AdaptHealth Corp. Q1 FY2022 Earnings Call

Greetings, and welcome to the AdaptHealth First Quarter 2022 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Joyce. Thank you, Chris. You may begin.

Thank you, operator. I'd like to welcome everyone to today's AdaptHealth Corp. conference call for the first quarter ended March 31, 2022. 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 the supplemental slide presentation regarding Q1 2022 results, is posted on the Investor Relations section of our website. In a moment, we'll have some prepared comments from Steve Griggs, Chief Executive Officer 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 2022 and beyond. Actual results could differ materially from those projected in forward-looking statements because of the 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 our Chief Executive Officer, Steve Griggs.

Thank you, Chris. Good morning, everyone, and thank you for joining us as we review our results for the quarter ended March 31, 2022. We are very pleased with our strong start to 2022 and the excellent performance of our 10,910 employees. Our revenues of $706 million reflected an organic growth rate of 3.7%, which improved approximately 100 basis points from the fourth quarter of 2021. AdaptHealth's Q1 2022 results reflect the continued strong growth of our diabetes business as well as the resilience of our home medical equipment business as we saw strong performance in our respiratory ventilation and home medical equipment operations. We were pleased by the improvement in our supply of CPAPs as the quarter progressed. And with the successful expansion of our patient setup capacity by our operations teams across the country, we saw patient setups in March at or near their 2021 levels. This momentum has continued in the current quarter as setups remained strong in April. While we hope our suppliers will be able to maintain this level of CPAP shipments consistently over the balance of the year, we are nonetheless pleased with how Q2 setups have continued to be strong. As with all healthcare providers, we are operating in an inflationary environment that includes continued workforce wage pressure, increased operating costs and rising interest rates. While these factors impacted our margin in Q1, the execution of our technology transformation program should generate operating efficiencies to offset many of these expense pressures. On the debt front, more than 75% of AdaptHealth's indebtedness is either fixed rate or hedged, thus limiting the effect of recent interest rate increases. While we do not expect these pressures to abate in the near term, I'm confident that we can continue to deliver expected results while we manage through them primarily through continued growth and technology improvements. My confidence was reinforced in April and May by the more than 1,000 AdaptHealth leaders I met over the course of 10 two-day sales and operation meetings held in 9 cities across the United States. These meetings showed we are coordinated and committed to empowering our patients to live their best lives at home. This collaboration amongst our teams from these meetings makes it clear to me that the unique strength of AdaptHealth is our ability to deliver flexible, locally focused patient care, which leverages our efficiencies across our national platform. I believe our ability to deliver a wide range of home medical equipment to ensure beneficiaries differentiates AdaptHealth from other home health providers and will continue to drive our sales growth and operating efficiencies. We believe our core strengths position us well to take advantage of rapidly changing healthcare delivery models throughout the United States. Over the next 5 to 10 years as government agencies and commercial payers turn to population health and outpatient home-centric care models, AdaptHealth's broad home medical equipment and supplies offerings and our ability to design custom delivery solutions will help to make us a partner of choice for those payers, healthcare systems and physicians managing care for their patients. Our products, when properly monitored and used, generate important real-time data, usable by our physicians and managed care partners, to control costs and improve outcomes. As a national leader in sleep, respiratory and diabetes, servicing 3.9 million patients annually, we are well positioned to capitalize on the demographic growth in the expected U.S. population that is living longer and more actively than ever before. As we learned from the past 2 years navigating the COVID pandemic, these trends are also favorable for healthcare providers such as AdaptHealth, who are critical in the management of chronic conditions and can deliver care to the home. I will now turn the call over to our President, Josh Parnes, to elaborate on our commitment to expanding our presence in outpatient and at-home services.

