AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Good afternoon, everybody, and thanks for joining us here again today. We are fortunate to have AdaptHealth with us for this fireside coming up. with us, we'll have Jason Clemens, who's Chief Financial Officer of the company; and Anton Hie, who heads up Investor Relations. Really appreciate you guys taking the time out of your schedules this week to be with us and to do this fireside today. And what I think I'll do is I'll turn it over to Jason for a few opening remarks. And then we'll come back and structure it more as a Q&A thereafter. So with that, Jason, I'll turn it over to you.

All right, Miles. Thank you, and thanks for having us. Thanks to all on the line for participating today. Before we get started, I'll pass it off to Anton for a brief introduction.

Sure. Thanks, Jason. So AdaptHealth is one of the largest HME, that's home medical equipment providers in the country. We focus on a pretty broad range of products that we deliver directly to patients in their homes ranging from, of course, more traditional, durable medical equipment like walkers and wheelchairs, all the way over to ventilation products, respiratory products and our -- certainly newest category in diabetes management with continuous glucose monitors and insulin pumps. We have a really large footprint all across the country in many of the growth geographies that you should know, serving over 3 million unique patients across the country. We also have what we think is a leading -- industry-leading technology platform that really enables a lot of high-touch service levels to the patient and adds a lot of efficiencies to what has traditionally been a very inefficient operating model. And so that's most of, I guess, what we would want to address. And certainly, I'm happy to leave up investment highlights, if -- I don't want to take up too much time so we can get straight to Q&A, but there's a lot of attractive, I think, investment highlights, we could go over, hopefully, through the Q&A process.

Well, thanks, Anton. We were lucky enough to recruit Anton here to AdaptHealth within the last quarter. So first quarter on the job coming from the sell side, we're thrilled to have him, and he's been a great fit culturally and from his experience. So I'm Jason Clemens, I'm the CFO of the company. I've been here since July of last year, joining most recently from about a decade of experience at MEDNAX, traded on the New York Exchange, also a health care operator. So very glad and fortunate to be here and part of the company and happy to be here with you all today. So Miles, glad to take this wherever you'd like to go.

Sounds good. Thank you both for that. Okay. So I'll just kind of jump into Q&A and I'll bounce around some, apologies in advance for that. But to start out, maybe if we could just talk about the M&A pipeline in terms of revenue opportunity. I think Adapt has talked about traditionally looking to buy $100 million, $150 million of kind of run rate revenue. And this year, we're already well ahead of that. What would be the right way to think about the expectation going forward? Would it be closer to the $300 million as things are coming up and you're getting bigger? Or would we reset back to the traditional range?

Well, great question, Miles. I might ask Anton to flip ahead to Slide 15. We can orient you a little bit to the marketplace. $150 million is -- we wanted to anchor investors to something to kind of take to the bank, have a clear expectation that we intend to acquire a minimum of $150 million of annualized revenue every year. We would expect that for next year. We do not include any kind of nonacquired units in our guidance. But we think it's a decent way to plan for the future. That said, I'd tell you that I think for the next several years, you could expect to see us acquiring 1 or 2 diabetes companies a year. I mean these are pretty large companies, typically $50 million-ish of revenue. I mean, we acquired Healthy Living earlier this year. It's a Michigan-based diabetes company. We're absolutely thrilled with that business. I mean I was up there several weeks ago, and it's just a fantastic business with great growth and great operational metrics and great leadership. Frankly, we'll take a look at every CGM company out there on market. We love the business. We're very excited about it. And obviously, pricing has to be right and makes sense, but we're going to take a look at anything that comes across our desk. And with HME, I mean, you'll see on the slide, kind of the landscape. You should expect a dozen, kind of, tuck-ins a year. These are typically sub-$10 million revenue type companies. Don't be shocked to see 2 dozen. I mean we'll take 2 dozen if that's available, and we're able to do those deals. I think with Steve Griggs leading AeroCare and the origins of Adapt with Josh Parnes, both companies have acquired at that pace for a very long time. The economics on those small kind of mom-and-pop 1, 2, 3 locations, the economics are just fantastic. They're delevering in terms of our financial profile, I mean, by doing those deals. So I think you can all expect that we'll do as many of those as makes sense in a year. There's about 6,000 of those companies out there today. That's down from about 10,000 companies that we classify as like mom-and-pop over the last, I think, since 2015 or so, just per CMS data. So there is just a ripe opportunity for consolidation in this business right now. I think it benefits us and our national competitors. Just the -- I mean the dynamics are there. The competitive bid, which we might talk about later, I don't know that Adapt really views that as a negative thing. I mean I think pricing transparency and -- it makes a ton of sense, I mean, with a concept even for health care, right? So I think that doesn't necessarily benefit the little guys. I mean, they don't have the same ability to pass on pricing. They don't have the same ability to provide access, particularly in very rural markets. And as Anton said, I mean, we're in 47 states. So we have a national footprint of over 700 locations. So anyway, that's a little bit on M&A. I'm glad to go wherever else you want to go next.

