AdaptHealth Corp.

Greetings and welcome to the ADAPT Health First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer set to follow the formal presentation. If anyone should require operator assistance during the conference, please press star Z on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris. Thank you, Chris. You may begin.

Thank you, Operator. I'd like to welcome everyone to today's ADAPT Health conference call for the first quarter ended March 31, 2022. 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 Q1 2022 results is posted on the investor relations section of our website. In a moment, we'll have some prepared comments 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 2022 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 Corp. shall have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, we'll reference certain financial measures such as EBITDA, adjusted EBITDA, and free cash flow 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 Grix.

Thank you, Chris. Good morning, everyone, and thank you for joining us as we review our results for the quarter ended March 31st, 2022. We are very pleased with our strong start to 2022 and the excellent performance of our 10,910 employees. Our revenues of 706 million reflected an organic growth rate of 3.7%, which improved approximately 100 basis points from the fourth quarter of 2021. ADAPT Health's Q1 2022 results reflect the continued strong growth of our diabetes business as well as the resilience of our home medical equipment business, as we saw strong performance in our respiratory, ventilation, and home medical equipment operations. We were pleased by the improvement in our supply of CPAPs as the quarter progressed, and with the successful expansion of our patient setup capacity by our operations teams across the country, we saw patient setups in March at or near their 2021 levels. This momentum has continued in the current quarter as setups remain strong in April. While we hope our suppliers will be able to maintain this level of CPAP shipments consistently over the balance of the year, we are nonetheless pleased with how Q2 setups have continued to be strong. As with all health care providers, we are operating in an inflationary environment that includes continued workforce wage pressure, increased operating costs, and rising interest rates. While these factors impacted our margin in Q1, the execution of our technology transformation program should generate operating efficiencies to offset many of these expense pressures. On the debt front, more than 75% of ADAPTEL's indebtedness is either fixed rate or hedged, thus limiting the effect of recent interest rate increases. While we do not expect these pressures to abate in the near term, I'm confident that we can continue to deliver expected results while we manage through them, primarily through continued growth and technology improvements. My confidence was reinforced in April and May by the more than 1,000 ADAPT Health leaders I met over the course of 10 two-day sales and operation meetings held in nine cities across the United States. These meetings showed we are coordinated and committed to empowering our patients to to live their best lives at home. This collaboration amongst our teams from these meetings makes it clear to me that the unique strength of Adapt Health is our ability to deliver flexible, locally focused patient care, which leverages our efficiencies across our national platform. I believe our ability to deliver a wide range of home medical equipment to insured beneficiaries differentiates Adapt Health from other home health providers and will continue to drive our sales growth and operating efficiencies. We believe our core strengths position us well to take advantage of rapidly changing healthcare delivery models throughout the United States. Over the next five to 10 years, as government agencies and commercial payers turn to population health and outpatient home-centric care models, ADAPT helps broad home medical equipment and supplies offerings, and our ability to design custom delivery solutions will help to make us a partner of choice for those payers, healthcare systems, and physicians managing care for their patients. Our products, when properly monitored and used, generate important real-time data usable by our physicians and managed care partners to control costs and improve outcomes. As a national leader in sleep, respiratory, and diabetes, servicing 3.9 million patients annually, we are well-positioned to capitalize on the demographic growth in the expected U.S. population that is living longer and more actively than ever before. As we learned from the past two years navigating the COVID pandemic, these trends are also favorable for health care providers such as Adapt Health, who are critical in the management of chronic conditions and can deliver care to the home. I will now turn the call over to our president, Josh Parnas, to elaborate on our commitment to expanding our presence in outpatient and at-home services.

