This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: And welcome to today's ADAPT Health 1Q23 earnings release. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. You may withdraw yourself from the queue by pressing star and 2. Please note, this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Chris Joyce, General Counsel.
spk05: Thank you, Operator. I'd like to welcome everyone to today's ADAPT Health Corp conference call for the first quarter ended March 31, 2023. Everyone should have received a copy of our earnings release yesterday evening. If not, I'd like to highlight that the earnings release, as well as a supplemental slide presentation regarding Q1 2023 results, is posted on the investor relations section of our website. In a moment, we'll have some prepared comments from Richard Barish, Chair of Adaptel, Steve Griggs, Chief Executive Officer of Adaptel, Josh Parnas, President of Adaptel, and Jason Clemens, Chief Financial Officer of Adaptel. We will 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 2023 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 the Chair of ADAPT Health's Board of Directors, Richard Barish.
spk04: Good morning, everyone. Thanks for joining us on our first quarter conference call. As you know, this morning we announced that Steve Griggs will step down as CEO of ADAPT Health as of June 30, 2023. He will be leaving the company in sound financial condition and much improved operational shape. Further, Adapt Health is blessed with a high-quality senior leadership team that will continue to lead the company forward in the areas we will be discussing today. On behalf of the board, I thank Steve for the critical leadership role he's played at Adapt Health to help build a market-leading provider of sleep, diabetes, respiratory, and other health care solutions. As CEO, he has led the company through the successful integration of AdaptHealth and AeroCare, overseen more than two dozen acquisitions, and helped us navigate the challenges of COVID-19 and the CPAP shortage resulting from the Phillips recall. The board has begun an extensive search process and so far has been quite pleased with the quality of the candidates to become CEOs. We're optimistic that we can fill the role over the next several months, but if there's a gap, the board has asked me to step in as interim CEO until the role is officially filled. I will now turn the call over to Steve.
spk09: Good morning, and thank you for joining our call. Adapt Health is a full-service nationwide provider of products and services for patients at home and in the community, empowering them to live their healthiest lives. I want to start, as I always do, by expressing my appreciation to our 10,802 employees operating in 47 states for their tireless efforts to respond to the needs of the more than 3.9 million patients we serve. As a company, we continue to adapt to our changing environment, expand our reach, and capitalize on emerging opportunities. We are the nation's leading provider of sleep equipment-related supplies. And we had another exceptional quarter in this business, delivering 18% growth in net revenues. We believe that the extraordinary efforts we undertook to maintain our supply and setup of PAP units during the Philips recall and pandemic have resulted in increased market share and accelerated setups. In March, our PAP setups were more than 50% higher than at any time prior to the commencement of the Philips recall. Our census of PAP rental patients is up 53% from our lowest point in February 2022, while our census in our much larger population of resupply patients is up 10% from the same period. Our first quarter also reflected the continuing evolution of our diabetes and CGM business, largely driven by the pharmacy channel shift. Despite these headwinds, the diabetes and CGM product lines remain attractive due to the continued growth in patients through expanded Medicare coverage. We expect improved profitability of this important product line through a number of ongoing operational and strategic initiatives, including lowering costs. It is important to note that our unit sales continue to grow, and now we have a census of approximately 138,000 patients and the 8.3% percent increase in the past 12 months. As Josh will describe, we are now beginning to take the steps to connect our diabetes members in a way that puts us squarely in the middle of the healthcare ecosystem. In our respiratory line of business, we are proud of the part we played during the pandemic, going to extraordinary efforts to get oxygen to health systems and patients. Most of these patients have recovered and no longer need oxygen. Our respiratory business now turns to a steady state