AdaptHealth Corp. Q1 FY2021 Earnings Call

Greetings and welcome to the AdaptHealth First Quarter 2021 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Joyce, General Counsel. Thank you, sir. You may begin.

I would like to welcome everyone to AdaptHealth Corp.’s earnings conference call for the quarter ended March 31, 2021. Everyone should have received a copy of our earnings release earlier this morning. If not, I would like to highlight that the earnings release as well as a supplemental slide presentation regarding Q1 2021 results is posted in the Investor Relations section of our website. In a moment, we will have some prepared comments from Steve Griggs, Co-Chief Executive Officer; Josh Parnes, President; and Jason Clemens, Chief Financial Officer. 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 earnings 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 in our annual and quarterly SEC filings. AdaptHealth Corp. shall have no obligation to update the information provided on this call to reflect subsequent events. Additionally, on this morning’s call, we will reference certain financial measures such as EBITDA, adjusted EBITDA and adjusted EBITDA less patient equipment CapEx, which are all non-GAAP financial measures. This morning’s call is being recorded and a replay of the call will be available later today. I am now pleased to introduce our Co-Chief Executive Officer, Steve Griggs.

Thank you, Chris, and thanks everyone for joining our call. Before we get to our prepared remarks, I would like to start out by thanking our 9,331 employees across the country for their unwavering resilience in the face of the ongoing pandemic and their continued commitment to serving our patients. The past 15 months have been an extraordinary time for all healthcare providers. And I couldn’t be prouder of how the AdaptHealth teams have met this challenge while remaining focused on our patients. These efforts have also been critical in helping our healthcare system partners and patients manage overwhelming healthcare demands. Additionally, our collective experience through COVID confirms that our respiratory, diabetes, sleep, and home health equipment services are crucial to meeting the overall healthcare needs of the communities we serve. Before we get to the numbers, I’d like to discuss some of the highlights of the quarter. Despite the ongoing effects of the pandemic on certain product lines, we’re very pleased with our organic growth rate of 11.5%. With the recent return of referral volumes in our sleep and hospital discharge business to pre-pandemic levels and current organic growth in diabetes and resupply, we feel confident that the balance of 2021 will meet our organic growth expectations. The integration of AdaptHealth and AeroCare organizations is proceeding quite well, as Josh will discuss in a moment. In particular, the alignment of our management teams and the speed at which we are adopting organizational best practices stand out as areas that have exceeded my expectations. We’ve made significant progress implementing each organization’s strengths across the entire organization. And as a result, we are seeing improvements in important areas of the business, such as CPAP patient compliance, which will drive meaningful revenue and cost synergies in the future. We have completed five transactions since January 1, 2021, most recently acquiring Spiro Health, which closed last week. Spiro is a full-line HME company, headquartered in Massachusetts and operating largely in New England, a market which we were previously underpenetrated. With the acquisition of Spiro, AdaptHealth now has the premier HME provider in the New England market, a top-flight local management team led by Gary Sheehan, and a platform to drive substantial organic growth across all AdaptHealth’s product lines in that region. The acquisition of Spiro, like our February 2021 acquisition of Alina Health Systems HME business in Minnesota, reinforces our ability to expand our footprint in growing markets through strategic acquisitions of market-leading suppliers. The combined M&A teams of both AdaptHealth and AeroCare, which executed more than 240 transactions, continue to see opportunities to make strategic, accretive acquisitions. With this in mind, we recently worked with Regions Bank and our other lenders on a $300 million expansion of our senior secured credit facility. The expansion, which includes an increase in our revolving credit line to $450 million, allows us to execute on a robust M&A pipeline and take advantage of opportunities to expand our scale and geographic coverage across HME, diabetes, and supply product lines. Going forward, our organization goals are simple: grow organically, operate efficiently, acquire aggressively and intelligently. These principles are the legacy of the AdaptHealth and AeroCare growth story. Now that we are one combined and powerful enterprise, I’m very excited to continue on this path and transform the HME industry that I’ve been part of for 33 years. And now, I will turn it over to Josh.