Yes, that's really helpful. Thanks. Maybe just to dovetail on to that. Can you talk a little bit about multiples? I guess, industry talks about multiples of revenue. I don't know if you could say anything about -- like EBITDA as we kind of think about year 1, year 2, as you're able to integrate that, or if it's just more strictly a revenue multiple discussion. And maybe a little differentiation between diabetes and HME and maybe a differentiation between like mom-and-pop HME and a larger one?

Yes, sure. I'll give you -- I'll be happy to give you all that. Firstly, on like a sales multiple, I mean, we're going to acquire, on average, $1 of purchase price per $1 revenue. That's very consistent. So that would imply if we acquire $150 million of annualized revenue in any given year, I mean we're going to self-fund all that. I mean if you look at free cash flow, we expect to generate over the next 12 months, at least $150 million, probably closer to $200 million of free cash flow generation. As a reminder, anticipated free cash flow plus an untapped revolver and $300 million of cash on the balance sheet from the most recent debt deal, I mean, we're looking at about $1 billion of capital at the ready for deployment. To your question on, I guess, pricing multiples, we price based on a multiple of first year adjusted EBITDA less patient equipment CapEx. We think that's the appropriate multiple. I mean, that's how we measure our operators is on their organic growth of their units on the revenue line as well as their adjusted EBITDA less patient equipment CapEx. At a local level, it's a good proxy for unlevered free cash flow. And we're really -- we're somewhat ensuring that people aren't just loading up on CapEx and growing, but doing it at the expense of cash. So we acquire HME assets at 4 to 6x that first year multiple. We've been buying at that level for a very long time. I can't say there's really been any change in multiples for the bigger HME deals. Obviously, you're going to be closer to the higher end or if you've got strategic capabilities, you'd be at the higher end of that versus the smaller folks. Diabetes companies, you're going to see about a turn or 2 higher than that, just due to the nature of the bigger businesses, more infrastructure, more inherent organic growth built in. And so it makes sense the pricing is more expensive. So that's been the historic pricing and what we're currently seeing.

That's helpful. Thank you. And then maybe just one more on this topic. You talked about the diabetes companies being a little larger, and then the HMEs can be significantly smaller. How can we think about -- like the number of opportunities, realizing this is a fragmented industry, but like the number of opportunities of more substantial targets out there like your $100 million-plus type targets. Are there a handful of those? Are there 50 of those? Like can you just give us a sense of what that opportunity set looks like?

Sure. It's closer to a handful. The scaled regionals on this landscape slide that Anton has got up, it gives you a sense. You would have seen Spiro Health Services in this group last year at this time, and we acquired Spiro earlier this year. I mean I gave enough detail in our guidance as part of that acquisition to allow you to back into an annualized revenue of Spiro of about $55 million or so, maybe a touch less. But that's a sizable business. I mean it came with a pipeline as well that we're continuing to kind of roll into our master pipeline and roll along as we build out New England through that platform acquisition. But the companies you're seeing on this list of scales regionals, that's a good sense of who we're competing against and who brings that size. Some of those companies are above $100 million as you asked. There are several on the product specific that also meet those expectations. Solara and Pinnacle Diabetes would have both been in the product-specific categories prior to our acquisition of them. And those businesses we compete against, CCS Medical and US MED, I mean those are private equity-backed companies. Byram and Edgepark are also in that space. They're part of larger publicly traded companies. Byram is part of O&M and Edgepark is part of Cardinal. And then you'll see several other just product-specific companies that we either compete against or we actually distribute their products.

