Good day, everyone and welcome to today's AdaptHealth 1Q 2023 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. [Operator Instructions]. Please note this call may be recorded. [Operator Instructions]. It is now my pleasure to turn the conference over to Chris Joyce, General Counsel.

Thank you, operator. I'd like to welcome everyone to today's AdaptHealth 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 Barasch, Chair of AdaptHealth; Steve Griggs, Chief Executive Officer of AdaptHealth; Josh Parnes, President of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. 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. AdaptHealth 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 AdaptHealth's Board of Directors, Richard Barasch.

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 AdaptHealth as of June 30, 2023. He will be leaving the company in sound financial condition and much improved operational shape. Further, AdaptHealth 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 AdaptHealth to help build a market-leading provider of sleep, diabetes, respiratory and other healthcare solutions. As CEO, he has led the company through the successful integration of AdaptHealth and AeroCare overseeing more than two dozen acquisitions and helped us navigate the challenges of COVID-19 and the CPAP shortage resulting from the Philips recall. The Board has begun an extensive search process and so far has been quite pleased with the quality of the candidates to become CEO. 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.

Good morning, and thank you for joining our call. AdaptHealth 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 segments. In March, our PAP setups were more than 50% higher than at any time during -- prior to the commencement of the Philips recall. Our census of PAP renal 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 continued 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 an 8.3% increase in the past 12…

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 some 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 application, 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 health care costs and bridging of the gaps in care that frequently incur in the populations we serve. The next phase of the development of myApp will focus on our sleep and oxygen populations where real-time data will enable Adapt to continue and 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. Good morning and thank you for joining our call. For the quarter ended March 31, 2023 AdaptHealth 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. 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 continue 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…

Thanks Jason. I'll wrap up by underscoring our team's high level of confidence that AdaptHealth 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 AdaptHealth, it certainly has been my closure 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 would like to open the lines for Q&A.

Thank you. [Operator Instructions] And we'll take our first question from Brian Tanquilut with Jefferies.

Hey. Good morning. Steve thanks for working with all the time that we work together. Good luck with the next move. I guess my first question as I think about the guidance and all the moving parts here right? I appreciate like where you're coming from as you look at the cost cuts. But on the revenue side, maybe I'll start there. What gives you confidence that 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 maintaining any guidance ranges for the year?

Yes. Hey Brian, Steve. 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 pharmacy as we indicated, and it happened much quicker with the advent of a few more products, particularly for manufacturers. So, we went from an organization in diabetes posting double-digit growth to negative growth. That obviously has 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 differs. It differs in process, differs in products and differs in costs, which are all net positives for us. So going forward, we should look at sequential improvement in the diabetes business. We're pretty 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, the questions we ask ourselves, is it fully into the Q1 numbers? And we believe so that materially so. So we shouldn't see any more degradation from that pharmacy shift. People that have shifted have already shifted. And so there's just not that many more that can shift over there. All of the government products, products that we need to be looking for, certainly they're very profitable on the way we do it and so we'll be a more government-centric business. And then so do we think we'll have sequential growth? Absolutely. We'll grow in the government products to be offset a little bit by some continued pharmacy shift. But again most of it is done and offset a little bit by some pump business. But again, the pump business is now such a small part of the business, so it shouldn't have a material effect. So, well we look for the diabetes is increased revenue and improvement in margins. And I think that's the main issue with guidance going forward that if we solve that should be handled nicely. Jason, do you want to add to that?

Yes. Thanks, Steve. Brian to your question -- your second question on guidance and assumptions. We're expecting Q2 to hold the same trends frankly across all product categories by including diabetes for the second quarter. So, we do expect pumps to be down, pumping-related supplies to be down in that $9 million ballpark, that it was down in Q1. Based on what we are observing from the market, 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 is saying. We expect Tandem Medtronic the other pump manufacturers to continue on their trend lines 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 single -- 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, 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 here? And just any details that you can share with us in terms of how that works? And how do you see that driving growth for you guys going forward?

Well, 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 will give us some advantages in marketing the other products for those companies. So yes, I mean it's very, very significant. It's back part of the biggest contract that we have ever even come close to the landing. So, we're very, very excited, but the team has done an incredible job and more to follow as we're able to announce it shortly.

Awesome. Thank you.

And we'll take our next question from Kevin Caliendo with UBS.

Hi. Thanks for taking my question. I want to talk a little bit about the cash flows. Originally, I think Jason had said that, 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. And while the cash flow was strong in the quarter there was -- it looked like, a big benefit on the liabilities line that changed. If you can maybe explain, a little bit of that to start with.

Sure, Kevin. This is Jason. Just one maybe misinterpretation of use of cash. I think you had mentioned, 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 orders, as we deem appropriate at that time. I would say in terms of the Q1 timing benefit, I described in our prepared remarks, 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. Turning to the other elements of working capital. Really, 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 onetime benefit of essentially that cash plot, that cash through 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 Q1. So this is just timing. We still believe in our original expectation of delivering between $15 million and $20 million of free cash flow, in the first half of this year.

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, what you wanted since then. But if we think through that long-range plan, are there still parts of it that you're comfortable with or fully comfortable with or less comfortable with? If you can just maybe talk to that a little bit, would be really helpful.