Thanks, Steve. First, I’d like to echo what Steve said about our teams and how well the AdaptHealth and AeroCare workforces have combined under our new leadership team. While this is a tribute to our regional and local leaders, it also reflects the benefit of the joint integration planning efforts that started in late November 2020. Supported by a team effort of the best and brightest on the AdaptHealth and AeroCare teams, we have made substantial progress rationalizing our overlapping operations and transforming many of our most important business functions. These efforts are generally meeting or exceeding our expectations, and many are ready ahead of their pre-closing timelines. Specifically, we have seen great success in the areas of direct spend, branch office consolidation, resupply operations, and revenue cycle management consolidation. In the area of direct spend, we have completed our negotiations with our largest vendors and expect to see the financial benefit of these negotiations on cost of goods sold in Q2 2021 and beyond. Despite closing the transaction less than three months ago, our branch consolidation team, led by Shaw Rietkerk and Dan Bunting, has completed its review of our combined branches. We are well on our way to executing a plan to rationalize our infrastructure, consolidate redundant facilities, and reduce overhead. At the end of April, we exited more than 56 overlapping branches, reducing our footprint to 614 locations, and we are continuing to evaluate further consolidation opportunities. While these two work streams have proceeded, our operations, revenue cycle management, and sleep teams have been working hard to identify and implement best practices of both our companies and take advantage of synergies and technologies. While the cost and revenue synergies associated with these work streams will take some time to realize, I’m confident that the work plans in place, when executed, will have the effect of improving the operating performance of the legacy AdaptHealth and AeroCare businesses as we move forward into 2021 and 2022. These are just a few examples of Adapt-AeroCare integration progress, which give us the confidence to confirm our previous guidance estimating $50 million in run-rate synergies by Q4 2021 and $30 million of synergies as of December 31, 2021. Another area of investment and focus has been centered on bringing together our diabetes and HME product teams and technologies. Many years spent streamlining and developing infrastructure and technologies for HME products and supplies directly correlate to what we see as opportunities in the diabetes product lines. One of the things we are very excited about is the ability to leverage our approximately 500-strong sales team to cross-sell both diabetes, sleep, and HME products. Our initial phase of rolling out cross-selling of diabetes products in select markets is showing promising results. As our technology matures to allow for seamless processing of orders across multiple product lines, the benefits to our referral sources and patients will be palpable. Over time, this should also allow us to operate more efficiently. Continuing on the theme of leveraging what we have learned on creating a more efficient home care model, we have increased our share of new orders for diabetes coming through e-prescribe to over 30%. The benefits of digital adoption by our doctors are multifaceted, from cost reduction to greatly reduced turnaround time and higher overall patient satisfaction. All will play an important role in the performance and growth of our diabetes product line. Over the last few months, I’ve had the privilege of working very closely with Albert Prast, our Chief Technology Officer, who has many years of experience in leading technology-forward healthcare and HME businesses. Albert has spearheaded the efforts over the last few years with AeroCare to develop operational technology to drive significant efficiencies and enhance patient experience. We have already been leveraging this technology across our combined business, and our teams are excited by what they see. On the technology front, I would also like to welcome Gary Sheehan and the entire Spiro team to the AdaptHealth family. Gary and I have been collaborating over the last few years on operational technology, and he is an innovative and well-respected leader and advocate of the HME and supply industry. Over the coming months, we plan to continue to invest in a significantly enhanced digital connected patient experience as well as technology to help drive better outcomes in our home care patients. As Steve mentioned, our goal is to continue to scale our business, both through M&A and organic growth, while at the same time investing and creating a more efficient and patient-centric model of home care equipment, supplies, and services. With that, I will turn it over to Jason for results of our first quarter and a discussion on our full-year outlook.

Thanks, Josh. Good morning and thanks for joining our call. For the first quarter ending March 2021, AdaptHealth reported net revenue of $482.1 million, an increase of 152% from the first quarter of 2020. The substantial increase is a result of our company-wide focus driving organic growth and the efficient integration of our 2020 and 2021 acquisitions, including the acquisition of AeroCare, which was completed on February 1, 2021. As a frame of reference, pro forma revenue for acquisitions was $564.1 million for the first quarter, driven primarily by AeroCare, but also from solid performance from previously announced acquisitions. As detailed in our Q1 2021 earnings supplement, our organic growth for the quarter was very strong at 11.5%, up significantly against Q4 2020 organic growth and led by new starts in our diabetes product line. There’s additional good news on the revenue front as we learned of several regulatory changes during the quarter that will provide additional tailwind to our business in 2021. Medicare sequestration relief was extended through the balance of the year. Additionally, the public health emergency was extended through mid-July, positively impacting the non-rural non-CBA DME fee schedule. Finally and importantly, the CMS published its April 2021 DME fee schedule, which resulted in higher reimbursement rates. Some of these impacts were partially accounted for in our guidance, but the net incremental impact of these programs for the balance of 2021 is accounted for in our guide raise that I will discuss later. Adjusted EBITDA for the first quarter was $104.2 million, an increase of 242% from the first quarter of 2020. Our adjusted EBITDA margin of 21.6% came in as expected for the period. Adjusted EBITDA margin improved materially against the first quarter of 2020, led by turnaround results within the PCS business and higher margins from acquired companies, particularly AeroCare. We expect these trends to continue throughout the balance of 2021, and we also expect incremental margin expansion sequentially throughout the balance of the year as our integration and synergy program picks up steam. As a reminder, we projected $50 million in run-rate cost synergies by Q4 2021 and approximately $30 million of such synergies to be recognized in the full year ended December 31, 2021. Turning to the balance sheet, we ended the quarter with $132 million of cash and $1.76 billion of debt. As previously announced, on April 26, we took the next step in our capital structure planning by amending our senior secured facilities to increase our term loan by $100 million and by expanding our revolver capacity from $250 million to $450 million. At the time of the deal, our net leverage was 2.9x pro forma adjusted EBITDA. With the completion of this transaction, we are confident that the company has the resources to move quickly with respect to our M&A opportunities. As previously stated, our net leverage target remains at or below 3x adjusted EBITDA pro forma for acquisitions. I would 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. We are guiding to net revenue of $2.22 billion to $2.39 billion, adjusted EBITDA of $525 million to $565 million, and adjusted EBITDA less patient equipment CapEx of $330 million to $360 million. As a reminder, our guidance does not include any contribution from acquisitions that have not yet been closed. With that, I will turn the call back over to Steve.

