AdaptHealth Corp.

The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Chris Joyce, General Counsel. Thank you. You may begin.

Thank you, operator. I'd like to welcome everyone to today's ADAPT Health Corp conference call for the fourth quarter and full year ended December 31, 2021. Everyone should have received a copy of our earnings release earlier this morning. If not, I'd like to highlight that the earnings release, as well as a supplemental slide presentation regarding Q4 and full year 2021 results, is posted on the investor relations section of our website. In a moment, we'll have some prepared remarks from Steve Griggs, Chief Executive Officer of Adapt Health, Josh Parnas, President of Adapt Health, and Jason Clemens, Chief Financial Officer of Adapt Health. We'll then open the call for questions. Before we begin, I'd like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2021 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in our annual and quarterly SEC filings. ADAPT Health Corps shall have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, we will reference certain financial measures, such as EBITDA, adjusted EBITDA, and adjusted EBITDA, less patient equipment capex, all of which are non-GAAP financial measures. This morning's call is being recorded, and a replay of the call will be available later today. I'm now pleased to introduce our Chief Executive Officer, Steve Griggs.

Thank you, Chris. I'm going to begin with a review of 2021 and then provide an outlook for 2022. For the past two years, the worldwide pandemic has directly impacted every part of our business. Despite this and the added stress caused by higher supply chain-related costs and the reduction in supply of CPAP devices, I am very proud to report our business has grown and prospered. Adapt Health more than doubled in size in 2021. as measured by a 102% increase in net revenue and a 99% increase in the justity of a dollar. We now provide needed and often life-saving equipment and supplies to approximately 3.8 million patients each year. Every day, more than 32,000 patients receive delivery of our products in order to live healthier lives in their homes. We now have 11,049 team members across 757 locations in 47 states. It is a testament to their hard work, resilience, and creativity that we're able to carry out our mission, and I thank them all for their continued dedication. ADAPT Health always strives to serve the needs of our patients and referral partners in spite of any short-term disruptions. The February 2021 merger with AeroCare was the most significant driver of our growth in 2021. By all metrics, including the achievement of projected synergies, this transaction has been a great success for Adapt Health. Aside from the financial improvements, we also brought together and enhanced both companies' best-in-class technology solutions. With the AeroCare merger and the 22 other acquisitions we did in 2021, we are now truly a national company, thereby enhancing our value proposition for managed care partners and referral sources. In addition, we also expanded our direct-to-consumer e-commerce operations in 2021. I think it's also worth noting how our capital structure evolved to fund these acquisitions and to begin to simplify our balance sheet. Since July 2021, we have raised $600 million in fixed rates to ventures. As rates have begun to rise, that transaction looks increasingly attractive in retrospect. Some of these proceeds were used to retire expensive debt that AdaptHealth had incurred as a private company with a balance used to make accretive acquisitions. The most significant challenge we faced in 2021 and continue to face was the June 2021 Philips PAP device recall and the resulting reduction in the supply of PAP machines, which has had a more negative effect on our business than originally contemplated. Unfortunately, Philips will be unable to provide new CPAP devices for longer than we originally anticipated, and other manufacturers have been unable to make up for the shortage. The demand for these products continues to be robust, but we were unable to fill the needs of all of our patients in the fourth quarter and are projecting a continued shortfall in devices through 2022. This shortage will end at some point, hopefully by the end of this year, and when it does, Adapt Health will be well-positioned to resume its historic organic growth. As these situations improve, we believe the actions we've taken and the investments we've made to ensure patients and referral sources are taken care of position us well to gain market share going forward. And now I'll pass the call over to our president, Josh Parnas.

