AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Well, good afternoon, everybody. Thank you so much for being here. My name is [ Chris Holt ], I am an associate in the health care investment banking group here at JPMorgan. Today, we have the opportunity to hear from Richard Barasch and Jason Clemens, the Chairman and CFO, respectively, of AdaptHealth. They've planned for about a 20-minute presentation, followed by Q&A. So, we'd love to hear the questions from the audience after their presentation concludes. Thank you.

Thanks. Well, Jason and I are delighted to have the coveted 5:15 on Wednesday slot at J. P. Morgan. The goal of AdaptHealth is to be the leading provider of equipment and increasingly importantly, services that empower health care at home and in the community through best-in-class care and superior technology. Our job is to improve patient lives and reduce the overall cost of care. We are touching 4 million people at this point on a periodic basis, and that includes people that we set up equipment for and people though we do resupply for. Resupply being an incredibly important part of keeping people on service, adherent and an important part of our business model. We have just under 700 locations around the country, and that number was quite a bit higher. So, we're kind of getting a little bit more efficient after several years of acquisition. So, we've sort of digested a good part of them and continue to digest. We do 38,000 deliveries per day to people's homes. And that's critically important to understand that we have a very important and very good logistics part of our business. But as we move forward, the fact that we've got 38,000 deliveries, including many from our own personnel, that makes us a very important part of the value chain for our patients. I've got 2,700-plus insurance contracts and nearly 11,000 employees. So, the reach and scale of this company is unmatched in the business. We have a full product line, we're in all states. And we think that we are best-in-class at what we do. We've had some headwinds in the past couple of years. And despite manufacturer recalls, supply chain issues, the pandemic, labor and other inflation, and some of our own internal issues and a couple of unforced errors, we've increased our revenue and profitability every year. The big story though for 2023, even beyond that, is the increase in free cash flow. We're in a business that's heavily CapEx with the needs for CapEx, and we're always trying to outrace our CapEx. And in 2023, we kind of finally turned the corner and expect this trend to continue in a very significant way. This gives us more flexibility for our balance sheet to be able to use our free cash flow to pay down debt, make some investments in the company, perhaps at some point, not right away, but maybe in the future, think get back into doing accretive acquisitions, but we're delighted with the fact that we're going to have the additional flexibility of free cash flow. We're either #1 or #2 in all our major product categories. Jason Clemens, our CFO, is going to take you through the 3 specific categories. And I think that's your queue, Jason, to come up and talk about the categories.

Thanks, Richard. So, we'll start with an overview of the chronic disease states that we assist our patients in treating. The big 3, if you will, represents sleep, diabetes and respiratory. This does account for the predominance of our revenue. And you'll see at the bottom, the percent of the portfolio that these product lines represent. So, as a chronic disease, I mean, by definition, there is no cure for these diseases. So, the idea is to get patients that have been diagnosed on census as quickly as possible, to help treat these chronic disease states across sleep, diabetes and respiratory, and then help that patient live a healthy life at home or how they choose to live it out of the hospital. And so, the nature of our business is a compounding census over time, and we'll talk through some of the keys of the product categories in the forthcoming slides. And so first, sleep. We are the largest operator in the United States for sleep. We treat patients with obstructive sleep apnea with the use of CPAPs as well as BIPAPs. The major suppliers in the category include ResMed, as well as Philips Respironics, React Health and others. You'll see our renal census in about the middle of the screen. And so these are new patients that are getting diagnosed with sleep apnea. They are getting prescribed a CPAP. We are continuing to set up about 40,000 patients per month, every month on CPAP therapy. As part of that setup, we include the soft goods or the resupply component to make the PAP functional. It's almost a razor blade type model where over time, we're resupplying those patients with new masks, cushions, tubes, humidifiers, et cetera, so the components of the CPAP to make it operative. So, we've got a best-in-class operations center based in Nashville, Tennessee. We've got best-in-class orders per year for patients. We are almost at 3 full orders per year on average for our patient population. We have a continuously