Thank you, Steve. I will provide a brief update on our Q1 M&A activities, as well as an update on our fast-growing diabetes business and some additional color on the company's ongoing technology transformation and progress with respect to our strategic opportunities. M&A continues to be a growth opportunity for ADAPT Health, and while we are active in the market, we are being more selective about how capital is deployed. In Q1 2022, We focused intense integration efforts on our 23 transactions completed in 2021, particularly Community Surgical, our largest HME acquisition other than AeroCare, which was completed in late December 2021. We have been very pleased with the performance of Community versus Expectations, and the integration of their talented team is already yielding some nice wins in our New York and New Jersey markets. This year, we have closed six transactions, While these transactions have been smaller in terms of revenue than in previous years, each acquisition was contiguous to an existing ADAPT Health branch operation and is expected to generate very attractive synergies once integration is complete. For example, in April we acquired Keen Medical Products, an HME and respiratory provider operating in the New England market, a nice complement to the Spear operations that we acquired in Q2 of 2021. Switching to operations. Market conditions have forced ADAPT to become an even better company. ADAPT Health continues to be a leader in promoting ePrescribe among facility and physician referrers. And in Q1, as we continue to roll out ePrescribe to more regions, we are seeing approximately 50% adoption on new orders. As well, we have been investing in our digital ordering and digital reordering capabilities And in Q1, more than 55 percent of diabetes and 38 percent of CPAP resupply orders were generated through proprietary digital portals. The cost reduction and billing efficiencies which result from increased e-prescribing and digital ordering are significant and allow us to allocate workforce and other resources much more efficiently. As an example of this efficient allocation, note that despite the broad labor inflation, Our labor expense as a percent of revenue increased less than 1% year over year. This technology also puts us inside the physician offices and patient homes, which we believe will improve physician and patient engagement. Supply chain challenges led ADAPT to build in redundancies to mitigate shortages. We've sourced more product directly and built out their competency. The CPAP shortages have forced us to drive more utilization out of existing devices and asset recovery. The integration of AeroCare in the middle of a pandemic forced an upgrade on ERP and internal systems. All of these things have made ADAPT better today and will continue to drive efficiencies going forward. In addition to our ongoing technology transformation, we are constantly assessing strategic opportunities to leverage our core competencies and increase our revenue, either through expanding service offerings from one region to another or by entering into new markets. Our expansion into CGM supply and diabetes services in 2020 is a good example of a strategic expansion into a new market. We believe this is a core differentiator for AdaptHealth. Prior to July 2020, AdaptHealth had no presence in the fast-growing diabetes market. Our strategic review of diabetes services, and in particular CGM, confirmed that many of the drivers of that business were similar to those we found in our CPAP resupply business. This review also noted a substantial degree of overlap between chronic sleep and respiratory patients and those in the target demographic for diabetes services. Based on these conclusions, we executed on a plan to aggressively move into the diabetes market with acquisition of Celera in July 2020, followed by six additional acquisitions in the diabetes space over the next 18 months. As we have integrated Celera and our other diabetes supply acquisitions, We have successfully implemented many of the technologies used in our HME resupply business to increase revenue and improve operational efficiencies. As communicated by Dexcom and Abbott, the pharmacy shift is largely done, and as we have said consistently, patient volumes have grown throughout. Further, our ability to drive longer-term adherence to a CGM patient is being recognized as a critical piece in the successful CGM therapy of a diabetic living at home. Turning to strategy, ADAPT now services 3.9 million patients annually. Many of these patients are polychronic, having some combination of diabetes, COPD, CHF, and sleep apnea. These are the patients that drive extremely high healthcare costs. and are the subject of numerous programs to control spending. ADAPT regularly engages with these patients through setups, resupply orders, frequent deliveries, and in-person interactions. Real opportunities exist to transform these interactions to drive patient behavior change, given the connectivity of these devices, as well as how frequently ADAPT interacts with these patients. We are one of few companies that have the breadth of the relationships and engagement with the polychronic patients in their homes and are set up to ingest the data and coordinate between the patient, the doctor, and the payer. ADAPT sits at the crossroads of these key stakeholders in the healthcare continuum and has the infrastructure to be able to effectuate better outcomes of chronic diseases without much additional cost. We are now focusing talent and resources to establish partnerships and innovative programs focused on lowering healthcare costs for chronic disease patients in the home. With our already broad offering of connected medical devices in the home, we believe we are well positioned to be the leading edge of driving better outcomes for a lower overall cost of care. More on these initiatives will be discussed in future quarters. 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 first quarter operating results, our cash flow and capital allocation activity for the first quarter, and conclude with a discussion of our 22 outlook. For the first quarter ending March 31st, 2022, Adapt Health reported net revenue of $706.2 million, representing year-over-year growth of 46.5%, including a full quarter's contribution from the AeroCare acquisition that closed in February 2021, versus two months' contribution in the year-ago quarter. Organic growth for the quarter was 3.7%, improving about a point from the fourth quarter of 2021. Non-acquired growth was also 3.7% for the quarter. And as expected, organic growth and non-acquired growth are converging as we lapped our larger acquisitions, including AeroCare and Solara. As Steve noted, we were pleased with our ability to deliver revenue and adjusted EBITDA consistent with internal expectations, despite the ongoing impact of the Phillips recall and supply chain challenges. Results for the first quarter also reflected strong performance from our diabetes products, which benefited from better than expected patient volumes and a solid performance in our HME and sleep categories, particularly in PAP resupply despite the PAP device shortage. As expected, higher costs and supply chain challenges have impacted our results. However, as Steve and Josh have described, we are taking steps to mitigate these pressures by leveraging and scaling our technology. As such, we saw the expected increase in technology expense for the quarter. We've highlighted these investments on previous calls, including our patient delivery platform, OTL, as well as Oracle and other strategic technologies. Although these investments increase G&A expense, we are very confident that we will accelerate operating leverage as we utilize these tools to drive cost and inefficiencies out of our labor pool and out of other operating expenses. We anticipate adjusted EBITDA margins to rebound from current levels in future quarters and we remain confident in achieving our full-year guidance that implies 21.9% margin at the midpoint. As previously noted, we are no longer reporting adjusted EBITDA less patient equipment capex. This is in an effort to simplify, but it also reflects the continued evolution in our business as diabetes, with very little capex, increases as a percent of total revenue mix. We will continue to guide to total capex and focus on generating free cash flow and eliminating the impact of equipment lease financing. Like most other healthcare providers, first quarter cash flows are historically light through a variety of factors in the revenue cycle, patient ordering patterns, the payroll cycle, and the timing of interest payments. DSOs held firm at 47 days with no change from the fourth quarter of 2021, and cash paid for interest was $44 million. Overall, cash flow from operations was $66.4 million, up from $18.4 million a year ago. Total capital expenditures were $77.2 million. As expected, CapEx was higher than historical spend due to inflation and freight surcharges and represented 10.9% of revenues, consistent with our guidance for 9 to 11% of revenue. Free cash flow was negative $11 million. This includes the non-recurring outflows related to the CARES Act recoupment of $5.2 million. Accounts payable was a $35 million use of cash during the quarter, relates to our erp implementation this activity will continue in q2 but it will be done by the end of the quarter we expect this work will pay off starting in q3 as we leverage our prompt pay discounts so we will realize an roi on this use of cash in spite of these items that should improve throughout the year we remain on track to convert five to six percent of revenue as free cash flow for 2022 which should improve to seven to eight percent of revenue next year and beyond at quarter end We had cash of $119 million and zero balance on the revolver. Net leverage as defined under a bank covenants was 3.4 times. And the trailing 12 months leverage was 3.6 times. Turning to the 2022 outlook. We are updating our guidance range, primarily reflecting the small acquisitions that we completed in the first quarter and the extension of the public health emergency by another 90 days. Additionally, one additional point of sequestration relief is included in the quarter. Specifically, our revenue range is now $2.840 to $3.040 billion, up from the previous range of $2.825 to $3.025 billion, and our adjusted EBITDA range is now $615 to $675 million, up from the previous range of $610 to $670 million. Recall that the guidance we provided in February already assumes that it will take the entire year before Respironics equipment is back on the market and that we would not return to prior allocations with ResMed until the back half of the year. As is customary, our guidance does not include contribution from acquisitions that we have not yet closed. I'll now pass the call over to Steve for some final thoughts before we open it up for Q&A.

