AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

All right. Great. I want to thank every for joining us to the virtual BofA Health Care Conference. It's my pleasure to be introducing AdaptHealth. Adapt is one of the largest providers of home medical equipment and services. Presenting today, we have Steve Griggs, the co-CEO; Josh Parnes, President; and Jason Clemens, the CFO.

So I guess maybe we should start with probably the biggest topic going on right now with the company is just the management transition that's going on now with Luke. I guess, on leave right now. How are you -- I guess, the market is generally worried, I guess, to some degree that him not being there is going to impact the company's ability to integrate AeroCare or potentially grow, particularly, I guess, through M&A. I guess how would you respond to that concern to help address those fears?

Well, the integration role for combined entity companies before he left and then the negotiations before closing is going to be mine and Josh's responsibility. So it still is. And so that hasn't changed at all. So that was completely ours. As far as acquisitions, in the HME space, AeroCare and Adapt competed for acquisitions. And I think every acquisition they did, we were involved vice versa, too. So I've been in this business for 30 years, done more acquisitions in HME than anybody in the planet. So I'm pretty comfortable with that acquisition environment. If you move to the diabetes side, we didn't do much of diabetes and Adapt got into it the summer of last year. But Josh has been there every separate ways. He's been involved with every acquisition. He knows the players in the industry, the people that operate in the sales for that division or know the industry also, know the players. So we'll miss Luke, of course, but I don't think we miss a beat as far as those type of consumers.

All right. Great. That's helpful. And I guess one question we've been asking people generally is, obviously, COVID impacted your various businesses to different degrees in different ways. I mean how are you thinking about the timing and pace of volume recovery or in some cases, may be a respiratory or maybe a headwind or normalization? When should we expect to get back to normal?

Well, I believe on the sleep side that we are there -- January and February were unusually soft after a pretty good December. So that kind of throws for a loop. But March and April were our new starts and referrals to our company were up. And so as far as we're concerned internally, we're out of it. We need to get back to work. The labs are open. Doctors' offices are open. Salespeople need to get out there and [indiscernible]. They're welcomed back in with our patient metrics. So we should be back working full speed. On the oxygen side, COVID, obviously, increased those numbers in particularly the last part of the year and in January as a matter of fact. So those patients such are the ones that had minor or doctors concerns of COVID. Those patients are coming off and thank gosh, I mean, we want them to be off oxygen. So we're glad we could help out during that period. So those sales will be kind of flat and a little bit of a rocky through the next quarter or so. But then we should be back up to normal. We don't have a high growth rate on our oxygen side anyway. It's low single digits. And so I don't -- we'll be a little bit less, maybe will be the same quite possibly as we move into the new fall season. So I don't think it's going to affect our numbers much at all. And then on the diabetes side, I'll let Josh comment on the COVID impact there.

Sure. So I think the diabetes, there wasn't really significant impact, if at all. I mean, there was some paid out there at the beginning of the pandemic with endocrinologists being a little bit slow. Again, there was a lot of stuff done through telehealth. We saw a little bit in July. Now just a reminder for everybody, we've only been in the diabetes business since kind of summer of last year. So it was past kind of that first wave of the pandemic. We saw a little bit out of the gate in the summer. But other than that, it really recovered I'd say even in Q3 of last year. Q4 was really great. And then obviously, we have the cyclical deductible set where patients slow down their ordering in the first quarter, and then it ramps from there throughout the year. So I think there was some confusion about that in our quarterly report, but business is very much on track. New starts are up significantly quarter-to-quarter. I mean, year-to-year, quarter-to-quarter, we're seeing tremendous organic growth there. And we're excited just about the technology prescribed we spoke about a little bit and some of the things that are going on there.

Okay. Yes, I was going to ask about the diabetes number in Q1, I think that's your point. Since it's new for you, it's new for us. And so can you just remind us that seasonality, I guess what should we normally be expecting from Q4 into Q1 on a same-store type basis?

