AdaptHealth Corp. (AHCO) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the AdaptHealth Corp. Fourth Quarter and Full Year 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Chris Joyce. Please go ahead, sir.

Thank you, Kevin. I’d like to welcome everyone to today’s AdaptHealth Corp. conference call for the quarter ended December 31, 2020. Everyone should have received a copy of our earnings release earlier this morning. If not, I’d like to highlight that the earnings release as well as a supplemental slide presentation regarding Q4 2020 results is posted on the Investor Relations section of our website. In a moment, we’ll have some prepared comments from Luke McGee and Steve Griggs, Co-Chief Executive Officers of AdaptHealth; Josh Parnes, President of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. We’ll then open the call for questions. Before we begin, I’d like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2021 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in our annual and quarterly SEC filings. AdaptHealth Corp. should 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 adjusted EBITDA less patient equipment CapEx, all 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 Co-Chief Executive Officer, Luke McGee.

Thanks, Chris, and thanks everyone for joining our call. I’d like to start with a quick thank you to all of our AdaptHealth employees. I continue to be impressed by the heroism of our front-line employees, clinical teams and delivery drivers who have continued to meet the critical needs of our patients in the face of the COVID-19 crisis. Our patient’s home health needs have only grown throughout the duration of 2020. And now that AdaptHealth and AeroCare have combined, we have amplified our ability to empower our patients to live their best lives out of the hospital and in their home. To put that in context, on a combined basis, we provided home medical equipment to more than 43,000 patients with a COVID diagnosis. On top of that, we provided hundreds of ventilators, thousands of oxygen concentrators and hundreds of thousands of pulse oximeters and thermometers to our hospital partners. We, along with our HME peers, were a critical part of the health care system in responding to COVID. Not only did Adapt step up to meet the needs of our patients, payers and referrals throughout 2020, but we did so while delivering record financial results. As Jason will detail later, our full year results beat the high end of our updated guidance that we published in November 2020 across revenue, adjusted EBITDA and adjusted EBITDA less CapEx. We continue to grow our business with accretive acquisitions through the year, including the transformation of acquisition of AeroCare that closed on February 1, 2021. In total, we acquired 22 companies in 2020. As we’ve demonstrated over the past several years, our team has the ability to integrate acquisitions into a cohesive and comprehensive platform to deliver health care in the home. The acquisition of AeroCare will only enhance and accelerate our goals here. Our management teams have shared a common view of success for a long time, a business that is powered by technology, connectivity and ease of doing business with our referring providers, efficient logistics and turnaround times and patient satisfaction with our products and services. We continue to invest in these important areas and the team we’ll talk about progress in our prepared remarks. Following AeroCare closing, we remain focused on strengthening our geographic footprint, product mix and patient access through strategic and accretive acquisitions. In late February, we closed on the acquisition of Allina Health Home Oxygen & Medical Equipment in Minneapolis. And earlier this week, we closed on two other acquisitions, further complementing our existing HME businesses in the Midwest and Southern California. We continue to build out our rapidly growing diabetes supply business to complement the acquisition of Solara last year. We are pleased to announce the acquisition of Louisiana-based diabetes management and supply, a leading supplier of CGM and diabetes management supplies throughout Louisiana and the Southeastern United States. We’ve also added an additional scale with a small acquisition in Upstate New York at the end of 2020. To support our acquisitions with appropriate financing, we’ve been active in the capital markets. We are pleased with the recent success of these activities, including our $500 million unsecured note issuance, our $700 million refinancing of our senior secured credit facilities and our successful $279 million equity raised in January 2021. In total, we expect these acquisitions to deliver $130 million to $150 million of incremental revenue in 2021, and we are increasing our guidance in quarterly. Jason will talk about the components of our guidance later. But for now, I’ll turn the call over to Steve to talk about what we’ve accomplished together in our first 30 days.

Thanks, Luke. I’ll start by acknowledging the tremendous collaboration our teams have demonstrated since meeting each other. Our mentalities are aligned from the beginning. So we are off to a very fast start. From the announcement through the closing date, our teams spent time learning the details of our respective businesses, processes and systems. That was time well spent as a resulted in detailed operating plans to implement best practices, accelerate growth and drive cost savings. Importantly, we remain on track to deliver $50 million in annual run rate synergies. I’ll touch on the progress on the revenue side, and Josh will talk about our cost synergies. Prior to closing, we expected to achieve revenue synergy in a few key areas focused on helping patients stay adherent to their prescribed protocols, ensuring patients get their resupplies they need when they need it and streamlining the revenue cycle. First path here is within our sleep business. The first 90 days of path therapy is critical to patient success. Accordingly, we have significant opportunity to install our combined best practices for patient setup procedures to focus on the first 30 days of therapy. In addition, we are aligning our resources across our sleep coaches and compliance teams to drive increased path appearance for the next 60 days of therapy. We have also sold common reporting and visibility across the enterprise so we make efficient decisions to train and educate our teams to drive improvement. Second is tap resupply. There’s an opportunity to improve patient outcomes by ensuring regular, efficient and dependable resupply. This requires streamlining eligibility requirements through enhanced technology and optimizing shipping costs while ensuring timely delivery. We’re working to install a common platform for our entire company. Third is patient collections. We’re focused on implementing the best practices at the very beginning of the patient setup process to ensure an autopay is enabled and monitored over the RCM life cycle. Many of these revenue projects will take time to materialize, but the hard work is underway to integrate best practices and hardwire or processes. Importantly, while we work on these revenue synergies, we remain focused on winning new business each and every day. Next, we’ll turn to cost synergies. I’ll let Josh discuss the details.