Thanks, Jason. I'll finish by first thanking again our 10,910 employees for everything they have done and continue to do to address the needs of our patients and our communities in a safe and caring manner. Their efforts are greatly appreciated by the entire executive team. And before we turn the call over to the operator for Q&A, there are two additional things I would like to cover. First is an update on the Respironics recall and PAP shortage. This will ultimately be solved by a combination of Respironics coming back to the market with new devices, greater availability of computer chips, and other suppliers, increasing their offerings and capacity. We expect the backlog of patients waiting to be set up on CPAP will continue to grow until these supply pressures are reduced. This is consistent with our own experience in March and April, where ADAPT Health CPAP backlog continued to grow despite strong patient setups. Based on published remarks, we continue to believe it is unlikely we will see new CPAP units for sale by Respironics before January 2023. And our guidance reflects that assumption. However, we hope that other suppliers will be able to address their supply chain issues this year. As such, we continue to invest management time and resources into efforts to reduce historical turnaround times associated with CPAP equipment delivery and patient setups to ensure we maximize our market share when an adequate supply of CPAP units return to the market. Finally, as noted in our earnings release this morning, ADAPT Health's Board of Directors, with the support of our bank group, has authorized a share buyback program of up to $200 million of ADAPT Health common stock. This buyback program demonstrates our confidence in ADAPT Health's outlook and a belief that our common stock continues to trade at a discount to its immediate prospects and long-term value. With that, 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. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hamster before pressing the star key.

One moment, please, while we pose for questions. Thank you. Our first question comes from Brian Tankula with Jeffery.

Please proceed with your question.

Hey, good morning. Congrats on the quarter. I guess, Steve, just to hit on that last part that you talked about with the Respironics where you call them the backlog. If you can share with us any color that you're seeing in terms of the backlog build and maybe even some of the conversations you're having with the manufacturers and how you think this will all play out in terms of market share shifting and maybe even supply shifting as things start to normalize presumably at the end of the year or towards early next year.

Yeah, sure. Thanks, Brian, for the question. Definitely the backlog for not just us, but for everybody in the industry continues to grow because there's just less PAPs, even at a record supply that we've had the last couple months that doesn't meet up with the demand. So the backlog is going to continue to grow until those factors that I described are solved. And the main factor is chips. With chips, a lot of this could be solved by other people besides Respironics. But we want Respironics back in the market because they will bring chips into the market as much as anything else. So, you know, with that, you know, what we're trying to do is we're trying to minimize, you know, and get set up as many PAPs as we can to minimize our portion of the backlog or our pro share, we're out of share of the portion of the backlog. So when they do come available, we'll be in the best position to fill not only our backlog, but also any increased demand that's out there from these levels. So, you know, with that, you're seeing other providers come in, or other manufacturers coming in there. ResMed has announced their card to cloud products that's gonna add more products in there. They won't have the connectivity, they won't have the modem, so that puts additional work on the physician's offices and on us, but it's really important to get these patients, as many as we can, out there with that technology. So it's an older technology, you know, we did it before, So we can do it again, but it'll be an AirSense 11 machine to have all that benefits to it, but just won't have that modem capability. Gotcha.