Yes. I'll take that one, Kevin. We're going to follow very similarly the same sequential trend you'll see from the device manufacturers. I think if you study their data over the last probably 3 years, and you'll see Q4 to Q1, there is approximately a 15% to 20% sequential drop. That's consistent with what we saw in Q1. Frankly, our Q1 was a little better than what we were planning based on those trends. I think as Josh said in the previous quarter, I think folks were looking at a pretty much flat sequential Q4 to Q1 and then accounting for acquisitions that we announced and arriving at the number that said, well, gee, your Q1 was under Q4, and I think that was confusing externally. I'll tell you internally, it was right on mark. And frankly, we beat our internal expectations.

Okay. That's helpful. And so we should normally kind of be expecting that drop or you should be doing better than that because you expect to be growing sequentially or quarterly?

No. I'd say the end market in general is growing extremely rapidly. Our goal certainly is to outpace that end market growth. And even in our organic numbers, we talked about 8% to 10% blended. That accounts for, call it, a point or so of market share as part of that 8% to 10% of market share expansion. So I'd say I would plan for a slight beat against those expectations. But certainly, our goal is to beat that.

Okay. Perfect. And then I guess, how should we think about this year's guidance? I mean this guidance includes a number of onetime positives, the sequestration, the extension of the health emergency. When we think about what is a good pace EBITDA number to be growing off of into next year, should you be backing those things out? Or do you believe that this number is still in good base?

I think, I mean, the number is a good base. I mean, if you're -- for the folks kind of modeling this, right, line by line, I mean, certainly, you would want to pull it out, right? Those will be -- will become headwinds, if you will, as we lap it. However, what we have said about revenue synergy in general is that we expect to overcome that headwind. Frankly, we expect to more than overcome more than meet and overcome that headwind. I think when you consider a base EBITDA, I'd say, firstly, the $30 million of in-year synergy that is part of our guide, we feel very good on that. We had some comments on the call. I'm glad to discuss further here, but we feel very good about that $30 million in year. But a $50 million exit rate, again, very confident we'll hit that at end of the year. So we should plan for another $20 million in 2022. And then from there, certainly, we'll have guidance as we get to the latter part of this year. But I think that, that number plus the kind of the stub year of synergy and the stub year of acquisitions, that's the right way to think about base EBITDA.

Okay. That's great. And then Q1 organic growth was 11%, obviously incredibly strong number. How do you guys think about your long-term organic growth and what's driving that?

Yes, I can talk in terms of numbers. I think I'd ask Steve and Josh to round out the color of our strategy and operations. But we maintain our 8% to 10% company organic growth rate. We put out materials in investor presentations on our website over the last 6 months, and we think that those end market growth numbers hold. So think of DME and supplies of the home as low single digit, anchored very steadily to Medicare population growth and just that age and patients utilization of those type of products that we service. As Steve said, respiratory, that's a low single-digit to mid-single-digit number. We expect that to continue. If you look at sleep, it's closer to a 7% to 9% growth rate. I think that's consistent with what you'll see others in the industry on the manufacturing side as well as the distribution side. And we've got diabetes at 10% to 12%. Those are all net numbers, so think of that as volume and price blended. So in some of those areas, frankly, volume is larger, but we're accounting for just overall risk. But that's how we're thinking about long-term organic growth. Guys, you want -- you want to weigh in with some operational color?