Thanks, Jason. Before we open the line for your questions, I’d like to address the recent announcement of Luke McGee’s unpaid leave of absence. As you know, on April 13, 2021, the company announced and had learned that Luke had been formally charged by the authorities in Denmark for alleged tax fraud related to certain private activities between 2014 and 2015. Following these revelations, the Board of Directors immediately placed Luke on unpaid leave from his role as co-CEO and initiated an investigation into his conduct by a special committee of independent directors. Terry Connors, the Chairman of AdaptHealth’s Audit Committee, is leading the special committee, and the investigation is being conducted by DLA Piper, an independent law firm with no prior connection to the company. The primary inquiry of this investigation is to confirm that there is no connection between Luke and the alleged personal conduct and AdaptHealth’s business or operation. The investigation is well underway, and we continue to believe that Luke’s past private activities were entirely separate from the company, and the company was unaware of this alleged criminal behavior prior to April 12. As I am sure you can understand, we have been instructed by counsel that it would be inappropriate to answer any questions about this ongoing investigation. Therefore, we will not be taking any questions on this call regarding Luke’s situation or the investigation. With that, operator, please open the line for questions.

Thank you. Our first question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Hey, good morning, guys. Steve, I appreciate the last comments that you made, but I guess I will ask a question kind of related to that. So, how would you address investors’ concerns about the business? Obviously, Luke was a big part of the company and he built the company together with Josh over the years and you on AeroCare. So how would you guys give comfort to investors that the company is fine, things are going well and that you guys have everything in control and that you have the bandwidth to take over some of the responsibilities that Luke had when he was CEO?

Well, we have a lot of experience in the business. Like I said, I have been in it for 33 years. So I am very confident that we can operate the business going forward. The vision that AeroCare had and the vision that AdaptHealth had for where this business is heading and the importance of home care evolving as a more crucial part of the healthcare delivery system are very much aligned. That’s why the acquisition made so much sense or the combination of the companies. So we’re confident in it. I was a public company President; granted, it was in the ‘90s, but I’m pretty familiar with how capital markets work, very familiar with how big markets work as evidenced by the increase in the loan and the tremendous support we got from the bank group. So I think as far as where the company is headed, I think it’s pretty clear we are going to be heading in a very same, if not similar, direction. Home care is growing tremendously. Its importance is growing. The ability to do things at home is unprecedented. You cannot take care of patients in the same manner in the future as we do today. So things have to go to the home environment, and we’re prepared for that. And we have got all these processes and people in place to take advantage of that opportunity. So we’re very comfortable with the ability to carry forward the mission of AdaptHealth through our leadership team. We have great people in the field. We have great people in corporate offices. We are very impressed with all the processes that we’re doing. And we could go through the numbers of people that are really contributing to make a difference to make this a world-class organization.

Hey, Brian. I will just quickly add a little color there. Obviously, Luke and I have been working closely over the last kind of 8 to 9 years from when we met in 2013. We have been hand in glove really doing some of the things in my lane, some of the things in his lane. So obviously, the vision and the execution of the vision we each kind of shared. Obviously, where we are today and where we’re set up is we feel very good about where we are, and we feel good about it because, at the end of the day, there’s a complete army behind us that’s helping get this done every day. And like we said in the script, our employees and the management team that we’ve built over the years, the additional strength that we got from both the AeroCare and now with the Spiro acquisition, really are HME veterans, people that know the business inside and out. But more importantly, I’m thinking about what the future of this business means in terms of technology, connected care, and how this really fits into the overall healthcare delivery system, like Steve said. So we are definitely going to miss Luke’s presence now. And obviously, the strategy and where we are executing on and where this business is going is well established. We just continue to believe that we will prove that through our numbers, and we continue to feel confident about executing on the plan.

I appreciate that. I guess my second question is, Josh, you mentioned the diabetes business you are happy with it. Now as I look at the sequential growth in revenue from Q1 – or from Q4 to Q1, just a little over $1 billion, right? So I know you have done some acquisitions in that area in Q1 as well. So, how are you thinking about that? Shouldn’t the diabetes business have performed a little better given the deal flow in the quarter? How should we be thinking about the next quarters in terms of sequential growth?