Then, Josh, in your prepared remarks, you talked a little bit about probably being more prudent on the acquisition front or slowing down a little bit or being more picky, I guess is probably the better term. Any thoughts on why? Maybe you can share with us. what you're seeing that prompted you to do this? Or also on the flip side, what is it doing to valuations in the market as you've pulled back a little bit from the acquisition game?

Yeah, so I think some of this is kind of valuation-based and some of it's focus-based. So some of it is related to just real work that we're doing on integrating the many acquisitions that we did last year and the lots of opportunity that we have internally in terms of driving additional profitability, free cash flow, and technology improvements on the businesses that we acquired. So some of that's just kind of the natural course of digesting what we took on last year. And others related to really the market shifting in terms of, you know, we don't know, and I think a lot of folks don't know where valuations shake out in terms of, you know, there's still a decent amount of product on the market for us to acquire or companies that are looking. But you also have this kind of in-between state of where, valuations were pretty high going into this year. And really, you know, there's somewhat of a reset in terms of where the market is in terms of inflation, in terms of Phillips recall. Some companies were impacted more than others in terms of the Phillips recall if they're sleep-based. So some of that is a little bit of a valuation reset for some of these folks that's kind of playing out in the negotiations. But really, that's kind of what we're seeing at this point. But, you know, we're, I guess, opportunistic in terms of seeing really good opportunities that we feel like we could get easier synergies out of if it's in market or it's adjacent to some of the branch office operations that we have. So we're looking at those, obviously, as a priority just because of the amount of work and the synergies and the upside that are there are going to take priority of some of the deals.

Got it. And then last question for you, if I may. Josh, you talked about care management quite a bit there. Just wondering how you're thinking about, you know, monetizing that or what benefit it brings to the overall enterprise as you get bigger in that service category.

Sure. So, I mean, initially, really what we're doing now is really just trying to leverage our existing kind of distribution or existing relationship with the patient and the home to drive a better outcome. We were already doing this on CPAP and CPAP resupply in terms of adherence. lengthening out the amount of adherence that we'll do with a CPAP patient to really drive a longer term better outcome. But now we're looking at that on diabetes, on COPD and CHF and some of the other chronic diseases that we're managing. So I think in terms of monetizing, I think it's really going to be a value add for ADAPT to be able to get into more value-based contracts and more value-based agreements to drive outcomes in those chronic diseases without much additional cost because I'll remind you, we don't have the cost of acquiring the patient or of establishing the infrastructure to connect with that patient and interact and ultimately drive a better outcome. We already have a connected device in the home, and our ability to leverage that and really establish and get that data and also communicate that to the other stakeholders like the doctors and the payers is really going to allow us to drive a better outcome without much additional investment in terms of infrastructure. So we've got a number of things in the works that we'll discuss in the upcoming quarters.

Awesome. Thank you, guys. Thank you. Thank you. Thank you. Our next question comes from Joanna Gadget with Bank of America. Please proceed with your question.

Thank you. Good morning. So I guess first a follow-up on the rest of the learnings recall, and I guess FDA has proposed to force Philips to do a repayment price or refund. The recalled ventilator. So I know, was this a refund part always part kind of of the equation here is that you were, I guess, if that was to happen, how would that kind of flow through, you know, for that customers that bought the device and eventually, you know, how would it flow through to adapt?

Well, yeah, the refunds will be on the older products, and we'll probably utilize those refunds to get replacement products. It'll be newer CapEx that come in there at a lower price is where you'll see it hitting the financial statements. We don't think this is a significant amount yet, but we're still doing the math, and And the FDA is also continuing to put pressure on Philips, as we are too, about how to do some remiteration of these interim devices.

Okay, thank you. And I guess related somewhat, but on the CapEx, so for the year, I guess you've based, or you maintained the ratio, right, of the revenues, but the revenues went up a tiny bit. So it seems like... You don't feel like there's a need to adjust for high fuel prices. Is that the way you think about it? Kind of CapEx maybe raised for the acquisitions, but nothing incremental in terms of these freight surcharges and whatnot?

Hey, Joanne, it's Jason. Yeah, the CapEx line, that's the right way to think about it. We came in at 10.9% of revenue for the first quarter. We think we'll get a little relief as the year goes on, particularly later in the year. Regarding fuel, you know, some of that is really up in the COGS lines. You know, we did see several million of, frankly, just gas prices for our fleet of 2,400 vehicles that just, you know, came out of the blue. It was hard to predict. And then in terms of the added freight that we are incurring freight forwarding from our centralized locations to our distribution network, You know, that's up a touch versus prior year, but it's all baked in our guide, and we're feeling comfortable with what we're seeing. So it is contributing to higher COGS up within the gross margin, but we're feeling comfortable with what we're seeing and what we've got for the year.