Thank you, Steve. I will provide a brief update on our Q1 M&A activities as well as an update on our fast-growing diabetes business and some additional color on the company's ongoing technology transformation and progress with respect to our strategic opportunities. M&A continues to be a growth opportunity for AdaptHealth. And while we are active in the market, we are being more selective about how capital is deployed. In Q1 2022, we focused intense integration efforts on our 23 transactions completed in 2021, particularly Community Surgical, our largest HME acquisition other than AeroCare, which was completed in late December 2021. We have been very pleased with the performance of Community versus expectations. And the integration of their talented team is already yielding some nice wins in our New York and New Jersey markets. This year, we have closed 6 transactions. While these transactions have been smaller in terms of revenue than in previous years, each acquisition was contiguous to an existing AdaptHealth branch operation and is expected to generate very attractive synergies once integration is complete. For example, in April, we acquired Keene Medical Products, an HME respiratory provider, operating in the New England market, a nice complement to the spear operations that we acquired in Q2 of 2021. Switching to operations. Market conditions have forced Adapt to become an even better company. AdaptHealth continues to be a leader in promoting e-prescribe among facility and physician referrals. And in Q1, as we continue to roll out e-prescribe to more regions, we are seeing approximately 50% adoption on new orders. As well, we have been investing in our digital ordering and digital reordering capabilities. And in Q1, more than 55% of diabetes and 38% of CPAP resupply orders were generated through proprietary digital portals. The cost reduction and billing efficiencies, which result from increased e-prescribing and digital ordering, are significant and allow us to allocate workforce and other resources much more efficiently. As an example of this efficient allocation, note that despite the broad labor inflation, our labor expense as a percent of revenue increased less than 1% year-over-year. This technology also puts us inside the physician offices and patient homes, which we believe will improve physician and patient engagement. Supply chain challenges led Adapt to build redundancies to mitigate shortages. We've sourced more product directly and built out that competency. The CPAP shortages have forced us to drive more utilization out of existing devices and asset recovery. The integration of AeroCare in the middle of a pandemic forced an upgrade on ERP and internal systems. All of these things have made Adapt better today and will continue to drive efficiencies going forward. In addition to our ongoing technology transformation, we are constantly assessing strategic opportunities to leverage our core competencies and increase our revenue, either through expanding service offerings from one region to another or by entering into new markets. Our expansion into CGM supply and diabetes services in 2020 is a good example of a strategic expansion into a new market. We believe this is the core differentiator for AdaptHealth. Prior to July 2020, AdaptHealth had no presence in the fast-growing diabetes market. Our strategic review of diabetes services and, in particular, CGM confirm that many of the drivers of that business were similar to those we found in our CPAP resupply business. This review also noted a substantial degree of overlap between chronic sleep and respiratory patients and those in the target demographic for diabetes services. Based on these conclusions, we executed on a plan to aggressively move into the diabetes market with the acquisition of Solara in July 2020, followed by 6 additional acquisitions in the diabetes space over the next 18 months. As we have integrated Solara and our other diabetes supply acquisitions, we have successfully implemented many of the technologies used in our HME resupply business to increase revenue and improve operational efficiencies. As communicated by Dexcom and Abbott, the pharmacy shift is largely done, and as we have said consistently, patient volumes have grown throughout. Further, our ability to drive longer-term adherence to a CGM patient is being recognized as a critical piece in the successful CGM therapy of a diabetic living at home. Turning to strategy. Adapt now services 3.9 million patients annually. Many of these patients are polychronic, having some combination of diabetes, COPD, CHF and sleep apnea. These are the patients that drive extremely high healthcare costs and are the subject of numerous programs to control spending. Adapt regularly engages with these patients through setups, resupply orders, frequent deliveries and in-person interactions. Real opportunities exist to transform these interactions to drive patient behavior change, given the connectivity of these devices as well as how frequently Adapt interacts with these patients. We are one of a few companies that have the breadth of the relationships and engagement with the polychronic patients in their homes and are set up to ingest the data and coordinate between the patient, the doctor and the payer. Adapt sits at the crossroads of these key stakeholders in the healthcare continuum and has the infrastructure to effectuate better outcomes of chronic diseases without much additional cost. We are now focusing talent and resources to establish partnerships and innovative programs focused on lowering healthcare costs for chronic disease patients in their homes. With our already broad offering of connected medical devices in the home, we believe we are well positioned to be on the leading edge of driving better outcomes for a lower overall cost of care. More on these initiatives will be discussed in future quarters. With that, I'll pass the call over to our CFO, Jason Clemens. Jason?