Yes. Obviously, some of this business is a quarterly timing thing with Q4 before reset of deductibles; you get a spike in December. We’re extremely proud of how the diabetes business is performing, particularly Q1, which is typically softer in that business, came ahead of our expectations for the quarter. Obviously, we haven’t been in this business all that long, only since last July, but the progress we’ve made both on e-prescribing and restructuring our processes and organizing some of the acquisitions and putting them on an organic pathway to growth and better bottom-line numbers makes us extremely proud and confident about the current diabetes product line.

Got it. And then last question for me, I guess, Jason, as I think about the guidance, obviously, strong organic growth in Q1 raising the guidance for the year. How are you thinking about the cadence factoring in any seasonality, or how should we be thinking about just the breakdown of the quarters?

Sure. I would be happy to give you some overarching comments on that. As you know, we don’t guide to the quarter, but in general, I mean, this business from a revenue perspective produces somewhere in the ballpark of 23% of annual revenue in the first quarter. It steps up from there a touch in Q2, still under 25%. And then Q3 and 4 are bigger quarters. And as Josh said in diabetes, Q4 is particularly a big quarter. A lot of that is due to just the traditional healthcare dynamics of resetting deductibles and patient patterns, ordering patterns. And so that’s really what’s driving that. For this quarter, we are a touch under that 23% I mentioned because we only had, as you know, two months of AeroCare as opposed to three.

Got it. Thanks, guys.

Thank you.

Thank you. Our next question is coming from the line of Anton Hie with RBC Capital Markets. Please proceed with your question.

Thanks. Good morning, guys. Just one that kind of feeds off Brian’s last question a little bit, but could you help breakdown sort of the components of the guidance raise? I think you mentioned that the sequester holiday extension was already in there, possibly. I’m not sure I heard that right. And then maybe how some of the latest completed M&A factors into the additional $10 million of EBITDA versus organic performance? So really just all those kind of three elements, how that feeds into the new guidance?

Sure, Anton. Be happy to cover that. So firstly, you’ve got it right on sequestration relief. In terms of other regulatory tailwinds, the CMS did publish new fee schedules on April 1. As part of that were increases around oxygen that, frankly, the industry and our leadership team have been pushing for, for a long time. I mean, once I finish, I can pass it to Steve to talk about those efforts a little bit. In terms of thinking about the size of that, you can think of the oxygen annual increase in the high single-digit millions of dollars. So of course, you only have it for nine months, so you got to run that math. And then the rest is frankly the Spiro acquisition that we’re just so incredibly excited about in New England. So that was the reason for the raise. I suspect we’ll talk later about synergy, but we did not change the in-year delivery or the exit rate delivery of synergy, as you saw the bands have tightened slightly. But frankly, it’s still early in the year. We are still in a pandemic, and we feel great about the numbers that we put out. Steve, do you want to add a couple of comments on the oxygen increases?

Yes. The oxygen increases were related to budget neutrality conditions that were put in some 15 to 20 years ago that were related to portable oxygen concentrators. When competitive bidding came in, it seemed like that should have been eliminated, but it didn’t. We spent a lot of time, I was involved in it along with CTRC, VGMA, home care, and a bunch of people from the industry talking to CMS. CMS agreed, but they just didn’t feel like they had the authority to get it out of there and discontinue it. So it had to go through legislative action. So finally, after years of industry work with the hill, they were able to take it out on April 1. So now that just levels those rates, which resulted in that increase for everybody within the industry.

Okay, great. Obviously, a very strong organic growth performance there, but I wondered how much – or can you talk about any impact that you may have had from the severe winter storms that we saw? I know you guys have some presence in Texas and Arkansas, certainly areas that saw a lot of shutdowns, if you could just address that real quick?

Yes. I mean, certainly, the weeks of those storms, we didn’t have a lot of patient setups, but the business popped back nicely from that. And nobody is complaining about their revenues in those two states that both those states performed well over the quarter. So, they popped back nicely and had no effect really on our financial performance.

Okay. And then last one for me, are you seeing – I mean, obviously, it seems like we are through the last real big COVID surge and the vaccines are rolling out. Are you still seeing at this point any real issues with patient access and/or kind of maybe how that trended from month-to-month within the quarter?

Yes. Generally, the healthcare businesses and the healthcare entities are open for business. So, I think that we are pretty much past the pandemic and how people are willing to come to the doctor’s offices, come to sleep labs, come to our offices to get treated, whether – and still – we’re still in a lot of virtual care still. So generally speaking, that is behind us. I think everybody saw some softness in January and February. It’s hard to figure out why that happened, but everybody kind of did that I talked to. So it was an interesting time, but March and April popped back nicely. So, we generally feel like it’s behind us. Now, I can tell you, I’ve been in this business a long time and pretty darn good about predicting the future. The whole COVID thing on oxygen is going to be interesting to see how it affects what they are calling the long-haulers and stuff like that and how it’s going to affect patients going forward, but the rest of our business should be consistently growing within our expectations.