Thank you, Steve. I'd like to add my thanks to our ADAPT Health employees for their hard work throughout the past year and their ongoing dedication to improving the health of the 3.8 million patients we serve on an annual basis. In an environment of increased costs and supply chain challenges, it is even more important for us to be best-in-class operators as measured by efficiency and cost. Over the past 12 months, the ArrowCare and AdaptHealth teams have worked side by side to integrate our businesses, bring together our best-in-class technologies, and maximize financial and operational synergies. For example, we implemented an enterprise-wide delivery tracking system that allows for real-time updates to patients waiting for their equipment, as well as a consolidated sales reporting platform, which gives our sales teams continuously updated patient order statuses that are vital to our physicians and facility referral partners. This produces a measurably better customer service experience for our patients. As Jason will also touch on a bit later, We're excited to have also launched our enterprise-wide Oracle ERP system on February 1st, which will dramatically improve visibility into our business and its trends. I'm also excited to announce the December 31st close of our acquisition of Community Surgical Supply, a clinically focused home care equipment and services provider with over 50 years of healthcare experience headquartered in Toms River, New Jersey. Community Surgical is the largest HME in respiratory acquisition in ADAPT's history outside of the AeroCare merger, adding approximately $100 million in annual revenue. This transaction further expands ADAPT Health's already robust product offering in the New York, New Jersey, and PA markets, as well as many surrounding states, enhancing patient service levels, response time, as well as deepening our relationships with local referral sources. Consistent with many of the transactions we complete, Community Surgical brings not only strong operational and financial performance, but also experienced sales and executive leadership. We have known and competed with this team there for 20 years, and we are thrilled to be joining forces. This combination brings the complementary strengths of both organizations together. The integration is well underway. and we expect a smooth transition with high expectations for improved performance and patient care. AdaptHealth continues to invest in innovative workflow solutions and technologies that not only enhance our operating efficiencies and leverage our capabilities, but also continue to move us up the chain of value-based care. The company already has over $50 million in programs underway with managed care payers based on shared savings and value-based reimbursement models, And as these programs prove themselves out through improved cost of care, as well as better patient outcomes and satisfaction, we anticipate that opportunities with payers will continue to increase. We believe that as a last mile provider into approximately 3.8 million patient homes across all 50 states, we are uniquely positioned to add significantly more value in the coming years to the healthcare continuum. We will do this by continuing to work with our payer and referral partners to improve clinical outcomes through the connected therapies and devices that we provide, and we are excited about what the future holds on that front. With that, I'll pass the call over to our CFO, Jason Clemons. Jason? Thanks, Josh.

Good morning, and thank you for joining our call. I'll discuss the fourth quarter operating results, our cash flow and capital allocation activity for the fourth quarter and full year 2021, and conclude with our updated guidance for 2022. For the fourth quarter ending December 31st, 2021, Adapt Health reported net revenue of $702 million, representing year-over-year growth of 102%, including contribution from the AeroCare acquisition that closed in February 2021. Organic growth for the quarter was 2.7% and non-acquired growth was 2.4% as outlined in our earnings supplement. As Steve noted, We were pleased with our ability to deliver revenue ahead of expectations despite the ongoing impact of the Phillips recall. However, our profitability was negatively impacted by these factors, leading to adjusted EBITDA and margin below our expectations. Specifically, adjusted EBITDA was $158 million for the quarter, representing adjusted EBITDA margin of 22.5%, which included the one-time benefit of $11 million in PRF funds. While we had anticipated some cost pressures related to these factors, our margin performance was further affected by lower than expected availability of PAPs for manufacturers, which resulted in lower rental revenue. Even though PAP resupply and diabetes products outperformed, these businesses carry significantly higher cost of goods relative to the rental business, thus reducing our overall EBITDA margin. On the positive side, we were pleased to see sequential improvement in cash flow performance for the quarter. Recall, third quarter 2021 cash flow was lower than normal due to a temporary spike in DSOs, partly related to the consolidation of billing operations in connection with the integration of the AeroCare acquisition. As expected, AR collections improved sequentially, contributing to free cash flow of $37 million during the fourth quarter, up significantly from negative $33 million in the third quarter and representing just over 5% of fourth quarter net revenues. Additionally, the company increased inventory levels in order to mitigate continued supply chain disruption, and we anticipate that inventory levels and AR will remain elevated in the short term and convert to cash over the next few quarters. For the full year, cash flow from operations was $276 million and free cash flow was $72 million. We estimate that the recoupment of CARES Act funding and other factors represented an approximate $70 million reduction to cash flow for the year We expect $13 million of final recoupment and approximately $10 million of other one-time impacts in the first half of 2022. Even with this continued recoupment of the CARES Act funding, we expect to improve free cash flow conversion, and we remain comfortable with our long-term target for free cash flow of approximately 6% to 7% of net revenue. We also remain confident that our acquisition strategy is adding significant shareholder value. Note that for the 22 transactions we completed outside of AeroCare, the average multiple on last 12 months EBITDA was under six times and year one performance has exceeded that through synergy. That being said, we acknowledge that in an escalating rate environment, it will be increasingly important for the company to exercise discipline with capital allocation decisions. At the end of 2021, our net debt to adjusted EBITDA leverage was just under 3.2 times as defined under our bank covenants and leverage on trailing 12-month EBITDA was 3.7 times. Available liquidity was approximately $585 million, including cash on the balance sheet and the revolver. Turning to our 2022 guidance, we are updating our outlook based on the latest developments and what we are seeing across the business lines. As discussed in this morning's press release, we now anticipate fiscal 2022 net revenue of $2.825 billion to $3.025 billion, versus our prior range of $2.7 billion to $2.9 billion, and adjusted EBITDA of $610 million to $670 million, versus our prior range of $635 to $695 million. We continue to anticipate total CapEx representing 9% to 11% of net revenue. Although we believe the organic growth for our business in a normal operating environment is at least 8%, Given the performance in the fourth quarter and the continuing impact from the recall, we think it is prudent to set 2022 organic growth at a midpoint of 4%. That includes about one point of pricing from the DemiPost fee schedule and about three points from volume growth. We also added approximately $100 million of revenue through the community acquisition discussed earlier. As it relates to our previous guidance, we are now estimating a $45 million greater reduction in our EBITDA from the Phillips recall and PAP supply challenges and the resulting impact on our rental mix. This is partly offset by contribution from the community acquisition that was not in our previous guidance. Although we believe the PAP shortages discussed on this call will alleviate by the end of 2022, we believe it is appropriate to rebase our guidance with the assumption that it will take the entire year before Respironics equipment is back on the market and that we will not return to prior allocations with our main supplier until the back half of the year. As is typical, our guidance does not include contribution from acquisitions that have not yet closed. With that, I'll turn the call back over to Steve.