Thanks, Steve. On direct purchasing, we’ve reached agreement with all our major manufacturer partners on new purchasing terms that recognize the enhanced scale of the combined company. We expect these new purchasing terms to combine – to contribute significantly to our $50 million cost synergy target with the majority of these savings already being realized in Q1. Indirect vendor consolidation is also well underway with some early wins in shipping costs, office supplies and insurance. The back-office consolidation will be methodical and should result in elimination of some duplicate roles as our functions get integrated. Although, the geographic footprints of Adapt and AeroCare were largely complimentary, there are dozens of locations with overlap based on our time to deliver to patients. We are already in process of consolidating locations, jobs, vehicles and resources across the country. We have tremendous opportunity for improved efficiency in our centralized business functions, including our revenue cycle, customer service and resupply operations. We are bridging technology and best practice across all areas of our central functions. Finally, our initiatives to advance e-Prescribing continue to yield results. Specifically, our diabetes business is already generating 20% of new starts through our e-Prescribe platform up from 0% at the beginning of the fourth quarter. We have growing demand for e-Prescribe from our referring providers and we’ve made investments in sales training and commission programs to accelerate conversion to this workflow. Overall, we’re extremely pleased with the results and proud of our teams. With that, I’ll turn it over to Jason.

Thanks, Josh. Good morning, and thanks for joining our call. Turning to our results for the fourth quarter of 2020. AdaptHealth generated net revenue $348.4 million, an increase of 133% from the fourth quarter of 2019. Adjusted EBITDA was $79.4 million, an increase of 136% from the fourth quarter of 2019. Adjusted EBITDA less patient equipment CapEx was $58.5 million, an increase of 168% from the fourth quarter of 2019. Our financial results include $14.3 million of funds that we qualified against the provider relief fund reporting update that HHS announced on January 15, 2021. The remaining funds will be returned to the government. As Luke mentioned earlier, we are very proud of our Q4 and full year 2020 results. During a time of tremendous change in our business and an operating environment made more challenging due to the pandemic, we delivered record financial results while also expanding our platform and setting ourselves up for future success. Compared to a year ago, we were a much larger company with an expanded geographic footprint and product reach, including an exciting diabetes business that is well positioned in a fast growing category. For the full year, we closed on 22 acquisitions, which does not include the acquisition of AeroCare that closed in February, 2021. These acquisitions added exposure in high growth HME markets like the Southeast and Southwest provided additional density and geographies in the Northeast and expanded our product portfolio, particularly in supplies and diabetes. While we have a strong M&A pipeline and we’ll continue to assertively deploy capital via acquisition, we remain focused on growing our business organically. On that note, our new start business has rebounded nicely from the pandemic lows in mid-Q2. Specifically, our PAP new start business, which declined more than 30% from pre-pandemic highs in Q2 has nearly reached those pre-pandemic highs. The uptake in COVID cases in December, 2020 and so far in 2021 has slowed down some of that recovery, but we remain confident we will be above high water for new starts for PAP and other HME like wheelchair and walkers by the end of Q1, 2021. Our resupply business has remained steady throughout the pandemic and we are encouraged by continued growth in the CGM resupply business. Lastly, our oxygen business was elevated throughout 2020 with a significant increase in the back half of Q4 and year-to-date 2021. We expect oxygen new starts to remain above pre-pandemic levels for at least the balance of the first quarter. Synthesize all of the trends above and a detailed on the slide in our Q4 2020 earnings supplement, our organic growth for full year 2020 was 8.6%, when including the COVID B2B business and 5.6% when excluding B2B. For the fourth quarter, organic growth was 5.7% when compared to the fourth quarter of 2019, including the COVID B2B business, and 4.9% when excluding B2B. With our PAP census rebuilding after the depressed new starts in mid-year, increase in oxygen business in Q4 and continued market expansion in CGM, we remain confident in our organic growth prospects between 8% and 10% for 2021. With that context on organic growth, I’d like to turn to our guidance for 2021. As announced this morning, we are increasing our 2021 full year guidance for net revenue, adjusted EBITDA and adjusted EBITDA less patient equipment CapEx. Our previous 2021 full year guidance for net revenue was $2.05 billion to $2.20 billion. Adjusted EBITDA was $480 million to $515 million. And adjusted EBITDA less patient equipment CapEx was $300 million to $330 million. As a reminder, the previous guide assumed 11 months of contribution from AeroCare as well as $25 million of in-year synergy delivery. We closed the acquisition on schedule and believe integration is running ahead of plan. As such, our increased guidance assumes $30 million of 2021 synergy realization. Our increased guidance includes a full year of contribution from the DMS acquisition and a partial year contribution from Allina and the other acquisitions Luke mentioned earlier. We expect to be in active acquirer over the coming months and believe acquired revenue on an annualized basis will exceed $200 million in 2021 and including BMS, Allina previously closed and future acquisitions. As a reminder, our guidance does not include any contribution from acquisitions that have not yet been closed. We are guiding to net revenue of $2.18 billion to $2.35 billion, adjusted EBITDA of $510 million to $550 million and adjusted EB less equipment CapEx of $320 million to $350 million. With that, I’ll turn the call back over to Luke.