Okay, that's good to hear, because I guess, you know... Those fuel prices went up, I guess, since we last spoke. But I guess, if I can, just very quickly, last one on the six acquisitions. Any way to quantify the magnitude in terms of the annualized revenue contribution and EBITDA? Thank you.

Yeah, sure, Joanna. So we raised guide at the top line by $15 million today. A little over two thirds of that is related to acquisitions. So of those, of the acquisitions announced, there was one really of size and the other ones were very small, but great deals. We believe in our hub and spoke model. So of the 15, I call it 11. 10 and a half to 11 is from acquisitions. The other three and a half to four million top line is from the extension of sequestration. So of course we get an additional point through the balance of Q2, which added some top line, as well as the PHE extension for the next 90 days. So sequestration PHE, we've got about 3.5 to 4 million top line. That certainly flows through entirely to the bottom line. So overall, 15 million top line raise due to acquisitions and government programs, $5 million bottom line raise due to the flow through of acquisitions and government programs.

Thank you. Thank you. Our next question comes from Andrea Alfonsa with UBS.

Please proceed with your question.

Hi. Good morning, guys. It's Andrea and for Kevin Caliendo here at UBS. Jason, just a quick question, you know, given sort of the trends that you've seen quarter to date and then some of the commentary you provided on sleep apnea today, could you maybe just give us a feel for how you're thinking about some of the expected EBITDA step down that you telegraphed last quarter for 2022? Is that still, I think 45 million was the number that was discussed. Is that still a range that you're comfortable with?

Yeah, based on everything we've seen in Q1 as well as for the month of April, we're very comfortable with the guidance. We're comfortable with the margin profile. You know, I don't know that I would call a bottom yet on PAP rentals, but I'll direct you to slide five in our earnings supplement. You will see that the, you know, the 66 million of sleep rental revenue that we produced in the second quarter of 21, so this is before the recall and the PAP shortage, you know, you do see it stepping down quarter by quarter. I mean, we produced 58 million of sleep rental revenue in this quarter, and, you know, could that be off another million or two next quarter? Possibly, but, you know, I think we're getting close to hitting the bottom on the rental side of the equation, because as we get to Q3, you know, we get an easier comp, and we think we'll be growing out of that. Now, the other dynamic I'd point out is that despite That rental census shrinking on account of having less pap units split out, I mean, our sleep resupply operation is just humming. I mean, it continues to grow quarter over quarter. Again, you'll see that in that same slide five. I mean, of all of our highlights for the quarter, that's the one I think that we're just thrilled about. I mean, we continue to be efficient and grow that top line in the sales revenue, despite what we're seeing on the product side and on the rental side. So, you know, overall, we're very happy with that.

Got it. Thanks so much. And then just if I could speak in a second question, you know, as I think about the drivers of better organic growth of the quarter, I'm curious if that's a benefit from entering new business lines or, you know, the underlying demand in some of your higher growth markets improve, for example. And the reason I ask that is, you know, other revenue in the quarter is becoming a bigger percentage of the business and strong again, you know, growing 2x year over year. It's up you know, in the mid to high teens sequentially. So, you know, how are you thinking about sort of those ancillary business lines longer term?

Sure. So, I'll answer the number side of the equation, and I think pass it to Steve to talk about the ancillary programs. You know, I'd say big picture, 4% was our guidance for organic growth for 2022. We feel very good with that. The 3.7% for the quarter was a reflection of diabetes beating. Again, you know, we had put up 18% as a target for 2022. We came in above that number and we're just thrilled with that business and the growth. You know, that was offset by the supplies business. We underperformed there by a little more than we expected. But, you know, at the end of the day, we're running a portfolio of products and we're feeling very, very good about organic growth for the quarter. Regarding the other product lines, some of the products that are in there, we have a nice hospice business in there, which is predominantly DME products. We've also got a terrific orthotics business that's been growing like a weed. We're very, very happy with that program. The organic profile of that program is excellent. Somewhat of a new entry is home infusion. Some of the acquisitions over the course of 21 and even into early this year have come with home infusion components. So it is a growing and a nice part of the business. We like that part of the business. So what you're seeing there is some acquisitive growth and some organic growth within that category, which is why it doubled year over year. Steve, you want to talk a little bit about what's happening operationally?

Yeah. And so with the pandemic, there's ups and downs. We benefit from some things we lose on other things and so it's a net net pretty net neutral you know throughout that you know but what we've been able to do we're very very proud of the 700 million we produce in the fourth quarter and then produce another 700 million in the first quarter was quite an accomplishment you know when we sat on this on a call you know just two months ago uh you know we really have that clarity in there that came through in the March and the team really worked hard. So our team's out there selling what they can control today and they're focusing on stuff that they can control today and not worry worried about stuff they can't control and that's been the message that we've been able to deliver to them and then our teams out there have performed tremendously. So there's plenty of products out there that patients need and the referral sources want for their patients and we can provide those and that's what we're doing today.

Great. Thanks so much for all the granularity.