growing average sales price and the amount of products we're putting out and the average sales price for each of those orders. And we're continuing to improve our retention rate quarter-over-quarter. That's been happening for some time now. And so, again, you'll see the stats here across all these metrics. We've got now over 1.5 million patients on active census for CPAP, BIPAP and the related supplies. Moving to diabetes. We provide products not just for type 1 diabetics, including not only CGMs, but pump and pump supplies. We also participate in supporting type 2 diabetics. So those that are multiple daily injectors and now with the basal population opening up coverage as determined by Medicare and many of the commercials, recently, our TAM for diabetes has expanded from about 4 million Americans to just about 7 million now with the expansion of basal. So, we distribute all major products for CGM. That's certainly Dexcom and Abbott as well as some small Medtronic business. on the pump side of things, we're a large Tandem shop. We also distribute Medtronic pumps and related supplies as well as insulate products with their OP5. We have recently moved from #3 market share to #2. So we're continuing to grow this business with a focus on getting the patient at the early stages of COPD. So, if you're able to identify that patient through the primary care sales point, early in the disease state, kind of a COPD Class 1 or 2, typically, we treat that patient with the use of a nebulizer. We also supply the Netmeds, out of our 50-state URAC-qualified pharmacy. And then as the disease progresses, that patient will need oxygen. Through a concentrator that's stationary or portable through a POC. Ultimately, as COPD progresses, the lungs can no longer ventilate and so a ventilation non-inventive ventilator will ultimately be required. And so it's a very, very long length of stay for that patient and a very consistent and steady growth rate as COPD continues to be underdiagnosed, but there is growing diagnosis of COPD in the United States. This was the respiratory slide. I think with that, Richard, I'll pass it back to you. Talk a little bit about the state of GLP-1s.

It's interesting because I became the interim CEO of the company early in the summer. And in my first couple of presentations, there were no questions about GLP-1s. And from that time in, I guess, June by the time we got to August, that was the first and first of many questions that we got. It's the issue of GLPs kind of worked its way through the analysts and the investing world kind of quickly. For us, it's been a headwind to our stock. I heard something today that I thought was the most is that there are some people who think that airlines are going to save money because people will be less heavy so, the need for fuel will be less. And that was the most outlandish thing I've heard, but GLPs have certainly caught the attention of the investing and the popular community. So, it's important that we both address it and have a point of view about it, and actually be able to do something to mitigate whatever effects there are. There's a camp that basically is saying, well, it may not be that important. It may not affect businesses like sleep apnea and even diabetes. I'm not of that view. I think it's going to matter in over a 5 or 10 year period. These drugs are going to have a material and I think positive effect on the health of Americans. So I'm happy that, that's going to happen. At the same time, we have a business that takes care of people who have obstructive sleep apnea and diabetes, which are largely obesity, comorbidities. So we have to think about how this affects our business. The first thing that I will say is that right now, we're experiencing no change, no slowdown in our CPAP starts. So, we're not seeing any difference. Our resupply census is growing with no increase in attrition now kind of early stages. But what's kind of interesting is that we've done surveying of our population, and have found that our population is already taking GLP-1s and found that 17% of our sleep population is on one form of GLP-1 or another. Which means that -- I think that's a very bullish sign for our company, which is that the GLP-1s and our therapies are coexisting. There was a recent study done that suggested that only 3% of people who take the drugs are able to get off of CPAP therapy at some point. So, yes, it will matter but it feels like right now, where we sit in 2024, that it's going to be a long pull, and it's going to be somewhat on the margin. But it really forces us as a company to think about what possibly could happen to our TAM. Two points of you and if you listen to some of the manufacturers, what they will say, is that the TAM could actually increase because of more awareness, funnel getting bigger. Now there's so much awareness of these drugs and so many more people going to physicians about obesity and diabetes and the expansion of that category that there may be just more people coming into our funnels for both diabetes and for sleep apnea. We already think that sleep apnea. We already know that sleep