Yes, sure. We -- obviously, the industry as a whole, nationwide is growing at similar numbers to those. So we should be able to at least get that. But every day, AeroCare is an organic growth machine. It was created that way. That's what we live and died on from day 1. And we're bringing that -- some of that discipline to the Adapt folks that were more acquisition-driven a little bit and consolidating driven. And so we're bringing that. And so we believe when we wake up every morning that the addressable need for our products, diabetes, sleep, oxygen is up here. And that's what should be ordered, but what's being ordered is way down here. And so our whole marketing strategy is to try to get our referral sources to recognize that, and we do that by showing them that we're doing a quality job with their patients and quality outcomes with their patients. And the better job we do with that on servicing the patients and the better job they'll do in identifying these patients earlier in the stage of their disease. COPD, for example, is great example. COPD, too many people today are being identified with COPD in the hospital for the first time. So they've had an acute attack. They go to the hospital. They get that, and they end up pulmonary doctors diagnosis and they become a patient at pulmonary doctor practice. Well, COPD, you guys don't wake up one day and have COPD. It's a degenerating disease that happens over a course of time. And so can we get more and more of those identified earlier than that? And we do that through education and just showing the benefits of the equipment on the patients. And so that falls in all these disease categories. And that's really our marketing goal. Every day we wake up trying to do that. And to date, it's been pretty darn successful.

Yes. So I guess within those growth rates, it sounds like you have a couple of percentage points of share gain. Where is that share gain coming from?

Well, I think it's coming from that where in our markets, I think they grow faster than the national average. We're in there. Well, with that, there's been a consolidation of the industry quite a bit. And so I think that gain comes from some of the -- from that consolidation too. So that's the combination of the 2, better awareness, better education, better details on how our patients are doing and then the consolidation of the industry creates some opportunity for us, too.

Okay. And then I guess maybe to build on the consolidation in the industry, the company has been, I guess, both companies have been aggressive as far as doing acquisitions. How do you think about the ability to add each year to growth? And if we think about leverage, where is a good leverage number to be thinking about for the company?

Well, we're pretty committed -- and we are very committed to that 3x EBITDA. So we're just under that. So maybe we go over it a little bit. Our banks and financial institutions are pretty good as long as it can come back down. So I think that's the range we want to be in. I would argue to the bondholders and the bond markets and the credit markets that it should be higher than that without competitive bidding overhang on you killing them up immediately. But that's for another day. It's a lot of education. So we're committed to that 3x. So with that, acquisitions in our system, I think the dollar amount of them will continue to grow. But obviously, the impact on our total revenue will continue to decline as a percentage as we get bigger. So Adapt went from few hundred million bucks in revenue to -- for AeroCare $1.4 billion over a multi 3- or 4-year period. You won't see that type of percentage growth, but you could see the level and the dollars [ even if it's some ].

Yes. So I guess, like the way that I think we kind of heard it you discussed it was 8% to 10% organic growth, another kind of 4% to 6% from deals. Is that kind of the right way to think about it over the next few years?

I think kind of big picture and long term, yes. I mean, we've messaged to expect about $150 million of annualized revenue to be acquired each year. We've been cautious to kind of put timing on that or to change that number too much just because we run a very disciplined M&A model with a pretty substantial M&A team and process that's in place. So there's a lot of rigor on this, just as a function been doing so many deals for so many years. So I think in terms of like big picture next 3 years, that's a proper way to think about it. But as a reminder, I mean, we don't include any deals that are not closed in our guidance. And some of that's just the discipline. I mean we don't want to feel backed in a corner to try to get something done that might be imprudent, but that's the way we're thinking about it.

Yes. And as far as the pipeline, I mean, it's much smaller than we thought it would be. Spiro acquisition that we just announced is a great example. Josh and I have known Gary Sheehan for a long time. He's been a great spokesman for the industry. He's been a great operator and all that stuff. And so prior to our acquisition, both our companies talked regularly. They had little interest in being acquired. But he expressed his interest. We had a good, great conversation. We obviously look at it close. And so that type of acquisition, we don't want to pass up. I mean that's -- I mean they're -- some great operators, some great geographics. So those, we're going to be very optimistic, opportunistic. Those come up, and we have a chance to get those type of assets.

And I guess, you guys do have a new business line. So when you think about incremental dollar of capital, where's the best place to put that money to work?