Thanks, Josh. Good morning, and thank you for joining our call. I'll discuss the first quarter operating results, our cash flow and capital allocation activity for the first quarter and conclude with a discussion of our '22 outlook. For the first quarter ending March 31, 2022, AdaptHealth reported net revenue of $706.2 million, representing year-over-year growth of 46.5%, including a full quarter's contribution from the AeroCare acquisition that closed in February 2021 versus 2 months contribution in the year-ago quarter. Organic growth for the quarter was 3.7%, improving about 1 point from the fourth quarter of 2021. Non-acquired growth was also 3.7% for the quarter. And as expected, organic growth and non-acquired growth are converging as we lapped our larger acquisitions, including AeroCare and Solara. As Steve noted, we were pleased with our ability to deliver revenue and adjusted EBITDA consistent with internal expectations, despite the ongoing impact of the Philips recall and supply chain challenges. Results for the first quarter also reflected strong performance from our diabetes products, which benefited from better-than-expected patient volumes and a solid performance in our HME and sleep categories, particularly in PAP resupply despite the PAP device shortage. As expected, higher costs and supply chain challenges have impacted our results. However, as Steve and Josh have described, we are taking steps to mitigate these pressures by leveraging and scaling our technology. As such, we saw the expected increase in technology expense for the quarter. We've highlighted these investments on previous calls, including our patient delivery platform, OTL, as well as Oracle and other strategic technologies. Although these investments increased G&A expense, we are very confident that we will accelerate operating leverage as we utilize these tools to drive cost and inefficiencies out of our labor pool and out of other operating expenses. We anticipate adjusted EBITDA margins to rebound from current levels in future quarters, and we remain confident in achieving our full-year guidance that implies 21.9% margin at the midpoint. As previously noted, we are no longer reporting adjusted EBITDA-less patient equipment CapEx. This is in an effort to simplify, but it also reflects the continued evolution in our business as diabetes with very little CapEx increases as a percent of total revenue mix. We will continue to guide to total CapEx and focus on generating free cash flow and eliminating the impact of equipment lease financing. Like most other healthcare providers, first quarter cash flows are historically light through a variety of factors in the revenue cycle, patient ordering patterns, the payroll cycle and the timing of interest payments. DSOs held firm at 47 days with no change from the fourth quarter of 2021, and cash paid for interest was $44 million. Overall, cash flow from operations was $66.4 million, up from $18.4 million a year ago. Total capital expenditures were $77.2 million. As expected, CapEx was higher than historical spend due to inflation and freight surcharges and represented 10.9% of revenues, consistent with our guidance for 9% to 11% of revenue. Free cash flow was negative $11 million. This includes the nonrecurring outflows related to the CARES Act recoupment of $5.2 million. Accounts payable was a $35 million use of cash during the quarter, which relates to our ERP implementation. This activity will continue in Q2, but it will be done by the end of the quarter. We expect this work will pay off starting in Q3, as we leverage our prompt pay discounts, so we will realize an ROI on this use of cash. In spite of these items that should improve throughout the year, we remain on track to convert 5% to 6% of revenue as free cash flow for 2022, which should improve to 7% to 8% of revenue next year and beyond. At quarter end, we had cash of $119 million and a $0 balance on the revolver. Net leverage, as defined under our bank covenants, was 3.4x and the trailing 12 months leverage was 3.6x. Turning to the 2022 outlook, we are updating our guidance range, primarily reflecting the small acquisitions that we completed in the first quarter and the extension of the public health emergency by another 90 days. Additionally, 1 additional point of sequestration relief is included in the quarter. Specifically, our revenue range is now $2.840 billion to $3.040 billion, up from the previous range of $2.825 billion to $3.025 billion. And our adjusted EBITDA range is now $615 million to $675 million, up from the previous range of $610 million to $670 million. Recall that the guidance we provided in February already assumes that it will take the entire year before Respironics equipment is back on the market and that we would not return to prior allocations with ResMed until the back half of the year. As is customary, our guidance does not include contributions from acquisitions that we have not yet closed. I'll now pass the call over to Steve for some final thoughts before we open it up for Q&A.

Thanks, Jason. I'll finish by first thanking again our 10,910 employees for everything they have done and continue to do to address the needs of our patients in our communities in a safe and caring manner. Their efforts are greatly appreciated by the entire executive team. And before we turn the call over to the operator for Q&A, there are two additional things I would like to cover. First is an update on the Respironics recall and PAP shortage. This will ultimately be solved by a combination of Respironics coming back to the market with new devices, greater availability of computer chips and other suppliers increasing their offerings and capacity. We expect the backlog of patients waiting to be set up on CPAP will continue to grow until these supply pressures are reduced. This is consistent with our own experience in March and April, where AdaptHealth CPAP backlog continued to grow despite strong patient setups. Based on published remarks, we continue to believe it is unlikely we will see new CPAP units for sale by Respironics before January 2023. And our guidance reflects that assumption. However, we hope that other suppliers will be able to address their supply chain issues this year. As such, we continue to invest management time and resources in efforts to reduce historical turnaround times associated with CPAP equipment delivery and patient setups to ensure we maximize our market share when an adequate supply of CPAP units return to the market. Finally, as noted in our earnings release this morning, AdaptHealth's Board of Directors, with the support of our bank group, has authorized a share buyback program of up to $200 million of AdaptHealth common stock. This buyback program demonstrates our confidence in AdaptHealth's outlook and a belief that our common stock continues to trade at a discount to its immediate prospects and long-term value. With that, operator, please open the line for questions.