where we expect to see sequential quarterly growth. We remain confident that our purpose-built national network supplying a full spectrum of sleep, respiratory, diabetes, and HME products allows us to gain market share and drive sustained growth in these product lines. For example, as discussed in previous calls, we believe value-based care is a key piece of our long-term strategy to evolve beyond the traditional home care distribution model and into what we now call Adapt Health 2.0. During 2022, we added value-based agreements with two managed care providers to cover certain home care products and supplies for their beneficiaries on an exclusive basis. These agreements help drive better patient outcomes and a better overall experience for both patients and payers with a clear and simple billing arrangements that put a premium on service to patients. We remain optimistic that this strategy will be a key contributor to our success moving forward. Shortly, we expect to announce more of these arrangements, including our largest to date, that will showcase how ADAPT Health's supply network, best-in-class technology, and full spectrum of home care solutions can be deployed to serve patients in designated geographical areas on an exclusive basis. These arrangements are expected to deliver incremental market share, revenue, and EBITDA growth across a number of our operating regions, and will improve our patient satisfaction by removing many of the administrative burdens associated with supplying home care equipment and supplies today. Adapt Health's national scale and product diversity is simply unmatched across the HME industry. And we have continued to invest in infrastructure and expertise to position the company to capitalize on these significant long-term opportunities in the markets we serve. These are highlighted in our RCM improvements that have led to faster cash collections, thus reducing our DSOs to 42.7 days down five days from Q1 2022. We are seeing signs that we are collecting not only faster, but also better. As these trends continue, we hope to see higher net revenue and contributions to EBITDA in the upcoming quarters. Sales reps and leaders from territories all over the country recently gathered at our national sales meeting, where we provided opportunities to learn about new enhancements and improvements we have made to the tools we provide them for servicing patients and referral sources. We also honor the most productive members of our sales teams, shared best practices, and offered expanding training and performance incentives to help them further grow their businesses. We believe an energized sales organization with a strong centralized support is a critical element to our immediate and long-term growth ambitions. Now I'll turn the call over to our president, Josh Parnas, to discuss strategic developments and further detail.
spk07: Thank you, Steve. As Steve mentioned, ADAPT 2.0 continues to focus on an innovative care model purpose-built for payers and patients. The foundation of this care model is technology that connects payers, suppliers, and patients. ADAPT MyApp is our foundational patient-facing app that provides logistics, billing, chat, and soon clinical data to help patients manage their chronic diseases. The initial launch of MyApp was focused on the diabetes product line and has seen strong adoption with 50,000 downloads and 7,500 actual orders transacted through the app. The downloads to date represent more than one-third of our diabetes patient census in just a few months. We will continue to iterate as we further refine and scale the app across other parts of our business. It is important to note that we have focused our efforts on our diabetes population, which represents 96% of the MyApp participants. There is strong consensus, now supported by Medicare, that proper usage and monitoring of the data generated by CGMs leads to better outcomes. As we continue to scale and refine the app, we expect it to become a powerful resource for patients to access data on their connected medical devices and believe it will enable more clinical interactions for our chronic disease management programs, leading to a transformative patient experience, further reduction in healthcare costs, and bridging of the gaps in care that frequently incur in the populations we serve. The next phase of the development of MIAP will focus on our sleep and oxygen populations, where real-time data will enable ADAPT to continue in the evolution of its ultimate value proposition. to be a low-cost, clinically-enabled provider of chronic disease patients healing at home. Now, I'll turn the call over to our CFO, Jason Clemens, for the financial review. Thanks, Josh.