Sure. I mean the short answer is, yes. I would tell you that the growth of diabetes, we still believe as we said, back in late last year Capital Markets Day, that it will land at a mid- to high single-digit growth business for us. As discussed, channel and payer 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 very, very well. I mean upper double digits, the upper teens consistent with what you might see out of some of the CGM manufacturers. And that's a great business for us, 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. 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. This is a -- I wouldn't call it a new arrow in 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 I think it's too early for us to really refine on 2025, but we still feel very confident about achieving those financial goals. Timing could slide, a quarter or two here or there. But as we get deeper into the year, we'll refresh that guide.

Thanks so much

And we'll take our next question from Philip Chickering with Deutsche Bank.

Yes. Hi, good morning, guys and Steve it's a pleasure working with you here. I'm not -- a series of questions here on diabetes and just setting it states here DexCom grew 17% in the US in the first quarter, Vivo were 50% and Omnipod were 49% and for diabetes decline of 6%. So, I guess question number one can you guys refresh us on exposures that you have percent of revenues between pumps and CGM? Number two you talked about sort of the pharmacy channel pressure. Any color on how much it will be decreasing pricing in order to make the patients channel diagnostic between the two? And number three can you quantify what is your commercial mix versus government mix in diabetes? I have one follow-up question.

Sure Pito. 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 exactly in line with what DexCom is saying. I would tell you that the mix of pump for 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 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. We still maintain a pharmacy business. We are growing it. For us it is on a growth engine, but to a bit of a mitigation strategy as plans shift to either a dual or a complete pharmacy benefit 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.

So, when someone shifts from a unit to pharmacy kind of what is the economic impact on both revenues and profitability?

Well, at a patient level or a unit level, if a patient on our census their plan changes design or policy and they ship 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.

Okay. And then a follow-up question here. I guess why are you so convinced that the shift to pharmacy has done at this point? I think it was literally. And in February on my question last quarter that you said you aren't seeing sort of a shift here. So, I mean I guess a little if you use is for three days later where you've seen such a huge dramatic shift? Thanks so much.

Yes. So, again not to confuse against the pump and supplies market which we're seeing a very, very large channel mix shift -- payer shift due to the dynamics we talked about with Insulet Tandem and Medtronic. Now, in the CGM space, I'd tell you that it is very nuanced as you might expect. As a plan moves channels. 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 with our 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 are referring providers on the dual benefit will not elect the 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 to your question on the -- just the unknown and the challenge in predicting I mean those are the reasons why. But as we sit here in May 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 2020.

Great. Thanks so much.

[Operator Instructions] We'll take our next question from Joanna Gajuk with Bank of America.

Good morning. Thank you so much for taking follow-up. So on diabetes did I hear you say the organic growth actually negative in the quarter? And then how does this impact the full year. So I guess previously you going to lower the guidance for the year. So how do you expect this to play out for the full year when it comes to organic growth for diabetes?

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.

Okay. So flat for the year overall. Okay. And then on this value-based contract that I guess, we're going to hear the specifics sounds like very soon. But I guess it sounds like you expect this to be actually accretive to EBITDA. So how does it work? Is it kind of bringing -- completing new business, or is it kind of changing some of the contracts you have with this particular payer in place? And can you explain why do you expect this to be accretive in year one? I guess when it comes to these vials care contracts appears to be a ramp-up time and some investments upfront. So just trying to understand the economics of that contract. Thank you.

Well, Joanna, 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 next year we'll get the full benefit of that. So we expect some benefit in 2023 with the balance with most of it coming towards the end of the year, but then in the course of 2024 it will be fully baked.

I'm sorry. So that is already included in the guidance, or your commentary for the full year that you expect this to be a positive contributor in second half?

Yes. 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 that it's the benefit from these contract wins that again we have internal expectations on that. We're -- we want to be cautious until all the data exchange is completed and everything is finally announced, but that's really the big tailwind that we believe will get us back to the mid.

Okay. So the cost cutting and this new contract will -- you would expect to help you get back to the midpoint.

Yes.

Okay. Thank you.

[Operator Instructions] We'll take our next question from Richard Close with Adapthealth [ph]

Yes, Richard Close, Canaccord. Steve's 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. So yes the $20 million number of in-year EBITDA has already been achieved. It's been validated whether that is a process or a real estate or a contract or changes in organization. That is all tracked at a very detailed level and has been confirmed as flowing if you will. 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.

Okay. And then with CapEx, you talked about some I guess certain purchases. Can you just go over the CapEx, how you're thinking about it the rest of the year please?

Yes, absolutely. So maintaining guide at 11% of revenue for Q1 as expected we were 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 sort of 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 expect that's going to be the ballpark for Q2 that call it 1.5% 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?

Yeah. Yeah. 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?

Yeah. I mean, I'd say that some of this is related to the new sales commissions and programs that we discussed last quarter as going effective on March 1. 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 DMV catalog. It's a substantial cost to work through documentation and pre author everything that it takes to qualify that equipment on patients. And we've demonstrated incredible benefits for just efficiency and cost of obtaining electronic orders when you prescribe for that equipment. We are essentially spiffing and adding commission for that type of order. So what you're seeing is a profile change at the revenue line we are maintaining and starting to improve the bottom line from that category.

Okay. Thank you.

[Operator Instructions]. 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.

Thanks all. We appreciate everybody's time this morning on the call and we look forward to accomplishing the tasks ahead of us for the remaining part of this year. And thanks all. Appreciate it.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.