AdaptHealth Corp.

Good day, everyone, and welcome to today's ADAPT Health second quarter 2023 earnings release. At this time, all participants are on 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 by pressing star 1 on your telephone keypad. Today's speakers will be Richard Barish, Chairman and Interim CEO of ADAPT Health and Jason Clemens, Chief Financial Officer of Adapt Health. Josh Parnas, President of Adapt Health, will join Richard and Jason for the question-answer portion of this call. Before we begin, I'd like to remind everyone that statements included in this conference call and in the press release issued today 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 financial results for 2023 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risks and factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. ADAPT Health Corp should have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will 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 Chairman and Interim CEO of Adapt Health, Richard Barish. Sir?

Good morning, everyone. Thank you for joining us today to discuss Adapt Health second quarter performance. To start our call today, I'd like to take a moment to welcome Crispin Teufel, who will be joining Adapt Health on September 1st as our new chief executive officer. Crispin brings many years of industry experience and a deep understanding of the markets in which we operate. His expertise and proven track record will be key to this organization's future success. We're excited to get him on board and look forward to you getting the chance to meet with him in the coming months. Adapt Health is a full-service nationwide provider of products and services that enable our patients to live their healthiest lives at home and in the community. We have nearly 11,000 employees, including nearly 1,000 healthcare professionals who work to bring these needed products for approximately 4 million patients. We know that we are crucial in the healthcare continuum, especially for post-acute care and management of chronic diseases like diabetes, OSA, and COPD. Most of our devices are connected and generate lots of useful data to help manage these chronic conditions and reduce downstream costs. We are now in the process of figuring out how best to use that connectivity for the benefit of our patients and our payer partners. Turning now to the details of the quarter, I'm pleased to report solid second quarter results driven by strength in our core sleep and respiratory businesses. coupled with sequential improvement in our diabetes business and successful execution of cost savings initiatives. Most notably, our non-acquired revenue grew 8.7% and our adjusted EBITDA increased 14% year over year. We're also quite pleased with our improved cash flow generation in the first half of the year. The highlight of the quarter was continued growth in our sleep and respiratory product lines, which represent more than half of our total revenue. Building on the robust first quarter, these products grew a combined 15% year over year in the second quarter. Grilling down, the performance in our fleet business was driven by strong market demand, both new starts and resupply, as well as our improved ability to service this demand more efficiently. The investments we've made in this business line over the past year are now paying off. We have enough equipment on hand to satisfy demand, and we've improved our processes in new starts, especially in resupply, an area of great strength for Adapt Health. Industry data shows that we are the clear leader in sleep and have gained market share over the past year. Our respiratory line of business had its strongest patient acquisition quarter since the fourth quarter of 2021. We hit our setup expectations and we're starting to see stabilization in the length of time patients are on oxygen events, which had decreased during the pandemic. Now turning to diabetes. After a very disappointing first quarter, we saw a modest rebound in our diabetes business in the second quarter. We acknowledged that we did not react swiftly enough to changing market dynamics and are committed to resuming growth in this crucial market. Over the past three months, we've done a deep dive into all aspects of our diabetes business and have emerged with a solid plan to achieve results that reflect a growing market for diabetes supplies, especially CGMs and pumps. This plan, building on our existing patient census, which is the highest in our history, gives us a solid foundation upon which to grow. I'm going to highlight two specific areas of focus in our plan to regain our momentum. First, we are going to be even more intentional to focus on our government business, where the market for CGMs and pumps is large and growing. We're encouraged by recent decisions by Medicare and other government payers to widen their coverage of CGMs as a result of the emphasis on the medical benefits of compliance. The government market is growing rapidly, and we are generally able to achieve pricing that takes into account inflationary pressures. We've emphasized to our vibrant sales force the importance of government business and have already seen meaningful impact. Government-sponsored payers now represent 77% of our CGM census, an increase of 900 basis points compared to last year and up 200 basis points from the first quarter. We anticipate this trend will continue over the course of the year. As to the commercial business, we plan to update contracts to enable us to increase access to our current and new CGM patients, including through the pharmacy channel. We see this as an essential part of the strategy to offer full and creative solutions for our payer partners and patients. Next, we are employing the scale and capability of the entire ADAPT Health team to rapidly improve the operations of our diabetes business. One example is creating synergy between the HME and diabetes sales forces to take advantage of HME's national reach. Another is to use our world-class HME resupply operation to make it easier and more efficient for our diabetes patients to get their supplies, including through digital reordering. The diabetes line of business is crucial to the growth and strategic success of Adapt Health. Sadly, diabetes continues to grow rapidly in our population, and we intend to expand our reach and services to help our patients manage this chronic disease. More to come on this important topic in future reports. Subsequent to our earnings call in May, we announced a relationship with Humana to become the value-based provider of home medical equipment and supplies to their Medicare Advantage HMO members in 33 states plus the District of Columbia. The program began on July 1, 2023, and we are working hard on the implementation of this transformative arrangement. Based on our patient-focused culture, we've committed to high levels of customer service, which is a sign of the alignment that we've established with Humana. This value-based contract marks a significant step toward highlighting our essential role in keeping our patients healthy in their homes. We think this is an important new area of focus for ADAPT Health, and we intend to pursue other similar arrangements. Like most businesses, we've been affected by increased labor and other costs. We are actively mitigating inflationary factors in several ways. First, as we have done in the past, we are continuing to add and refine technology that reduces the costly administrative friction between our prescribers, patients, and payers. Among the most important KPIs we review each week is the percentage of e-prescribed orders that we process, which has grown meaningfully over the past year. Another tangible result of technology and process improvement is in our RCM function, which, as Jason will describe, has led to significantly reduced DSOs and better collections. Building on these technology improvements, we are also focused on additional cost-saving opportunities. As you know, we were an active acquirer in prior years and are now focused on achieving the scale of a much larger business. As a result of this effort, we are confident that we will achieve the previously announced target of $25 million in cost savings, and we're continuing to examine our operations for areas of further improvement. I'll now turn the call over to Jason Clemens, our CFO, to review the second quarter financials and four-year guidance. Jason?