Thanks, Jason. Before we open the call for questions, I’d like to summarize our key focus areas over the coming quarters. First, we will be focused on the integration of AeroCare and Adapt. We are pleased by progress this far and are running ahead of plan, but we will remain focused on completing the plan. Second, we will continue to find ways to drive organic growth. We will learn from AeroCare best practices and also seek to capitalize on growth opportunities as life returns to a more normal cadence throughout the course of 2021. Third, we plan to pursue additional value creating acquisitions in both HME and diabetes. We believe we are an acquirer of choice with a deep track record of successful integrations. And fourth, we will invest in technology to improve our internal processes, better the patient experience and expand our ability to monitor our patients’ health through connected care. Investment in technology has been a key part of our success to date. We know, there are exciting technology initiatives that will be a key part of our future success. Finally, I’d like to thank all the AdaptHealth employees for their contributions over the past year. They’ve been real heroes in helping our country deal with the COVID-19 pandemic and I’m deeply grateful for all of their efforts. On a personal note, my wife and I are expecting our second child, a little baby girl in the next few days. With her arrival, I planned to take a family leave to spend time with her, my son and my wife. I am fully confident that Steve, Josh and Jason will drive Adapt forward during my absence. Operator, please open up the lines for questions.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Brian Tanquilut from Jefferies. Your line is now live.

Hey, good morning guys. Congrats and Luke congrats on the upcoming baby. I guess my first question, obviously, during the quarter, there were a lot of investor concerns or questions about the stories. I figured I’d hit some of those. Volumes were strong during the quarter, but there were questions about whether COVID was impacting from a mortality perspective. Is that an issue that you’re seeing? And then I guess on the flip side, what are you seeing on oxygen as a result of COVID. And so just broadly speaking, just kind like their growth outlook, given all the noise around happening right now.

Yes. So we’ve been pretty consistent that we haven’t seen the crossover between [indiscernible] renal patients and having mortality in our patient base, there just really isn’t much correlation. As a reminder, most of our patients have chronic diseases are in the home. And so we haven’t seen increased mortality sort of whatsoever across our patient base. What I’d say is, what we have seen, particularly in the last 90 to 120 days, is a big influx of oxygen prescribing related to, yes, COVID. But as Steve, Greg and I’ve discussed, it’s not just actually COVID diagnosis. It’s patients who are stage 1, stage 2 COPD ERS who were just more cognizant of their respiratory issues and going in and getting sort of diagnosed with the need or prescribes the need for oxygen. So we think that, that’s a very, very nice tailwind for us. Our census has built pretty materially in the last 90 days. And also the cadence of oxygen new frontload, the CapEx cost also frontload, the operating costs to get the patient set up and you kind of reap what you – your harvest as the patient stays on oxygen longer. Outside of oxygen, really across all of our key products, we saw a pretty straight-line rebound, and this is true at Adapt and AeroCare from June until early November. From then, we’ve seen it kind of flatline a little bit as you’ve seen the sort of second wave or third wave, whatever you want to call it of COVID. And so we’re – for PAP, we’re not quite at pre-pandemic levels. We’re getting close for some categories like beds, we’re back above pre-pandemic levels and wheelchairs within a couple of points. But particularly the way we sort of see the vaccines rolling out, we’re pretty sure that we’ll be above pre-pandemic levels sort of at the end of Q1 for almost – probably all of our key products will have the benefit of the oxygen census. And so we’re pretty excited about the growth 2021.

That’s awesome. And then, Luke, diabetes is another area that people have been focused on in the last few weeks. So if you don’t mind just reminding us the strategy when you decided to go into diabetes, number one. And then I know you have long-term growth guidance for diabetes or for CGM as a group. So what is the assumption that you’re embedding in that in terms of the PBM or the pharmacy shift that’s happening within the CGM space?

Yes. When we acquired Solara, it was about adding sort of another product category that felt like was in our wheelhouse. It’s a very similar patient base. There’s actually quite a bit of comorbidity between the diabetic patient and a lot of our patients. The resupply cadence is very similar to our PAP resupply business. And so we thought that we could use similar technology, similar processes. And I think we’ve been right about that. Certainly, the headwind that people talk about in advanced diabetes is a shift to the pharmacy benefit. We’re not seeing it in our numbers. That’s not to suggest there aren’t more plans that are opening up a pharmacy benefit. We certainly see that. But in terms of the new setups that we’re seeing, and I remind our business is about 90% medical benefit, 10% pharmacy, we are in network with all the big PBMs we can service the pharmacy benefit. But we’re just seeing spectacular growth on a unit basis. You’re seeing pricing normalize. There has been some compression. But the unit growth is more than surpassing any for pricing headwind that’s happened here. And so we look across all of the diabetes business. I think we bought five diabetes business now, and we’re working to get them all sort of integrated into a coherent platform. They’re already all on Brightree. Then the unit growth is, I think when we look at Q4 to Q4, it was well in excess of 50% year-over-year unit growth across all of those businesses. And so we are very excited about the growth in our advanced diabetes business. We really haven’t scratched the surface yet about co-marketing and using our sales force that has sold to things like our people, prescribers like PCPs. AeroCare just has a fantastic footprint in that market. So we think that there’s actually a lot more upside in our diabetes business. We haven’t done as many insulin pumps as we should do. We’ve just started to roll out a bigger focus that in Q1 2021. The e-Prescribing trends, which Josh mentioned, have been fantastic from a standing start team up to 20% of our new starts now being e-Prescribed. It just – it shortens the turnaround time, and we actually think kind of narrows the difference in-patient experience between a pharmacy and medical benefit. So that’s a long answer saying, we’re still really excited about diabetes business. In our guidance, we assume 10% to 15%. It contributes to that 8% to 10% target. That is certainly conservative to the unit trend and even the net revenue trends that we are seeing. And so we’re excited about that base.