Our first question comes from Brian Tanquilut with Jefferies.

I guess, Steve, just to hit on that last part that you talked about with Respironics, where you mentioned the backlog. Maybe if you can share with us any color that you're seeing in terms of the backlog build and maybe even some of the conversations you're having with the manufacturers and how you think this will all play out in terms of market share shifting and maybe even supply shifting as things start to normalize presumably at the end of the year, towards early next year?

Yes, sure. Thanks, Brian, for the question. Definitely, the backlog for not just us, but for everybody in the industry, continues to grow because there's just less pass, even at a record supply that we've had the last couple of months, that doesn't meet up with the demand. So the backlog is going to continue to grow until those factors that I described are solved. And the main factor is chips. With chips, a lot of this could be solved by other people besides Respironics, but we want Respironics back in the market because they will bring chips into the market as much as anything else. So with that, what we're trying to do is, we're trying to minimize and get up as many paths as we can to minimize our portion of the backlog. So when they do become available, we'll be in the best position to fill not only our backlog but also the increased demand that's out there from these levels. So with that, you're seeing other providers come in or other manufacturers coming in there. ResMed has announced their cloud products that's going to add more products in there. They won't have the connectivity. They won't have the modem. So that puts additional work on the physicians' offices. But it's really important to get these patients as many as we can out there with that technology. So it's an older technology. We did it before, so we can do it again. But it will be in there since that machine to have all those benefits to it but just won't have that modem capability.

Got you. Josh, in your remarks, you mentioned being more cautious regarding acquisitions or perhaps slowing down and being more selective. Can you share what you're observing that led to this decision? Also, how does this impact valuations in the market as you've stepped back from acquisitions?

I believe our approach is influenced both by valuation and our focus areas. We are currently working on integrating the various acquisitions made last year while identifying opportunities to enhance profitability, free cash flow, and technology advancements within those businesses. This integration process naturally takes time. Additionally, there seems to be a market shift; we are uncertain about how valuations will settle, especially given the number of products available for acquisition and interest from other companies. Early this year, valuations were relatively high, but we are now experiencing a reset, partly due to inflation and the impact of Philips' recall, which affected some companies more than others. This shift is influencing negotiations, providing a valuation reset for several companies involved. Despite these challenges, we remain focused on identifying valuable opportunities, particularly those that could yield synergies related to our current operations. These opportunities are taking precedence over other potential deals due to the significant work and benefits they promise.

Got it. And then last question for me. If I may. Josh, you talked about care management quite a bit there. Just wondering how you're thinking about monetizing that or what benefit it brings to the overall enterprise as you get bigger in that service category?

Sure. So I mean initially, really, what we're doing now is really just trying to leverage our existing kind of distribution or existing relationship with the patient in the home to drive a better outcome. We were already doing this on CPAP and CPAP resupply in terms of adherence, lengthening out the amount of adherence that we'll do with the CPAP patient to really drive a longer-term better outcome. But now we're looking at that on diabetes, on COPD and CHF and some of the other chronic diseases that we're managing. So I think in terms of monetizing, I think it's really going to be a value-add for Adapt to be able to get into more value-based contracts and more value-based agreements to drive outcomes in those chronic diseases without much additional cost because I'll remind you, we don't have the cost of acquiring the patient or establishing the infrastructure to connect with that patient and interact and ultimately drive a better outcome. We already have a connected device in the home. And our ability to leverage that and really establish and get that data and also communicate that to the other stakeholders, like the doctors and the payers, is really going to allow us to drive a better outcome without much additional investment in terms of infrastructure. So we've got a number of things in the works that we'll discuss in the upcoming quarters.

Our next question comes from Joanna Gajuk with Bank of America.

So I guess, first, a follow-up on the Respironics recall, I guess. FDA has proposed to force Philips to their repair price or refund the record regulators. I don't know, was this refund part always part kind of, of the equation here? Is that new or I guess, if that was to happen, how would that kind of flow through to that customers that bought the failed device? And then eventually, how would it flow through to Adapt?

Well, yes, the refunds will be on the older products, and we'll probably utilize those refunds to get replacement products. So it will be new CapEx to come in there at a lower price is where you'll see it hitting the financial statements. We don't think this is significant amounts yet, but we're still doing the math. And the FDA is also continuing to put pressure on Philips as we are, too, about how to do some remuneration of these interim devices.