Got you. Very helpful. And then sorry, one more on this. I think you've talked about some leverage targets at various points. I guess I'm curious -- can you just remind us kind of where your head is on leverage targets longer term? And then the real question for me is, if you have the right deal that might be larger or the right set of assets over a short time to acquire, how high would you take leverage for the right situation, assuming you had some line of sight to working back down again over a relatively reasonable time frame?

Yes, sure. I'll take the second part first. I mean it's just based on recent history with AeroCare. As part of that deal, I mean our pro forma leverage was as high as 3.6x and that's net leverage on adjusted EBITDA. We brought that down and grew through that pretty fast. I mean, we exited Q2 at just under 2.9x. Our stated leverage target is 3x even. But I mean we're very comfortable in that upper 2. I mean, you're going to see us -- I would anticipate in that area for the foreseeable future.

Great. People are focused on labor. Can you maybe just -- I guess a specific question first, and then I'll kind of maybe ask it broadly in connection with that, just in terms of labor shortages and how that's impacting your business is kind of the broader topic. I guess one of our specific questions is when you're delivering products from your warehouse to the home or wherever, what proportion of these shipments are done via Adapt trucks versus contracted delivery? I'm just trying to think about risks around labor shortages and things of that nature. And then maybe if you could talk more broadly about where it's hitting you and what types of things you -- you're putting in place?

Yes. Well, Miles, so the -- in terms of the kind of percent of kind of outsource or augmentation for delivery, so kind of from Adapt to the patient's home, it's an immaterial amount. I mean we do work with some courier services and other, kind of, operators in times of need. I mean drivers is probably the first thing I'd focus on. But that's been tough. I mean, we're spending more on drivers than I would like right now. I expect that to continue at least through the end of '22. That driver role is, I mean, it's more than just kind of picking up and driving and driving off. I mean we've got folks that are entering the patient's home. They're setting them up on equipment. Sometimes that's a fairly complex setup, whether it's a bed or the kind of the ancillaries that come with it, wheelchairs, ventilators. I mean, it can be a complex setup. And you're entering a patient home in the middle of the pandemic, so it's -- it's more than just a driver role. I'd say next, on the clinical side, I mean, I think you're seeing that out of a lot of home health operators, where they're kind of changing guidance, enduring a lot of risk just on clinicians, nurses inside the patient's home. We don't have a huge clinical workforce. I mean we do have several hundred respiratory therapists or RTs, but it's a little bit of a pocket of health care. We're pretty big in this space. Certainly, there was a run on RTs early in this calendar year by hospitals, really in response to COVID. It seems that smoothed out. So I mean, we'll take frankly as many as RTs as we can hire, but I wouldn't say it's keeping us up at night. The other challenge, like any other worker or I think any company is going to acknowledge that there are challenges now, just due to whether it's vaccination requirements and/or just kind of government programs that are just, I think, changing the amount of folks in that labor force. So something -- interestingly, we don't have a vaccine mandate in place at Adapt other than when we have employees entering facilities that do have a vaccine mandate, right? So folks that are in the 4 walls of the hospital, sales folks, liaison folks that are helping with discharge coordination and such, we have a lot of those people inside the 4 walls of the hospitals. So we do have expectations in place there. But for like a back office, like a call center employee who might be working even remotely, we encourage full vaccination, but we're not requiring it for those folks. So we're actually seeing a spike in applicants. Just -- I don't know if it's other health care operators that are mandating it, and there's just -- there's that dynamic happening right now. So that's one thing to point out. I think, though, the bigger picture is that for revenue cycle, call center operations, resupply operations, like all these centralized functions, it's a big part of AdaptHealth. I mean we have almost 2,000 offshore FTEs. We've had that model for a very long time. We've got senior leaders in management that come from 20, 25-year careers of kind of outsource and offshore expertise. I think we're pretty good at it. And you don't certainly pick up any job and just outsource it overnight. I mean there's a lot of process reengineering and technology investment that's got to be put to place there before you get a job offshore. But we're spending a lot of time in those areas. I mean, so as we have risk, we're derisking through those operational levers. I think big picture, as a percent of revenue, I mean, labor is going to be right around 26% of revenue. I don't expect that to shift too much. Now if I'm growing organically 10%, I obviously don't want my labor growing that fast. But we're not going to get great gearing out of labor probably over the next 18 months. At the same time, I don't see it -- I don't see it negatively impacting our margins.

