AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to day 3 of the UBS Healthcare Conference. I'm Kevin Caliendo, UBS Healthcare Services analyst. And with me today is the management of AdaptHealth. With us, we have Josh Parnes, who's President and Jason Clemens, CFO. Gentlemen, thank you so much for joining us.

Glad to be here.

Thank you.

Do you want to have any opening remarks or opening comments?

Yes. I mean, I think, in general, we had a good Q1. We feel pretty good about where the trajectory of the business is in terms of CPAP starting to come back online, at least we had a good Q1 setup. Again, we're riding out this Philips recall that we project is going to run through the balance of the year at least. But in general, our ability to start sourcing from other manufacturers as well as starting to build that pipeline back up for us on the patient census is going well. A number of other parts of our business are performing really, really well. Our CPAP resupply business, which hasn't been much affected by the recalls is really strong. Our diabetes business is growing -- grew north of 18% for us last quarter. So organic growth in spite of the Philips recall was a pretty strong 3.7%. We feel very good about that. We feel very good about where we're going and where we've been on kind of free cash flow generation. So a lot of the kind of core fundamentals are -- we're feeling very good about. And then one of the other things that I spoke about, which I'm sure we'll discuss a little bit here today is really the emergence of chronic disease management programs and where Adapt is positioned and how we're thinking about some of those things going forward and really leveraging our pipes, if you will, into our almost 4 million patients that we have on an annual basis and what it is that we're going to do with those patients and how are we a broader solution for the home care market and how do we have a more kind of cost-effective opportunity there for payers and for health partners that we're working with. So those are some of the things that we're working through, but happy to go anywhere you want.

Sure. Well, look, we might as well start with the sleep apnea and stuff. It's certainly top of mind for most folks. It sounds like things are progressing. I think Philips is here at this conference, and I reiterated sort of it's going to go through the end of the year similar to your commentary. Take us through, how do we think about backlog. We also had Owens & Minor, who talked about the Apria business. And they have a backlog, and they said they expect there to be a bolus sometime in 2023 that will come back on as product comes back on. How do you guys think about it? Where are we in terms of that building -- is it really building a backlog at this point? Are you able to service as many customers as you think you should be?

Yes. So our backlog grew Q1 in spite of the fact that we had strong setups. I think you're hearing the same thing from OMI, which is the large CPAP providers as an Adapt's probably either #1 or #2 in the marketplace within the number of CPAP setups that we do and Apria as well as some of the larger competitors. There's -- our estimation is probably now around 900,000 to 1 million patients on backlog across the industry of patients that need CPAPs that haven't been set up. So essentially, the backlog has built for a number of the larger companies, and we project that to be probably at least as much where we are today at the end of the year going into next year. When CPAPs come back, it's not like overnight, there's going to be this -- there's going to be a working down of that backlog. Our estimate is that you're going to have some drop off of that backlog. But generally, people who are diagnosed with sleep apnea are going to come back around, like at a certain point, they're going to want to get it addressed and CPAP at this point is still the most effective and cost-effective and manageable therapy to provide for sleep apnea. So our projection is that bolus is going to be worked down through 2023 and maybe even into '24, which obviously, from our perspective, our rental census on machines is a big driver of EBITDA and we're cautiously optimistic about '23 being a very good year for us.

Kevin, I'd add from an infrastructure and a labor perspective, we feel well positioned. I mean I think -- any other company -- I've worked in that had margin challenges, cut costs and focusing on labor. This is unique, though, in that, frankly, we can't hire enough, fast enough to support that bolus you mentioned that's coming. I mean we are -- in March, I mean we had a record set up. And that was a result of late-night setups and weekend setups and throwing everything at it from an overtime perspective, just to get PAPs on, on patients. We are investing in education and training on group setups. I mean most folks that set up PAPs aren't they don't -- they'd like to do a one-on-one setup. But the reality is we're going to have multiple patients coming in 3, 4, 5 at a time. I mean we've done this in the past. But I mean that's what we're facing. And so from a labor and infrastructure perspective, we're feeling pretty well positioned.

Has that -- and I'm not asking you for 2Q guidance or anything. But what you saw in March, has that continued into April and May?

We did comment on the call about March and April being very strong and very similar months. I mean that's probably about as far as we go into the quarter. But the drop -- the big drop we saw in December, January into early February. For now, we feel like we're past that. I mean at the end of the day, if we've got enough PAPs, this problem goes away. But we're feeling fine about Q2 and the rest of the year and what we put out for guidance.