Before we start the Q&A, I'd like to make a few additional comments about the PAP supply situation. We are now either the first or second largest provider of PAPs in the country. So the current shortage of supply will affect us, but only as long as this temporary situation persists. We estimate that over 2 million PAPs are delivered in a typical year. But with the shortage of supply that began last year, we estimate that only approximately 70% of the patients who will need machines will receive them. This suggests that at the end of 2022, after a year and a half of reduced PAP supply, there will be approximately 900,000 patients diagnosed with OSA waiting for delivery of a PAP device to begin their prescribed therapy. Given our leadership position in the industry, we expect to capture a significant share of this backlog and benefit from the historic organic growth of the sleep sector. Operator, please open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Pito Chickering with Deutsche Bank. Please proceed with your questions.

Hey, good morning, guys. Thanks for taking my questions. I guess going back to the 2022 EBITDA bridge, you said that the, you know, the 2022 guidance came down to the midpoint by 25 million. You said that CPAP was actually 45 million worse. Can you just sort of go back to the bridge, sir, where we were before? You know, what are the good guys and bad guys here, just so we understand better sort of what, you know, what occurred sort of, you know, for the 2022 guidance?

Hi, Peter. This is Jason. Sure, I'd be glad to address that. So, you know, to help shine a light on the trend we saw in Q4, I'd point you to slide five in our supplement. You know, that sleep rental line is really where the big impact is, and we just missed on the Phillips expectations. I mean, we tightened the band last quarter to expect about a $10 million hit, and the reality is that came in closer to 30, plus another five in oxygen noise, really. We had a bit of a COVID spike in Q3, and those patients fell off faster than we thought, so that was about $5 million. The $30 million on the sleep side, if you look at Q2 2021, that sleep rental run rate was about $66 million. Well, it is declining, but not as rapidly as it might appear because certainly we have acquisitions that are piling in there. So what we should have expected on a normal growth rate of about 1.5% to 2% sequentially per quarter, that $66 should have been closer to about $69 in Q4. And that same unit portfolio, if you will, it delivered 52. So ended up missing by 17. And then there is a compounding effect within the sleep resupply. So that's some of the gory detail of what we're seeing in Q4. As we bridge to 2022, yes, we brought guide down by $45 million. So most of that is the negative impact of the recall. and the continuing trend that we saw in Q4, at least for the early part of 22. And then we have netted some upside for dummy post-fee schedule and kind of PHE benefits, and then $20 million for community. So that will bridge you out to the 640 in our midpoint.

Got it. So, I mean, so fundamentally, actually, ironically, the guides would have been going up if the VAs did not increase the CPAP headwinds, which should fade when Philips gets their act together.

Oh, okay. Without question. Yeah, without question. I mean, we had last quarter, so when we reported on November 4th, we thought the impact of the recall in 2022 would be in the neighborhood of 20 million. So kind of the same 20 million we had back at 21, we thought that would be about 20 million first half 22. And now just with the much bigger miss in Q4, you know, that number is closer to 65 million. million of PAP rental impact in 22. So, yeah, without the impact, we would have been up. It's disappointing, but it's just where we are.

Okay. One more quick question here. Can you walk us through, you know, looking at 2022, we've obviously seen a lot of manufacturers face, you know, both wage and raw material inflation. Are you seeing any vendors try to push through price increases to you guys? And how should, you know, you model gross margins in 2022, you know, thinking about A combination of your long-term contracts versus manufacturers trying to push price. Thanks so much.

Yeah, sure, Pete. I mean, I'll start on the numbers side, and then I'll pass it to the guys to talk operationally what we're seeing. So, you know, first, the DemiPost fee schedule was announced in mid-December. So that was around a ballpark 5% increase, and we've accounted for that in our guidance on the top line. So we brought top line up about a point, maybe a touch higher, as you heard in my prepared remarks. But, you know, that Medicare Demi-Post fee schedule increase, I mean, that's a very heavily inflation-based metric, which is a good thing because we're certainly seeing inflation, as you said. So, you know, there is some dollar pass-through of that, but, you know, downstream, if you will, at the manufacturer level, you know, they're certainly seeing inflation and surcharge on raw materials. And so, you know, a sizable portion of that increase, you know, will hit our COGS. Guys, you want to weigh in on what you're seeing with the main manufacturer's operation?