The best place? Well, I mean, we're obviously excited about diabetes and the growth with diabetes and how diabetes plays into in our overall strategy of being more of a chronic care manager and management company as much as anything else. So diabetes is crucially. Any conversation, you go into the health system, big physician group, certainly any payer, diabetes is mentioned and how you're going to manage those. So it's critical that we do a good job of those -- with those patients and show that we're doing a good job, not only getting the products to them, but also improving their outcomes. So I think lean a little bit towards diabetes. But right now, if you just looked at what's on the pipeline, it follows our current business mix pretty well. What gets closed and what doesn't get closed might change that. But if you keep the acquisitions kind of at that, but then the organic growth on diabetes will certainly move the business mix towards a little bit more favorable to diabetes over the next 2, 3 years.

Okay. That's helpful. One of the things that we've been hearing from people. So obviously, there's respiratory has been up during COVID. And you mentioned that a lot of those people are dropping off. Are you seeing any indication that some of these patients are actually turning into chronic patients for you?

Well, there's no question on some of the more severe cases that there's been significant damage to their lungs. I think the that that's out in the marketplace. And so doctors are seeing that. Doctors responding to that. And in those patients, I think they're going to keep on oxygen maybe more of a PRN type. I mean, it's too early to tell what's the correct treatment for those patients. I'm not a doctor, obviously, but I promise you all these great teaching institutions across the country are looking into the long-term effects of COVID. And on respiratory and -- and oxygen is going to be part of the solution. I think most part of the medications will be too. Ventilation would be further down the line. So I think they're going to use our whole toolkit to try to manage these patients.

Yes. Makes sense. And then I guess when we -- I think the company has been brought together through Adapt as -- brought together through a lot of acquisitions and then AeroCare on top of it. How are you guys thinking about the long-term margin opportunity for the combined company? And where are the levers to get there?

In terms of the kind of merit targets, the way we're thinking about it is, I mean, we printed 21.6% adjusted EBITDA margin for Q1 this year. If you look at the midpoint of our guide, you'll see it's hovering around 23.6%, 23.7% in that ballpark. And so what you'll expect to see as the year goes on is the delivery of the $30 million of synergy, and that will continue to compound throughout the year. And so that's making up a fair amount of that. And secondly, there's just the natural shape of our business. I mean we've talked a little bit on the last call, and you can hear particularly on diabetes, but just the shape of what to expect kind of Q1 to Q4 from a revenue perspective. So certainly, we're getting fixed cost leverage in this business as the year goes on. And you do see natural margin improvement over the course of the year, I think, as you see in many health care providers. When you get into 2022, don't forget the $20 million of the kind of stub synergy, if you will. So adding that in, that's, I don't know, another 60 or 70 bps or so. And then we think incremental to that and for each of the next call, 3 years, at least until the next round competitive bid, we've said openly and confidently look 30 bps a year, we feel of margin enhancement. It feels very good to us. Don't expect a lot of that on the SG&A line as we think SG&A as a percent of revenue, at least 12 to 18 months, there's critical investments we have made, we are making and we'll continue to make as part of scaling but as part of those investments, certainly, there's cost out to be had on labor and vehicles and infrastructure that we expect we'll continue to bring over the next 3 years or so. I mean, Steve, Josh, anything I missed? Or do you want to talk about any specific levers?

I think the numbers generally are right in terms of the guide. I mean we're going to be investing more in technology and kind of this connected patient experience, digital patient experience. Obviously, at this time, we're learning, and we're -- we have a couple of pilots out there. But as that ramps, we definitely expect to be investing more, probably start ramping that, Q3, Q4 this year, but obviously, we'll have more details on that as that comes through. But I don't know that net margin with the efficiencies that we're going to get out of that changes all that much, but we're looking at that model right now.

All right. And I guess, maybe it makes sense to kind of take a step back and talk about some of the synergies, that $50 million, that you're looking for between AeroCare and Adapt. Can you just walk us through where the opportunities lie?