Thank you. Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my questions. I follow up to Joanne's question about the guidance raise. You said that the guidance raise is due to the deals and the government extensions. Are you sort of implying that despite sort of the increased fuel costs, you know, obviously the inflationary costs we're seeing, that there is sort of zero impact on your original guidance due to sort of strong cost controls?

Yes, that's what we're saying, Pito. I mean, the, you know, fuel in Q1, it was a touch under $2 million of unexpected costs. You know, so the, you know, we've got to find a way to curb that. You know, we've got various levers within the other operating expense lines that we are pulling, and, you know, some probably need to pull faster. But there is improvement in those lines year over year as a percent of revenue, and we're confident that we'll execute on that. So overall, the only change to guidance is what we communicated on government programs and on the acquisitions. You know, as you know, I mean, we took a big chunk out of guide in the last call, and, you know, we feel very, very comfortable with what we put out.

All right, excellent. For diabetes, typically because of the seasonality, first quarter, Diabetes revenues typically are in the sort of 20 to 22% sort of annual revenues. So if I look at the 155, that would imply sort of diabetes revenues in the 740 range for the year. Is that the right way of thinking about diabetes?

You might be a little heavy on that, but you're in the ballpark. Yes, it's the right way to think about the profile.

Okay, and then let me sort of follow up on that one. You know, when you guys break out the – proforma organic growth. Is there any way you can do this by product line, like sleep and diabetes?

Yeah. So, Peter, when we put out the guide, we talked about a 4% weighted average for total top line. We call a point of that rate and three points volume. rate predominantly from the DemiPost fee schedule increase as well as some of the changes that came with the DemiPost final rule. In terms of products, we had put diabetes at an 18% organic growth rate. We feel very confident with that. If anything, we'll do a touch better than that over the course of the year. We had pegged sleep at about a negative 6%. I think we had five to 6% negative. We're doing a touch better than that because of the outperformance and the resupply that I mentioned. The other product lines, respiratory, we had at five points. We're in that ballpark. And then DME, other, and supplies to the home, we had at 4%. As mentioned, supplies is dragging a bit, but overall, we feel great about the 4% at the portfolio level, and we think Q1 demonstrates that.

So on these sleep sales revenues, to your point about the resupply versus the rental, they were incredibly strong, I guess. How sustainable are these levels? Was that more of sort of getting backlogged for people that weren't ordering it during the fourth quarter, or do you think that this resupply is a sustainable level going forward?

Well, yeah, Peter, this is Steve. Yeah, they are very sustainable. I mean, we just keep improving that program. Our team has done an incredible job with resupply. Just in electronic ordering, we've over the past three years have gone from under 10% to now over 40% of our patients ordering electronically through us now. And we haven't cut back our staff. And so we're able to use our staff to focus on the remaining 60% of the patients that need more time, need more attention, and stuff like that. And so all that just continues to increase are orders that the patients and their compliance with the machines, that they'd be able to work on that and get that stuff done. So this is very sustainable. In fact, we believe it's going to continue to improve.

Great. And the last quick question for me on capital allocation. I understand for lack of doing sort of instant large deals, it gets integrated and the valuations sort of normalize out here. I guess, what's your view between ShareRepo and reducing debt? Obviously, you guys put through the $200 million ShareRepo. Just curious how you guys view buyback or own shares today versus due leveraging from here. Thanks so much.

Yeah, thanks, Peter. You know, the first thing I'd say is if you look at our trailing 12 net leverage, I mean, we did come down 0.1 from Q4. You know, we think that that will continue as we grow and produce cash. You know, in terms of the authorization, I mean, we'll be, you know, opportunistic. I mean, we think acquisitions and other uses of investment internally are just excellent uses of cash. But, you know, frankly, at the trading levels, I mean, we just thought and the board thought it was appropriate to authorize the program and we'll use it as we see fit going forward. But I think in terms of capital allocation, you'll continue to see us do tuck-in deals. I mean, we're going to be very methodical and disciplined on that. and you're going to see the continued investment in technology and then obviously the share repurchase program. Guys, I don't know if you have anything to add to that.

Yeah, you know, the acquisitions are still a big part of our story, but, you know, the comeback of PAP availability to us, which will come back, you know, we need to be focusing on that and using our capital on that to take advantage of this once-in-a-lifetime opportunity for us to, not only get our backlog, but also the possibility to shift some market share. We're a leader in PAPs, and how we have this historic opportunity as a leader in PAPs to actually increase our market share pretty significantly coming out of this. And so a lot of the focus is on that, and we want to make sure that we have the product and the people and the focus to be able to do that. It's probably the biggest opportunity we've seen in a long time in HME, and so it's pretty high on our mind, needless to say.

Great. Thanks so much, guys.

Thank you. Our next question comes from Matthew Blackman with Steeple. Please proceed with your question.

Good morning, everybody. Thanks for taking my questions. I've got two. I just wanted to get after the M&A commentary one more time. How do you line up sort of that more selective commentary with, you know, call it that historical $100 to $150 million in acquired revenue target? Is there any way you could juxtapose sort of your new commentary versus that historical trend? And then I got one follow-up on diabetes.