Okay. I have a question regarding Capital Expenditures. For the year, it seems you have kept the revenue ratio steady even though revenues have slightly increased. Does this suggest you don't feel the need to make adjustments for high fuel prices? Are you considering raising Capital Expenditures primarily for acquisitions, without any additional costs related to freight surcharges?

Joanna, it's Jason. Yes, the CapEx line, that's the right way to think about it. We came in at 10.9% of revenue for the first quarter. We think we'll get a little relief as the year goes on, particularly later in the year. Regarding fuel, some of that is really up in the COGS line. We did see several million of frankly, just gas prices for our fleet of 2,400 vehicles that just came out of the blue. It was hard to predict. And then, in terms of the added freight that we are incurring, freight forwarding from our centralized locations to our distribution network, that's up a touch versus prior year, but it's all baked in our guide, and we're feeling comfortable with what we're seeing. So it is contributing to higher COGS up within the gross margin. But we're feeling comfortable with what we're seeing and what we've guided for the year.

That's good to hear. Since we last spoke, those fuel prices have increased. Could you quantify the impact of the six acquisitions in terms of annualized revenue contribution and EBITDA?

Yes, we adjusted our revenue guidance upward by $15 million. Over two-thirds of this increase is related to our acquisitions. Among the announced acquisitions, one was significant, while the others were smaller but still valuable deals. We are confident in our hub-and-spoke model, so we estimate that approximately $10.5 million to $11 million of the increase comes from acquisitions. The remaining $3.5 million to $4 million in revenue is due to the extension of sequestration. This includes an extra point for the remainder of Q2, which contributes to our revenue, along with the Public Health Emergency extension for the next 90 days. Thus, the sequestration and PHE together account for about $3.5 million to $4 million in revenue, which will fully translate to our bottom line. In summary, our $15 million increase in revenue is driven by acquisitions and government programs, leading to a $5 million rise in our bottom line from those same factors.

Our next question comes from Andrea Alfonso with UBS.

It's Andrea for Kevin Caliendo here at UBS. Jason, I have a quick question. Considering the trends you’ve observed so far this quarter and your comments on sleep apnea today, could you provide some insight into your expectations regarding the EBITDA decline you mentioned last quarter for 2022? Wasn't the figure discussed around $45 million? Are you still comfortable with that range?

Yes. Based on everything we've seen in Q1 as well as for the month of April, we're very comfortable with the guidance. We're comfortable with the margin profile. I don't know that I would call a bottom yet on PAP rentals, but I'll direct you to Slide 5 in our earnings supplement. You will see that the $66 million of sleep rental revenue that we produced in the second quarter of '21. So this is before the recall and the PAP shortage. You do see it stepping down quarter-by-quarter. I mean, we produced $58 million of sleep rental revenue in this quarter. And could that be off another $1 million or $2 million next quarter? Possibly. But I think we're getting close to hitting the bottom on the rental side of the equation because as we get to Q3, we get an easier comp, and we think we'll be growing out of that. Now the other dynamic I'd point out is that despite that rental census shrinking on account of having less PAP units put out. I mean, our sleeper resupply operation is just humming. I mean, it continues to grow quarter-over-quarter. Again, you'll see that in that same Slide 5. I mean, of all of our highlights for the quarter, that's the one I think that we're just thrilled about. I mean, we continue to be efficient and grow that top line in the sales revenue, despite what we're seeing on the product side and on the rental side. So overall, we're very happy with that.

Got it. And then just if I could sneak in a second question. As I think about the drivers of better organic growth of the quarter, curious if that's a benefit from entering new business lines or the underlying demand in some of your higher growth markets improve, for example. And the reason I ask that is, the other revenue in the quarter is becoming a bigger percentage of the business. It's strong again. Growing 2x year-over-year. It's up in the mid- to high teens, sequentially. So how are you thinking about sort of those ancillary business lines longer-term?

Sure. I'll address the financial aspects first and then let Steve discuss the additional programs. Overall, we expected 4% organic growth for 2022, and we feel confident about that. The 3.7% growth for the quarter was driven by better-than-expected diabetes performance, surpassing our 18% target for the year. We're very pleased with that segment's growth. However, our supplies business didn't perform as well as anticipated, which slightly impacted our overall results. Nonetheless, we are optimistic about the organic growth for the quarter as we manage a diverse portfolio of products. Regarding other product lines, we have a robust hospice business mainly consisting of DME products, and our orthotics business has been experiencing significant growth, which we're very pleased about. The organic performance in that area is strong. Additionally, we've recently entered the home infusion market through acquisitions made in 2021 and early this year, contributing to our growth in that segment. This has resulted in a combination of both acquisition and organic growth, leading to a doubling of that category year-over-year. Steve, could you provide some insights on operational developments?