spk09: Good morning, and thank you for joining our call. For the quarter ended March 31, 2023, Adapt Health reported net revenue of $744.6 million, an increase of 5.4% from $706.2 million in 2022. Non-acquired net revenue growth for the first quarter was 4.7%, again led by sleep, our largest product category. Sleep patient rental census continues to reach record levels and is now up 53% from the lows reached during the worst of the PAP shortage. This reflects continued strong patient demand for sleep products that we expect will continue in 2023. Additionally, our PAP resupply business continues to outperform, also reflecting strong demand and execution. The shortfall in non-acquired net revenue growth reflects the acceleration of the headwinds affecting our diabetes product line that we have previously discussed. Specifically, while CGM patient census grew 8.3%, an increasing number of payers have shifted their diabetes patients out of the DME channel and into dual benefit and pharmacy only, partially offsetting that volume growth. Additionally, diabetes revenue for pumps and supplies was down $9 million year over year. We very recently seen negative impact from share shift toward integrated pumps sold to patients through the pharmacy channel, as well as the effect for manufacturers retaining some of their DME distribution in-house. The adjusted EBITDA for the quarter was $134 million, which declined 2.7% from the first quarter of 2022 and was below internal expectations. Adjusted EBITDA margin declined 150 basis points year-over-year to 18% in the first quarter of 2023, primarily reflecting these pressures in the diabetes business. While we continued to experience inflationary headwinds, we were generally pleased with our ability to keep labor expense contained at 25.9% of net revenue, up from 25.4% in the prior year. Within cost of goods, in addition to the factors previously highlighted within our diabetes business, we continue to incur elevated distribution expense. However, this is trending in the right direction and should further normalize over the course of the year. Operating expense and G&A expense were both in line with our internal expectations. Cash flow from operations was $140.2 million. CapEx was $89.1 million, and free cash flow was $51.1 million. The quarter benefited from timing of key contract payment term negotiations as well as large one-time purchases of patient equipment and supplies. We anticipate the first half of 2023 to generate $15 to $20 million in free cash flow, the third quarter to be a modest source of free cash, and for the bulk of our 96 to $128 million range for free cash flow to come in the fourth quarter. Turning to working capital, we had cash on hand of $101.4 million with net leverage of 3.6 times as defined under our bank covenants. Approximately 77% of our total debt is fixed, including our swaps. Day sales outstanding for the first quarter was 42.7 days, a full five-day compression from first quarter of 2022. reflecting the benefits from refinements to the revenue cycle process and our technology and workflow investments, which have resulted in increased adoption of e-prescribe and faster, cleaner claims. During the first quarter, we completed $9.2 million in share repurchases under our previously announced buyback program, leaving approximately $177 million remaining under authorization. Even though our first quarter did not meet our expectations, we are not changing our full-year guidance at this point. The first quarter results has us projecting toward the lower end of our published guidance, but we think we have the tools and programs in place for the balance of the year to get back closer to the midpoint, namely our cost management program and the new contracts that Steve mentioned earlier. Management is taking decisive actions to reduce our cost structure, specifically through organizational operating model changes, rationalization of footprint, renegotiation of certain supplier contracts and other means staged throughout 2023, we believe we can generate annualized cost savings of approximately $40 million, with $25 million expected to be realized in calendar 2023. The actions we have already taken to date represent approximately $30 million in annualized savings, of which $20 million will be realized this year. Importantly, we do not anticipate any of these actions to negatively impact the high service levels we are committed to delivering for our patients, referral providers, and payer partners, as well as the commitments that we have made to our employees. Finally, for the second quarter, we believe we will maintain the product category revenue trends we experienced in Q1 2023, and we believe we will achieve improvement and adjusted even a margin driven by cost of goods, labor, and other operating expenses. Specifically, we expect net revenue growth in the mid-single digits over Q2 of 2022, and we expect adjusted EBITDA margin to come in just under 20%. This expectation for the quarter does include benefit from our cost management program, but it does not include benefit from the contracts that Steve outlined, as they won't be effective until the third quarter. We'll now pass the call back over to Steve for his concluding thoughts before we open it up for Q&A. Thanks, Jason. I'll wrap up by underscoring our team's high level of confidence that Adapt Health is well positioned to capitalize on the opportunities ahead of it. We expect to drive significant shareholder value as we make further progress across a number of important strategic initiatives within our core markets and through expanded opportunities under Adapt 2.0. To the 10,802 employees of Adapt Health, it certainly has been my pleasure to work with each and every one of you. some for only a short period, all the way to some for 35 years. A lot has been accomplished over the years, and I'm excited to see the future that you will deliver to not only our patients, but also our referral partners, managed care entities, suppliers, and other stakeholders. Thank you again. At this time, I'd like to open the lines for Q&A.
spk01: Thank you. At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. And we'll take our first question from Brian Tinklett with Jefferies.
spk06: hey good morning uh steve thanks for uh working with you all the time that we work together good luck with uh the next move um i guess my first question as i think about the guidance and all the moving parts here right um i appreciate you know like where you're coming from as you look at the cost cuts but on the on the revenue side maybe let's start there you know what gives me confidence that you know we're close to seeing the end of it or any sort of visibility into the shift that's happening on the diabetes side of things? And as it relates to the guidance, like, what are you baking in in terms of assumptions that will give us confidence in the validity of, you know, maintaining the guidance ranges for the year?
