AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

So good morning, everyone. This is David Cohen again, and happy to have AdaptHealth with us, first-time presenter at this conference. We'll have Steve Griggs, who's the Co-CEO; We have Josh Parnes, President; and we have Jason Clemens. The strategy is to spend about half the time on some prepared remarks and slides. And then I'll come back and lead the Q&A. I'll just say that we're super appreciative of the fact that the company is spending time with us close up coming on earnings. And so we're going to respect that by not asking specific sort of quantitative, results-type and financial performance questions, and we ask that you do as well. With that, I think I'll turn it over to you, Josh. Thank you.

Yes. Thanks, everyone. So Josh Parnes, President of AdaptHealth. With me on the line, you have Steve Griggs who's our co-CEO; and Jason Clemens, our CFO. So really just high level, and again, we want to keep it interactive, so we want to leave as much time for questions as people have. I want to just share kind of a high level. It's been a pretty busy 2020 for us and want to just kind of be -- keep it high level, obviously, before earnings in terms of specifics about performance for 2020. And happy to discuss just kind of questions after as much as we can. Steve, I don't know if you're on the phone, if you wanted to start out, kind of giving the overview or you want me to handle that? Okay. I'll take that. So -- and Steve will join in progress. I know he's traveling to a couple of our locations out in the Midwest with integration. So wanted to be respectful of his time as well. So really AdaptHealth is, without reading through the slides, it's really just -- what we do and when we started in our routes is really we provide home care -- home medical equipment for patients in their home. We've expanded over the last year, 1.5 years to supplies, particularly a focus on diabetes and medical supplies. Now with our combination with AeroCare in February, we now have a national footprint with density in very attractive markets, particularly in the Southeast and further West. What we always talk about with Adapt is really, we're a technology-leading solution for home medical equipment. So historically, home medical equipment providers was a very manual kind of antiquated type of industry. And we really looked at this a number of years ago and said, how can we both grow through a market that was consolidating very rapidly, but also how do we grow through the use of technology-forward solutions to enable patients to live better lives at home, referral sources to get patients from an acute or subacute setting into the home, and really foster a better kind of collaborative post-acute care experience for patients needing medical equipment at home. So now with that expanding to supplies, we're leveraging a lot of our technology across those platforms as well. Really, our market that we're in and what we're excited about is it's a very large and growing market. HME kind of represents a $12 billion to $15 billion segment in what's a broader kind of $56 billion market. CGM and diabetes, which we'll talk about in a couple of minutes, is really growing very, very rapidly. We estimate that to be about a $60 million segment. And medical supplies to the home is about a $10 billion segment. So really, our internal targets are on 8% to 10% organic growth, and that will vary between different categories that we provide. Just shifting real quickly to our strategic vision. And some of this I covered a little bit briefly is, with scale and with our investments in technology, we're really focusing on driving both accretive growth organically and through acquisition across the country. We're getting into other product lines over the last couple of years that have allowed additional growth opportunities, but also more importantly, has allowed us to now service close to 3 million patients on an annual basis. And that's going to allow us to kind of shift into some more connected care and connected health solutions that we're working on in the background while we're doing all this to create more value for payers and also to be able to drive better outcomes, particularly for the millions of patients that we service on an annual basis. Real quick, shifting into our product mix. Right now, it's pretty much, from a rental perspective, close to 40% to 50% of our revenue comes from rental products. And rental products consist of CPAP devices and oxygen and ventilation and other products that insurance companies rent on a regular basis and then other 50-plus percent, 50% to 60% is kind of resupply recurring revenue, but also medical supplies and CPAP and sleep supply. So really, sleep right now is a pretty large part of our business at 38%. Diabetes is growing at 70%. And then respiratory and HME makes up kind of the other 40%, 40-plus percent of our business. Right now, most of our business is commercial payers and Medicare Advantage plans. Medicare represents 20% to 24% of our business. And then other smaller payers, Medicaid, Medicare Managed Care is -- and patient direct billing and patient out-of-pocket represents the smaller pieces of the pie here. Just real briefly on the management team. Recently, we've had the opportunity to bring in and welcome Steve Griggs, co-CEO of our company. Steve -- Luke, who's our co-CEO, is not on the call today, but Luke and I have been in business since 2013 when we joined our businesses back in Eastern Pennsylvania, New Jersey and since then, have embarked on really a rapid growth in both acquisitions and organic growth opportunity in the consolidating business that's been HME over the last number of years. So Steve and the team at AeroCare, we're very excited to have them on board. We've known them for a number of years. There's really a lot of cultural similarities and synchronizations that we have with the team. We overlap nicely, and we have a lot of opportunity in markets where we're not in to work closely together. And the fact that we've been comfortable with each other, and we've been friendly even before we got to know each other and partner with each other has been a big help in terms of integration in general. Want to just flip it over, Steve, if you're on -- if you want to talk a little bit about kind of the markets that we're in, organic growth, some of the things that you guys and the team are focusing on. So I'll cover that. I don't know. We're having some audio trouble with Steve out in -- traveling around the Midwest. But really, just to briefly touch on kind of the markets that we're in, and then I'll flip it over to Jason to talk about financials, is our organic growth in sleep. We're really pegged to a lot of categories or a couple of categories that are particularly fast grown. So outside of just the general growth in senior population and