Thank you, Richard, and thanks to all for joining our call today. I want to reiterate Richard's sentiment about the strength in our core product lines and the opportunities ahead of us in diabetes. Let me begin by reviewing our second quarter results. Our revenue of $793.3 million increased 9.0% and our non-acquired revenue increased 8.7% year over year. Our second quarter results were led by strength in our sleep and respiratory product categories, both of which were up double digits. Taking a closer look at each of these product categories, our total sleep revenue of $303 million increased 16% compared to a year ago, driven by PAP equipment setups and consistent resupply operations. Our PAP equipment patient census grew 41% year-on-year and our resupply orders are up 11%. Respiratory delivered another strong quarter with revenue of $154 million, an increase of 13% year-over-year. As mentioned, this was the strongest quarter of net patient census since the fourth quarter of 2021. Our diabetes revenue was up 2% over the prior year. The 13% year-over-year increase in CGM patient census was just enough to offset the expected decline in pump and pump supply orders. Further, the strength in our government census helped offset the channel mix pressures in our commercial business, which strengthens our foundation for future growth. As we look forward to the second half of the year, we anticipate third quarter year-over-year growth to be in line with the second quarter and the fourth quarter to be somewhat higher. Our adjusted EBITDA was $171 million in the quarter, an increase of 14% compared to a year ago. This reflects an adjusted EBITDA margin of 21.6%, a full-point increase year-over-year primarily attributed to execution of our cost management program. Cash flow from operations in the second quarter was $86.3 million. As expected, Q2 CapEx was 10.4% of revenue compared to 10.6% a year ago and 12% in Q1. For the first half, we generated free cash flow of $54.8 million, which gives us confidence in achieving our full-year goal of between 3% and 4% of revenue. Now turning to the balance sheet, We ended the second quarter with $45.1 million in cash. ESOs of 41.2 days are trending in the right direction compared to 45.4 days a year ago and 42.7 days last quarter. We expect ESOs to remain at this level in the second half as we fully realize the benefits of refining our revenue cycle process and investments we've made in our technology and workflow. Our net leverage ratio at the end of the quarter was 3.54 times, down from 3.63 times at the end of the first quarter. We were very pleased with Q2 results, but there is still a gap to make up from Q1 expectations, so we are updating full-year revenue and adjusted EBITDA guidance as follows. Revenue of $3.16 to $3.20 billion. adjusted EBITDA of $650 to $680 million. We are maintaining our expectations for total capex between 10% and 12% of revenue and free cash flow between 3% and 4% of revenue. I would like to provide a little insight into the assumptions that support our guidance. We expect Q3 revenue to increase just over 5.0% year over year. Keep in mind that Q3 2022 is a tougher comparable period as the PAP equipment supply chain eased considerably in the second half of 2022. We expect Q3 adjusted EBITDA margin to be in line with Q2. In terms of free cash flow, we continue to expect the third quarter to contribute modestly and the rest of our projected free cash flow will come in the fourth quarter. We are making steady progress and we're pleased with where we stand today. We look forward to providing updates on our operational improvements and our Humana agreement as it ramps up in the second half of the year. With that, we will open the call for questions. Operator?