apnea is highly underdiagnosed that there's still many millions of people in this country, actually tens of millions of people in the country who have sleep apnea that's been undiagnosed. So, we still think there's plenty of TAM left even if there's a little bit of movement on the top side of the TAM, if you will. But we, as a company, we're not going to sit back and just let this all happen. We are the largest, as Jason said, in sleep. We've increased share every year for the past several years. We continue to increase share meaningfully the number of -- when I first got involved with Adapt, I think we quoted that there were 10,000 mom-and-pop kind of DME operators in the country. We think that number is less than 5,000 now, and that's going to continue. And as we get more scale and our buying power gets better with our manufacturers, it's going to be harder and harder for the smaller folks to compete with us. So, we think we can continue to build share in the market. We're also getting more efficient in our admin, our OPPs so we're trying to take out some costs in the middle of the balance sheet. We didn't mention this, but it's important and one of the reasons why our profitability in 2023 was good, and the improvement over 2022, was that we were able to take out $25 million in year of costs on a $40 million program to reduce costs, and that's going to flow through a little bit in 2024 as well. So, we're working on that. That was a little bit of, I hate to use the word brute force, but important, especially since we had done so many acquisitions, it was a digestion of some of the acquisitions that we had done in '21 and '22. But now the way for us to get better and more efficient is through technology. And we're starting to see the benefit of technology working its way through our system. So we get bigger and we get more efficient that will allow us to compete even if there's some diminution to the TAM. But what it also does for us, and I've been coming to this conference for a long time, and in my prior company, I was a managed care guy. And when I think about Adapt, and I've thought about this since I've been involved with the company, we are essential in the health care continuum. On the respiratory side, if we don't show up with oxygen, it's an emergency room visit. It's a little less acute on diabetes, but not really if somebody has a CGM and they need their sensor, we better be there to deliver that sensor. On sleep apnea, this is a kind of a new field for me when I started with Adapt 4 years ago. But the more you kind of hear about people's experiences with CPAPs who have sleep apnea, once they use them, and it works, it changes their life. They can sleep. And for those of you who don't sleep you, I'm sure have -- I was up watching some of our commercials last night for active style. So being able to sleep is a hugely important part of health and it's becoming more and more recognized as a pillar of good health. So, we're already key to the health care continuum. But what's been really interesting in the last 6 months or a year is the recognition that the data that's being generated by CGMs is important data for our patients. It's important data for the providers who prescribe and it should be important data for the payers as well. So we're starting to gather the data, and kind of figure out good usage for it. And we were talking to someone earlier, a very knowledgeable person. And remote patient monitoring just sort of hasn't worked yet. Nobody's cracked the core. They will. In 10 years, remote patient monitoring will have a form that I can't predict. But the most successful remote patient monitoring right now are CGFs, which has the data that is being generated, people use them. They use the data that's generated by the CGMs in order to eat better, exercise more. And there's absolutely no doubt that people who use their CGMs, use the data and work with their either coaches or their physicians, their downstream effects and they just are healthier. They live better lives. So we're starting to work with endocrinologists, and even some payers about how to use this data that we're generating. We also have in our CPAPs, every one of the CPAP that we install, not everyone, we have some that don't, very few, right? Like 5% don't. 95% of our CPAPs are also connected. So, we're generating data from those. And now the next frontier for the company is to really kind of insert ourselves appropriately in the continuum. Doctors find it very difficult to spend the time they should be spending with their patients, both primary care and endocrinologists in the case of diabetes. So we're going to provide a very important connectivity between the patient and the providers. So, we see this as a huge part of what's going to go forward in AdaptHealth. My title as Chairman and interim CEO of the company, this is not supposed to be nor will it be a permanent job for me. We are engaged in a search. But even though there's a little bit of uncertainty at the top of the company, company's moving forward in a very good and strong way. And one of the evidences of that is that we've