AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Wednesday afternoon session of the 41st Annual JPMorgan Healthcare Conference. My name is Alex Kramer, and I am an associate at the JPMorgan Healthcare Investment Banking Group. And it is my pleasure to introduce our next presenting company, AdaptHealth. And without further ado, I'll now turn it over to CEO, Steve Griggs, to take it away.

Thank you. Appreciate it, and welcome, everybody. At heart, our 10,902 employees live to take care of our patients and make their lives better. So our whole vision is to empower our patients to live their best lives. And with that, we hope to improve the patient's life and, of course, reduce the overall cost of care. So our company, approximately $3 billion in revenue, 90% of it is recurring. So you keep that same patient on continuously. We've had 6x revenue growth since 2019. We serve just short of 4 million patients. That's 1 in 90 patients is a patient of AdaptHealth in the United States. So already during this conference today, we ran into about 3 or 4 of our patients in our talks. So we touch a lot of lives out there. 36 home deliveries. We shipped 400,000 products a month to patients, 2,600 insurance companies and again, just under 11,000. So our portfolio is diabetes, supplies, HME, sleep, respiratory, these common products and services for the chronically ill patients. Some of our differentiation that we'll talk about is our technology. So there's plenty of issues and problems and opportunities with patients. They cannot be solved with human capital, period in the story. And so we can get started that way, but to solve that problem at any type of scale you have to use technology. And I think that's been the big differentiator for our company since inception. We're in 750 locations in 47 states. Again, 36,000 deliveries to -- every day to these patients. So technology is leveraging us again, gets us closer to the customer. We believe we're as close to that patient as anybody in the United States with this amount it touches in person and with electronic communication either by text, e-mail, phone or app. And we're the last mile really of that patient's care. And so as we take care of that patient. And so people try to call us a home care company, I would disagree with that. We're an every day, all day, anywhere company, so our patients wear their CGMs. There might be some in here today wearing a CGM device. There's people that came here to this conference, bringing their CPAP so they could sleep at night, and they're certainly -- our patients walk around with portable oxygen concentrators. So our patients are using our products and services every day to carry on their life. These are the diseases we play in. These are all chronic diseases, obstructive sleep apnea and diabetes, chronic respiratory failure, COPD, CHF. And then we solve these diseases or the progression of these diseases with our machines and the connectivity of those machines and the information those machines give to us and the patient's caregivers and the patient's referral source or doctor. So these are like CPAP machines, that's continuous positive airway pressure, BIPAPs is going two ways, glucose monitors, continuous glucose monitors for diabetes patients to CGM. If you watch the U.S. Open tennis, you probably saw somebody a couple of players with that on them as they're playing in the U.S. open. Hopefully, they were our patients. I didn't check on that, but it probably should have. Oxygen therapy devices, that's concentrators and then noninvasive ventilation as that patient gets sicker and older, they still need oxygen, but they have to have a way to ventilate that oxygen, so ventilation is [indiscernible]. And then, of course, we have some basic home medical equipment such as beds, walkers, wheelchairs. And then we have a big supply business incontinence, wound care, ostomy, et cetera. Sleep is the largest part of our business, over $1 billion in revenue. There's 280,000 patients on rental. And so the way our business works, that patient either gets that machine as a purchase upon entering our company or it gets rented for 10 to 13 months, and then it becomes their ownership. But then that patient continues to be ours as we resupply the needs of that patient of masks, tubings and everything else, so they need to continue to change for the best to maximize that therapy. And so with that, while we have 280,000 on rental, there's another 1.2 million that's on resupply only. That means they've come off that rental and they purchased the machine. And so that's at 1.4-ish million patients that are rental. So in this PAP resupply because of that dynamic is the biggest part of the business, 75% of our revenues are coming from PAP resupply and 25%. We are the #1 provider in sleep in the United States. It's been that way for a few years. And with the recall of Philips machines and our reliance on ResMed and our market share with ResMed has allowed us, we believe, to increase that market share. Respiratory, so that's for the COPD patient, oxygen therapy. So they need oxygen. They deset predominantly at night, sometimes during the day, they deset at night, they need oxygen concentrator at night. They continue to deset during the day, they need portable oxygen. And so that patient, again, continues to get sicker and older, and so they need quite often ventilation at the tail end of their life or that ventilation allows them to still be active. So there's portable