That’s awesome. And then third question for me, Luke. Emerging technology and sleep. Obviously, there’s inspired medical there and then apnea med is something that people are talking about. How are you thinking about, how your business could change as these sleep developments occur?

Yes. In general, Steve can hop in here if he has anything to add. I mean, more awareness of sleep hygiene and the need for sleep, you see across sort of whether it be in the venture space or in sort of the more traditional medical space, the importance of sleep to overall health, we think is a great trend for us. And something like Inspire, that’s a surgical procedure. We still think most patients are going to start on PAP, and it’s a tough therapy for some folks. And if they can’t make it on PAP, we want them to have other options. We want to make sure that we’re helping our patients live the best life. And if that’s a surgical alternative like Inspire, where we don’t participate financially, that’s just fine because more people being aware of sleep apnea, more people being – taking sleep test, whether it be in lab or at home, likely means growth in our business even if Inspire grows as well. I mean, Steve, do you have anything to add there?

Yes. PAP therapy is still the mode of choice, and it’s going to be that way for a long, long, long time. Maybe those surgical procedures get really, really fine tune. We’ve had the same thing with dental appliances that some patients prefer and that kind of stuff. But again, I think the awareness of sleep is only going to help us not just in the short-term, but in the long-term. So these procedures will be for a small select portion of the patients, but the vast, vast majority of patients will be on the traditional PAP therapy through a CPAP or bi PAP machine.

Got it. And then last question for me, Luke. The comp bidding rates were released by CMS, even though comp bidding obviously does not happen. How are you reading into that? Or how should we read into what the comp bid rates came out as?

Yes. So I mean, I think it’s tough to read too much into – obviously, CMS came out when they postponed this rounded provided bidding, and so they weren’t going to get any savings. I think the rates that were released that probably six, eight weeks at this point sort of proved that out in across almost every product category, which we had predicted some of this. Rates were going to go up because there’s been a lessening of the number of providers. The existing rates across some product categories are certainly – have – a lot of people won’t do the products that walk their wheelchair beds. And so rates are going to go up. Now there are certainly some anomalies. Oxygen would have been up like 100%, I think, in Chicago and Miami. And that, I would acknowledge, is probably directly related to moving to our clearing price versus a median. But I think the key takeaway is rate was going to go up. And I’d also remind you, I believe when OMV had scored the new competitive bid program, they had actually anticipated rates going up. And so it will be interesting to see – we’re going to stay in touch with CMS about whether they’re going to pursue the program in 2024 and changes they’ll make. But I think that, in general, it sort of validated our belief that across most of our product categories, we are at sort of a rate bottom. And if anything, there’s probably some slight rate inflation to come.

Awesome. Thanks, again. Congrats.

Thanks, Brian.

Thanks. Our next question today is coming from Pito Chickering from Deutsche Bank. Your line is now live.

Good morning, guys. Thanks for taking my questions and nice quarter. A couple of quick ones here. On the 2021 guidance raise, you talked about the 8% to 10% organic growth rate. So just a double check, is the guidance rate solely coming from M&A done since your last guidance?

So on the revenue side, we didn’t change any revenue. So that would be – the revenue raise is related to the acquisitions, the adjusted EBITDA and adjusted EBITDA less patient CapEx. We have moved forward some of the synergy guidance. At this point, we haven’t raised what we think the full total will be. We’ll certainly comment on that probably when we release Q1 earnings and we have a better sense. But we do have visibility. We were able to sort of realize some of the cost synergies faster than we anticipated. So $5 million of the updated sort of guidance relates to the acceleration of synergies.

Okay, got it. And as you bridge the fourth quarter, the organic revenues to your 2021 guidance, can you give us some color on the organic revenue growth from sleep and diabetes, what you saw in the fourth quarter? And has it changed at all on your sort of 2021 guidance one way or another?

Yes. So – and Jason, you can hop in here if you want to clarify me. In Q4, sleep was not a contributor to organic growth just basically because so much of our sleep revenue is from the rentals. We saw continued depressed census in Q4, and so my guess is that sleep was probably a zero contributor organic growth in Q4 just because we’re still working through the depressed census. We should come out of that in Q1, so the back half of Q1 and into Q2. And so for the guide, we think sleep is back to normal, to be honest. That’s what we’re seeing in the new start trends. In diabetes, yes, diabetes, we beat our internal plan on the top line in Q4. Q4 does – because of deductible resets, it tends to be sort of heavier compared to the other quarters, particularly December. We’ll continue to monitor diabetes. And if we have to raise guidance because diabetes continues to outperform, we’ll do that. Right now, we still feel pretty good with that 10% to 15% contribution right now for the full year 2021.

Okay. There obviously was a lot of concern around the COVID spike in January and February. It’s hard to look at your seasonality of the business due to the amount of M&A you’ve done over the last couple of years. Is there anything guys can give us some color on sort of what – in the general range of what percent of your annual EBITDA actually coming in the first quarter just so we don’t – the models can catch appropriately?

Yes. And so I think that the business isn’t very seasonal. There is some seasonal effect. First quarter tends to be the weakest quarter just as deductibles reset, some resupply doesn’t get ordered. We are a little bit more conservative in revenue recognition, making sure that we’re reserving appropriately on bad debt because we know we’ll have more patients deductible and more patient co-pay. But I would say if you looked at sort of $100 of earnings through the year, you’re going to – 55% of that is going to be weighted to the back half of the year with Q4 being the biggest contributor because of the resupply ordering in PAP and diabetes. 45% would come Q1, Q2 and probably just a little bit more in Q2 than Q1. Hopefully, that helps, Pito.