Yeah, certainly they have, particularly the public ones that we deal with, you've seen that their price raises that they have posted. So we're dealing with those. Outside of that, and this is Steve, by the way, outside of that, you know, the non-public ones have also tried and successfully raise their prices too, not to the level of the increases that we've gotten. So that's been good. But the freight surcharges and the increased freight expenses certainly are being passed on to us. And we look for those as post-supply chain issues and stuff. Those start coming off towards the later part of 2022 and certainly into 2023.

Peter, this is Josh. I'll just jump in for one second here with a little color. So what we baked in also for 22 was not only on the shortage of the PAPs and therefore affecting the rental census, but also we're spending a fair amount of money expediting whatever product we could get our hands on because strategically we want to be positioned coming out of 22 to be able to capture market and be able to capture referral sources that stuck with us or didn't get PAPs from other vendors during during this Phillips recall issue that we expect to last kind of mostly, most of 22 with the back half improving a little bit, but generally we baked in a more kind of conservative approach to how quickly we feel that's going to resume. But there's a fair amount of air freight and other very expensive freight forwarding costs that we're incurring strategically because we feel that obviously this is going to impact us in 22, but we really want to be positioned to jump out of the gates in 23 and beyond to capture that backlog.

Okay, just one question on the expedited shipping. That's just on the CPAP, or you have to do that on a diabetes, just because I know that the margins on diabetes are thinner, and if these are expedited shipping, that can really crush those margins, I believe.

It's just on CPAP right now. We're not having any access issues with other supplies at this point. Thank you.

Thank you. Our next question has come from the line of Brian Tanaquillette with Jefferies. Please proceed with your questions.

Hey, good morning, guys. I guess my first question just on CPAP is staying on the topic. Steve, you talked about how there's backlog building here. So how do you envision that being recaptured? I mean, obviously, folks are still showing up in doctor's offices. And is there a system that you guys are putting in place to keep track of that as you get the referrals or just, you know, kind of like your thoughts on how this will all play out as we look past, you know, 2022.

Yeah. Thanks, Brian. Yeah, the backlog is going to continue. We keep track of those patients. They come in there. They're being told that it's, you know, used to be, you know, a few weeks before we could get their pap. Now it's a few months. and they're going on that list. And that list, unfortunately, and the time to get on there is growing, but they're doing on there. Some doctors are sitting there saying, well, I'm not sure I want to prescribe with this long list. And we tell them, well, the list isn't getting any shorter as far as time periods, so let's get them on the list. So the doctors are continuing to prescribe, but we're doing a better job of educating the patients up front of this global supply chain. So they're on a list. Now, the reality is, as we know, going, you know, being in this business for as long as the longer between when something's ordered to when it's delivered, the higher likely of a decline that's going to happen. So X amount of those patients will decide, you know, boy, I don't need this, but that doesn't cure their sleep apnea. So they're still going to have it. So let's get back into the system later. But I think it's really, really important to understand that approximately a million patients will be out there with a prescription for a PAP device. And so they're going to be looking for somewhere and anywhere to get that solved. And so right now, it's just going to be on who can process and who can get that product. So we're all getting the same allocations of our historical demand. So we're just keeping track of them, and we're getting them done as fast as they can. And they just fall into the line and the queue, and we keep them informed.

Gotcha. And then I guess, Jason, just to follow up on Pito's question from earlier, Maybe looking past the CPAP discussion, just because we've spent a lot of time on that already, but as we think about the other product categories, how should we be thinking about what you're seeing there growth-wise and then what you're seeing in terms of the margins? I guess diabetes is one that we can focus on for a little bit here. Yeah, sure, Brian.

So I'd say there's no change in our guidance on the organic growth within each of these product categories. I'm outside of sleep, so I'll start there. You know, so diabetes we believe will grow at 18% or more in 2022. We believe that respiratory will grow 5% in 2022, and we believe that the HME and other categories will grow at 4% in 2022. So there's no change there. think sleep when you look at a big picture it's probably down about five or six percent year over year and so when you run the weighted average of that you'll land right at that four points in our mid um so so you know no change across the other product categories i mean if it weren't for the recall i think we'd all be feeling pretty good about about about the quarter and and where we're heading um but you know outside of uh sleep and getting our hands on paps i mean you know it's all it's all systems go um in terms of margin You're seeing deterioration in Q4 as well as into 22, again, on that sleep line. So the nuance of the rental product lines and the billing that comes with that and just the accounting that comes with that is a dollar of rental revenue doesn't drop to margin the same as a dollar of sales revenue. So on the rental side, you know, a dollar of rental revenue drops essentially 100% to EBITDA. I mean, probably 95% or so because you've got a little equipment depreciation in there. But, you know, it essentially all drops down. On the sales side, so if you're looking at, you know, diabetes or PAP resupply and supplies to the home, you know, those gross margins are, you know, depending on the product, they're between 30% and 50%. So although we outperformed on those resupply lines and we felt great about that, you know, that's coming with a very heavy cost burden, as I mentioned in my prepared remarks. So, you know, only 30 to, you know, 50 cents dropping depending on the product. And we lost rental, and we lost rental big, you know, that 25 incremental miss that we mentioned. And so that's all dropping down and accounts for, you know, when you take out PRF, basically missed our mid by $20 million. And so that math is carried forward into 2022. You'll see that in our overall margin profile. We're showing adjusted EBIT at 21.9% at the mid. We've got every confidence that that will repair to the upper 23s, pushing into the low 24% as we exit 22 and look ahead to 23. Awesome. Appreciate it. Thank you.