vents out there now where you can do actually do that ventilation and walk around and be in your car, go to football games or whatever the heck you want to do. So we have 290,000 patients on O2 in vent. We're the #2 player in oxygen in the United States. Diabetes, $700 million, 250,000 patients on census. This is predominantly continuous glucose monitors, but it's also insulin pumps for those patients. And so that revenue mix, which is pretty important to us, heavy, heavy governmental, a lot of private insurance. and a handful of pharmacy-based patients. This patient first care is really what we try to do, and this is collaboration and communication between everybody within our organization. So these are the people that are interacting with that patient. So it's just not a service tech or just not a respiratory therapist, you're getting a lot of people coming in there from their PAP centers, our care coordinators, our local respiratory therapists, our compliance centers, our pharmacy, all that's coming in there to hopefully get that patient to utilize their equipment upon and match up with the doctor's orders. So patient compliance is a big problem at all throughout health care. It's no different for us. And so it's our goal with our 1,000 of health care professionals to get that patient to use that equipment to live a better life. So when you talk about how do we do this and the technology that we use, this is kind of the stuff that we use. A lot of this is proprietary or we've taken somebody else's product and helped them with it, and we partner with them. So it starts down here with Adapt referral management. And so that's an app that all of our sales reps have out there, and it gives them a competitive advantage. What's their competitive advantage? So the doctors today want to know or doctor's office want so what's going on with my patient. So if our -- if the sales rep is in a doctor's office and the doctor says, "Hey, what's the status with Mrs. Jones", our competitors get on their cellphone or they call their office, hopefully, get hold of somebody, hopefully, they can find out the status, and hopefully, they can relay that to them or they have to get back to them. Every one of our referral -- every one of our sales reps will take out this smartphone here. And within seconds, they can find the status of that patient. It's a big deal and it's a big deal of reason why we lead in selling across the country. The next thing that happens, so we get that, we get the relationship, and then it's getting that doctor to send that patient to us via e-prescribe. Why is that so important? Because that e-prescribe technology, which is either GoScripts, DMEscripts or Parachute that we support -- that gets that referral to us with all the proper documentation that we need in order to accept that order and to bill that order and get paid for that order and keep that money from that order. In addition, it gets us to it faster, so we can make that decision. So our patients get set up faster upon when the doctor or the health system makes that order, anybody else because we're getting that paperwork, and thus, our collection rates are exceptional too. So we are, by far, there's going to be even close in the e-prescribe as 50% of our diabetic patients are going to be e-prescribe and some 30 -- low 30% in the HME are coming that way. Next part of our technology is one that we developed for years. It's called OTL, our order tracking log. And that it manages that patient, once they have been said to go be set up, then that goes into that system and that works with the driver to schedule, not only schedule, but also notify the patient that we are on the way. And it's not just notifying the patient that were on the way in 20 minutes. It actually sends a picture of the driver that's going to show up or the service deck or the respiratory therapist. Now that's a big deal because if you -- if all you all out here right now, you're probably more interested on who the heck is coming into your home than who your doctor is. That person is going to be coming into your home. You want to make sure it's the right person coming to your home and not just somebody knocking at the door, pretending to be somebody. -- and puts that time frame on when they're going to be there. So before this technology, we would show up, the patient wouldn't be there, patient won't be ready for us and all this kind of stuff, and the patient had it was just unsatisfactory experience. So today, we do that in that same technology allows the patient to rate us at the end of that encounter. Just like Uber, 1 through 5 stars, 98.5% of our deliveries received a 5 star. Those patients are encouraged to go tell the world about it on Google. If you go research us, which I beg you all to go research, AdaptHealth, AeroCare, and the related subsidiaries, you'll see that our Google ratings are superior to anybody else in the industry. So please take the time to do that. myApp is the app that the patients can sign up on that does a couple of things for them. It's fairly new for us, but allows them to track their orders. It allows them to order on that for -- particularly for diabetes, soon for resupply and allows them to interact for their payment of their bills and track their insurance and to be able to change their insurance. So that interaction with the patient is really crucial. And so you can see from these handful of things that we just talked about here, patient engagement and referral