Okay, great. And then last quick one here. The consideration of the common shares liability. Will that create more dilution than you’re thinking original? Can you just walk us through how that impacts dilution, if it does? Thank you so much.

Yes. God bless the accountant on this one. No, listen, it’s the same amount of dilution. It was 3 million shares, 1 million was earned as we expected based on the stock price being above $15 at the end of the year. Nothing has changed from the business perspective. And again, Jason can hop in here if he wants to correct me. This is just related to some updated guidance. Yes, as you put out a comment letter for another SPAC, as everybody knows, just a tremendous amount of focus on SPACs and with the SEC sort of focusing more on some of the accounting. It’s just some clarification, no more dilution whatsoever. Based on where the stock price is, we expect those additional 2 million shares to be kind of earned when we’re in an EPS positive position, which we would have been bought for this sort of accounting, nonsense, if you will, the accounting implication. It’s already been factored into our diluted share count. So Jason, if you want to add anything, go ahead.

No, I don’t have anything to add to that, Luke.

Great. Thank you so much, guys.

Thank you. Our next question is coming from Whit Mayo from UBS. Your line is now live.

Hey, thanks. I wanted to go back to the manufacturing and contract savings opportunity. I think Steve talked mostly about this. It sounds like you guys are finding some opportunities maybe above and beyond what you had previously contemplated or at least communicated. Any way maybe to frame that? I would think you guys have pretty good line of sight into where you could be tracking at this point?

Yes. So Steve and I both took the lead on that part of the synergy realization efforts, and so I think the recognition of accelerating and moving $5 million in the fiscal 2021. The right mission that we just – we did it earlier than we thought. The quantums are probably a little bit higher than we expected, but it’s still a little bit early when I see invoices come through. We want to make sure we didn’t miss anything. As I said, I think we’ll be back to investors in two months when we release Q1. But yes, we’re pretty happy with the way sort of the manufacturer negotiations turned out. They’ve been great partners to us. They’re supporting us. We’re making sure it’s not just a price discussion, but we’re ordering in ways that they can fulfill more efficiently. Steve, do you want to add anything there.

I think that’s right. As those contracts come up, those pricings will come through for us. And a lot of it’s based, on Luke alluded to it, our purchasing patterns and processes. And so I think all that’s hedged in a perfect direction. So we’re very comfortable with the $15 million.

Okay. So if I circle the $5 million that you’re moving forward in the guide, that’s primarily from the manufacturing contract opportunity?

Yes. So I think you could – it would be fair to say that’s exclusively related to us, just hitting that ahead of time.

Other question I had, there’s some very well-documented supply challenges that the industry is seeing across oxygen. And I’m just sort of curious as you look at what’s happening in the market. What does this mean for you? Is this an opportunity? I feel like it should be a little bit of an opportunity, but kind of how you’ve responded and what you’re seeing.

Yes. I mean, oxygen was hard to buy in the fourth quarter concentrators. I mean, it all goes back to – I think you can trace a pretty direct line to competitive bidding, pushing the price for oxygen. So down, so far that the provider community wasn’t buying as much of it, and then the manufacturers sort of reduce their capacity. And so when we have this pandemic in the spike, there’s just a global shortage. I think to Steve and the AeroCare’s team credit, they built inventory throughout the year, smartly thinking ahead to what could happen if there was a big spike. Adapt had done some of that, not to the same quantum of AeroCare. But we were able to utilize some of those supply sort of excesses to make sure we met demand. I mean, new starts were up almost 100% at sort of during certain weeks in December and January. And so there was this shock to the system. We did not have to – we never turned anybody down. We were able to get product. In fact, we were actually – we had some emergency calls from a very well-known hospital system in California, looking for concentrators. We were able to make good on that and deliver that for them. The O2 shock has subsided a bit. There’s still backlog for the manufacturers, but we feel like we have sufficient inventory to meet all the needs. We’ve met every single need that’s been asked of us. And we’ve actually been able to help not only from health systems, but even some smaller competitors who call looking to buy sort of wholesale oxygen. We’re able – I think we were able to get 50 concentrators to a small supplier in need last week.

That’s helpful. One last one for me. Just Solara and active style, I think the old target was $55 million, including $7 million of synergies. Is that number moved at all? And that’s all I got. Thanks.

I think, to be honest, we’ve been very focused on the diabetes business and adding to it, and so it’s hard to think about that number now. You got to stack on all the acquisitions. What I can comment is active style is running absolutely at plan. Solara and our diabetes business, we’re actually probably more excited about now than we bought Solara. And so not mentioned not to answer your question, it’s just – I think particularly for the Solara, we now have to look at it on a combined basis with the SCM, with Pinnacle, with the PCS diabetes business that we inherited from McKesson. But we are very excited about diabetes.

Okay. At least in line with plan, if not ahead. I appreciate it guys. Thanks.

Thank you. Our next question today is coming from Matthew Blackman from Stifel. Your line is now live.

Good morning, everyone and congrats on a solid end of the year. Maybe just start, Steve, how quickly do you think you can realize some of the AeroCare revenue synergies you highlighted? Clearly, work is underway. I appreciate there’s still work to be done, as you mentioned. But could we see any of these revenue synergies start to play out in the back half of 2021? Or is that more of a 2022 and beyond event? And then I have a couple of follow-ups.