Thank you. Our next question has come from the line of Joanna Goodchuck with Bank of America. Please proceed with your questions.

Hi, guys. This is actually Courtney Fondufe on for Joanna. Thanks for taking the question. I guess just turning back to, you know, the inflation conversation, you know, you guys mentioned, I think, last quarter that you were seeing some minor staffing shortages and some back office positions like delivery personnel. You know, can you just give an update on what you're seeing there now? And I guess, you know, what is the wage inflation for those positions looking like?

Well, certainly on the, on what you have to pay people, the cost has gone up. And so we're building in a, you know, two to 3% there because we already took care of most of them in 2021, but going forward, we built that in there. On the personnel side, you know, we've had some challenges, you know, with personnel in the beginning of 2021, but as the year has gone out and now with less cap available, that's actually freed up some people to be able to use in different functions and different things. So, you know, as far as the personnel side, we're still having a hard time getting people, but our need is just less in 2022 than it would have been without the PAP resupply issues. So that's kind of the offset of the good news related to it. You know, we can certainly have more people to be able to perform the functions that's needed out in the field.

And this is Josh.

I'll just add a little color to that, which is, you know, a lot of the things that we do with some more efficiencies on technology, we're essentially not as much of a people business as a lot of other folks in the home care business. So, you know, back office, revenue cycle management, customer service positions are less impacted in terms of we can use technology and other things to drive efficiencies there, which, you know, somewhat offsets the increase in labor as labor comes up and we get more efficient. We're not really seeing labor as a percentage of revenue increase that much. So that's kind of, that's a good story here is that we feel like we have that at a good spot in terms of we don't expect any massive deterioration on the labor to net revenue line.

Yeah, and to add some specific numbers to that, in Q3, our labor as a percent of net revenue was 26.1%. That's actually come down a touch. So in Q4, as you'll see when the K drops early next week, we're down to 25.3%. Now, you know, some of that is the outperformance of revenue, specifically in diabetes and resupply lines. So, again, we feel great about that. But, you know, we're holding firm at that 26% of revenue in terms of labor. So Steve mentioned, you know, we are facing some pressure, and ideally we're not going to grow labor at the same level we're growing revenue. That's not ideal, but, you know, we're certainly not growing any faster.

Yeah, that's really helpful. And I guess just one last one for me. You know, you guys mentioned that the recall impact is coming in worse than expected and it's, you know, going to have a longer overhang than what you were initially baking in. So could you just talk through kind of the cadence of what you are currently assuming in terms of how the supply chain improvement largely plays out?

Yeah, and so in our guidance, we show no product from Philips. So if Philips is able to produce product and produce patients in 2022, that would be an increase to our guidance. In our guidance also, we show the historical allocation from RestMed. If RestMed's able to produce more product than their historical, that will improve our guidance. But to date, they haven't been able to do that except for the last few months. So that's what's going to you know, change the guidance and looking for it. I will tell you this, though. The people at RestMed are working hard to try to figure out how to get more product into place. They have the manufacturing capacity to do it. They just don't have the components. If they get the components, they will get product out there to exceed their production beyond before Russ Phillips gets there. Why? Because they will have a permanent, you know, market share increase, so they're desperately doing it. At the same time, Phillips knows that, so they're desperately trying to get the market back to market faster too. So it's just a race between those two, if you will, and we will be the benefactor of it. I think it's important to realize that every PAP made will be put out in 2022. Every PAP made in 2023 will be put out, and probably every PAP made in 2024 will be put out. So there's a, and the supply chain and the chips related to that won't last forever, and when it does, I think there's gonna be plenty of product and plenty of patients waiting for that product.

Okay, thanks guys, super helpful.

Thank you. Our next questions come from the line of Kevin Caliendo with UBS. Please proceed with your questions.

Morning, thanks for taking my call. I guess my question is around the acquisition environment. When you have these kind of pressures and supply chain issues, does it limit or does it prompt you to want to slow down acquiring products? Like does that create more of a log jam for you if you continue to buy or is it steady state and let's keep going and the plan isn't really for near term but for long term? Can you sort of help us think about how this impacts your acquisition strategy?