Thanks, Steve.

Thank you.

Thank you. Our next question is coming from Mathew Blackman with Stifel. Please proceed with your question.

Good morning everyone. Thanks for taking my questions. Maybe to start, Steve, I have a couple of questions for you and then I will have a couple of follow-ups for Jason. Maybe, Steve, just in general big picture what are your priorities in 2021? Is there any particular area you’re now going to be more focused on? And in the past, you’ve talked about $100 million to $150 million in annual M&A revenue contribution. You obviously expanded the credit lines recently. Should we take that as a signal that you see opportunities that perhaps may put you above that threshold? And are there any particular areas of focus?

Well, the focus is in our core business, which is diabetes and respiratory care, which includes both sleep and oxygen and ventilation. The activity is significant, and the opportunity to get really high-quality assets is out there. Spiro is a good example. I’ve known Gary for a long time, and we kind of thought that he was not going to be available to merge into our company. But I think you saw the strength of the acquisition of the two companies and really got excited about joining that team. So, we’re seeing more and more of that. I think we’re going to have a lot of opportunities. The pipeline is robust, and it’s across the whole spectrum of that. As far as initiatives, I don’t think they have changed. I mean, when I came here and the mission was to put the organizations together, but then create that organization. AdaptHealth has grown significantly through acquisition. And now it’s time to put all the pieces and parts and all the backbone and the foundation together to make this an organization that not only works today but works in the future. We have tremendous growth opportunities and ambitions. We’ve got to have the foundation in the organization to be able to take care of that. And that’s not just an easy task. You don’t just snap your fingers and boom, it happens. I mean the accounting, the IT, the revenue cycle management, and we have the people in place to get all that done and to be – and if we do it right, we will actually create competitive advantage in each of those areas that we will be able to further improve it. So our focus is really on becoming a better company in all aspects of it. We can go through our 16 or 17 different work streams that we work on every day and have people assigned to that to make sure that happens. An overarching aspect of that is an organic sales mentality that we have to bring to this company and into the combined organization that really should set us apart. And so that’s our focus. And then within it, these great assets are showing up, and we’re just not going to pass them up.

I appreciate that. And Jason, just a couple for you, I want to make sure I heard you correctly. I think you said pro forma, the first quarter sort of revenue run rate is somewhere in the $564 million range. Did I hear that correctly?

Correct.

Okay. And then G&A did spike in the quarter. Is that AeroCare related or if not, is it something else? And is that sort of the trajectory we should be thinking about from here? And that’s all for me. Thanks.

Yes, great question, Matt. G&A, I mean, there are some adjustments to EBITDA that flow through there. Even after adjusting out, we’re seeing SG&A as a percent of revenue hold pretty steady. I think that’s what you should expect from us over the next, call it, 12 to 18 months, maybe a couple of bps higher as we’re continuing these investments in technology and back-office infrastructure to continue scaling. But to your point, I mean, I wouldn’t expect SG&A as a percent of revenue to really move too much over the next, call it, 12 to 18 months.

Thanks.

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

Good morning guys. It’s obviously been a very trying month for the management team. If you step back and think about sort of both strategy and operations, Luke was always the visionary sort of leader behind Adapt. So I’m just curious, from an acquisition perspective, will there be any changes in terms of being aggressive in M&A? And will target deals change at all over the month? And then, Josh, just to check on with you as well. Are there any changes that you foresee happening within the operations side of the business?

Yes. As far as acquisitions, we are focused. I think the fact that we have $0.5 billion in available capital probably says as much as I can say about acquisitions and the ability to do that. I think the focus, again, is the same in those product lines. Home care, again, has this huge, huge opportunity for us. Getting as many assets out there in the field to take advantage of the future of home care is part of our mission, and we’re going to do that both through organic growth and expansion and through acquisition.

And Pito, I’ll address your second question regarding operations. So as far as we saw it, Luke and I used to joke around about how he does the easy work and we do the hard work behind where all the sausage making happens. So Luke clearly was a visionary. Luke was a great partner to work with and really helped set the organization up on solid ground in terms of where this needs to go. But again, that was also alignment of him and I getting together a number of years ago when the team that we’ve built over the last number of years shared that vision of being able to be changers or leading the change within the HME and really the post-acute care world. With regards to the operation, we have a really phenomenal team, Shaw Rietkerk, Dan Bunting from AeroCare, a lot of our regional leaders state by state as we go through and even some of the folks that I’ve got to meet over the last number of months from the AeroCare team are really the best – I’d say the best and brightest in the industry. The other thing that I think would be changing is really just more investment in operational technology and connected care. I mean, I think we feel like, just from a footprint perspective, we’re positioned nicely, but where we can really set ourselves apart is if there is much less friction between the patient, the referral, and the provider, which would be us. As that gets better over time, we’re going to be able to drive significant change in terms of velocity of the amount of orders to be produced and go through our system, as well as potentially, becoming more efficient providers and able to take some of the costs out of the home care post-acute care business that we’re in. We’re going to look to make aggressive moves in that scene and more investment in that area. So more from us in the future, but we’re feeling pretty good about where operations are today.