You will certainly see some of that happen in the back half of 2020, 2021. We’re proceeding along right now. And so they just grow slowly, but it’s all incremental as you add patients on type of patients on the rental base. So I think by the end of second half of 2021, we should be seeing some nice contributions from all those efforts.

Okay, I appreciate that. One for Jason, I just want to clarify, so the entirety of the revenue guidance range lift is driven by the new M&A, but the raise on EBITDA is entirely from the faster realization of some of those cost synergies. What does that say about the opportunity in some of these businesses that you’ve acquired to drive margins higher? Is that – I guess it would just sort of imply that those are sub-corporate type margin businesses. Any help there as we think about the contribution from EBITDA from some of these new acquisitions? And then one final question after that for Luke.

Yes. Sure, sure, Matt. So on the revenue side, I mean you’ve got that right. I mean, we increased the organic growth in the revenue guide when we came out with the Aero announcement in late 2020. So no real change there, just kind of confirming evidence that we feel rock-solid about our organic growth. To your point, the increased revenue is from the acquisitions mentioned by Luke that we’re very excited about. I think when you run the math, take out the $5 million of increase in your synergy, I think what you’re getting at is really just a ramp in some of these businesses. I mean these are very recently acquired businesses. I mean, some synergy and scale, we get out of the gate, such as some of the vendor negotiation that we’ve talked about. Some just has a longer tail, kind of labor cost-outs and things like that coming downstream as well as like revenue synergies, the things that Steve is talking about in those programs. I mean, those things really have a longer tail, and that’s the reason you’re seeing the margin profile difference.

Okay. Makes sense. And then final question for Luke, a bigger picture question. Do you feel like you have the scale and the assets now to more aggressively pursue, let’s call it, the connected care strategy you’ve talked in the past? If not, what else might you need? And how do we think about when these initiatives might be potentially visible incremental contributors to growth?

Yes. No, I don’t think we’re lacking in scale to go tackle this. I mean we launched a pilot sort of this quarter with a portion of our diabetes population to do more than just sort of deliver them product to give them sort of more technology to be able to manage their disease. It’s just so early in that. I mean I think that admittedly, there’s – we have a lot to do on the technology side, which is all exciting, which will all sort of create future value, and connected care is on that. I would hope that if this pilot goes well, then we can expand it in a bigger way later this year. We’re also – we’re going to make some hires on the connected share side. I think what we’re finding is – and it’s a good problem to have, is there so many opportunities that like we have to sort of start prioritizing them. And on connected care, we remain as bullish as we’ve ever been. We are sort of in these patients’ homes. We are helping patients care with their chronic diseases. And so long way to say, we launched a pilot this quarter. Yes, we will continue and may have an update on that sort of next quarter as we start to see results. I don’t expect it to be a financial contributor at all in 2021. Hopefully, we start to see some impacts in 2022 with the caveat it may not be explicit contribution from a connected care revenue line. It may just be enhanced volumes, right. If we can differentiate ourselves, we already think we’re differentiated from our peers. We offer a better customer experience. We sort of have led with technology, both internally and externally on things like e-prescribing. And it may be that we go to a health plan and offer connected care as part of the bundled offering just to get more volume.

All right, makes sense. Really appreciate it. Thanks so much.

Thank you. Our next question today is coming from Anton Hie from RBC Capital Markets. Your line is now live.

Thanks. I just want to add my congrats to the team and to Luke on the family news. Just a couple left here. One, on competitive bidding, obviously, that probably changes the dynamic for a lot of the kind of downstream operators. Have you seen that affect your M&A pipeline at all? It doesn’t sound like what you’ve been able to execute on, but just if you could get some color there.

Yes. No, I mean we see a great – we have a really, really good pipeline. Obviously, we’ve been active as we foreshadow a little bit. Last time we spoke to investors with both Adapt and AeroCare having deep pipelines. Now if anything we’re seeing lots and lots of opportunity out there. We get asked questions, well, isn’t it more competitive? Do you have other competitors who are more well funded now? Does that mean it’s going to be hard to do M&A? And I think the answer is, we don’t feel that way whatsoever. We have a great pipeline. We will remain disciplined to make sure that these acquisitions are, most importantly, value contributing and value creating. Financially accretive is nice as well. And as I said, we have a track record of being very disciplined on that. But we’re really excited. I mean I will say just a shot out to the AeroCare team. They do a really good job on integration, too. Dan Bunting, our COO of Branch Operations, is great on the integration side for acquisitions. And so I think you’re going to continue to see us be acquisitive throughout the year.

Okay. And Luke, earlier in the previous question, you talked about the dynamic between diabetes patient growth and unit growth versus pricing. Can you give a little bit of color what’s going on there?

Yes. So it’s still so nearly in the grand scheme of the diabetes – advanced diabetes, primarily CGM has really – was approved by Medicare, I believe in 2017 for reimbursement. And so what you’re seeing is there’s been some shift to a pharmacy channel, which we acknowledge, and it hasn’t at all slowed our top line growth numbers. We’ve seen some payers switch to did the Medicare payment methodology, not necessarily the rate, but the K codes versus A code. And so we continue to see this as we’ve been underwriting these acquisitions. We’re underwriting kind of gross margin settling in the low 30s range, which is, we think, completely appropriate for the category. And so nothing that we’re concerned about whatsoever and I think we’re just – we’re really excited because we’re still early in the compounding of the census, which is because a lot of people who are coming on CGM are still new to the therapy. We think that there’s going to be pretty long length of stay on this therapy, which means that not only are we seeing kind of growth in new starts, but we are seeing compounding in the census, which should persist for years. I mean it’s – we’re really excited about diabetes.