Look, the alternate provider model take us through sort of what you've been doing to try to offset. I mean, because I know it's not a static number, right? You lose some, and you have to replace some. Take us through what's the replacement market look like right now? Are they all like FDA approved? Like how does that work? Where do you find them?

Yes. So there's not an infinite number of companies. it's really a handful, like less 3, 4 companies that are providing PAPs that are FDA-approved for CPAPs use. I think the -- one of the advantages of being a larger supplier is you get allocations from these companies. You can do longer-term deals, partnerships and commitments to buying from these companies longer term that will make you more attractive. We're doing that. One of the things that we're doing and this kind of bled into a little bit of increased cost in Q4 and even in Q1 is we're spending money on freight forwarding. So airplanes to bring in devices from ResMed and other manufacturers overseas to get our allocations to the U.S. and to our patients earlier to keep our backlog consistent so that we try not to grow the backlog as much as we can. And the backlog growing is really evidence of just how many people within the market are not getting CPAP right now. And that gives us confidence kind of as we -- Jason mentioned this, but we're spending a lot of time on the backlog, keeping those patients engaged, what can we do to make sure that we get the more acute patients service as quickly as possible and to make sure that backlog is still there as we go forward, so that patients don't drop off and say, hey, forget about it, right, because CPAP will come back. It's a question of when, right? Is it late '22? Is it beginning of '23? But when it comes back, we have a significant amount of work to do to get those patients set up. We have telehealth models that allow us to do this that we don't have to have tremendous amounts of labor against it. We're working to refine those and get those perfected before this bolus and the CPAP full supply comes back to market. So those are things that we're busy with, but it's a work in progress. No doubt.

That 800,000 to 1 million backlog, what is a normal backlog? Like what would it have been 2 years ago for the country do you think?

Normal backlog, I mean this patient what...

Probably 100,000, maybe 150,000. I mean backlog is typically a couple of days to maybe 2 weeks. So when you take the total TAM, I guess, in a year, let's call it, a couple of weeks. So it's significantly -- it's nowhere near where we're right now.

Understood.

90% more or less.

In your market share, you've talked about it's in 20s. Is that fair, roughly?

Yes, it's fair.

Give or take. I'm just wondering, coming out of this, given that you are one of the largest suppliers, you are going to get, hopefully, presumably preferential treatment as the new CPAPs come to market. Is there an opportunity to actually pick up share amongst that backlog?

Yes. There's definitely an opportunity. We're certainly working towards that. And that's what I mentioned before is really the better job we do with keeping those patients on the backlog engaged and the quicker, more efficient our pipeline could be in terms of getting those patients set up and operationalizing that, we're then able to be a solution for sleep labs and doctors that are just really trying to get their hands on as many of their patients set up. So the better solution we are, the more market share we could take. So the larger companies are definitely positioning themselves. And then the market share naturally, you have some of these smaller providers that just can't ride out the CPAP shortage and/or go into other product categories, which then leaves those CPAP open for the taking. So I think we're optimistic that there will be some market share pick up for us.

Okay. That's interesting. And I want to talk about the market share pickup a little bit further in the context. We heard about some of the smaller guys struggling like for obvious reasons, whenever these kind of things happen. But your M&A, you did a large M&A deal at the end of last year. You've kind of -- I don't want to say talked down, but you've been a little more cautious saying, look, it's harder to do M&A right now with the shortage of products. How does that balance? It sounds like there might be more opportunity because of that shortage, but at the same time, maybe the prices come down? Like how do you weigh one versus the other? I don't know it's question for both of you.