patients that want to be at home with home care equipment, we've been really active in sleep, and particularly recently, the diabetes markets, which have much faster organic growth as a market, as well as our ability to transfer patients from our competitors' products through the use of our technology forward solutions. Our many, many, many field sales reps that are out there that are marketing to doctors, hospitals and payers. And so if we look at those 2 areas of opportunity, sleep is an enormous area of opportunity. Many are familiar with ResMed or Respironics. Those 2 are big partners of ours. We buy product from them. We work closely with them to really help get their products out on patients that have undiagnosed or diagnosed sleep apnea. Sleep apnea is growing astronomically in terms of awareness. And also people seeking treatment and sleep tests really going to the home, which are making it more accessible to people to identify sleep apnea, and that's another area that we're focused on helping grow that market. The other market that we've gotten into last year with a number of acquisitions, and we've been investing in that pretty nicely over the course of 2020 is the diabetes market, particularly the CGM or continuous glucose monitoring market. DexCom and Avid are both partners of ours, and we acquire product from them to work with endocrinologists to get patients set up on devices. And we all know there's a tremendous opportunity in the diabetes market. It's considered one of the most costly chronic diseases in the U.S., about $327 billion in annual cost that's associated with that, that's -- roughly 1 out of every 7 health care dollars is spent on it. And there's a lot of attention and focus going to this particular disease state. And more importantly, the technology that's evolving to help patients deal with this in real time, keep their doctors in the loop, keep their suppliers in the loop and keep people aware to drive better outcomes in diabetes, which will have a tremendous positive impact on the health care system in general. And we kind of view this also as an opportunity for us to expand our connected care strategy to help leverage our relationships with these diabetes patients that are at home to help them better manage and drive better outcomes. So really, on the diabetes growth opportunity, flipping to the next slide, we partner with endocrinologists, we have our representatives in those doctors' offices, in primary care physicians. And we're working on getting those patients set up both on technology and on the CGM in their home to enable them to learn how to use their device, to get set up on it, but more importantly, to get them set up with the regular cadence of resupply on sensors. And then really what we've been focusing on is how do we drive increased adherence. Similar to like what we're doing on the sleep side of getting patients adhering to sleep therapy, we're driving the same thing on the diabetes side to try to drive adherence across CGM devices, which ultimately will play into our connected care strategy to drive better outcomes on diabetes. Now 1 important thing to note, then I'll turn it over to Jason to talk about our financials, and then we can open up and save some time for questions. One important thing to note is that with diabetes, some of the products go through a medical benefit and some of it go through a pharmacy benefit. Adapt has invested and owns -- we do have multi-benefit capabilities, so we can drive business through our pharmacy channel or through our medical channel. And we have a 50-state licensed pharmacy that's a network with the key PBMs that as the growth in diabetes happens, we're able to address kind of multiple different entry points for both what the payers want, what patients want and really what's going to drive a better outcome at the end of the day. So really Adapt, over the last -- over the last year, or last couple of years, really, we've been acquiring both small and midsize and even larger HMEs and diabetes businesses across the U.S. We look for particularly focused companies that are -- that have opportunities on the technology side, but more importantly, getting really good people to join the company and be able to help us scale. And I think we've become really, really good at integration. We have a pretty aggressive schedule when we first start integrating about getting visibility and getting system alignment, both in terms of billing systems and IT systems. We have phenomenal teams in all those areas that really focus on how do we get our arms around these acquisitions early, and that's enabled us to really drive pretty solid numbers out of the gate with these acquisitions as we take them into our footprint. Real just briefly on COVID. Again, it's impossible to predict where we're at in this disease, but we've seen kind of, like a lot of other health care providers, we've seen ups and downs with it over the last year. But particularly, we've been at the forefront of somewhat response and recovery to COVID, particularly for our health care system partners. So really out of the gate in Q2, we drove a lot of our workers, like a lot of businesses, to remote workforce, but we also needed to have a pretty large footprint of delivery technicians and liaisons in hospitals that were pivotal to work with hospital systems across the U.S. to enable them to get ventilators, to get oxygen concentrators, to get patients out of emergency rooms and into the homes. As much as possible, they could be set up on oxygen equipment and other things. And Pulse Ox is to help monitor them, thermometers, hospitals could get patients in and out of there quickly. We've really retooled in Q3 and offset a lot of the declines in PAP, which patients were not going into labs kind of mid-2020 by focusing a lot on our B2B strategy, and we've done phenomenal with that last year with driving a lot of B2B sales in focus areas of ventilation and oxygen and respiratory particularly. And then further shifting into Q4, we've seen with that latest spike in the U.S. in Q4, we've seen our oxygen concentrator rentals across the U.S. spike and we were prepared, thankfully, in the sense that we had enough product to get into the patient's home, and we became a trusted source for a lot of our health care partners and our hospital partners to be able to get them oxygen concentrators when there was a lot of that, that was in tight supply across Q4. New start levels exiting 2020. We've seen them pick up nicely to kind of pre-pandemic levels. And we're hopeful and we're praying that the worst is behind us in terms of -- as a country, in terms of COVID. But we're prepared with stock and with other things in case things take a turn for the worse. But with that, I'll turn it over to Jason if there's any -- on some of the financial updates, and then we're happy to open up the lines for questions.