spk09: Yeah. Hey, Brian, Steve, you know, certainly on Diabetes, let's start there because I think that's the biggest surprise to people. Without that reduction, the quarter would have looked much different. So there's significant market change, mainly the shift to the pharmacy, as we indicated. And it happened much quicker with the advent of a few more products, particularly from manufacturers. So we went from an organization in diabetes that was posting double-digit growths to negative growth. That obviously had some cost concerns to us. But it also resulted in just a larger percentage going forward of government and more stable business for us and obviously a decrease in the pump business. So the cost structure for the government business, you know, differs. It differs in process, differs in products, and differs in cost, which are all net positives for us. So going forward, you know, we should look at sequential improvement in the diabetes business. We're very confident that Q2 will be over Q1, Q3 will be over Q2, and Q4 will be over Q3. And so the impact of the pharmacy, you know, the questions we ask ourselves is, you know, is it fully into the Q1 numbers? And we believe so, that, you know, materially so. So we shouldn't see any more degradation from that pharmacy shift. The people that have shifted have already shifted, and so there's just not that many more that can shift over there. Are the government products, you know, the products that we need to be looking for? Certainly. They're very profitable the way we do it, so it will be a more government-centric, you know, business. And then, so do we think we'll have, You know, sequential growth? Absolutely. We'll grow in the government products to be offset a little bit by, you know, some continued pharmacy shifts, but, again, most of it's done, and offset a little bit by, you know, some pump business. But, again, the pump business is now such a small part of the business that it shouldn't have any material effect. So what we look for in the diabetes is increased revenue and improvement margins. And I think that's the main – issue with guidance going forward, that if we solve that, it should be handled nicely. Jason, you want to add to that? Yeah, thanks, Steve. Brian, to your question, your second question on guidance and assumptions. You know, we're expecting Q2 to hold the same trends, frankly, across all product categories, but including diabetes for the second quarter. So we do expect pumps to be down, pumps and related supplies, to be down in that $9 million ballpark that it was down in Q1. You know, based on what we're observing from the market, you know, Insulet and their Omnipod is growing incredibly fast. and their pharmacy component has moved from 80% in Q4 to 85% in Q1. We do expect those trends to continue because that's what management's saying. We expect Tandem and Tronic, the other pump manufacturers, to continue on their treadlines and their guidance. So we think the result will be continued compression in pumps and supplies, which today represents just a touch over 20% of our diabetes business. Turning to CGM and the discussion that Steve outlined, we do expect to anniversary some of the channel mix and payer pressures at the second half of the year. We believe that by the fourth quarter, we'll start returning to mid-single-digit growth year over year, and we do believe that that will continue to normalize as we bridge into early 2024. Got it. And then,
spk06: I guess in your prepared remarks, you talked about value-based care and how you've got some contracts coming up. So just curious what the setup is, what the revenue model is for you guys in value-based care, and just any details that you can share with us in terms of how that works and how you see that driving growth for you guys going forward.
spk09: Well, you know, we can't mention too much about the specific contracts until they're finalized and they are announced. But that should become shortly. But the contracts that we're seeing will be much more on capitated and value-based than ever before by AdaptHealth. and it'll give us some, you know, advantages in marketing the other products for those companies. So, yeah, I mean, it's very, very significant. It's by far the biggest contract that we have ever even come close to landing. So we're very, very excited, but the team's done an incredible job, and, you know, we'll get more to follow as we're able to announce it shortly.
spk06: Awesome. Thank you.
spk01: And we'll take our next question from Kevin Colendo with UBS.
spk08: Hi. Thanks for taking my question. I want to talk a little bit about the cash flows. You know, originally I think Jason had said that, you know, mostly all of the cash flow is going to be used to fund M&A. I'm just wondering if that's still the plan. While the cash flow was strong in the quarter, there looked like a big benefit on the liabilities line that changed. If you can maybe explain a little bit of that to start with.