Yes. And so with the pandemic, there's ups and downs. We benefit from some things. We lose on other things. And so it's a net-net, pretty net neutral throughout that. But what we've been able to do, and we are very, very proud of the $700 million we produced in the fourth quarter and then to produce another $700 million in the first quarter was quite an accomplishment. When we said this on a call just 2 months ago, we really have that clarity in there that came through in March, and the team really worked hard. So our team is out there selling what they can control today. And they're focusing on stuff that they can control today and not very worried about stuff they can't control. And that's been the message that we've been able to deliver to them. And then our teams out there have performed tremendously. So there's plenty of products out there that patients need, and the referral sources want for their patients. And we can provide those, and that's what we're doing today.

Our next question comes from Pito Chickering with Deutsche Bank.

A follow-up to Joanna's question about the guidance raise. You said that the guidance raise is due to the deals in the government extensions. Are you sort of implying that despite sort of the increased fuel costs, obviously, the inflationary costs, we're seeing that there is sort of zero impact on your original guidance due to strong cost controls?

Yes, that's what we're indicating, Pito. In Q1, we experienced just under $2 million in unexpected fuel costs. We need to find a way to manage that. We have several strategies within our other operating expenses that we're implementing, and some of these need to be accelerated. However, there is year-over-year improvement in those expense lines as a percentage of revenue, and we're confident in our ability to achieve that. Overall, the only adjustment to our guidance is related to the government programs and acquisitions. As you know, we significantly reduced our guidance in the last call, and we are very comfortable with the information we've shared.

Right, excellent. For diabetes, typically, because of seasonality, first-quarter diabetes revenue typically are sort of 20%, 20% sort of annual revenue. So if I look at the 155, that would imply to diabetes revenues in the 740 range for the year. Is that the right way of thinking about diabetes?

You might be a little heavy on that, but you're in the ballpark.

Okay. And then let me sort of follow up on that one. When you guys break out the pro forma organic growth, is there any way you can do is sort of by product line like sleep and diabetes?

Yes, so when we put out the guide, we talked about a 4% weighted average for total top line. We call a point of that rate and 3 points volume. Rate predominantly from the DMEPOS Fee Schedule increase as well as some of the changes that came with the DMEPOS final rule. In terms of products, we had put diabetes at an 18% organic growth rate, and we feel very confident with that. If anything, we'll do a touch better than that over the course of the year. We had pegged sleep at about a negative 6%. I think we had 5% to 6% negative. We're doing a touch better than that because of the outperformance in the resupply that I mentioned. The other product lines, respiratory, we had at 5 points. We're in that ballpark. And then DME, other and supplies to the home, we had at 4%. As mentioned, supplies is dragging a bit. But overall, we feel great about the 4% at the portfolio level, and we think Q1 demonstrates that.

On the sleep sales revenues, regarding the resupply versus the rental, they were incredibly strong. How sustainable are these levels? Was it mainly due to catching up on backlog from customers who weren't ordering in the fourth quarter? Or do you believe this resupply is a sustainable level moving forward?

Well, yes, Peter, this is Steve. Yes, they are very sustainable. We just keep improving that program. Our team has done an incredible job with resupply. In electronic ordering, we've gone from under 10% to now over 40% of our patients ordering electronically over the past 3 years. We haven't cut back our staff, so we're able to use our staff to focus on the remaining 60% of the patients who need more time and attention. This continues to increase our orders and the patients' compliance with the machines. This is very sustainable, and we believe it will continue to improve.

Great. And then last quick question for me on capital allocation. I understand it's for a lack of doing sort of large deals as you guys integrate the regulations sort of normalize out here. I guess, what's your sort of view between share repo and reducing debt, obviously, has put through the $200 million share repo? Just curious, how you guys view buying back your own shares today versus deleveraging from here?

Yes. Thanks, Pito. The first thing I'd say is, if you look at our trailing 12 net leverage. I mean, we did come down 0.1% from Q4. We think that, that will continue as we grow and produce cash. In terms of the authorization, I mean, we'll be opportunistic. I mean, we think acquisitions and other-uses investment internally are just excellent uses of cash. But frankly, at the trading levels, I mean, we just thought and thought it was appropriate to authorize the program. And we'll use it as we see fit going forward. But I think in terms of capital allocation, you'll continue to see us do tuck-in deals. I mean, we're going to be very methodical and disciplined on that. And you're going to see the continued investment in technology and then obviously, the share repurchase program. Josh, I don't know if you have anything to add to that?