engagement is critical to our success. And it's even more critical to anything that we want to do in the future referral engagement, referral source engagement and patient engagement is probably the #1 criteria for us. Next is our partner ordering tracking. So what is that? So we get business three different ways. We get them from doctors, we can go from health systems and then we get them from payers that have a group of patients that are having problems and they send that group of patients to us. So the partner order tracking allows them on the group of patients in particular, that make sure that they know everywhere, what's happening exactly with that patient and the timeliness of that patient. And so that patient is when they order their ostomy or supplies or whatever it was, where it is at the stage and is it getting to them? Because they're big complaint, their pain point that we're solving for them is the patients weren't getting their stuff timely. And then finally is our e-commerce. And so our e-commerce division is predominantly just a typical e-commerce site where we go out there and we do Google marketing, paid searches and things like that and get new customers to us. They want to pay cash for our products. But in addition, we're using that same site to go over there and reach out to our patients for the needs that they have, both on a non-covered basis or cash item and also on a core basis. The industry itself, is in great shape. And so I think everybody in the industry is riding a pretty nice tailwind as the aging of the patients and the need of our patients continue to grow. I would say that as far back as you can look, the unit growth in our business has been 7% to 8% annually. And I think if you look into the future, you can see that same growth 7% to 8% annually. But what's unique is there's less suppliers. I don't know any other business. I hope you can tell me what it is because I'd like to go invest in them where they've had 7%, 8% in the past, 7%, 8% in the future, and there's less people providing it. It's a unique position for us that provides us some unique opportunities. So sleep is growing 7% to 10%, respiratory 3% to 5% and diabetes for us because we play predominantly in the medical benefit space, 10% to 12%. And obviously, home care outpatient is the preference for anybody who needs this therapy. Our road and how we've gotten here has come with a significant amount of M&A. And so all these things have allowed us to add and put all these different product categories on our spectrum of care for our patients, our referral sources and our health systems. And I think this is really key for us as we solve a pain point for a health system or a doctor, they're asking us every day, can you help me out with these other things. So strategies to unlock this in our Capital Markets Day earlier late last year, we announced our 2025 goals, $4 billion in revenue, $1 billion EBITDA, over $300 million in free cash flow. And so how do we do it? Non-acquired growth. I think if you just put a reasonable growth rate on our current $3 billion in rate in revenue today of the last year, you'll get there with maybe a handful of acquisitions at the end. Operational excellence, what does that mean? We think with that growth rate now that we're through this unique period of pandemic, recall, inflation, that we ought to be able to improve our profitability considerably and get our profitability rates or EBITDA rates back to that 25%. And finally, some strategic M&A if we do a lot, then there should be more significant than that. And then so that's what we call our ADAPT 1.0. That's our opportunity to get there. But in addition to that, we call this ADAPT 2.0. And ADAPT 2.0 is simply put is we have 4 million patients. They need more stuff than we're giving them today. And so how can we do that? They want it, their referral source, our referral source or the doctors group wants it, the managed care entity wants it and the health system wants that information or that something with that patient. So we're leading the market today. The future is using our connective solutions, can we provide more products and services to that patient? And so we're very early in this, but we're seeing pretty significant early wins. And so we're pretty darn excited of how this is going to play out over the next few years. So connected care, what is that? We have all these devices out there that are connecting us electronically to the patient and to the referral sources. The referral sources access to that and our payers could have access to it. So think of a triangle, us, the patient, the referrals and the payer, all electronically connected, and we're sending information between us. And with that information, decisions will be able to be made much faster and much quicker for the benefit of the patient. Chronic disease management, all of our patients have chronic diseases. Diabetes is a big, big problem in the United States is a big diabetic. It's a big disease problem that causes more comorbidities and issues with those. And so our solutions and as we take care of these patients, hopefully, are going to drive better outcomes for those patients and hopefully, we'll be able to show the payer and be able to improve the payers' interaction with that patient. And then finally, connections to that payers, getting information going both ways from us and the payer is very critical to our success. We're delivering it, and now we're finally getting