Yeah, I'll take that. So I think, you know, in general, that's been our guide, and we've exceeded it and lowered it, you know, obviously as appropriate. But again... That's still our guide. I think that's what we're looking at. There are plenty of deals in the marketplace for us to do. Again, we're talking right now about our focus Q1, Q2. Again, in the back half of the year, depending on where CPAP supply gets in terms of availability of product, we could dial up or down our ability to do integrations and acquisitions. We have two very, very powerful M&A teams that came together from AeroCare and ADAPT. Um, so in general, like, we keep that target and in general, we've, we've hit it in all the last years that we've done it. And pretty much we're, we're still thinking about that as a target opportunity for us in that range.

Yeah. And, uh, Matthew, Matthew, you should also realize that. Community acquisition was done on the last day of the year. So in all intents and purposes, at least for us, you know, that's really a 2022 acquisition. And so if you had the revenue for that, the revenue we've already done, you know, we're already either at or we're certainly exceeding the low end of those range targets. And so we're still going to be, in our mind, very, very active in acquisition and acquiring revenue throughout the year. Got it.

Makes sense. Excuse me. And then diabetes, I'm just curious, do you typically see any uptick in that business with new product launches? I mean, there could be two new CGMs on the market this year. There's a new patch pump out. These products are probably likely somewhat skewed to pharmacy, but they are big launches. And just Curious if you see any typical changes in trajectory around new major product releases in that diabetes franchise. Thanks.

Yeah, thanks, Matt. This is Josh. So, yeah, in general, I think, you know, a lot of the new innovation that's coming to the market in diabetes is driving more and more patients into the funnel, and that's why I think we're seeing really strong underlying secular tailwinds there in terms of patient demand. I wouldn't tie it to any specific product per se. But in general, I think both doctors, patients, and the technology keeps getting better. And you're seeing more adoption. You're seeing more adoption of patients in different disease states within diabetes and different levels. Both cash pay, out-of-pocket, insurance-based, there's a lot, a lot of interest on the diabetes supply. And I think that's why also our focus as distributors is not just to distribute these products, but it's also how do we help that diabetic at home with that connected device leverage that technology to be able to connect them with their doctor, with their health plan, with their health system, and then really help them stay adherent to that therapy to drive better outcomes in the long term. And I think that's, you know, that's some of the advantage of going through distributors like ourselves and suppliers that really help hold the patient's hand. But in general, a lot of those new technologies coming together are driving a lot of patient interest and doctor interest as well in getting patients on the therapy.

Thank you. Our next question is from Whit Mayo with SVB. Please proceed with your question.

Hey, thanks. Jason, maybe first one I wanted to, there's kind of a lot of boring stuff going on with your ERP and systems conversion from most investors' perspective, but I'm kind of fascinated with it. Can you just talk about some of the heavy lifting, the movement behind the scenes, just any update on those initiatives and any of the expected benefits or tailwinds that you would expect to see in the next year or so?

Sure, Witt. So you're referencing it and boring my CEO and president are rolling their eyes at me because I could go on and on about this stuff. I'd say, you know, the heavy lift is behind us. We went live on February 1st. So we've got over 750 locations. They are requisitioning and requesting product locally. It's done all electronically versus what used to be done, a lot of phone calls and post-it notes, things like that. I'd say in terms of the just SOX adherence and leveraging that tech on three-way match, we've caught all kinds of products coming in on invoice that price is higher than contracted or agreed to. And so that's some of the beauty of leveraging the tech to auto match and to throw out variances. And so our purchasing teams are working on that. And so there's dollar savings there that will be realized over time. I'd say next in terms of, you know, we spoke a little bit about payables. I mean, we've probably another quarter coming up just tightening up on the payable side. Some of that is to frankly avoid either finance charges or late fees as well as just, you know, staying right sides with our suppliers. But, you know, there's prompt pay discounts. There's other, you know, EBITDA drivers that we absolutely intend to capitalize on. So that's very positive. And then I'd say finally, you know, some of these kind of category management programs, they can be run without a best-in-class ERP, but it just makes it a lot harder. And so when you turn on the visibility, what we've got now is ability to manage category spend on the direct side and the indirect side. I mean, we are launching as we speak. We've got an RFP out for hundreds and hundreds and hundreds of locations that need everything from internet service, to utilities, to waste management, to security, all this boring stuff, but the dollars significantly add up over time. Two quarters ago, we talked about we expect the GNA to hit five points of revenue. We came in right at that, straight down the fairway, and we think that's going to be money very, very well spent in these programs as they start standing up and launching, and we expect to get that operating leverage in our cost of revenue line.

That's helpful. Maybe just one other question. I'm curious, as you look at the payers that you're working with, and we're hearing various anecdotes across different subsectors around payers being a little bit more aggressive on claims edits and pre or prior authorization, is there anything that you're seeing that stands out as being new or different? Your AR days look pretty good, so there's not really anything that I can pick up in the quarter. So just curious about that. just sort of your view around how payers may be changing their behavior.