Yes. The acquisitions are still a big part of our story. But the comeback of PAP availability to us, which will come back, we need to be focusing on that and using our capital on that to take advantage of this once-in-a-lifetime opportunity for us to not only get our backlog but also a possibility to shift some market share. We're a leader in PAP. And this historic opportunity as a leader in PAP to actually increase our market share pretty significantly, coming out of this. And so a lot of the focus is on that. And we want to make sure that we have the product and the people and the focus to be able to do that. It's probably the biggest opportunity we've seen in a long time in HME. And so it's pretty high in our mind, needless to say.

Our next question comes from Mathew Blackman with Stifel.

I've got two. I just wanted to get after the M&A commentary one more time. And how do you line up sort of that more selective commentary with, call it, that historical $100 million to $150 million in acquired revenue target? Is there any way you could juxtapose sort of your new commentary versus that historical trend? And I've got one follow-up on diabetes.

Yes. So I'll take that. So I think, in general, that's been our guide, and we've exceeded it and lowered it, obviously, as appropriate. But again, that's still our guide. I think that's what we're looking at. There are plenty of deals in the marketplace for us to do. Again, we're talking right now about our focus, Q1, Q2. Again, in the back half of the year, depending on where CPAP supply gets, in terms of availability of product. We could dial up or down our ability to do integrations and acquisitions. We have 2 very, very powerful M&A teams that came together from AeroCare and Adapt. So in general, like we keep that target. And in general, we've hit it in over the last years that we've done it. And pretty much we're still thinking about that as a target opportunity for us in that range.

Yes, Mathew, it's important to note that the Community acquisition occurred on the last day of the year. Therefore, for us, it essentially counts as a 2022 acquisition. If you consider the revenue from that along with what we've already generated, we're either at or exceeding the lower end of our target range. We plan to remain highly active in pursuing acquisitions and revenue growth throughout the year.

Got it. Makes sense. And then diabetes, I'm just curious, do you typically see any uptick in that business with new product launches? I mean, there were 2 new CGMs on the market this year. There's a new patch pump out. These products are probably likely somewhat skewed to pharmacy, but they are big launches. I'm just curious, if you see any typical changes in trajectory around new major product releases in that diabetes franchise?

Yes. Thanks, Mat. This is Josh. So yes, in general, I think a lot of the new innovation that's coming to the market in diabetes is driving more and more patients into the funnel. And that's why I think we're seeing really strong underlying secular tailwinds there, in terms of patient demand. I wouldn't tie it to any specific product per se. But in general, I think both doctors, patients and the technology keeps getting better. And you're seeing more adoption. You see more adoption of patients in different disease states within diabetes and different levels. Both cash pay, out-of-pocket insurance space, there's a lot of interest in the diabetes supply. And I think that's why also our focus as a distributor is not just to distribute these products, but it's also how do we help that diabetic at home with that connected device, leverage that technology to be able to connect them with their doctor, with their health plan, with their health system and then really help them stay adherent to that therapy to drive better outcomes in the long term. And I think that's some of the advantage of going through distributors like ourselves and suppliers that really help hold the patient's hand. But in general, a lot of those new technologies come together that are driving a lot of patient interest and doctor interest as well in getting based on the therapy.

Our next question is from Whit Mayo with SVB.

Jason, I wanted to ask about your ERP and systems conversion. While some investors may find it less interesting, I'm quite intrigued. Can you provide an update on the work being done behind the scenes, including any developments on those initiatives and the expected benefits or positive impacts we might see in the next year?

Sure, Whit. My CEO and President are probably thinking I could talk about this forever. The significant effort is behind us now. We went live on February 1, and we have over 750 locations that are ordering products locally through an electronic system, moving away from the old methods of phone calls and post-it notes. In terms of adherence to the technology for three-way matching, we've identified various products coming in at prices that exceed what was contracted. This is one of the advantages of using technology for auto-matching and identifying discrepancies. Our purchasing teams are addressing this, and we expect to see dollar savings from it over time. Additionally, we anticipate continuing to tighten our payables for another quarter. Part of this is to avoid finance charges or late fees and to maintain the right relationship with our suppliers. We also plan to take advantage of prompt-pay discounts and other EBITDA drivers, which is encouraging. Lastly, while category management programs can operate without a top-notch ERP, having one makes it much easier. With improved visibility, we can manage spending in both direct and indirect categories. We are currently issuing RFPs for numerous locations that need services like internet, utilities, waste management, and security. Although these may seem mundane, the costs can accumulate significantly. A couple of quarters ago, we mentioned that we expected our general and administrative expenses to be about 5% of revenue, and we hit that target. We believe the investment in these programs will be very beneficial as they start to take shape, and we expect to gain operating leverage in our cost of revenue.

