more proactive outreach. At the same time, just like the current Medicare age patient may want to talk to someone. I know myself, I'm completely the opposite. I don't want anybody to call me. I want to order on a -- if you send me a text, and I can just say, yes, I need my stuff and answer all the clinical questions, then, yes, I want to do it that way. And if I can't do it via text, then, yes, I'd rather go into your app or your website. And what we've seen is bigger order sizes and more frequent order when we offer other mechanisms to order. And so we're going to be investing more and more in that. We are seeing double-digit percentages of our orders come via either text, app or portal. In some respects, it is frustrating at times because a lot of payors necessarily put speed bumps. They don't want the patient -- if you ask the patient, patients say, I want my stuff every quarter, please just send it. And unfortunately, a lot of payors don't allow that to happen, including Medicare, which is we need to contact with the patient. We need to affirm that they're using their supplies and they need them, which is, as I said, probably a good check on fraud waste and abuse, and we never want to be tarred with that. And so what we have to do is we have to make it feel to the patient like they are getting it every quarter. We have to interact with them in ways they want to be interacted with, to let them get their stuff, eliminate that and kind of exceed to their wishes of the frictionless experience, while complying with all the rules that the health care system has put in place to make sure that there's not overutilization. I'm super, super bullish about the future there, and we're going to invest in that.

That's really helpful. So just touching quickly on M&A. Obviously, you guys have a proven track record, have been very active last year, this year as well. As you think about the recent acquisitions, obviously, on the diabetes, that's attractive, it accelerated your organic growth. As you think about other acquisitions down the road, is there anything you're specifically looking for, either geographic expansion, product expansion, anything that you can point to?

So I mean I think we're -- we have a very nice pipeline, and I'd sort of break it into 2 pieces of sort of the traditional HME RT businesses that we bought a lot of. We have a very, very nice sort of system processing team that can integrate those. They tend to be highly accretive. We can grow them after we buy them. We can bring in talent. I think we've done a really nice job of incubating talent even post acquisition. So we're going to continue to do those type of deals, whether they be geographic expansions, New England, the upper Midwest; or geographic density deals, mid-Atlantic, Southeast, Southwest. And then with the Solara acquisition, it sort of opened up a new frontier for us on the CGM side. It's a market that there are a number of regional players that do a nice job that, we think, would fit very well on to a bigger platform, not dissimilar to the way we started on the HME RT side 5 or 6 years ago. So those are the 2 core sort of buckets. We also understand that we bid off a lot with these new acquisitions. They're large. We need to get them sort of on our systems, on our processes, get to know them. And so I don't think you're going to see us do a transformational or bigger deal the rest of the year. I've gotten that question because we have a lot of cash on our balance sheet. We're going to be prudent and good stewards of capital in that respect. And then if there's a wild card, I think it's less product expansion because, again, we are, by far, the most diversified in the sort of medical equipment and supplies business, being able to do everything from respiratory to diabetic to supplies. There's really no one else out there that has that same spectrum of any size. I think the wild card could be -- we are believers that with all our chronic disease patients that we can be a more active participant in driving on health care costs. We have the patient relationships. We have the payor relationships, we have the referral relationships. We have the internal attitude to monitor connected devices because we do it for sleep. But if we wanted to do it at scale across other devices, we certainly have a technology hole. And so if the right technology existed for us to be able to fill that out then I can't rule that out.

Okay. That's helpful. I'm going to bring in that question from the audience here, if that's okay. And so we have 2 or 3 minutes left. Unfortunately, it goes by quick. But this is in and around COVID as well as guidance. But -- so the question is, is guidance does not include $17 million for CARES Act grants received? What would lead you to recognize the grid? Does it require the respiratory market to remain weak, weaker than pre-COVID levels? And then if you don't recognize it and return it, is it fair to think you would earn that much EBITDA from operations in the second half? Essentially, meaning that guidance is $17 million higher than what is currently published.

No. I think that the way to think about it is, out of conservatism, unfortunately, there hasn't been clear guidance issued exactly what they mean by lost revenue in COVID-related expenses. Certainly, as of today, we've lost more revenue because of COVID in the $17 million. We also incurred a significant millions of dollars of cost. And so I'd say it's really abundance of caution and conservatism. I mean, as you all know, we're a new public company. And so we don't get the same kind of latitude that some of the bigger health care chains, the HCAs of the world will get on if they were wrong and things have to be reversed. We know we're not going to get that flexibility. And so we are on side of conservatism. Nothing would need to change for us to be able to recognize it as long as we get comfortable with guidance, we'll bring that in the P&L in the second half.

Okay. And I think we'll finish up in terms of the risk factors. Obviously, the competitive bidding always comes up. You brought it up earlier in your commentary. I think we're looking at some timing here anytime soon in terms of an update there. So what are your general thoughts about competitive bidding, your exposure? I know you've used that to your advantage in some cases in terms of your competitive position. You've been a real good operator. So if you can talk in and around that, that would be great?

Yes. And so I will start with the commercial. I mean it's the reason we got into this business, it's the reason we've grown our business, so competitive bidding has been our friend. And we do think, even if there is some headwind, it opens up M&A opportunities for good operators like ourselves. But I think that investors, obviously, they say, yes, but they want to hear the number, what it means. 17% of our business is exposed to Medicare competitive, 1-7. When we run sort of the numbers, we think it's a high single-digit million dollar net impact to us. Then if I had to put a range around that, I'd say it's probably plus or minus $5 million either way for me to have high confidence. Obviously, we don't want it to be $14 million. That would be a bad outcome, but that will be less than 10% of our next year's cash flow. And so it often comes across and is asked as this existential threat to our business. This is a once every 3- or 5-year event. And if we have to take a very, very small step back to take 2 steps forward next year, then like that's what will happen.

Excellent. Well, we've bumped up on our time. It's interesting, exciting story, and looking forward to working with you going forward on it. And congratulations on all this success, and thank you for participating.

Well, thank you so much, Richard. Thank you, everyone. And we'll talk soon.

All right. Have a good day.