more and more information back from them. So connected care, we want to leverage our connected device in there to better care management. So with that information, we can interact faster. There's big beliefs, and I'm sure came in, there are certain presentations on how predictive conditions and acute situations can be. And so can we be more interactive with that patient to be able to better predict issues for that patient. So this gives us, again, better control, tied to the patient, and this should lead to lower cost of care is that patient stays out of the acute hospitals. The clinical component to chronic disease. So OSA, these are how we treat them with these types of CPAP BIPAP, again, COPD, oxygen and ventilation, CGMs, and you can see the amount of incidences of this in the population today. It's a big problem. All of our diseases that we treat are big problems. And so can we address those and can we really improve their outcomes. We feel like we already do, but we could do with some cooperation from the people we're dealing with. Finally, it's solving the patient's pain points. The HME spend that we're representing 2% of payers pay claims out there. But the pain point is much more than that because it's this confusion and incompetence and trouble that we have, that the patients have with dealing with the insurance company. It all starts with the authorization process and then our delivery to them. So the quicker we can get the authorization, the quicker we can deliver to the patient, the better the patient satisfaction. Our solutions and particularly e-prescribe solves that for the insurance company and for the patients. So that means quicker and faster and better response to that patient. So the -- so obviously, e-prescribe OTL, again, is our solution to that patient. And so the future of all this is this connectivity with the payer and then ultimately leading to a more value-based care model. And value care -- value-based means a lot of different things. It can be reducing costs on our side, reducing costs on the payer side. it could be taking risk with approved outcomes. And so all that, we feel like is going to happen. We all recognize more and more stuff is coming to the home. We've already gone over that. So evolving financial profile, we built the scale. We went out to -- we're now in 47 states. We have the people in place. So now we need to optimize those places were out there, and then we're going to accelerate value by doing more with those patients. This is our model. We should be -- generate steady cash. We should do 5% of revenue should come to cash in '23. Disciplined M&A. We've been an acquirer. I probably acquired as many businesses as anybody in this entry, some 700 or 800 over the past 30 years. So we continue that continued technology investments. We are a leader in technology. Our competitors are on AS400s, everything we have is in the cloud. continuous improvements and again, focusing on patient outcomes and also that should be produced returns back to our shareholders. We're in great position with our cap structure. 76% of our debt is fixed. We don't have anything coming due until 2026, which is our -- really our term loan. And so we can refinance it with the bank or by that time, we'll be generating significant amount of cash to pay down significantly or we could accumulate that cash. Our debt ratio right now is 3.5. We have a stated target under 3. You can see if we just produce and keep at going down this path on our 2025 goals, that should come well under 3 and actually get down under 2.5 relatively quickly. We have $430 million of undrawn capacity on the revolver. So if you add up our cash that we're going to generate in the next 3 years is $400 million, we have over $1 billion available to do acquisitions, if that's what we want to do with it or if we want to pay down debt with that cash. Finally, ESG is a big thing. We're committed to it. We've done some in the initial reporting -- reports back from it. We should be able to produce out there. We think that this is a very, very important component to our company to be responsible, and we're committed to it. And so you'll see a report out hopefully this year towards the end, and you'll see continuous improvement on that. Our leadership team, two of them, three of them are here today, but the rest of them are out there hopefully working and doing some good work. Our Board of Directors consists of a variety of people from aspects of health care. They've all been in health care for 30-plus years on average. And so they are very helpful to us. So again, our 2025 goals, $4 billion in revenue, $1 billion adjusted EBITDA, $300 million in cash flow. Finally, last night, we released our guidance for 2023, shows our potential growth rates, our projected growth rates of the mid sleep of 12%. I think that's very reasonably obtainable with the return of the PAP devices to us. We didn't have PAP product the first half of 2022. We now have it. Diabetes, 12% also. That's down from our historical growth rates, but there's some tightening in that market, supplies of the home 5%, respiratory 5%, HME 4%. So all those come to 9% growth rate. There is some rate in there as we got for our Medicare patients and increase based on inflation. And so that should come to a midpoint of 3.25 and $720 million in EBITDA, adjusted EBITDA for year 2023. We have some -- in the deck, you get some non-GAAP financial measures, but I'd certainly like to open up for questions.