Yeah, and it's definitely going to affect our strategy. So let's say there's a provider out there that's a great provider, but they were a heavy Philips Respironics customer. So, you know, I just don't think we can make a deal with them that they would accept. It would have to get very, very creative and that kind of stuff. And most of the smaller players out there are predominantly Philips. If you look at the market share that ResMed had, I think all the three major suppliers were well over what they were in the market share. So that means everybody else was predominantly a Phillips provider. So when you go out there and look at those, we just can't do those today. So if we had a great company we looked at, they're heavy Phillips, I just don't see how we could make a deal that they would accept. So within that, you know, that limits us. And then, you know, we have this great acquisition that Josh is leading in community that, you know, we feel, you know, very, very great about it because it's right within our marketplace. So I think the deals that we'll be looking at will be smaller in nature that will solve specific needs in specific markets. So, yes, I think you could look to that. that in a normal environment, our acquisitions would be a lot higher than we expect them to be in 2022. Josh?

Yeah, I mean, I think like Steve said, you know, obviously Phillips heavy suppliers will be impacted in terms of both valuation and how we think about those deals in 22 because essentially even some of the deals that we did in 21, some of those deals that had a bigger Phillips kind of allocation of their business affected our total supply. So we're having to take whatever perhaps we could get our hands on and have to allocate to those acquisitions as well. And that's why you're seeing some of the impact even in the core businesses is we're trying to feed some of these acquisitions that we did with products when they historically wouldn't have had had we not bought them. That being said, you know, on the diabetes front, on other kind of respiratory HME supply providers, those were a wide breadth of products. We're still in the market kind of strategically looking at opportunities, geographically looking at opportunities. Definitely, you know, we have a lot to digest. I will say that we have, you know, community coming on and as a hundred plus million dollar deal, you know, nice geography presence for us up in the Northeast. So we feel really good about kind of being able to wrap our arms around that and utilizing kind of that clinical respiratory focus to grow in what's a very fast growing kind of end market at that size. but and i think around the country we're really looking at kind of all right where's our geographies that we want a little bit more density what products and teams are strategic are there any technologies that are embedded in any of these organizations but i i would definitely say kind of we're being more prudent and focused and also focusing internally on digesting a lot of the deals that we've done in 21 and we feel really good about being able to extract some some real opportunities you know, added those as well that we anticipated in terms of synergies and operating efficiency. So we have our work cut out for us, and you're still going to see us active, but definitely going to be a focus to digest a lot right now.

Fair enough. If I can ask a quick follow-up. How should we think about cadence for the year? I mean, is your expectation the backlog starts to get better? Is the year now going to look a little bit more back half-weighted because of that? Is there anything we should think about when modeling out the course of the year?

Hey, Kevin. This is Jason. The guys may round this out. But in terms of the numbers, yes. I mean, it's probably slightly more tilted than normal. You know, I think we talked about 22% to 23%, maybe 23% to 24% Q1 last quarter as a percent of kind of annual revenue. That probably comes off a point, maybe a touch higher. you know, due to this. Now, for the rest of the business, I mean, again, it's all systems go and everything's operating as normal. And so, you know, this sleep rental is a percent of total. It's certainly going to tilt us a little bit. So, again, a little lower Q1 and ramping as the year goes on. Guys, you got anything to add there? No, I think that's right.

All right, guys, that's been really helpful. Thanks so much for all the info today.

Thank you. Our next questions come from the line of Matthew Blackman with Stiefel. Please proceed with your questions.

Good morning, everybody. Thanks for taking my questions. Just a couple for Jason. Jason, in the fourth quarter, is it possible to tease out, to get to sort of an adjusted, we'll call it a more normalized organic growth number, the impact of Phillips and also some of the contracts he exited in early in 21? I assume those were also ahead. Can you give us sort of a a more normalized organic growth number, if that's relevant?

Yeah, Matt, sure. I'd be glad to. So I guess first I'd say on the exit of contract side, you'll see in our supplement, we typically call out that impact from PCS. That's dwindling as we expected in Q4. It was probably, I don't know, maybe 2 million, 3 million compression. Over the prior year, you might recall that was closer to seven, between seven and eight million per quarter at the beginning of 21, because as those contracts were exited late 2020 and early 21, we're now reaching a more normalized level with PCS. So there's a couple of bucks there. But the big picture is really on Phillips. You know, we talked about a $10 million expected miss in Q4, and that ended up being 35. And so, you know, adding that back in, yeah, you're going to be at a more normal upper single digit, you know, call it 7% to 8% organic growth if you make that adjustment. I mean, you know, again, we think it's prudent to expect closer to 4 overall for 2022, and certainly that changes. We'll provide that update.