Yes. I'll take it first and you can talk a little bit about the quantification of it. But I think in general, Adapt has always been very acquisitive. Last year, we did $450 million of deals outside of the AeroCare merger, which was huge. So it was a very busy year for us last year. This year, we've signaled there is room for us to digest a lot of those deals that we did, especially a lot of them we did in the back half of last year. So there's opportunity for us to additionally monetize the synergies on a lot of those deals, further integrate them into operations, again, technology platforms and running on one technology platform has always been kind of core to how we integrate, getting extreme visibility into these things right out of the gate. So there's some more work to do there. But as it relates to the M&A, we're still going to acquire, and we're going to be acquisitive as much as the market allows. There's ebb and flow than any company that's acquisitive, particularly with us as times when we eat and times when we digest. We're in a little bit of a digestion period. And even in a digestion period, we've done 6 deals this year, not including the Community deal that we did at the end of last year, which is a pretty large deal, the largest HME deal outside of AeroCare. So in terms of the CPAP acquisition market, I think sellers and like, Kevin, you mentioned some of these smaller sellers now that are struggling, some of them are saying, hey, this is really not an opportunistic time to sell, right? Like I don't have product. My financials are adversely impacted, but it's not forever. It's going to be a year, the whole thing 1.5 years at most like it's not forever. So whenever these come back, these companies should bounce back. The overall growth secular tailwind of the sleep business is somewhere between 8% and 11%, and it's been growing that way for the last number of years, and we feel confident that, that's going to continue. So some of those sellers just kind of put their heads down and are not selling anymore. In other verticals like diabetes and supplies and HME, still seeing a fair amount of acquisition activity, although shifting kind of macroeconomic conditions are making sellers a little bit caution. Valuations have to normalize a little bit from where they were a couple of years ago. So I think you're seeing that kind of shift right now in the market.

And I think bigger picture, when you just think about the overall industry. I mean, back 2015, 2016, there were over 10,000 DME operators in the country. Today, it's about 6. Now some of that has been consolidation driven. Some of that has been competitive bid in that program, frankly, changing reimbursement for the little guys that they're not going to purchase at the price levels we're purchasing some of that. And so I think that over the next several years, I mean, the opportunity set for consolidation is mind boggling. The value that we create day 1 when we buy these companies and the 6 we've already done this year is incredible. I'm sure we'll talk capital allocation later. But I mean, highest and best use all day long is M&A for our business. One story or anecdote to go along with the digestion that I've been telling, I mean, these guys kind of laugh at me. But I think it's illustrative of what we're doing and what we're spending our time on right now. We've got 750-plus locations throughout the country. You wouldn't guess how many Internet service providers we've got in those 750 locations. We had 81 in the first quarter. I mean think about that. And it's not just -- it's utility. It's waste management, security. I mean, you go on and on and on about the infrastructure you need to run the business and just how many variations we've had at different price levels for many years, consolidating companies. Well, effective in June 1, we've got one. And so the amount of costs we're able to drive out of the model by doing that. Just the simplicity, the efficiency and at the end of the day, the dollars, I mean, that's $1 million of savings that will go on forever. And we've got opportunity to do that throughout the platform and to position us that when PAPs are back, when we're ready to turn that throttle back along on M&A, I mean we're going to be even better positioned than we were historically.

And when you say turn the throttle back on, is it just going and buying share? Or is there -- I mean, your M&A strategy has been about share, but there's also technology and some other things, be more vertically integrated potentially into the home, talk about that. Take us through -- as we go into 2023, perhaps come back online, is your M&A strategy going to be focused on, let's just scoop up as much market share as we can? Or is there -- we're just thinking about sort of the bigger picture in terms of you've talked about your chronic disease management and things like that. Where do you focus?

Yes. I would say vis-a-vis M&A, our core focus is going to be continued on acquiring companies with revenue stream and profitable revenue streams. Number one, just from the allocation of capital and the return on invested capital, that's going to give us our best return. Number two, and I'd say more importantly is essentially what we're doing is we're aggregating patient lives in the home in an accretive type of fashion, right? So we're buying patients' lives in the home. We're buying businesses that make a profit that within our model make even more profit with the synergies. And then not only that, we're now compounding patient lives in the home, which feed into this thing of this chronic disease management in the home now. On the technology, the chronic disease management of the home, we have kind of a very core technology platform, a foundational technology platform that can scale into that and grow into that. We have some pieces that AeroCare has built over the years, that Adapt has built over the years that we acquired over the years, that we've kind of off-the-shelf stuff that we plugged and played with over the years that are going to continue to enable this chronic disease management at the home. But the reality is, is that if there's an acquisition there, it's not necessarily -- probably not necessarily this big technology infrastructure that loses money and has a pipe dream to make money one day, we're into is it profitable, does it make you money and then aggregating those lives and plugging them into our technology model to add to that flywheel. So that's kind of how we're thinking about the M&A. And as it relates to small technology platforms, yes, we'll acquire them if it fits into our platform and it makes us better, but we're looking for a pretty significant ROI on that. It's not just necessarily a dream type of thing.