Thanks, Josh. As David mentioned earlier, we're reporting earnings this week, so we're going to keep the numbers very high level. Turning to Slide 14. Over the course of January, we took a series of steps to solidify the financing for our AeroCare transaction. We issued $500 million of senior notes due January 2029. We issued 8.45 million shares of Class A common stock. And we refinanced and increased our existing senior secured credit facilities, including Term Loan A and revolver. We included the pro forma credit statistics and the components of net debt on this slide. Using this pro forma adjusted EBITDA, which is lower than our current guide for adjusted EBITDA, our total net leverage is 3.3x. Our target for net leverage has been, and will continue to be, 3x or less. On Slide 15, it highlights our current guidance and our long-term targets for each of these metrics. We expect to grow organically at 8% to 10%. We expect to continue to acquire between $100 million and $150 million of revenue annually, and we expect margin enhancement over the next few years. We will refresh our guidance tomorrow, March 4, through our earnings call for the fourth quarter of 2020. So with that, I'll turn it back over to David for Q&A.

Great. Thank you. I've got 4 questions. So I'm going to prioritize my questions over my own right now. I think this first one is for Josh, You mentioned that acquisitions can bring you new technology. But I think acquisitions are going to be fairly quiet this year. So I guess the question is, are you content with your existing technology? And are you actually expecting to find technology in this year's acquisitions?

Generally, our strategy is -- has always been to use and invest in our platform from a technology perspective. And then when we take -- when we acquire businesses, typically, and not in all cases, but in most cases, their technology is way behind kind of where we're at in terms of our updated technology infrastructure. And therefore, there's an extra synergy lift that we get, and customer satisfaction level increase that we get when we acquire companies is that we make just the business operate much more efficiently. And that's been a tremendous source of energy for future acquisitions. And like I said, now we're going to focus on the integration with AeroCare. And particularly with these 2 companies, there's a tremendous opportunity. AeroCare has been very, I'd say, very advanced and very forthright in terms of their investment in technology, and we kind of viewed ourselves as the 2 kind of more technology-forward HME organizations in the business. And now with us getting together, there's -- we're looking at technology platforms across both of our businesses and saying, how do we complement each other with that. And we're focusing our integration activities around that, and we expect that to be very beneficial for both organizations.

Okay. I'm going to move to the next one, which is what is the longer-term impact of Inspire-type stimulation implants on your sleep business? Do you anticipate these devices taking meaningful share over time? And I'll just point out, in case you don't know. I think Steve has rejoined by phone.