Okay. And then final one for me. I know Texas and Tennessee were a couple of AeroCare’s strongest organic growth states. Can you talk a little bit about some of the disruptions you may have experienced there with the winter storms we’ve had in the past couple of weeks? Thanks.

Sure, I’ll let Steve handle that one.

Yes. I mean, certainly, the storms that came through Texas disrupted our – it ran up our costs to take care of patients, to get oxygen to them and stuff like that. And certainly, our new starts for that 1.5 weeks declined dramatically. But all those patients that could have been started in those 1.5 weeks will get started. Over the next two to three, four weeks, such just a delay in new revenues, but the recurring revenue hasn’t really changed. So our Texas operations will report just fine results. Expenses will be up a little bit, but insignificant, and they’ll be bounced back in March very nicely. Same in Tennessee. So for the quarter, our operations won’t be affected by it. Maybe February will be a little bit heavy on expenses, and March will be a little bit heavier on revenue.

Thanks, Steve.

Thank you. Our next question is coming from Eric Coldwell from Baird. Your line is now live.

Thanks very much. The age old question when 2020 in front of you is do you bow out gracefully or you make something up, but I guess I’ll squeeze in a couple here. First one, Luke, you mentioned the combination synergies. There would be – obviously, you guys have hundreds of facilities around the country. I think I heard you say you had the potential to consolidate a number in the dozens. I was hoping to get a finer point on that, specifically what kind of facilities might be consolidated. And what the – when you look at your $50 million synergy goal, how much of that actually comes from rent, real estate, facility management, things for that sort.

Yes. And so I’ll answer the last question first. I mean it’s not a big number. It’s a couple of million bucks maybe. I mean most – we don’t – we have 500 combined our finding – cost combined locations. Most of these are a couple of hundred – a couple of thousand square feet. These aren’t big leases. We generally kept lease terms pretty short, three to five years is our preferred, if not near – sort of month-to-month or year-to-year. I think – and Josh, you can hop in here. But I think it’s about 75 facilities that we identified were close enough to each other. I think it’s also important to know. I mean, the 75, yes, we can close one location. But like in every market, and maybe Steve can comment on this, every market, we’re not looking to kind of cut costs on the sales side and the customer service side. We want to – there’s so much business for us to go out and get. So yes, there is the rent savings there might be an actual delivery truck. You get some utility savings. But in these markets, I mean we’re actually – we want to sort of reinvest in growth. We’re going to deliver that $50 million cost synergy number. It’s just not a big number that comes from the branch consolidation. Josh and Steve, do you guys want to hop in there?

Yes, I agree with that. I think it’s more than what we would initially have thought. Just in terms of considering our locations are pretty much complementary that we did have some locations that could be consolidated. But even when we consolidate locations and the rent, obviously, the big drivers, the labor expense and the vehicle expense and the delivery expense. And since we’re reinvesting in kind of organic growth, foundational things, we’re putting some of those dollars back to help us grow. So it’s going to be a nice number, but it’s not going to be the big driver of our synergy case.

I appreciate those comments. And I just – I had one other one, a little – again, a little off the beaten path today. But Luke, you reminded me of something when you talked about Q1 seasonality and how you maybe reserve a bit more just to be cautious going into the year. I’ve always thought of a longer-term opportunity with Adapt being the ability to improve upon your bad debt profile, collectibility. The flip side is you’re growing so fast you have to focus where you have to focus, and maybe that wasn’t the biggest focus in the past. I am curious where you stand on collections and bad debt and what initiatives may be underway with AeroCare and other acquisitions that you’re doing to improve upon historic trend because, again, I always felt like there was maybe two or three points of opportunity there for you.

Listen, I think we would agree with you that there is definitely some upside, and I’m going to let Steve talk about some of the numbers of specifics. I think you can get some data points on new patient pay setups. Because really, a lot of our – there’s two things. One is just having better processes. When you drop a claim and make sure the other right insurance on file, you’re not oversupplying versus quantity, and that’s more on the commercial insurance reimbursement. And we’re going to get – we have gotten better at that, and we continue to put better systems in place. But then it’s about to pay new patient setup because if you can educate the patient appropriately about their deductible and their co-pay and how they’re going to need to have a card on file with us, it’s a big opportunity. AeroCare did a better job, and so I’ll let Steve talk about some of the trends you are seeing real quantitative evidence that we’re getting better sort of month-over-month.

Yes. There’s no question that we’re making great improvements in patient pay in particular. So now the policy is for the combined company. When a patient comes in – comes on to service, one of the first conversations is the financial responsibility. So right away, we’re making decisions on what we have to do with that patient if there is a reduced waiver or anything like that, if there’s financial need and all those things that we have to go to right at the beginning. So as of today, over 80%-plus of new starts that have a co-private pay attachment to it, 80% of those or being over 80% are being put on a credit card for auto pay. That’s a big, big deal. And now that will take time to work its way through the process, but we’re up to the mid-30s of all of our bills going out from the Adapt side, going out on – for auto pay, for credit card, that number is in the mid-60s for AeroCare. So you’ll see those get closer and closer as the year goes on as those new starts come in there and that 80%, 80%-plus come and keep adding up in there. So you’ll see that narrowing, which just continues to improve the patient pay side of it. But in addition, Luke mentioned, the RCM function that Adapt has pretty superior – it was superior to AeroCare’s and the identification of the right – getting the right payment mechanism, the right authorization, the right reauthorization, and those processes are superior. So we’re implementing those, which is going to help our collection percentage on the insurance basis. And so those combination of those two, I think, will have significant effect. But again, it’s a building thing. So really in 2022, you should see increased percent or lower percentage of bad debt and increased collection percentage.