spk09: Sure, Kevin. This is Jason. Just one maybe misinterpretation of use of cash, I think you had mentioned earlier. to predominantly be deployed to M&A. We would expect extremely modest M&A during this environment, only for very small and incredibly accretive deals. The remaining of cash, I mean, the bolus of free cash that we will generate this year, you can expect that to be returned to shareholders or debt holders as we deem appropriate at that time. I would say in terms of the Q1 timing benefit I described in our prepared remarks, you know, again, DSO, we're just incredibly proud of, now under 43 day sales outstanding. We do believe that we'll maintain that five-day compression through the next quarter or two until we lap many of the improvements that we deployed late last year across our rev cycle, our technology, and our processes. um it turning to uh the other elements of working capital um you know really the the key factor are the updated payment terms that we've negotiated within some of our very key supplier agreements and so we are getting a one-time benefit of uh essentially uh that cash hold on to that cash through the uh the new extended payment terms as well as some strategic product acquisition we made in the first quarter, that because of the extended payment terms, you're looking at a Q2 cash flow impact as opposed to a Q1. So this is just timing. We still believe in our original expectation of delivering between $15 and $20 million of free cash flow in the first half of this year.
spk08: Okay. That's super helpful. If I can ask a quick follow-up it seems like a long time ago you put out this long range plan in 2022 and obviously things, the world has changed a little bit and the results haven't been, you know, what you've wanted since then. But if we think through that long range plan, are there still parts of it that you're comfortable with or, or fully comfortable with or less comfortable with? If you can just maybe talk to that a little bit would be really helpful.
spk09: Sure. I mean, the short answer is yes. I would tell you that, um, You know, the growth of diabetes, we still believe, as we said back in late last year at Capital Markets Day, that it will land at a mid-to-high single-digit growth business for us. You know, as discussed, channel and pair mix shift came faster, frankly, than we anticipated. And so the compression we're taking on the commercial side of the business is happening faster than thought. Now, the upside there is our government business is growing rapidly. Very, very well. I mean, upper double digits, upper teams, consistent with what you might see out of some of the CGM manufacturers. And that's great business for us. Very, very strong margins. We're very pleased with that business, and we still believe very strongly in those growth rates and the earnings power of the business. You know, the contract that we just discussed with Steve, again, we don't have details to disclose. We will have details to disclose very soon. In terms of ADAPT 2.0 and how our revenue profile is changing, how our ability to land and secure large-scale arrangements that I think are preferable for, first and foremost, the patient, the referring providers, The payers and for us, you know, this is a, I wouldn't call it a new arrow in the quiver, but we are absolutely demonstrating our ability to execute there. So certainly some ins and outs, sleep performing, frankly, above expectations. And as the largest sleep provider in the country, we expect that growth. to continue. So, you know, I think it's too early for us to really reapply on 2025. But we still feel very confident about achieving those financial goals. Timing could slide, you know, a quarter or two here or there. But, you know, as we get deeper into the year, we'll refresh that guide. Thanks so much.
spk01: And we'll take our next question from Peter Chickering with Deutsche Bank.
spk10: Hey, good morning, guys. It's a pleasure working with you here. I'm going to ask a series of questions here on diabetes. Just setting the stage here, Dexcom grew 17% in the U.S. in the first quarter, Libre 50% and Omnipod 49%. And yours for diabetes declines for 6%. So I guess question number one, can you guys refresh us on the exposures that you have as a center of revenues between pumps and CGM? Number two, you talked about sort of the pharmacy channel pressure. Any color on how much you'll be decreasing pricing in order to make the patient's channel diagnostic between the two? And number three, can you quantify what is your commercial mix versus government mix in CGM? and diabetes. I have one follow-up question.