So what do you think you can do in the home like what services do you think you're going to be able to provide. There's a lot of companies that are providing service into the home. A handful of them have been here at this conference. What can you guys do or what can you guys do better? Where do you think you have an edge in terms of providing certain types of services?

This is really interesting because I think either market doesn't necessarily understand this opportunity, and I think we're starting to really get our arms around kind of what do we do with this opportunity, right? An opportunity is only so much of what you do with it. But Adapt is in a very unique position in that, it sits at a crossroads of the patient, the payer and the doctor in a way that's very hands on with the patient, right? So if you think about our home health peers, some of them, Amedisys had and some of these other companies, they have basically nurses, caregivers, aids going in and actually touching and feeling these patients every day. We do that in a way that I'd argue is more impactful in the sense that we're impacting more patients. So now -- and it's growing, right? So every time we do an acquisition and organically we grow the 3.94 million patients that we touch on an annual basis is going to grow. Now what do we do with those patients? Now the unique thing about some of the models that have come out in terms of value-based care or the telehealth type of models of, hey, we're a telehealth model and we're going to drive better outcomes in your patient. That's great. The problem that I believe that some of those models have is that their patient acquisition strategy. How do they get to the patient, right? Like is it an envelope in the mail that says, hey, sign up for our services that goes in the garbage right away? Or is it hey, these patients coming to me already for CGM products, for diabetes products, for sleep products, for oxygen products, for medical supplies to the home, for ostomy urology. All these things are things that -- the patients are coming to Adapt already for. Now how do we leverage that relationship further. And so some of the things we're doing on sleep apnea in terms of a coach being able to follow up with the patient, we're going to start doing on the diabetes side. We're going to do on the oxygen side, on the COPD side. Following up with these patients clinically to drive better outcomes in their home with their connected devices and then taking that data back to the payer either for HEDIS scores or taking it back to the payer, where the payer can actually see, hey, I'm spending X number of dollars on CGM products every year, what's my impact on that? And I think Dexcom and Abbott are realizing that from a diabetes perspective, providers like AdaptHealth are going to provide longer-term value or longer-term adherence to the therapy and their patients have a longer lifetime value, but more importantly, better outcomes. And that's where we're going, which is these 4 million lives that we aggregated in the home, there's a huge opportunity now for where technology is today, and it took a little bit of while for it to evolve, but where technology is today, for us to be able to impact those 4 million patients, many of them with CHF, COPD, a lot of the big cost drivers in health care, we have an ability to impact that in a very, very cost-effective way. So I think when things that we're working on start to come to fruition and start to gain traction, we're going to get a lot of momentum in that chronic disease management space.

How do you get paid for that?

So 2 ways. Number one, out of the gate, we're thinking about it in terms of -- if all we do for the next 12 to 18 months is grow organically quicker with, a, we're already providing these products so you give us more of them. Instead of giving them these to smaller providers that are just pick, pack and ship and dropping it to your patient and forgetting about it, like we're actually going to send this stuff to your patient. We're going to monitor how they're doing on this stuff. And then we're going to make sure your patients are adherent to the therapy longer and more importantly, are getting better outcomes. So if you're a payer, you're a health system that's taking risk or you're an at-risk provider, an Oak Street type of thing that's looking for someone to provide these products to that's going to be a really good solution for those payers and for those risk takers to be able to provide the product in a very cost-effective way with outcomes. So if we could just grow organically from that in the near term, that's probably the most logical step over time as we get better at it and our adherence is proven and the outcomes are proven, we could probably either take risk or enable taking risk into kind of more complex models that may be our additional revenue streams down the road.

That's helpful. That's helpful. I want to talk about diabetes. It's obviously -- there's a lot going on in the space. People pointed to the shift from medical into the pharmacy as being a risk to you. How have you seen that evolve? It's now been -- it's been happening now for quite a period of time. Have you seen it impact your business in any way, shape or form as pharmacies are now selling some of the products that you also?