Yeah, I mean, first AR days, you know, typically our AR days grow in the first quarter, the fact that they stayed flat, an accomplishment to our RCM team that did an incredible job. And so what we're seeing from payers is certainly, you know, with the use of technology and the use of data, there's more and more interaction and more and more stuff that they can come in there and challenge. But at the same time, we're utilizing that data and making sure that our claims are filed accurately with the proper documentation. So net-net, yes, there's more activity, but net-net, we're ahead of the insurance companies with our data and our utilization of it. So our data lake and our data management and our data warehouse is fantastic, and so we utilize that to make sure that You know, our denial rates get less each and every month as we put in rules to prevent those and edit engines and all this kind of stuff that our RCM team works on constantly. And so that RCM team has done a fantastic job and this will continue to get better. So we're ahead of the curve, but we do see more of it coming. Great. Thanks, Steve. Appreciate it.

Mm-hmm. Thank you. Our next question comes from Eric Coldwell with Baird. Please proceed with your question.

Thank you. Good morning. I'm going to have to dig at the bottom of the barrel for questions here at the end of the hour, but maybe a bit myopic. The first one, in the conversation around the proprietary portal ordering, you tied into that labor expense being up less than 1% year-over-year despite wage inflation, labor challenges broadly. Was that a comment specific to the folks in the back office involved in ordering, or was that a firm-wide conversation?

It's really firm-wide, Eric. I mean, just our head count last quarter to this quarter is down, what, about 140 or so. Yeah. Now, and so that's pretty broad across the organization. Now, in terms of the operating leverage and where we're targeting that G&A investment, yes, that's back office. And not necessarily just people. It's just doing things better and cheaper and more efficiently. But yeah, that was a broad stroke comment. I mean, I will add that we had labor in at 26% of revenue for our guide. We feel comfortable where we stand today. We're into the 25, low 25% range. as you'll see in the queue printed later today. But we're feeling pretty comfortable with that. I mean, this year is a bit of a crossover of the investment in G&A, so G&A is going to come up, and then we do think we'll get that operating leverage as we exit the year.

Yeah. Eric, let me add to that. As we use our proprietary delivery solutions, which we call OTL, that engages the patient in an electronic manner that's greater today than it was yesterday. E-prescribe engages the referral sources in an electronic manner that's better today than it was in the past. And just those two, and those are just two of many, significantly reduce our cost in being able to get the product to the patient and get the bill out the door in a more correct manner. And that's where the upfront cost is all the time. And so we are confident that through these technology and keep getting more adoption of them throughout our referral sources and our patients and that electronic communication is critical to our success and will continue to lower our cost of taking care of the patient.

That's helpful, thank you. And then you talked about the CPAP, business quite a bit today. You talked about the patient backlog in CPAP continuing to grow, which I think we're hearing broadly across the market. I'm curious if you can remind us how many patients you have on respiratory therapy in total, whether that's CPAP-specific commentary or just broadly, and then what, if you would be willing to, what your patient backlog actually is in CPAP and how that compares to the past.

Yeah, I'd say on the sleep side of the equation, Eric, I mean, we've got around 250,000 to 300,000 patients on rental census. Now, the resupply census is well over a million. I mean, that's, you know, that's, yeah, it's probably pushing a million, four million, five even. You know, so that's really where that consistent recurring revenue stream is. and then every month, you know, due to the 13-month rental cycle, certainly we've got patients starting and coming on census, and you've got patients rolling off as part of that, completing that 13-month rental cycle.

I think it was, if I'm not mistaken, if it wasn't you, I apologize, but I think last quarter you said you could see CPAP backlog approaching a million patients in the U.S. by the end of the year. by the end of the saga. If that was you, I hope it was, uh, could you tell us, is that still the ballpark of, of where you see that backlog, uh, exiting the year?

Yeah, that was definitely us. Uh, we were the one that brought that to light and, uh, we are very confident in that number that that'll continue to grow unless there's some, you know, significant mitigation from that, from the stuff we'd already talked about. Uh, but there's a huge, huge amount of patients that'll be out there. 900,000, we said, and that's, you know, we're very, very comfortable in that number, which means that number is conservative. And those patients all have a script and are looking for a place to get a CPAP. And so as a leader in PAP setups out there and have a significant market share, If you could guess our market share, we can't give that out for a variety of reasons, but if you could guess that and apply that to that, that would be the starting point of the backlog that's related to us. Now, we're able to supply more than probably the market does, so that's part of our strategy is to get our backlog relative to our patients lower than maybe other people in the marketplace. And if we can do that, then we can take advantage of this opportunity as it comes to fruition. Certainly, eventually it will, whether it be early 23 or mid 23.

That's it for me. Thanks very much. Thanks, Eric.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Steve Griggs for any closing comments.

Thanks. all for attending the call and appreciate your attention and thanks for the questions from the various analysts and again thanks to all of our employees out there that on a daily basis go out there and take care of our patients so appreciate everybody thank you this concludes today's conference you may disconnect your lines at this time thank you for your participation