been able to hire some very good talent into the company in the past, literally 6 months or so. Brian Carey, is our incoming President of our Diabetes business, has a military background and was with in value-based care at DaVita for a long time. Breckon, also a DaVita person, we understand that if anybody from DaVita happens to be listening, thank you for training these people so well. We're delighted to have them with us and Jonathan Bosch has just joined us as General Counsel. So things are moving along, and my successor will be picked hopefully in the very near future. So, the takeaways are -- with all the headwinds with all the noise, the company has increased its revenue, increased its profitability and starting to generate more cash on a very demonstrable basis over the past several years. We're not giving guidance until we announce our results for the fourth quarter. Our expectation is the generation of cash is going to continue, not putting a number on it yet, Jason, I'm going to let you do that, but that's a key part of our plan. Our plan also is to continue to increase the top line, get more efficient. Hopefully, the bottom line will increase faster than the top line as we achieve the efficiencies. It did so in 2022. We have started almost another full vertical in our sales efforts, which is to do what we described as enterprise sales. Our first one is with Humana, where we are the sole provider for 1.2 million Humana HMO members across 33 states, that's why I asked you. It's a true squad over there. We had a little bit of a bump in the first quarter of that contract, but we're delighted with the ability to have gotten a chunky amount of business all at once with one provider. We think that's a good template for what we can do in the future with other providers. In DME, HME, even CGM, CPAPs, are not a huge spend for insurers, for the payers but they're very important, if you use those devices properly to reduce downstream cost but it's also a pain point. If the oxygen isn't there when someone comes home from the hospital, it's a ding on the part of the payers. So the payers are looking for scale partners that can help them avoid all of the potential for problems with CAP scores, problems with customer service, complaints, which no payer wants to see. So, we think there's a future in doing even more of these kinds of enterprise type selling. We've stood up a unit in our company that's doing that solely, and we think there's great promise to that. GLPs, again, we're very mindful of it. We're not putting our head in the sand. We haven't seen any reason to be concerned today. But these are important drugs, and we think that the use of these drugs in conjunction with the therapies that we are bringing to these members is going to continue. As I mentioned, and I'm really delighted about this because you just can't progress without great talent as the company has brought in some good talent and it's going to continue to find the right talent, including a world-class CEO. So, with that, let me open it up to questions.

If there are no questions from the audience yet, I guess I have one question for you. Thank you for walking us through some of the strategic focuses for the company here in the near to medium term. I guess in the next 3 to 5 years, what are some of the areas where you see AdaptHealth looking the same, different? What's your vision for the company in the longer term?

Table stakes is continuing to do what we're doing well and getting better and better at it, getting more efficient, using technology to reduce costs, using technology to be more efficient to get to get the equipment and devices to our members, patients faster. So, we just have to keep doing what we're doing but do it better, more efficiently, less expensive. And as I said, that's table stakes. Where I see 2 big differences going forward is, first, I would be very surprised if we don't have more, what I call, chunky contracts like Humana. It's a more efficient way for us to sell. And it actually even in a way replaces what we used to do, which is to buy blocks of business. Here, we're doing large contracts for blocks of business that's far more capital efficient organic growth as opposed to acquisition growth. By the way, I should mention, and this is important. I think I failed to mention this is all the growth in 2023 was organic. And this is after several years of growth that was fueled by M&A. And I think it was an important inflection point for AdaptHealth. But the place where I think we will see the most difference in the next 3 to 5 years, is how we take advantage of our spot and our ability to use the data that we're generating to help payers and providers and the patients do better on their health. That's a huge focus for the company, as said I'm a manager care guy, and the laboratory here is just amazing.

Excuse me, could you just go back to the CMS change that you mentioned that expanded the TAM, I think you said $4 million to $7 million. Could you just give us the run up to that, the rationale? How long is that in the works? And what are you seeing as a result of that so far?