Yes. Can you hear me now?

Yes.

Yes. And so yes, those devices continue to get better and better, but it's going to be a small percentage of the PAP patient that's going to be eligible for it, or want to pay for that. It's an invasive procedure. So while it will have an effect, it will be pretty minimal for an extended period of time unless the world changes. And the beauty about the PAP machines, too, is they change their pressures as the patients need it. And so they're still going to be the device of choice for many, many years to come.

Great. Next one is, can you ask them about their competition. And we've talked about this that we'd rather not get any names. But showing that creditor I guess skepticism little. It seems like you've got really high margins for a distribution business. Are your margins sustainable? Go for it.

I'm happy to take that, Josh.

Yes. Go ahead.

Yes. And so yes, the margins are sustainable. I think Josh alluded to the technology. I think the technology is going to continue to improve our efficiencies, and we're just going to keep getting better and better and better at how we onboard a patient, how we take care of a patient and how we interact with that patient. And so those are going to allow our margins to continue to improve. We're in a health care environment. Pricing reductions, we think, are pretty stable for the next 3 or 4 years. We'll always be -- we always plan for them, but those improvements should well and offset those.

Right. I'll go to the next one which is, can you talk a little bit more about your M&A strategy? Which products and capabilities are most attractive? What criteria do you consider when you're evaluating opportunities?

So I'll handle that one. We really focus -- I mean, we try not to get away from who we are as a business. I mean, recently last year, like I mentioned earlier, we expanded into the supplies business and the diabetes business. But those really are -- we're extremely complementary to kind of where our referral sources are ordering from, the hospital, the nursing home, the doctor's office at the payer level. But a lot of our M&A strategy is focused around our core businesses, which is HME, respiratory and diabetes. And we're going to continue once we get through our integration with AeroCare. And when we decide the time is right, we'll continue. We still have a very healthy pipeline of acquisition opportunities. But I think we're trying to stay true to our core and then leverage both technology and our connected care strategy over time to be able to make a bigger difference in a bigger number of patients living at home. And I think we feel like that opportunity is going to be pretty exciting once we continue to scale opportunity over the next couple of years with M&A.

Okay. Very -- I'm going to flip to some of my own questions. My first one was going to be, does this still feel like 2 companies? Or does it feel like you're running 1 company now? You've just put sort of a merger of equals.

Steve?

Yes. Well, yes, I'm out on the road right now and the reason for my technical difficulties. And we're -- for the past 3, 2.5 months, we've been visiting locations, combining. And everything that AeroCare did, every product that we serviced was a product that Adapt serviced. So it wasn't like we're bringing the -- again, it's all in their wheelhouse. And so now we're just merging the great technologies of Adapt on the back end and some of the really, very fine technologies that AeroCare had on the front end, patient engagement and referral source engagement versus RCM, revenue cycle management and for Adapt, and free supply management, for instance, centralized intake, for instance. So we're just emerging those technologies now, and those are all stuff that we were proceeding along with AeroCare and the stuff that -- AeroCare is bringing this all stuff that Adapt was proceeding along. So it's just continuing to improve our operations. So I would say, a month in, from the official close of the acquisition of February 1, we are pretty fully integrated. I think we act like 1 company on almost everything we possibly can, and just trying to find the best of the best of processes within both companies. So it's going along famously. And so just really haven't had any significant issues to date.

I'd like to ask you about sort of things that you can measure so that you can improve. I was very intrigued to learn that you're using some sort of technology that can tell a client when they're going to get a delivery, that Bob or Susan is going to be at your door at 12:30, and then actually got clients to rate their deliveries. How else can you measure patient satisfaction?

Well, yes, so that's the first step in it. So our mobile delivery device, which we call OTL, our system. That -- it's just like think of Uber. And so we've just copied that type of experience. So that's the first -- that's a hint on -- in that interaction. And then after that, Adapt had a very extensive patient survey for patients that really can lead us to Net Promoter Scores or things like that. There's 10 questions, or at least 10 questions, but 10 different ways to respond, 1 through 10. We will be utilizing that through our system and enhancing it for predominantly patients who have been on a service for a while and that whole customer survey -- patient survey responses. So that will get enhanced more and more. And we really embrace it because every time we do something like this, we enhance our service. We learn more about what's going on in our operations. What is frustrating our customers? What is appreciated? Well, what they do appreciate it -- and what they do appreciate in our service, and so we just keep learning and learning more. So we like those interactions.