Okay, great. The organic growth rate, 11.5%, is the best I have seen with you guys since I’ve known you. Can you walk us through the components of that organic growth rate? How do you think that progresses throughout the year? Any color that you can give us on cross-selling practices between the two companies, diabetes, and what was the key driver of that?

Pito, how about I start on the math side and then pass to Steve and Josh on cross-selling and, frankly, the exciting part of the story. I mean if you look at the components of how we generally guide each of our product lines, I mean, I’ll start with the kind of the traditional somewhat slower growers, but very, very steady and consistent DME supplies to the home. I mean, we’re back above pre-pandemic levels, and we’ve reached high watermarks there. Those products, we will consider to be steady as she goes for the balance of the year. As we get into respiratory, frankly, there is a little bit of a pop in early Q1 that we’re thinking of as nonrecurring. As Steve mentioned earlier, it’s still early to tell on the long haulers related to COVID and how that will materialize over the balance of the year. But we still feel firm about our range that we put out on expectations for respiratory. As you get into sleep, in terms of March, we are very happy with PAP starts and where we stand with that business. Now back to high watermark, as we said we expected by the end of Q1 on the last call. I’ll tell you, January and February were a bit soft, but resupply has been just a tremendous story for us as we’re beating internal expectations on the resupply side. And then last, certainly not least, is diabetes. I mean, we’re just so excited about this business. Volumes are frankly above expectations. Growth is great. We are still somewhat cautious to raise the 10% to 12% on diabetes that we typically talk about just because we still haven’t even owned this business for a year. But everything we’re seeing is indicating that we are in the right end market for this part of the company. As the year goes on, we will continue to refresh guidance accordingly. Regarding the cross-sell and all kind of the more exciting parts of this, I’d probably pass this to Steve and Josh.

Yes. The cross-sell is fascinating to me. So if you think about our sales reps out there in 2020, a lot of them weren’t able to get into doctors’ offices and had limited access. While we were still able to produce high-quality numbers. Now that that’s opened up, our reps are very busy making sure that they get back into all of our accounts, reestablish those relationships, and reconnect with all the patient demographics and compliance information to those referral sources. They are incredibly busy. But even within all that, we’ve made great strides already in cross-selling. While we’re very optimistic for it, I wasn’t expecting much because our reps were so busy. They took it upon themselves, put in extra hours, went to the accounts and started talking about different products. So we’re ahead of where I really thought we’d be just because we are incredibly busy right now. So, we feel good about it and think it’s going to be a driver for us in the later part of the year as that starts building momentum and you get the doctors more comfortable sending those types of patients to the various entities.

Okay. And then two quick follow-ups here. You didn’t change your guidance around synergies for the year, I just wanted to ask how the integration is tracking relative to your expectations. What has gone easier and what has gone harder?

You guys want to start with operations, and I’ll follow up on what we’re seeing on the synergy dollars.

Sure. Yes, I mean, I think like we mentioned in the script, the plan has been going really well. I’d say the highlights would be kind of revenue cycle management, branch office consolidation, and also the direct synergy from the purchasing costs of goods. The stuff that takes longer is really, like Steve said, the cross-selling, some of the revenue synergies on PAP resupply. Some of the longer-tail things are what we’re doing in terms of our intake, customer service, and technology integrations. Those we feel very good about, but it’s definitely a longer tail and some of that will go into 2022. But otherwise, the softer stuff, which is less measured by metrics, is really how well the team is getting along, the cultural aspects. There is no politics, and everybody is just focused on getting their job done. As a business operator all these years, that’s the thing that I feel the most confident about. Obviously, it will play out in numbers over time. But we certainly feel good about where it is operationally right now, and I’ll pass it to Jason for some of the numbers.

Thanks, Josh. I’d say that, that hard work has materialized. I can confirm for you that we have realized a couple of million dollars in the first quarter. And I’ll tell you that’s very heavily weighted in March. These programs have been locked in place. Depending on the contract date, the effect of day and when dollars start flowing, right, there is a shape to all of this. The beauty of the synergy is that these are recurring dollars. The couple of million I’m quoting will be recurring for the balance of the year. So take that number over 10 months, and you can see why we are so very confident with the $30 million in-year. There is still some work to do and a big hill to climb here that we’ve got confidence in our team to do. But we’ve been cautious to increase that in-year or the exit rate synergy at this stage. But based on what we’re seeing, we’re extraordinarily confident about what we’ve got.