Okay. Just to make sure I -- want to make sure I got the right sense of one of your comments. So it sounds like vaccine, either mandates in certain areas, are not meaningfully negatively impacting your labor situation, is that fair?

Correct. Now what does that look like 3, 6 months down the road? I mean I don't think it's going to move meaningfully, but we're keeping a very close eye on it. We've got infrastructure in place to monitor. But our expectation is, if you're working in a facility that is a non-Adapt facility that's requiring a full vaccination, you need to demonstrate evidence of full vaccination.

Okay. Great. And then just you mentioned the cost and the revenue growth. I'm trying to think about how you can leverage some of these costs or fixed costs. Can you maybe talk a little bit about the proportion of costs that -- not sure you called this out necessarily, but maybe you would deem as fixed that could be leveraged as revenue grows in a more, kind of, maybe not a year 1 environment but on a more normalized basis?

Yes. Sure, Miles. I mean it's probably about mid-30% of revenue would be the buckets of fixed cost. We had several things in there. I mean, we've got over 700 locations. We operate kind of a hub-and-spoke model in those major markets, but we also want to be close enough to our patients. And some of the products we distribute like oxygen, I mean, we must be within -- I mean, most oxygen patients get the prescription, and you got to have oxygen on that patient within 2 hours. So proximity to the patient is important. But as the patient census grows, I mean, we do get some scaling there. Vehicles, I mean we operate a fleet of 2,500 vehicles. We have just recently contracted with a national fleet operator. So we think that just in terms of like fuel purchasing, maintenance, tires, like just all the components that come with that, we're going to do better going forward than we've done historically. And some of that is just the scale of Adapt and AeroCare coming together and what that means. We got about 5% of revenue in like SG&A, kind of corporate company level, public company type costs that are part of that. And then at the end of the day, you got 10,000 employees. I mean most of those are kind of step, I would call pure variable or pure effects. But for our purposes, a bit of like a fixed cost. I think as we continue to install technology, enable our sales force with that technology, automate process of that tech, I mean, we'll continue to get some scaling on that footprint.

Got you. That's helpful. Maybe one more, just back to the broader environment. Are you seeing anything in terms of disruption related to getting products? And maybe along those lines, can you just remind us maybe like in terms of manufacturer concentration, can you just give us a sense what that looks like in your top manufacturers?

Yes, sure. I mean it's -- I'll probably focus on the major categories. I mean within the sleep business, you may or may not be aware of Philips Respironics in a recall that they put in place back in June. I mean that is disrupting the overall industry. It is an operational challenge. We've been working through that. I had hung some revenue risk of up to $10 million to $30 million of in-year impact from that. I mean, how that translates to P&L is, I mean, just do you have enough CPAPs and ventilators and product to get on patients that the demand curve hasn't really changed? So that's been tough during Q3. We're feeling better about those numbers in Q4 and just alternative supply going into early '22. I mean the big operators in that space, I mean, best-in-class is Philips Respironics and ResMed, not necessarily in that order. We haven't put any specific numbers on it, but you can expect we're -- I wouldn't say they're 50-50, but we maintain a healthy competition with those 2 best-in-class manufacturers. There are more manufacturers coming to market. This is a unique opportunity for them to gain share. Long term, we think that's a good thing for the industry, for us and our major competitors just overall, having more options. But at the end of the day, ResMed, Philips, they're great partners and they're fantastic products. Within diabetes, I mean, we distribute all of the major CGM manufacturers as well as pumps for CGM. I mean you'll see Dexcom, Abbott, Medtronic with their CGM monitoring technology. I mean, it's just fantastic tech. The pumps that come with it, Tandem, Pod, others, some of the -- some of the tubeless technology and these pumps and the interconnectivity with the CGMs, I mean the technology is just fantastic. And so we're a major player in the DME channel within those products, but that's -- that's a sense of the major manufacturers in that part of the business. In terms of your -- kind of your more specific question on challenges in the supply chain, I mean we talked about Philips, but when we go over to DME, it represents about 10% of our business, that's the bent metal. So the kind of wheelchairs, beds, walkers, canes, crutches, a lot of product manufactured in China and just in general, overseas. I can't say it's been a real challenge getting product, but more of getting product when we need it. I mean kind of surcharges for shipping and freight, I mean that has started to spike a touch. It's not enough to move the needle on, again, changing kind of guidance or big picture profitability. But it is a dynamic we're working through. I mean I think that you haven't seen a big change in profitability over 2020. It's really kind of netted against the synergy program we've been running with AeroCare. I think as you look towards next year, everything I'm seeing and reading, I mean we've likely spiked and capped off here. I mean I think that surcharges could be up a touch or down a touch next year at this time. But we don't see those numbers really moving the needle going into next year.