What about anything sort of clinical in nature, including patient adherence? Do you have a very up-to-date read on that sort of thing? And what is that -- what do you communicate to...

Well, yes, I'll start with it. All of our equipment now has ability to send information back to us. And so they're information providers as much as anything else. And that's leading us into the very beginnings of our connected care strategy, which is what all the referral sources want. They all want more data. The patients want more data. And the payers want more data. So everybody is looking for data. And so with that data, hopefully, you can enhance the patient experience, both in how well they're doing, but also the costs that the payers are looking for.

I know talking about competitors is something you want to sort of generally steer away from. So -- but without naming any names, many of our clients were familiar with home health from many years ago, and it wasn't the most wonderful experience. My perception is that your companies have sort of leapfrog technology. I'm wondering what sort of visibility you have on legacy names, their ability to do the things that you're doing, whether it be on clinical metrics or patient satisfaction and just implementing technology broadly for referrals or anything else you can think of?

Well, certainly, some of the issues that happened years ago, the industry has changed dramatically since that's happened. The amount of providers are down so there's significantly less providers. But the growth rate in units is still very, very strong. And so I think all those providers that had some issues before seem to be pretty strong right now. They seem to be doing well. The industry is in good shape. There's plenty of additional services and products that we can add to our patients. So I think those times are behind us for everybody. But for AdaptHealth, we pride ourselves in our technology and our access that we have that makes it easier for referrals, easier for patients and easier for our payers to deal with. And so that's going to continue to drive us. But the industry is, to me is -- and I've been in it for 30-plus years, it's never been in better shape than it is today.

Great. I'm going to flip to a line of question, asking about our -- the data that you generate, how do you feel about your security protocols?

So that's been a particular focus of ours and our CTO, Albert Prast, who's worked with Steve for a number of years, is a veteran of some very large companies, UnitedHealthcare and some other ones over his career, does a phenomenal job for us on kind of making sure our infrastructure is protected as well as part of the going public process and SOX compliance and some of those things that are areas that we've invested in very heavily. Understanding the risk that organizations have, and we're going to continue to prioritize that and make sure that both compliance, adherence to health care compliance as well as security protocols and security around our data and around our PHI is protected as best as we can.

Right. More of my questions was -- actually, I'll smoosh two together in the interest of time. COVID was widely recognized as having accelerated home care and also telehealth. I wonder if you could speak to what you've seen on that? Is that sort of a combination 1-2 punch that's particularly impactful for Adapt?

We've seen across the pandemic, particularly our sleep patients that we've been setting up at home, in the past, pre-COVID, a lot of those patients would come into our offices to get set up, or we would do a setup in the patient's home. Obviously, since the pandemic, we've been driving a lot more of those setups to telehealth. It also -- for us, and we've been a big proponent of this for a number of years, and we've been a leader in the industry at e-prescribing. And really -- we've really been able to drive a lot of adoption in e-prescribing over the last couple of months, particularly with COVID and doctors not being in their office and being remote and things like that. So we've been able to drive both telehealth and e-prescribing, which, overall, really feeds into our technology strategy of, like Steve said, becoming a more efficient HME, respiratory and diabetes supplier. And we're looking to press that advantage over the next couple of months and years.

Okay. And...

And if I could expand on that just a little bit. The doctors are becoming so fluent with telehealth that every doctor and every EMR system now has a reasonably good and constantly improving telehealth system. And so for our patients who are sick, and sometimes not that mobile, getting back to the doctor for a visit, for an extension, for an annual certification or periodic or for re-auds or all this kind of stuff that we need documentation, that's all beginning to get facilitated fantastic for our company and anybody else in this industry where they can meet the insurance and the payer requirements, but at a much easier and patient-friendly way. So telehealth is going to be fantastic for doing more stuff and more procedures and more -- not procedures, but more processes at home.

Okay. Thank you for that, Steve. I appreciate it. I think we're going to land this right on 35 minutes. Definitely, I have some more questions, but I can sit tight for earnings. And I'm just going to say again, a big thank you for being comfortable enough to take on this dialogue right in advance of earnings and spending time with us at this conference. So hopefully, we can get you back next year. I'll be listening in tomorrow.

Thanks. Thanks for having us. Appreciate it.

Thank you, David. Talk to you more.