spk09: Sure, Peter. This is Jason. I'll start maybe with question one and three. So as you said, Dexcom US is up 17% in the quarter. That is very consistent with our government CGM portfolio. We are also up high teens, you know, exactly in line with what Dexcom is saying. I would tell you that the mix of pump versus CGM of the $146 million of diabetes revenue in Q1 2023, pumps and pump supplies is just a touch over 20% of the portfolio. That's down, obviously, over a prior year due to the $9 million compression that we've experienced. I'm going to take a stab at your second question around really the mix of pharmacy versus the other channels. You know, we still maintain a pharmacy business. We are growing it. You know, for us, it is one, a growth engine, but two, a bit of a mitigation strategy as plans shift to either a dual or a complete pharmacy benefit. You know, that is an option that we leverage to keep the patient on census, to continue taking care of them, and to flip them to their channel of choice to keep them on our census.
spk10: So when someone shifts from a DMV into pharmacy, kind of what is the, you know, economic impact of both revenues and profitability?
spk09: Well, at a patient level or a unit level, if a patient on our census, their plan changes design or policy and they shift 100% to a pharmacy channel, we will work to continue distributing to them on that pharmacy channel. It is at a lower reimbursement rate. I don't know that we'll get into too much detail on that, but it's a patient worth keeping in every sense.
spk10: Okay, and then a follow-up question here, you know, I guess why are you sort of convinced that this shift to pharmacy is done at this point? I think it was literally end of February on my question last quarter that you said you aren't seeing sort of a shift here. So I guess I'm a little confused as to why sort of three days later we have seen such a huge dramatic shift. Thanks so much.
spk09: Yeah, so again, not to confuse against the pump and supplies market, which we're seeing a very, very large channel mix shift on pair shift, you know, due to the dynamics we talked about with insulate tandem and electronic. Now in the CGM space. I would tell you that it is very nuanced, as you might expect, as a plan moves a channel. You know, there are different ways of doing that. Even a 100% move from a medical benefit to a pharmacy benefit, it most often doesn't come without grandfathering in of patients that are already on a medical benefit, so we'll maintain them on census and continue to take care of that patient as the quarters and years go on. Some can switch entirely and deny all claims and essentially block those patients from achieving their CGM through a medical benefit channel. So that's on a full shift. And as you look at the duals, it's even more nuanced. So what percent of patients on a dual benefit or referring providers on a dual benefit will not elect a pharmacy channel and go to a medical benefit channel? That is... We're still getting data on that. It's still early in the switch to dual benefits. And so, you know, to your question on just the unknown and the challenge in predicting, I mean, those are the reasons why. But as we sit here in May, you know, a lot of plan policy or design changes happen effectively January 1st. So we're very comfortable. We have our arms around it for the balance of 2023. Great. Thanks so much.
spk01: And once again, if you would like to ask a question, please press star and 1 on your touchtone phone. We'll take our next question from Joanna Gudjuk with Bank of America.
spk03: Good morning. Thank you so much. So first I guess follow up. So on diabetes, did I hear you say the organic was actually negative in the quarter? And then how does this impact the full year? So I guess previously you kind of lowered the guidance for the full year. So how do you expect this to play out for the full year when it comes to organic look for diabetes?
spk09: Sure, Joanna. So for the pump and supplies business, we said we were down $9 million in the quarter. We are expecting that trend within the pump and pump supplies portfolio to continue. Related to CGM, we do believe we'll maintain about a flat growth profile, inching up in the second half of the year and exiting at mid-single digits. For the end of the year, for the full year guidance, the total diabetes revenue year-over-year, we expect it just about flat.
spk03: Okay, it's applied for the year overall. Okay, and then on this value-based contract that I guess we're going to hear. the specifics, um, sounds like very soon, but, uh, I guess sounds like, uh, you expect this to be actually accretive to EBITDA. So how does it work? Is it kind of bringing, completing your business or is it kind of changing, uh, some of the contracts you have with this particular payer in place? Uh, and can you explain, you know, why do you expect this to be, you know, accretive in year one? I guess when it comes to these value-based care contracts, um, there tends to be, you know, a ramp up time and some investments up front. So just trying to understand, you know, the economics of that contract. Thank you.
spk09: Well, Joanna, you know, any contract, certainly there is ramp up, but when you have a significant one, then you'll get some benefit during the year. And then obviously, you know, next year we'll get the full benefit of that. But so we expect some benefit in the, 2023 with the balance of most of it coming towards the end of the year. But then, of course, in 2024, it will be fully begged.