Great. That's very helpful. I appreciate all that. Just going next to organic growth. It's been somewhat topical in terms of questions. I guess, to start maybe -- I realize there's kind of a growth component within this 10-plus percent, a component that's diabetes that may be higher growth rate and then there's everything else, which would be below that. So maybe ex the diabetes and still sensing we're probably high single digits, maybe in terms of organic revenue growth, can you talk about kind of what it is that contributes to that high organic growth rate relative to some other sectors and subsectors within health care in terms of is it addressable market growth? Is it share capture? Is it price? Maybe some other stuff? Just any comments there would be great.

Sure. So I guess I'll start with the product lines, kind of the slower growers in our product portfolio but very, very steady growers. It would include DME as well as medical supplies to the home. So that includes product lines in wound care, incontinence, urology, ostomy and many others. The DME plus medical supplies in the home, it's heavily indexed to the Medicare population. So I think that no matter how you cut it, whether that's a 2% to 4% natural growth rate of just the end market and assuming utilization stays kind of flat, I mean that's our expectations. We're going to grow that market at about 2% to 4%. And that's -- and again, it's very steady. It's the slowest grower in our business, but it's just -- it's a very steady business, and it's an important part of offering, kind of, all products for all payers in all geographies. Next, when I get to respiratory, I think that if you look at the kind of the classic DME, respiratory and HME, DME, respiratory and sleep together, I mean, Steve Griggs on the line, our CEO, I think he'd tell you that these businesses have been growing end market 5% to 7% for 30-plus years. A lot of its due to underdiagnosed nature of COPD as it relates to respiratory and OSA or obstructive sleep apnea as it relates to our sleep businesses. Respiratory, so think of stationary oxygen, portable oxygen as well as ventilators, again, treating the progressive stages of COPD. That's -- we believe that about a 4% to 6% grower for Q3, and that's spiking. A lot of that, frankly, is due to COVID discharges and Delta variant. We saw the same thing back in Q1 this year. We think that normalizes next year, I think you can bank on the 4% to 6% for our respiratory businesses. In sleep, we expect that business to be growing about 7% to 9%. I can't say it's growing that fast right now. I mean some of that is frankly just impact to our census from the onset of COVID-19 last year. I mean our new starts just collapsed, kind of April through September or so last year. But patients kept attritting from the census. I mean, patients are either -- they fall off compliance, they -- patients die. Obviously, I mean, just using your patients roll off census. And COVID didn't change any of that. I mean patients continue to attrit. So although new starts came back by the very tail end of last year, there's still a hole to climb out of. And so probably low single digits earlier part of this year, we probably -- we were touching mid-single digits by the time the Philips recall hit, and then you got a perfect storm of now that's tripping us up a bit. So I would project second half of '22, we're back to that 7% to 9% expectation for sleep. And then finally is diabetes. That's just a fantastically growing product line. We will refresh our guidance at the next quarterly call. You should expect us to be closer to kind of mid-teens as opposed to historically we had projected kind of 10% to 12%. And -- that's just a rapidly growing market. I mean the conversion from just kind of manual finger prick test -- strip testing to CGM technology. I mean it's just light years ahead. And I think as -- as payers are seeing the value, I think led by CMS loosening restrictions even as recently as a couple of months ago for qualification for CGM for type 1 and type 2 insulin dependence, we just think that will continue. Now at some point, do you hit somewhat of a terminal velocity of folks that are going to convert technology? Probably. I mean we think that's at least 2 to 3 years out. So that end market should continue to grow very fast, and we're very confident that we're taking share.