Yes. I mean I think I'll point with that. We point to kind of how Dexcom has been messaging this stuff over the last 24 months. And we got into the space as a reminder, about 2 years ago with the acquisition of Solara in California, that was kind of with the thesis that whatever we're doing on CPAP and CPAP resupply is a perfect model for diabetes and the tremendous growth that, that end market was having. And I think what we've proven is we've driven a tremendous amount of e-prescribe to the diabetes space. So now kind of 50% plus of our orders in the diabetes space coming e-prescribe and that's enabling. And the reason I point this out vis-a-vis the pharmacy channel is that this allows the medical benefit, which were -- which we do 90% of our business through to be much more efficient and kind of quick and adherent -- for doctors to be able to order. So the ease of use that I believe that the manufacturers thought that they're getting through the pharmacy channel, number one, can almost be replicated with the HME channel today with how effective it is with e-prescribe. Number two, the added benefit of the medical channel, both for payers and for the manufacturers from the payer perspective is when a patient gets on therapy with us, the doctor documented really well why the patient needs it. We screen patients that really shouldn't be on the therapy, and we're really filtering out the ones that are going to benefit the most from it. So from a payer perspective, in terms of use of capital to set that patient up that's very cost efficient for them and kind of adds to safeguards that they like. And then for the manufacturer like a Dexcom or like an Abbott, our coaching and our diabetes coaches that follow up with the patient and make sure that they're getting resupplied and that they're adhering to the therapy and their glucose levels are monitored, like ultimately, that's driving a much longer and better lifetime value for that patient. So I think the signaling that we're seeing, and we don't obviously have any visibility into what they're doing, we could just tell you what we're seeing in our business is that the signaling 24 months ago was that a tremendous amount of patients are going to end up in the pharmacy channel. The reality is our business has grown 20% plus over the last 2 years. And even if there were small shifts here and there to the pharmacy, really hasn't impacted us. So there was less shift than we had thought internally even. And now Dexcom signaling that they believe that the shift is largely done through this year. And I think that's kind of them seeing that the long-term benefit of this being in the medical benefit is probably better.

Well, the 20% that Josh referenced, I mean in Q1 alone, I mean we outperformed our own internal expectations. That's a net number. And so have some payers and plans shifted, yes, but we are outgrowing that, and we're winning more on the ground, e-prescribers is a huge part of that. I mean, in the last year, I mean, we won 80% of the endocrinologists in the United States have referred to us. So we're winning more. We're growing through that. Now does 20% go on forever? No, certainly not. But as that patient census continues to grow and to swell internally, I mean, these patients, once you're on CGM, you're not going back to test strips and manual injections. And so the resupply that comes with that, I mean, it becomes a bit of an annuity to that growing census. And so despite shifts, I mean, will they happen here or there? Sure. But we're confident in our ability to grow through that.

You mentioned Dexcom. They just announced an acquisition Insulet. How does that -- how do you think about that transaction? Does it impact you in any way, shape or form?

Well, I mean, we're procuring from both companies today. We do think that the longer-term benefits of that type of combination, right, integrating the technology and the interconnectivity of the devices, I mean, that's tremendous for the patient, and that means it's tremendous for us. I mean we're a key component of the -- in the supply channels for these patients. So I mean, big picture, I think that it's very positive for Adapt. On the ground day-to-day does anything really change quickly? Probably not.

If they're under one umbrella, one house, they raise price, they combine it, how does that impact you or it doesn't?

And I don't know. I mean there are still competitors in the market. And so whether those competitors are combined or stand-alone, we maintain a pretty agnostic model. I mean, we're -- and we do that on purpose. I mean I think we're seeing the benefit of that through the PAP shortages. I mean some providers were tilted more heavily towards a ResMed or tilted more heavily towards the Philips. I mean that risk isn't worth taking for us. So from that perspective, whether they're together or stand-alone, I don't know that long term, it's going to make that big of an impact on price.

Have you guys ever disclosed your market shares on the device side?

Meaning like the supplier?

Yes, the supplier.

We have not . But you can think of us as -- well, you can think of us as very well balanced, and we think that's the smart way to do business.

Fair enough. That's right. Let's talk a little bit about the financials. Your opening comments were pretty optimistic. I mean they sound pretty positive around your guidance for the year and the long-term outlook for the business. In the first quarter, you did call out some cash flow issues. We know that inflation causes CapEx to be higher. It's a metric we use. Can you talk about that, the sustainability of that, how you're modeling that -- the impact of it?