Sure. I mean, the biggest and the quickest is through our contract renegotiations for all of our basic products and services we buy. So those have been substantially negotiated and agreed to. There's still some hanger on areas out there. And so 2 things happened with those, either they've been -- they come into place, and then they've run through inventory. So you don't -- just because you sign a contract today, doesn't mean the price mix that income statement got to run through inventory. And so we got to use up that inventory. So vast majority of that happened in the first quarter and some in the second quarter. And then we had some contract dates that those won't be effective to those dates. So we're very confident in those numbers as part of the $50 million. And then where we're going to get the extra pop that actually can grow hopefully beyond that is these increases in revenues. And so we're pretty careful of while we did it because some of those increases in revenues and with corresponding costs initially. And so we're managing that growth, if you will. And hopefully, sometime around, I think the fourth quarter, those will start spreading a little bit, so bringing more profitability to the bottom line in 2022. So that we want to leave 2021 as close to fully starting to drive this as possible. I think Jason's model shows it fully synergized in the middle of 2022, but we're hoping to -- that if we can, or come as darn close as we can, but I think that's how they manage. And we got very, very high degree confidence in that.

All right. I mean, are there areas where there might be potential upside to that number?

Well, certainly, in all those revenue targets, there are. And so that's CPAP resupply, patient compliance, patient collections, all those have continuing increases throughout time. And so -- but they'll be pretty small of this big bump we get in the first half, but then hopefully, we just keep improving those every day throughout a whole company, and they keep going. And so we have -- I think it's 18 work streams on synergies. And I think 7 or 8 of them are based on the revenue side. And some of them are much longer versions out there as we have to really invest to be able to get them in the tale of 1. So I think if we're going to look at getting more, I think that's going to be in late '22 and '23.

Okay. Excellent. And I guess one of the questions we're asking a lot of the management teams is, is there -- COVID impacted a whole lot of things between the way care is provided to the way the companies operate their businesses. Is there anything that you guys have done in response to COVID that you're now thinking it's going to be more permanent part of the business?

Well, certainly, telehealth is out of the bag, and it's going to be a permanent fixture going forward. So what we are looking to is not only accessing our patients that way. And so during COVID, with a lot of the initial setups were done that way. I'm not a huge fan of that, that initial setup. I think we need to bring that more in person. But the follow-up stuff is certainly going to be done over telehealth in the follow-up to our patients. And just beyond a phone call now, I think people are now getting more and more comfortable in their own personal devices to be able to link in, and that's very helpful. So I think you'll see that. In addition to the doctors now all in every EMR system is developing up to a virtual visit. A lot of our patients have requirements by the payer, you go back to the doctor and the doctor verifies certain things. And those can easily be done over a virtual call. And that's just what helped us out tremendously because some of these patients, we go back to the doctor just to do something so we can get -- continue to get paid as a great motivator for them. So -- but doing it over telehealth, we think is going to help us out tremendously. Keeping that patient engaged with their referral source. And then the whole management as we help that patient continue to get better.

Okay. Great. I guess one of the things that we think about with COVID is that it has been a boom to providers of home care, generally speaking, as hospitals discharge patients earlier. And patients generally not wanting to be in inpatient settings. Do you feel like any of that shift is at risk of going back to where it used to be when things get to normal? Is there a potential headwind to any of your businesses?

I don't think so. I think it's just putting eyes on an acceptance on what certainly, all 3 of us believe. And certainly, everybody in the home care market believes that things are moving to the home. I mean, we're big believers, you can't provide medicine in 10 -- 5 and 10 years, from now the same way you do today, there's just not enough people and bodies to be able to do what we were going through. But we think the home environment is going to get more and more popular and more and more as a requirement. And so we just think that this is open to people's eyes to it. So we think it's going to grow from here and not subside.

All right. Of course, I think it's all that we have time for. So I want to thank, everyone, for joining us, and look forward to doing this in person in Vegas next year.

Thanks, Kevin.

Thank you, Kevin.