And just one last quick numbers question; you raised the adjusted EBITDA less CapEx by $10 million. I think you said earlier that oxygen was high single digits. So is it right to think about the guidance raise; $8 million coming from oxygen and $2 million from the Spiro transaction? Thanks so much.

Well, I’d say, Pito, it was an April 1 implementation date for oxygen. So it’s just a little bit of a ramp there. But you’re thinking of it correctly as that oxygen revenue should flow through.

Thanks guys.

Thanks, Pito.

Thank you. Our next question is coming from Richard Close with Canaccord Genuity. Please proceed with your question.

Thanks. Jason, maybe on the synergies, I just want to check in on something. In one of the answers earlier, you mentioned tightening the bands. I just was curious what exactly that meant.

Sure. Yes. Richard, I was just talking about the guidance range on revenue, adjusted EBITDA, and adjusted EBITDA less Patient Equipment CapEx. So the numbers came up, the bands tightened slightly. I think as we go over the course of the year, you’re going to see us moving those bands closer just as a course of moving through the year.

Okay. I wasn’t sure if that was related to the synergies and just wanted to check there. Moving on to acquisitions, you guys talked a lot about that over the course of the call, but I’m curious in your discussions, it’s been about a month since the news came out with respect to Luke. I’m just curious whether – has that come up at all in any discussions with potential targets?

Well, sure, it’s come up, but I’ll just take Gary Sheehan at Spiro. Gary has known Luke for a long time. I’ve known Gary for a long time. He’s known Dan and some – Josh. And so yes, it sure came up, but obviously, it didn’t affect the outcome of that transaction. The other one is similar. We competed with – and AeroCare competed with Adapt in pretty much every acquisition they did. We were competing with them in every acquisition we did. We were competing – they were competing with us. So certainly, it’s going to come up, but we don’t see it affecting the ability to get a deal done.

And I’ll just add – this is Josh. I just want to give you a little more color there. Obviously, Luke always throughout the year used to tell me in working closely with him that this business is more than just about me, more than just about Luke, more than just about Josh. I think when I think about the events of this year, the puts and the takes, the AeroCare merger acquisition, the Spiro deal, the growth in our diabetes businesses are more than anything kind of Luke and I even on our vision would have thought would impact us positively. So in general, this business is not built around any one or multiple individuals. It’s really a team. It’s a vision, it’s infrastructure, it’s technology, it’s locations, it’s operations, it’s drivers. You guys only see the face of who’s talking maybe to investors or even analysts. But obviously, there is a lot going on behind the scenes, and that’s why I think we feel confident that the machine that was built over the last number of years and the combination of a lot of good people, companies, and technologies, when it’s all blended into one, which is making great progress, I think we will be very happy with the results.

And my final question is on e-prescribe. Can you just go over that again? I think you said above 30%. Where could that go over time?

Sure. So it was 30% plus on new orders for our diabetes product line. I think we’re extremely proud of that just because we started from order number one in October. This is a nexus of what I mentioned a little bit in the script of we’re taking what we’ve learnt in the HME business and some of the supplies businesses and really bringing that over to our diabetes business. Our diabetes business, we’re going to be taking things over to our HME business, and that’s what Steve was talking about vis-à-vis cross-selling. We have a team of 500-plus sales reps that are out in the marketplace. As our technology continues to evolve, the ability to do product line won’t be as important in terms of differentiating how we process orders and how we deliver to our customers. Our goal, over time, is to bring all these product lines together to drive a seamless experience for the patient and referring physician in their home. So I think in general, e-prescribing at 30% plus, over time – obviously, not going to be this year. But over time, we’d like to get that significantly over 60%, 70% plus of our business. Maybe even over time, similar to what we see in pharmacy where e-prescription is becoming much, much more dominant. Over time, we’d like to get that up north of 75% and 80%. But it will take some time to get there. But for less than six months, we’re extremely proud of where it’s gone to, and we believe that there is room ahead. So we will continue pushing there.

Okay, thank you.

Thank you. Our next question comes from Kevin Fischbeck with Bank of America. Please proceed with your question.

Alright. Great. Still trying to reconcile the guidance raise because it sounds like the deal and the oxygen rate update are the majority of it, but then I guess, sequestration was also extended. So just trying to understand a little bit all of the pieces in there and how you think about it. And then, I guess, more importantly, how much of this guidance raise is kind of a real increase to the base as we think about flowing into 2022 and beyond that we should use as a base off of which to grow? If there is anything in here that you kind of say is one-time in nature and we should be tracking out?

Well, the sequester, I’ve spent a lot of time on the hill and with our organizations. So we’re very confident that would be extended. When you have the hospital association and the physician association pounding CMS and, again, Congress, we just rode off their coattails. So that was always in the numbers, the sequester numbers. And then as far as the other increase, I’ll turn it over to Jason.