Sure. I don't know that I'd classify it as cash flow issues, more of the Q1 dynamic. I mean, as you know, in provider land, I mean Q1 is typically like we're -- for us, the reasons for that are multifold. I mean, first, there are larger cash outflows, just kind of bigger AP expense. You have a big Q4 push of resupply. And then as we're procuring those products and shipping them and sending them to patients, I mean it's just -- it's more of a timing issue of payables and things like that in the first quarter. Secondly, you have bonus payments, right? So I mean, look, a lot of companies bonafides, benefits, overall payroll timing. Again, thirdly is timing associated with interest. Just the way our bonds are stacked up, Qs 1 and 3 are big cash outflow periods. So that was another, call it, about $20 million of accrued interest that was paid as part of the timing. And so -- those are the big timing impacts. I'd say on the plus side, we're about done paying off the provider relief funds and the CARES Act, federal government, so another $5 million went out the door in Q1, and that's winding down. So that's -- we got easier comps, and that's a big deal for us to lap that. I mean now well over $40 million paid back to the federal government. On the intake side or the revenue side, I mean, DSOs were flat against Q4. I mean that's a huge deal. So in Q1, as deductibles reset, patient pays becoming a larger percent of your base. Despite that, I mean, we held DSOs at 47 days, and we're thrilled with that performance. And then finally, as a message, I think it was probably 2 calls ago, we talked about the hardening of the Oracle environment, the overall SOX environment. I mean essentially, every SOX control process is now done differently than it was a year ago. And so it's a lot of boring kind of process mapping and documentation and things like that, that it costs money to get through that. So anyway, what 7, 8 different components we covered there. I mean we're now through that. We're lapping that. And so we're very confident second half of this year will be very solid cash performance. We believe our runway, the way to think about us is between 6% and 7% of revenue will drop as free cash. And next year, we think that could grow. I mean we talked about maybe floating with 8%. We're confident in that despite the inflation and despite the surcharges activity. And so in coming years, we think that all that will end up being a tailwind for us.

To go from 6% to 7% to 8%, is that driven just simply by scale or it's there any one type...

Yes, it's more profile change. So as that diabetes census swells, as PAP resupply, I mean just -- there's no capital outlay on that. There is a setup. But as you have patients on resupply census, I mean, that's just a flywheel of cash flow. So it's really just profile changing and those components of the business getting bigger and bigger relative to the whole.

One debate in the stock has always been the true organic growth rate. There's been reports written and...

A lot of debate.

A lot of debate. I know you've had to address it. You've talked about 8% being the right number for your business. I know in the first quarter was 3% to 4%, right, I believe. What -- how do we get to 8%? is it simply just the backlog and filling that in that gets you to 8%? Is it the change incentive?

It's as simple as that. It's as simple as sleep. I mean when we talk about the weighted average components of the business, I mean, we're guiding 4% for the full year. So 3.7% for Q1, we're thrilled. I mean, that will pick up as the year goes on, and we're very confident in the top line guide. Diabetes, we pegged at 18% growth. We did a touch better in Q1. We're thrilled with that. supplies was a bit of a drag. We have that pegged at about 4% growth, and it was actually slightly negative for Q1. So you got -- that's the beauty of running a portfolio. You got some ins and outs. Respiratory was dead on at 5%. DME was dead on at 4%. And then sleep, we guided at a negative 6% for the year, and we did better than that. Still negative 3%, 4% negative. But that theme will continue over the course of the year. That negative 4% will become negative 2%, will become flat. The comps get easier second half because of the resupply that started in June of last year. So we feel great about the 4% that we put out. We feel great about 8% long term. And I'm not guiding on '23 yet. But I mean, if the PAP issue gets solved, I mean, 8% will be a bit of a layup. I mean because you've just got this huge backlog of patients. So arguably '23 should be a very big revenue year.

The question we get on the oxygen side of the business, is it becoming -- is it with COVID and the idea of long COVID and all this. Is it more chronic? Is there a longer duration for oxygen patients in there, had been as a mix younger and thus, maybe they stay on longer? Is that a thing that, is it driver? It sounds like maybe no?