spk03: I'm sorry. So that is already included in the guidance with your commentary for the full year that you expect this to be a positive contributor in second half?
spk09: Yeah, good question, Joanna. So we have not included the benefit from these wins in our description of believing we will deliver near the lower point of the current range. Also, as we've said, we do believe we have the tools and programs in place to get us back to the midpoint that we are maintaining. Those are two factors. It's the cost benefit that is already in and growing, frankly. And then it's the benefit from these contract wins that, again, we have internal expectations on that. We want to be cautious until all the data exchange is complete and everything's finally announced. But that's really the big tailwind that we believe will get us back to the mid.
spk03: Okay, so the cost cutting and this new contract will, or you would expect to help you get back to the midpoint?
spk10: Yes.
spk03: Okay, thank you.
spk01: And it appears, oh, and we do have one more question. And just as a reminder, if you would like to ask a question, please press star and 1 on your touchtone's note phone now at this time. We'll take our next question from Richard Close with Adult Health.
spk02: Yeah, Richard Close, Canaccord. Steve, good working with you as well. Jason, I was wondering if you can just go over the cost savings and provide a little bit more details as the or on the various levers there and just go over the total savings that you expect. I think you said $40 million in cost savings, $25 million realized this year. And then you said something about a $20 million realized from the stuff you already did. So if you can just go over the puts and takes on that, that would be helpful. Sure, Richard.
spk09: So, yes, the $20 million number of in-year EBITDA has already been achieved. You know, it's been validated, you know, whether that is a, you know, a process or a real estate or a contract or changes in organization, you know, that is all tracked at a very detailed level and has been confirmed as flowing, if you will, in the P&O. So that's already been accomplished. We are still aiming at $10 million annualized and $5 million in-year of the final phase of the program. We'll provide an update on that at the end of next quarter, but we're very confident in achieving the benefit.
spk02: Okay. And then with CapEx, you talked about some – I guess, certain purchases. Yes. Can you just go over the CapEx, how you're thinking about it the rest of the year, please?
spk09: Yes, absolutely. So maintaining guide at 11% of revenue. For Q1, as expected, we're at 12% of company revenue. I will tell you that the nuance of the capital equipment that we're acquiring, there was about a $10 million increase in fixed assets that are not yet in service, but we do expect to have in service soon. Frankly, that was pulling levers to ensure that we're continuing to capture market share within the sleep business. If you adjust for that, you're at a 10.6% of revenue. I'd expect that's going to be the ballpark for Q2. Is that 10.5% to 11% of revenue? And we do think it will dial back to a more normalized 10% of revenue in the second half of the year. So we feel very comfortable at 11% of revenue for the full year. Does that make sense? Yep, yep.
spk02: And then final question, obviously a smaller piece of your business, but on the HME, can you talk a little bit about the, I guess, the year-over-year decline there? I mean, obviously not huge, but anything to call out?
spk09: Yeah, I mean, I'd say that some of this is related to the new sales commissions and programs that we discussed earlier. last quarter as going effective on March 1st. We are making changes and adding commission for e-prescribe and electronic ordering on our DME. The complexity on paper or faxed orders, whether it's wheelchairs, walkers, beds, et cetera, throughout the DME catalog, it's a you know, a substantial cost to work through documentation, pre-author, everything that it takes to qualify that equipment. And, you know, we've demonstrated incredible benefits for just efficiency and cost of obtaining electronic orders through you prescribed for that equipment. We are, you know, essentially spiffing and adding commission for that type of order. So what you're seeing is a profile change at the revenue line. You know, we are maintaining and starting to improve the bottom line from that category.
spk02: Okay. Thank you.
spk01: And once again, if you'd like to ask a question, please press star and one on your touch-tone phone. We will pause for a moment to allow questions to queue. And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.
spk09: Thanks, all. We appreciate everybody's time this morning on the call, and we look forward to continuing accomplishing the tasks ahead of us for the remaining part of this year. And thanks to all. Appreciate it.
spk01: That concludes today's teleconference. Thank you for your participation.
Disclaimer