I appreciate that. And then just on the guidance ranges and mostly on the EBITDA range, is it still sort of the toggle that gets you to the upper or the lower bounds, or are there some other elements that push you one way or the other that we should be keeping an eye on? Thanks.

Yeah, that's the right way to look at the toggle. I mean, I think some may look and say, well, gee, your margin's coming off so much. You know, are you contemplating a you know, a material cost out initiative or something like that. And our response is we are not. I mean, we know how to do that. I think we've demonstrated that in the turnaround at PCS and just other cost out initiatives we've run over the years here. But, you know, the reality is if PAPs come, we're not going to have enough people. We're not going to have enough bodies, enough trucks, enough, you know, everything we need to meet the demand that Steve talked about. And so we think the right thing to do for this business is hold firm, you know, keep the trains running and do what we do every day, taking care of patients and, you know, wait this out. I mean, that's our view. So, you know, as we get late in the year, if, you know, there's further disruption outside of what we're already thinking, you know, would we contemplate something like that? Sure. But we just think where we are, we're going to need a lot more of everything we got if these paths come through. Got it. Thank you.

Thank you. Our next question has come from the line of David Common with J.P. Morgan. Please proceed with your questions.

Good morning, all. Thanks for the question. I'm doing sort of updates and ticking and tying to your new commentary this morning. I wanted to go back to your traditional metric of EBITDA minus patient CapEx. I see the total CapEx is wrapped around, I think, $300 million, but I wondered if you could comment on whether we could use... sort of a subset of that as patient capex or maintenance capex that's more sort of apples to apples than the whole 300? Hey, David.

Sure. So, you know, I'll point you to the press release that came out this morning, the statement of cash flows. You'll see the purchases of other fixed assets at 203 million. And in addition, I don't think we have it in the press release, but you'll see it in the K, and every time we produce statement of cash flows, there's a bit of a supplement at the bottom that will call out equipment that was acquired on leases. That was about $23 million through Q3. So I'd really add those numbers together and call it $2.25 or maybe $2.30. You'll also note when the K drops, we had $0 of equipment acquired through leases. You know, we're really ceasing that activity. You know, one, it was just part of some deals that we cut at the manufacturer level earlier in the year. And secondly, we just think it's going to provide a much cleaner view of free cash flow. You know, so overall, that's the two and a quarter, maybe 230. And then in terms of kind of maintenance versus growth, I mean, we generally run about a point. So we're guiding 10% of revenue. in terms of CapEx for 2022. So 9% of that would be from patient equipment and called about another point from non-patient equipment.

Okay. And even of that 9%, it seems to be an uptick versus, well, it just seems to be that there's some non-maintenance in there. I'm not trying to squeeze every last dime out, but to the extent that you can comment on how much that might be supporting growth

maybe i'm misreading it no i don't think you're mistreating at all david i i mean some of this is uh what we're seeing in terms of freight forwarding and surcharge activity and just the cost to acquire these units um that is increasing now in some we've got this i mean we we technically get a benefit on capex if we're putting out less paps i mean i you know we're not happy about that because we want to put out more paths but you know there's a little bit of noise in there um but In general, we're just seeing surcharge rate forwarding impacting that line, which is why we brought it up a point last quarter.

Very good. Thank you.

Thank you. Our next question has come from the line of Ben Hendricks with RBC Capital Markets. Please proceed with your questions.

Thank you. Hey, guys. Just wondering if you could briefly go into a little more detail on the community surgical acquisition and kind of the impact on business mix. and what that acquisition looks like with regard to the charts you have on page four. Thanks.

Hi, this is Josh. I'll take that. So Community Surgical is really a kind of clinical respiratory program that focuses on oxygen, ventilation, sleep, and also full-service HME. They also have a nice amount of VA business and a couple different business. which we feel is potentially attractive for us to be able to grow into and learn that model. You know, what's nice about that business is that there's a lot of kind of cross-pollination opportunities with a lot of our existing business in the Northeast. And, you know, that's from a business mix perspective, I'd say it's skewed respiratory. Again, you know, some sleep, but also ventilation. They have a very nice ventilation business. and they have a very nice kind of oxygen business. So, you know, good growers there, good opportunity, we think, for us on both the sleep side, once we exit the Phillips challenges and kind of the sleep resupply side, but also there's an opportunity to take that high-end kind of clinical respiratory expertise and pollinate it across the rest of ADAPT over the next couple of years. But generally, kind of really good talent, really good team there that can help us scale. So... And we're excited about it.

Thank you.

Thank you. Our next questions come from the line of Richard Close with Canaccord. Please proceed with your questions.

Thanks for the questions. Josh, you mentioned some technology offsetting some of the labor wage pressures. You also mentioned the enterprise tracking system and the rollout of the ERP. How are those factored? Is there any benefit associated with those systems here in 2022 factored into the guidance?