That's great. That's really helpful. I appreciate all the color. Just to go back to organic, you've talked about it on calls, but I want to make sure I'm getting some of the nuances right. Calculating the organic growth, you're going to exclude the B2B and then you're going to pull out acquisitions. So let's say you did an acquisition in the middle of Q2 of 2020. You're going to pull it out, obviously, Q2 of '21, but you're also pulling out for whatever portion of that quarter in Q2 of '20 as well, is -- is that correct?

We actually do it the other way around. It will get you, I think, to very much the same place. But every business we're operating -- we did operate in Q2 of '21, we're showing the revenue for that entire period against the prior year Q2 regardless of the ownership of that business. And so that's supported by quality of earnings reports, pre-acquisition. And we're giving you a view of how these businesses grew over those periods. The reason we do that, I mean, I think there's been questions around, well, why don't you just calculate a same-store or same unit like a classic like metric? Well, I mean, over 2/3 of our revenue for Q2 of '21 was from acquired units. And so we think it's a clear view of what's actually happening inside of the company by reporting organic growth with this methodology. Now that said, we've listened to investors and we acknowledge the desire to understand like what does your non-acquired growth look like. And so starting in Q1 of '21, our Chief Accounting Officer and I, we made a change in our filings and our disclosures. And so any investor can look through our filings and see what is the non-acquired growth, kind of -- it's not exactly same store, but it's more of a traditional measure, and how does that compare. I think what you should expect for Q3 and going forward is we're going to show you both. I mean it's -- both are in the filings technically. But rather than folks having to dig through it, we're going to be front and center with that going forward. I mean at the end of the day, those numbers will converge and be the same number once we lap the ownership of AeroCare come second quarter of 2022.

Got you. Okay. All right. That's helpful. And then just -- we get some general questions sometimes about why not CBS, Amazon, Google, whoever it might be, in terms of somebody larger disrupting or coming in. Can you talk about the nuances of that? And I guess I'd also be curious, is it significant enough for some of these guys to step away from that, or not just in terms of dollars, but like getting into the business and working with payers and referral sources and things of that nature? Just any thoughts you can share there would be appreciated.

Yes, sure. I mean I'd say that whether it's an Amazon or a CBS or anyone who's not in, I guess, DME land, who's not in this space, I mean, to try to comment, I mean, the barriers to entry to build it are very significant. You got to have the payer contracts. More importantly, you've got to have the referral provider relationships because after all, that's where the business is coming from. You got to build the whole machine to process orders, manage the revenue -- the health care revenue cycle with payers, ultimately be inside of patients' homes and taking care of patients. I mean at the end of the day, we're a health care provider. And so I think that -- I had the same questions when I was recruited to Adapt, because I guess I interpreted it from the outside more of a, well, you're kind of selling these products to patients, why can't you just do that online or through retail or through some other means? And the answer is that -- it's that provider -- it's that provider job that we serve. We've got over 600 salespeople all over the country. I mean, I hesitate almost to call them salespeople. They're more account managers and facilitators of our referring physician relationships. Those folks are in a lot of rural markets. They're swinging by the physician's office to check in and show their face and do kind of a traditional sales call. But every time they are there, I promise you they're getting asked by either the physician or the office administrator, where is Mr. John's CPAP? Or where is Mr. Smith's bed? Or we got a call from patient XYZ, and they need help, their mask isn't fitting. They're not compliant. They want to come off therapy, we need your help. Because that's what we do. I mean, our sales folks are equipped with our cutting-edge technology to know kind of where is my stuff, if you will. They know real time every single patient. They then click through their cloud-based technology on their mobile app and answer that question within 30 seconds. I mean, I promise you, our competitors are not as far ahead. I mean there's a lot of paperwork still to this industry, and that's not to be underestimated. It's significant. I think downstream then of entering patients' homes, having the footprint of over 700 physicals locations, I mean everyone I've been in, there are several patients coming in and out either getting fitted for the first time, meeting with a sleep coach and understanding kind of what techniques might work better to stay compliant on the therapy. I mean I think it's that personal touch and interfacing with the patient that I think is also a bit misunderstood. So at the end of the day, I don't know if there's anything preventing those companies if they want to be in this space. I would suspect Adapt or any of our competitors might become a target if they got interested in pricing right and all that stuff. But at the end of the day, I think building it from scratch and competing against what we do on the ground with the relationships we have, it's a very high hill to climb.