Great. Thank you, we can open it up to the answer questions, two methods of doing it, either online or be it a old-fashioned way of raising your hands and there will be mics floating around.

Can you just talk about the EBITDA margin at some there at the low end of the range? Is it more because of inflation? Or is it more because of you're incurring more cost to maintain that top line growth? And also like the '23 guidance, I guess, depends on what the consensus number you're looking at. It's either in line to slightly weaker than the consensus, like in '23, are you expecting inflation to continue at the same pace or just more color on margin?

Yes. So -- okay. So for the fourth quarter, revenue came in well. It came in a little bit different form than we thought. And so our products to the home and our sale products, in particular on diabetes side was higher than we anticipated. Our equipment rental was less. And so just doing that math on -- it was a $20 million difference just to pick a number. That's a $17 million, $18 million difference in EBITDA. And so I think that was a big part of it. Certainly, our cost as we anticipated renegotiating with our suppliers in the first quarter of this year, and we ended up doing it in the fourth quarter of last year. I think there was a benefit to doing that in our total -- in the cost, but it did hurt. Finally, labor was a little bit still muling for us to get our patient set up, the volume of them coming in there. The -- we're getting plenty of product, but how we get that product from our suppliers is not coming in the way that we need it to. We used to have 750 locations ordering and it would show up to those locations. Now it comes in bulk to us, and then we have to get it to them. And it's coming -- and it came late in November, 20,000 units came late in mid-November and 20,000 units came late in the beginning of December. Well, we schedule these patients out 6 weeks in advance. So we had to reschedule patients, had to do redeliveries and all this kind of stuff. So it was just a very inefficient quarter. So we did a good job of managing the revenue, but we just did a poor job of managing the cost. Some of it was out of our control, but a lot of it wasn't. And we just should have done a better job in managing those costs. With the question on '23 was what?

[indiscernible]

Yes. And so I think if you look at it, it's increasing revenue by 9%, and we're looking for a flow-through of that revenue of high 39% to 40%. Our EBITDA margins are low 20s. So 40% doesn't seem very unrealistic when approximately $60 million of that increase is coming from the [indiscernible] that has -- most of those costs we've already incurred for -- of the increases that was set there to cover. So we feel like that flow through is very, very appropriate and should be very manageable through it. And your last question was on inflation. We don't see and the people we're getting advice from don't see inflation in '23 relative to what it is today, pricing is today. We don't see that prices are going to be up 6% -- 5%, 6% January of '23 to January of 2024. So we're not seeing that. So -- and our contracts are all based that -- now all those costs should be baked in for this year. Gas is obviously a big component for us. It affects us greatly. It's down a little bit from last year. So we're actually getting a little bit of benefit there. If gas prices rose up, we could be in trouble, not in trouble, but it will be just extra cost.

Could you comment a little bit on G&A optimization as part of your EBITDA plan as well as supply chain efficiency?

Well, certainly, I think our G&A costs are relatively fixed. And so we should see that 10% of revenue continue to decline but probably in small bits and pieces. I don't see you'll see tremendous leverage there, but we do get some leverage in there. And then the supply chain for us is now for all of our products is back to normal with the exception of our PAPs. Supply is normal. So now we can set up as many patients as we can handle. We get plenty of product. The flow of that, like I mentioned earlier, isn't quite up to what we needed to be to really maximize our efficiencies on there. So we are operators by trade, all of us within the company. So now we're back to an operating environment that is more like it was pre-pandemic. So we don't see any reasons why we shouldn't be able to perform very, very well in '23, '24 and '25.

I can jump in and ask a question if you don't mind. So you talked a lot in your presentation about obviously, the significant amount of M&A historically and on a go-forward basis. How much revenue should investors expect the company to acquire through bolt-on M&A going forward?

Yes. And so the timing of that, I'm not going to comment on because you never know when they're going to close, but our intention is to spend our cash flow on M&A. So if we generate $150 million plus in '23, a couple of hundred million in '24, $300 million in '25, you can add those up, and that would be what we would do. Historically, we're buying approximately give and take 10% or 15% one time revenue. So you could add that to the model, assuming those acquisitions are available, assuming those acquisitions meet our criteria.

And then sort of to build off that a little bit, how high generally would you take leverage for, say, the right acquisition?

Well, I think we got up to when we did the AeroCare transaction to [ 3.7, 3.75. ] And so we feel comfortable in today's environment and reimbursement environment and the improvement of our business to take leverage up higher than that. But it's really dictated by the financial institutions. And of course, the interest rates on those are going to make it very, very difficult to make things work. So I suspect that we will just continue to drive it under 3x, under 2.5x through this process. But we're comfortable at a higher rate, but we're probably more comfortable than what the banks are willing to give us. So we really have to go with what the banks say, which I think is that [ 3.75 to 3.8. ]

And then another sort of unrelated question. Are there any other disease states that management would consider adding to -- on top of your core or current core of OSA, COPD and diabetes?