Yes, great question, Kevin. In terms of thinking about the foundation going forward into 2022 and beyond, the way we’ve thought about sequestration, any of these supplemental programs or short-term programs is that as a management team, our job is to grow through that and above that once those programs are eliminated or stopped. When we talk about revenue synergy, we haven’t hung numbers on that, but our expectation is that we absolutely surpass any of the supplemental relief or revenue that we’re seeing in 2021. We’ve talked about PAP compliance rates, we’ve talked about PAP resupply, and we’ve talked about patient pay and what we’re learning from each other, Adapt and AeroCare combined. Those will be very real numbers as we bridge into the tail end of this year and into 2022. Again, we haven’t hung specific numbers on it externally. It’s not included in the guide. I suspect over the coming quarter, we’ll start putting pen to paper on that for you all.

Okay, so the guide is really about the two things that need to – like that are only in the – partially in the year, the oxygen and the deals would have normalized in something bigger next year, but the guide also does include the sequestration, which we have to back out, but it did include that already. So that’s not new, right?

Correct.

That makes sense. Okay. And then, I guess, just want to follow-up on your comments about the respiratory business and the potential for long haulers. I mean, are you able to or are you seeing – patients who come in with a COVID diagnosis, are you able to convert or document that they actually are turning into chronic? Love to hear any kind of color there.

Well, certainly, we’re happy to see that a lot of these patients are getting off oxygen for their own benefit, and they are going back to their normal lives. So that’s a positive for those patients. We’re thrilled to help them with that process. Having said that, there is a lot of documentation out there and a lot in the physician communities about the long-term effects that COVID had on these patients. And so you’re seeing a lot of different doctors. If you go out to National Jewish or something like that in Denver, Colorado, where there are big respiratory providers out there, they are watching these patients pretty closely, and they are more hesitant to take them off oxygen. Some of those patients that are showing those symptoms and just having trouble really getting fully functional are still on oxygen. Thank goodness a lot of them are coming off, but there is still a lot to be found out of how this disease affects people long-term.

Okay, alright, great. Thanks.

Thank you. Our next question comes from Eric Coldwell with Baird. Please go ahead with your question.

Thanks very much. Sorry, I was going to ask about that sequester question too because based on management prior comments, we thought it was – the holiday extension was not in guidance. So I think that’s been clarified. I did want to just also clarify Spiro, the acquisition, the most recent deal, have you provided revenue for that deal and the specific EBITDA you’re looking for on an annualized basis? Again, I apologize if I’ve been toggling a couple of calls here, so.

Eric, this is Jason. No problem. We have not put out specific revenue or profitability guidance on Spiro, nor really on any acquisition. It’s just been our internal policy to not do that. However, in terms of the updated guide, you can run the math on our comments regarding the oxygen rates that went in place April 1. That certainly is part of the guide raise. The other side of that raise is directly attributable to Spiro.

Got it. Thank you much. And then appreciate the comments on organic growth and the pro forma way you do that. I am curious, Jason, do you have the more traditional calculation on organic growth where a company would just take out all deals yet to annualize and look at the base business that was intact 365 days prior?

Yes. It’s a little difficult in this sector of healthcare because as the business comes on, right? I mean, start with the patient, right? That patient may have produced resupply revenue last year, but as they come on to our platform, right, that patient will move around the system. There is no real kind of classic same-store to even compare against because we don’t operate that way. There are a number of reasons why we don’t follow, I guess, in your words, the traditional organic growth view. What we do provide in our supplement is visibility to the prior year revenue in the quarter, regardless of ownership of the business. So we’re validating that with QVs and such. So, what you are seeing year-over-year is the revenue of AdaptHealth compared against the businesses that - again, regardless of ownership year-over-year. At 11.5%, frankly, we are feeling great. We’re feeling great about the year and the growth that’s come since Q4.

Yes. No, I get it. Thank you for that. And then I know you can’t comment on specifics of the investigation. I am curious if you have a hunch on the timeline or what The Street might be looking for next in terms of updates, comments, findings? I know sometimes these things can take weeks, sometimes they take months, but I’m curious if you have a target date where you might be able to share some information with us? And then just, again, not specifics on the findings, but how do you plan to update us? Will there be a thorough discussion of everything that was reviewed or just kind of a conclusion on findings? I’m not sure if you have a process in place yet for how you’re going to share what your findings led to and kind of explain to us the level of detail that Piper and others went to in this process?

Well, your next update will be the completion of the investigation, which is probably a month or so, maybe I don’t know. We will see how fast they get through it. They want to do a thorough investigation, and I promise you they will do that, a multitude of things, but predominantly making sure that this was a private matter. We can’t comment or even guess on how it’s going to play out in Denmark. I think that would just be at best a wild guess, and so we’re not in the wild guess business. So your next update will be the investigation completion. And while we expect that to be as we’ve described, we will go through that complete and thorough process.

Sounds good. Thanks again, guys. I appreciate it.

Thank you.

Sure. Thanks, Eric.

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation, and you may disconnect your lines at this time.