I think one thing from -- we had our ups and downs with COVID in terms of patients coming on census and off census. I mean this is anecdotally during the Omicron wave end of '21, we had a tremendous amount of patients come on census and as quickly as they came on, they came off, right, because that wave was sort of really quick and short. But in general, we still have a very small percentage of our patients that are COVID related. But what has happened is definitely there's been a lot more awareness around respiratory, around oxygen as a therapy and on oxygen as a therapy at home. Hospital is not necessarily wanting to take patients and like hospitals are looking to really put only really high acuity patients in and admit them and anybody that's not as high acuity, we can send them on home oxygen and they're going to get cared for and monitored. And if it's a connected device, even better. So a lot of that, we're -- I think we're benefiting from of that awareness of respiratory, younger patients realizing oxygen therapy, the smaller profile of some of the portable concentrators that we put out from Inogen and some of the other manufacturers are allowing people to be more mobile with oxygen therapy. So it's a growing market. It's not growing at the same pace as, let's say, the undiagnosed sleep apnea population is in sleep ap and CGM adoption. But it's still going to be a nice grower, it's a long duration patient and the therapy is getting better and more effective over time.

And I'd add, Kevin, I mean our respiratory business is really aimed at the chronic disease states of COPD. And it's a progressive disease. There's no cure. Typically, a patient will start out on inhalers and then moving to a nebulizer, which we supply the drugs that come with it, we supply it through our pharmacies moving then into oxygen therapy, most typically in the later part of COPD and ultimately, to ventilators. And so that entire chronic disease life cycle. I mean, we're supplying product and equipment and resupplying drugs that whole time throughout that whole life cycle. So that's the reason that's a 5% grower is COPD is a massive problem in the United States. It's widely underdiagnosed and our equipment treats each of those states at home for the patient. So is COVID a very -- is it a contributor to respiratory? It was, but I mean we're talking single-digit percent shrinking each month as a percent of the pie. And so it's -- it was an impact, a little bit of a tailwind and then a headwind kind of depending on how it flipped. But at the end of the day, I mean, we're focused on the treatment of COPD and COVID is just such a small part of that.

Understood. We only have a couple of minutes left. I do want to talk about capital allocation. But first, the market is not exactly treating companies that are highly levered well. Interest rates go higher, and that's an immediate factor. Take us through the plan to delever? How do you think about that against the rest of your capital allocation strategy?

Yes. Well, first, I'd say even before a plan to delever, we locked in -- we updated our swap after the quarter. So it was a subsequent event that we reported in the Q. We've got 76% of our debt now is on fixed either through a synthetic or just a fixed rate bond. We're very comfortable in that area. I mean our cost of debt, I mean, is it likely to grow here over the next few years? Probably. But I mean we're just very comfortable where we're at and how we're managing it. We delevered on a trailing 12 basis from Q4 into Q1. Just as a result a little bit of amort and paydown of the TLA, but also just through growing EBITDA and that's going to continue. I mean we like to see trailing leverage 3.5x or less comfortable. We're going to be there probably in the second half, but certainly before the end of this year. And then on a kind of pro forma basis, on the covenant math, it gives credit for pro forma EBITDA. Our stated leverage target is 3x or less. And same comment, I'm comfortable we're going to be there as we get to the second half and certainly before we exit the year.

And so if that's that, is there any -- then there's M&A expense. Is there any other -- anything else, any other capital expenditures, technology investments anything else we should think about?

A little bit. I mean we raised CapEx a point of revenue in our guidance to account for inflation as well as some of the tech investments, things like that. Our G&A is up a touch, but as expected, we said it would be 5% of revenue and it came in right at 5% of revenue for Q1. That will continue just due to everything we've done with the Oracle install and some of the other upgrades on the OTL and our proprietary technology. But I mean, those investments are going to bring operating leverage for years to come.

One last one. We didn't really touch on labor costs or labor shortages. You've addressed it on your last couple of calls. Has anything changed? Has it gotten better? Are you seeing any...

It's pretty static. I mean, we got the same number. We're looking about 800 open requisitions on our website. It's about the same as last quarter. I mean as a percent of total, that 7%, 8% of the workforce, it's not ideal. But it's not -- I wouldn't say it's getting worse. Is it getting better? I mean we're still chasing people out the door and bringing them back, I think like any company, but we're managing it. I mean we're up a little over 4% over last year. So as a percent of revenue, we're very confident in what we've guided and our ability to control it. So again, the labor markets, I don't think good for anybody, but that will change.

Gentlemen, this has been great. Josh, Jason thank you so much for your time. Thanks, everybody, for joining us.

Thank you.