And what proportion of your business is digitized at this point? Or is at that level that you're talking about where you can track? And where -- when do you expect to be to your target rate there?

So in terms of the back end, where is product, over 90% of the business is digitalized. There are just a handful of locations at Adapt that we haven't yet rolled out the technology that AeroCare built. Most of that integration is complete. On the front end, that's a different type of digitalization, and we talk about our e-prescribe platforms. For the overall business, it's about 1/3 has been digitalized. We've been hard at work on that. I mean there's -- as of 6, 7 years ago, Adapt was shutting off the eFax machines in New York City and faxing back saying, we're done taking orders unless it's our e-prescribe technology. Here's the phone number of our competitor. I mean it's a foundational story that's told here because it's ingrained in our culture about how important it is to push providers on to e-prescribing. It's not just because it reduces cost for us on intake and processing, it does. But the satisfaction of a provider that might have missed a signature, page or an initial or a check box somewhere in the paperwork that's required to qualify the patient to produce a clean claim that's not going to get denied, I mean, it's crazy to think the eFaxes that fly back and forth, the salespeople that print -- our competitors still print physical paper and chase around a physician to try to get a signature on Page 14 of the document versus our workflow on our e-prescribe, you can think of it almost like a TurboTax, that it walks you through the expectations to qualify the patients. If they are missing signatures, we can send it back. Think of it like a DocuSign type of environment. I mean physicians can batch and sign off on dozens of orders at the same time as opposed to like printing these things off and chasing things around. So in our diabetes business, new orders are now over 40% e-prescribed. I mean that's up from 0 in November. So a little under a year ago, we weren't processing any diabetes orders on e-prescribe. But now, 40% are and that's after acquiring 6 diabetes companies and integrating them also. I mean, the progress has been tremendous.

Got you. Okay. That's great. Bouncing around here in the final minutes, I think you had an ERP go live back in June. Can you just tell us the...

Phase 1. We're at Phase 1 and going right.

Right. Yes. So what's the next milestone and timing related to that? And what's kind of the ultimate time frame there?

Yes, sure. So I think we got a best-in-class tactic with Oracle Cloud and best-in-class system integrator with Accenture on board. I mean, so this is a project running directly under my management. The next major milestone is in the P2P environment, so kind of the procure to pay. We now have 1/3 of the locations up and live. So they're doing their buying inside of Oracle. That will be rolled out before the end of this calendar year as kind of Phase 2. And then Phase 3 is the final tweaking with -- like T&E, travel and expense, and those type kind of bolt-ons to Oracle. Everything will be done by second quarter of '22. The amount of visibility and just kind of opportunity that's going to provide is going to be significant. I mean I think I'm taking it as a personal mission. I think there's a fair amount of cash in inventory that we'll be able to squeeze out once we get the visibility that Oracle is bringing to that environment. I think, overall, just the visibility and the opportunities that you get with a kind of ERP like this, I mean it's going to be a big benefit to the company. And certainly, integrations on acquisitions will get easier and faster going forward when it comes to like the accounting and finance space.

Have you talked about the inventory reduction either in dollars or days? Or is that something...

No. But I mean, look, we had -- I want to say $83 million or so inventory at the latest quarter. We can squeeze 20% out of that, I mean, would be my expectation.