Sure. I mean, I think what we're seeing is generally, I'd say more things coming to operational capacity after, you know, some investment in 21 and 20, both, you know, in the AeroCare delivery system and technology system that we had, as well as some of the ADAPT revenue cycle management systems that are not only being upgraded to support, you know, a multi-billion dollar organization, but also how do we scale this thing further? And what you're seeing, I think, you know, we didn't bake it necessarily into the numbers, but I think we generally think about these things as offsetting labor increases as labor potentially tries to creep up, our operational technology kind of brings more efficiencies, which brings labor down in line, which I think is a hidden benefit to kind of what our business model is, is that it's not extremely exposed to labor increases because there's an inherent opportunity for more efficiencies in what we do, particularly the back office revenue cycle management, claims processing, customer engagement type of technologies which are going kind of more digital and more automated and Kind of we're at the forefront of that and I think we're benefiting from from being able to offset some labor dollars with that But generally we didn't bake it into any of the guide with that But you know Jason has you know, I'll ask Jason to get a little more color shirt.

Hi Richard So, you know I'd add here that what we're seeing as we exit 21 is the full integration of technology across the company And so we're seeing that across the revenue cycle platform. We've got a common revenue cycle platform now. We fully integrated it. We talked about in Q3 the conversion activity that DSOs were up probably five, six days. And as we said, we expected that to normalize as we exit Q4. You'll note in our financials, I mean, DSOs are back down four days. And correspondingly, the cash is flowing in as we expected. We're running we're on a touch over 5% of revenue and you know that that will continue to increase It secondly we're on a common HCM or HRIS platform for human capital single platform for every employee in the company, you know 11,000 plus and then finally Oracle is fully live and enabled at You know all 750 plus locations, you know as we stand here today requisitions are being placed there electronically and POs are getting matched electronically. It's all flowing downstream and payments go out electronically. I mean, it's just a new day in the company in terms of the way we work, particularly in the back office. And so that's really going to show itself in cash flow and the generation of cash flow over the course of 2022. I'd say that between the CARES repayment and the cost to achieve the synergy that we talked about previously we had pegged that at 20 million dollars you're looking at 70 million plus of cash that that would have been generated in 21 and as you heard in my prepared remarks i mean you know pushing 150 is what that number would have been without the cost to achieve and without the cares recruitment so now as we're as we're looking at q1 q2 there's a remaining 13 million that'll go out as part of cares recruitment and that'll be done in final so that'll be non-recurring we'll deal with that again and probably about another $10 million or so as we get Oracle finalized some just general costs in ensuring that we start extracting the value from these investments. And as we lap that, you're going to see cash flow, a huge focus of the company. We'll be reporting it out every quarter. We think it's just such a core issue. important part of our business that, frankly, was misunderstood in 21 due to all the ins and outs. So it's hard to blame anybody for that because there are a lot of ins and outs. But as we stand here today, we feel great about the investments we made and about where we're at.

Okay. I appreciate that. And then my final question would be on the value-based care programs. I think the number was like 50 million. Can you just walk us through – know your exposure on value-based care there where you expect that maybe to go over time and then just sort of the economics uh associated with that as compared to you know regular business sure yeah so the number we threw out there was was 50 million it's probably somewhere between 50 and 100 right right now today and essentially those programs do is with a plan

kind of taking their full kind of HME respiratory and supply spend and then saying, hey, we're spending X number of dollars a year. We want to either PM, PM it or we want to give you the whole book of business and what could you underwrite it in terms of outcomes, in terms of patient satisfaction metrics and delivery times and different product mixes and things like that. I'd say we're well into it essentially over the last year. We spent some time on it. We're engaging with a number of payers across the U.S. and some different geographies that we operate in. And essentially what it does is it allows us to take costs out for the plan. And essentially because we are, you know, our product mix is really everything from supplies to respiratory to ventilation to custom rehab, we have a lot of capability to be able to offer plans sort of whatever flavor they want in terms of being able to take costs out if some plans want to focus on, you know, improved customer satisfaction metrics, delivery times. You know, every plan is obviously different, so this is not a one-size-fits-all situation. But what we believe is obviously being an efficient and low-cost provider and being able to do these products in the home, as what we mentioned, the last mile delivery. Plus, we have a lot of connected devices, such as CPAPs, CGMs, and ventilators that are connected through cellular modem. Those allow us to be able to help drive outcomes in patients at a lower cost because essentially we have the existing pipes into these patients' homes. We have the existing relationships with the patients. We have existing relationships with the doctors, with the health plans, with the health systems that they came out of. So we sit at a very important crossroads between all these stakeholders in the healthcare continuum And we feel like we're uniquely positioned to be able to not only take cost out, but also be able to provide a better outcome over time. So that's the core focus of what we're going to do. We're going to spend time on it. We're going to spend investment in it, both from a technology and a human capital perspective. Is that something that we're baking into 22 guidance? No, but we do believe that as we figure that out, it could gain traction in the coming years pretty quickly. So we're excited about it, but we're

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