Thanks very much, guys. I appreciate it. Congrats on the performance.

Thanks, Eric.

Thank you. Our next question today is coming from Richard Close from Canaccord Genuity. Your line is now live.

Great. Congratulations. Thanks for the questions. Mine is primarily some housekeeping. Jason, I was wondering on the 2021 guidance, just to be clear, based on Steve’s comments earlier on revenue synergies and I guess to the last question here, does the 2021 guidance include any of the revenue synergies? Or should we think of that as potential upside?

It does not include any revenue synergy. Over the course of the year, as we get the visibility, I mean we’ll talk about that. I mean if there’s confirmed synergy to be had, we’ll make those adjustments as the year goes on. So in this guide, it does not include any revenue synergy.

Okay, great. And then, Jason, I guess, again on the guidance, I think Luke referenced $130 million to $150 million in terms of the acquisitions that were completed already for the 2021. And then in your comments, you talked something about $200 million number. What’s the difference in those two? If you could just clarify that?

Sure. Yes, sure, Richard. The difference is in the $130 million to $150 million, those are acquisitions that have closed. They’re part of AdaptHealth today, and we include them in our guide as such. The $200 million is really – we’re working to give some visibility to expectations for acquisitions. None of that is included other than $130 million to $150 million that is already part of AdaptHealth.

Okay, great. Thank you. Congratulations again.

Thanks, Richard.

Thank you. [Operator Instructions] Our next question is coming from Kevin Fischbeck from Bank of America. Your line is now live.

Great, thanks. I guess just a couple of modeling questions. First, is there any cares money in your guidance? Second, how should we think about taxes for 2021?

Hey Kevin, it’s Jason. So no, there are no care funds in the guidance. What we reported this morning was that we qualified $14.3 million of those funds from the provider relief fund. So we’ve recognized that in the fourth quarter, and there are no funds included in the guide. In terms of tax, we’re projecting to be probably a mid-20% taxpayer once we cross that bridge. But we – based on what we reported for Q4 and the impact from the contingent shares, we won’t have that impact.

Okay. That’s helpful. And then I guess, I just want to get a little bit more color on the – how to think about the growth rate of 8% to 10% because this year is going to be a little bit of a lanky year given all the comp issues. It sounds like you’d probably be below that in Q1, but then maybe well above that in Q2 just because of the comp we’re going against. I mean how do we think about 8% to 10%? 8% for the year, is that your exit rate kind of back half of the year, your thoughts there.

I would think of it, and Jason, you can hop in. I would think of it as for the full year. To your point, the comp in Q2, it should be easy for us to hit that comp ex B2B if you took out the sort of B2B growth yes, on that and even Q3. And so yes, I would think that Q1 is going to be a little bit harder to put up a big number just because Q1 last year was also strong. You also have the rolling in of AeroCare, and so it is going to be a bit of a lanky year. But I would think of 8% to 10% if you look full year 2021 versus full year 2020, that’s 8% to 10% right reference point.

Okay. And then I guess just last question, it wasn’t 100% clear to me what you were oxygen comment that it wasn’t just COVID, that there was really more COPD patients coming through. Are you – I guess, my expectation was that you would probably see oxygen down this year as COVID. Are you saying that, that is still going to be the case because of underlying demand? Or are you just saying it still might be down, but not – maybe not as much as you would think because a lot of this has been for COPD?

Yes. I think if you think about oxygen is a census-driven business. And so we’ve seen relatively rapid build-up in the census in November, December, January and even into February. So – and probably through Q1. New starts will be elevated, so the census will continue to build. Some of these COVID patients will fall off through the year. And so oxygen revenue in the back half of the year, yes, it’s probably lighter than compared to the first half. But I think the overarching point is the – it’s not just a onetime COVID bump, where all of these – if our census coming into COVID was 100, it’s going to go back to 100. We actually think it’s going to remain elevated partly because a lot of these people who needed oxygen anyway and they just didn’t realize it, they go – they put on a [indiscernible] they tested and on behold their blood start to raise 89 to 90. And Steve, do you want to comment on that at all?

Yes. So there’s two components. One is what are the long-term effects of COVID? And I don’t think we have the answer to that. But we know the solution of that is going to be oxygen. So that will extend the life on service of these patients more than we thought. But in addition to it, when you go out there and you talk to the physicians and the medical community, the attention to COPD and putting patients on oxygen has heightened during this pandemic. The pandemic will, by the government, will go through the full year, I believe and maybe even beyond that. So I think there’s going to be still be a lot of attention on the COPD patient. And so with that, I think there’ll be more early identification of patients than it had been in the past years, and I think there’ll be more scrutiny towards that with these health systems and these doctor groups. So I suspect oxygen will still have a nice growth rate through 2021.

Okay. That’s helpful. Thanks.

Thank you. We reached end of our question-and-answer session. I’d like to turn the floor back over to Luke for any further closing comments.

Thank you, everyone, for participating. We look forward to going out and delivering results and talking to you guys in a few months. Thank you so much.

Thank you.

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.