Great. And then maybe just -- we get questions on competitive bidding. It's been a long, long road with that over decades. Can you just talk about where we are? I guess, 2021, what's the spending except for off-the-shelf stuff. And then there's some coming up in '24, I think it is. Can you just maybe talk about what proportion of your revenue is sensitive to that? And maybe what areas those are? And then also, I think I've read some different things, but just kind of refreshing on what the impact has been kind of over time. Like if you look at today versus the 2010 fee schedule, I know different categories are different and different markets are different. But maybe just a directional sense on how much we've come down in your view on, do we have like a lot more to come down in these subsequent rounds every few years? Or is it like we've taken a lot out, and a lot of providers are gone now, but the number of players is much less. And the additional reduction should be more at the margin. I don't mean to put words in your mouth, but that's kind of my multipronged question.

Yes. Well, I mean you're -- if you are putting words, those are the right words to choose, I think, to round that out. I mean if you look since kind of the origins of a competitive bid, I mean products like oxygen, I mean rates are up 70%, 80%. I mean, so that's evidence just to me, just one guy's opinion, I mean -- I think the program has been successful. I think certainly, there are tweaks that CMS is going to need to make. But I mean that's what was supposed to happen. I'd say that -- on the other hand, the 10,000 or so mom-and-pops that I referenced back in 2015, now closer to 6,000 -- look, over time, that's a fine line to walk. I mean I think that any taxpayer is going to tell you, look, we're all for transparency and competitiveness and pricing to get best price for Medicare on its beneficiaries. But how do you balance that with access? I mean how many of the little guys in rural markets are able to sustain their businesses and their product portfolio to get very, very necessary home medical equipment to patients when they need it most? So that's maybe more of a philosophical question. Back to kind of the details for competitive bid around '21, I mean it was canceled. I mean if you can't sleep tonight, there is a 212-page ruling on it that you could read. But the early parts of that, the CMS, I mean, I'll paraphase, but they said that they acknowledge that they did not achieve the economic benefit that they had expected for a competitive bid around 2021. Thus, they've canceled it with the exception of off-the-shelf bracing that you referenced for knees and shoulders. A little under 20% of our revenue is competitively bid. CGMs are not, and I wouldn't anticipate they would be. I think it's -- CGMs are providing so much cost benefit in other areas and keeping folks out of ERs that I would be very surprised to see that be included at any time in the near term. And then that 20% number is just giving you a view of like all Medicare business that is subject to the competitive bid. In terms of potential impact, I mean, I can only reference what we were projecting for 2021. So this is pre-AeroCare, so you probably just have to double the number. But I mean, we had said we think it's a high single-digit million bottom line impact. So let's say -- let's make the math easy, let's make it $10 million. Double that for AeroCare, it's $20 million. And then more of that would have come in, in the reimbursement, but we had expectations for what would be passed through to payers. So $20 million on our EBITDA projection, I mean it's not -- I don't think any CFO in the country can tell you that they'd be happy about that. But that's how to think about sizing. But again, that was with an expectation of rates in many places coming down just based on our internal modeling. And the CMS told you that they didn't achieve that. So I don't know if that's a worst case or not, but it's one way to think about it. The other thing I'd add is something the industry has been prompting for a long time is back to oxygen. The CMS actually came out and upgraded rates April 1 of this year, 2021. So very soon after canceling the program, they in fact came out and just unilaterally increased rates in that product category between 5% and 12% depending on your MSA. We expect fee schedule to increase coming into 2022. They went up 60 bps last year, I would suspect, probably ballpark 2, 3 points based on the data I'm seeing right now. So I don't think that any of that lends you to think that in 2024, anything is canceled or rates go up. I mean I think all of those things are possible. But just based on history, I think the CMS is just going to have their work cut out for them in terms of ensuring they've got access and getting the right price.

That's great. I think we'll wrap there since we're at time. But again, Jason, Anton, really want to tell you guys, we appreciate you taking time out of busy schedules. I know it's a lot to run companies and you turning out to meet with us is very much appreciated. I appreciate the thoughtfulness of your responses, and hope you have a great rest of the day.

Well, we're glad to do it, and thanks for having us.

Thanks, Miles.

Thank you, guys.