That's helpful. And maybe just one other question. I'm curious, as you look at the payers that you're working with, and we're hearing various anecdotes across different subsectors around payers being a little bit more aggressive on claims at it, pre or prior authorization, is there anything that you're seeing that stands out as being new or different? Your AR days look pretty good. So there's not really anything that I can pick up in the quarter. So just curious about just sort of your view around how payers may be changing their behavior.

Yes. I mean, first AR days, typically, RAR days grow in the first quarter. The fact that they stayed flat is an accomplishment to our RCM team that did an incredible job. And so what we're seeing from payers certainly, with the use of technology and the use of data, there's more and more interaction and more and more stuff that they can come in there and challenge. But at the same time, we're utilizing that data and making sure that our claims are filed accurately with the proper documentation. So net-net, yes, there's more activity. But net-net, we're ahead of the insurance companies with our data and our utilization of it. So our data lake and our data management and our data warehouse is fantastic. And so we utilize that to make sure that our denial rates get less each and every month as we put in rules to prevent those and added engines and all this kind of stuff that our RCM team works on constantly. And so that RCM team has done a fantastic job. And this will continue to get better. So we're ahead of the curve, but we do see more of it coming.

Our next question comes from Eric Coldwell with Baird.

I'm going to have to dig at the bottom of the barrel for questions here at the end of the hour. But maybe a bit myopic. The first one, in the conversation around the proprietary portal ordering, you tied into that labor expense being up less than 1% year-over-year despite wage inflation, labor challenges broadly. Was that a comment specific to the folks in the back office involved in ordering? Or was that a firm-wide conversation?

It's really a company-wide issue, Eric. Our headcount decreased by about 140 from last quarter to this one, which reflects a broad reduction across the organization. Regarding the operating leverage and our focus on G&A investment, it involves back office improvements and not just staffing—it's about being more efficient and cost-effective. I want to emphasize that we had labor costs at 26% of revenue in our guidance, and we feel confident in our current position in the low 25% range, as reflected in the Q that will be released later today. We're comfortable with this situation. This year marks a transition regarding our G&A investment; G&A expenses will rise, but we anticipate gaining operating leverage as we close out the year.

Yes. Eric, let me add to that. As we use our proprietary delivery solutions, which we call OTL, that engages the patient in an electronic manner that's greater today than it was yesterday. E-prescribed engages the referral sources in an electronic manner that's better today than it was in the past. And just those 2, and those are just 2 of many, significantly reduce our costs and being able to get the product to the patient and get the bill out the door in a more correct manner. And that's where the upfront cost is all the time. And so we are confident that through these technologies and keep getting more adoption of them throughout our referral sources and our patients and that electronic communication is critical to our success. And we'll continue to lower our cost of taking care of the patient.

That's helpful. You've discussed the CPAP business extensively today and noted that the patient backlog in CPAP continues to grow, which seems to be a common trend in the market. Could you remind us how many patients you have on respiratory therapy overall, whether that pertains specifically to CPAP or is more general? Additionally, if possible, could you share the current CPAP patient backlog and how it compares to previous figures?

Yes. I'd say, on the sleep side of the equation, Eric, I mean, we've got around 250,000 to 300,000 patients on rental census. Now the resupply census is well over 1 million. I mean, that's probably pushing 1 million, 4 million to 5 million. So that's really where that consistent recurring revenue stream is. And then every month, due to the 13-month rental cycle, certainly, we got patients starting and coming on census and you've got patients rolling off as part of that, completing that 13-month rental cycle.

I believe last quarter, you mentioned that the CPAP backlog in the U.S. could reach around 1 million patients by the end of the year. If that was you, could you confirm if that is still the estimate for the backlog as we approach the year's end?

Yes. That was definitely us. We were the one that brought that to light. And we are very confident in that number that, that will continue to grow, unless there's some significant mitigation from that, from the stuff we've already talked about. But there's a huge, huge amount of patients that will be out there. 900,000 we said, and we're very, very comfortable in that number, which means that number is conservative. And those patients all have a script and are looking for a place to get a CPAP. And so as a leader in PAP setups out there and have a significant market share, if you could guess our market share, we can't give that out for a variety of reasons, but if you could guess that and apply that to that, that would be the starting point of the backlog that's related to us. Now, we're able to supply more than probably the market does. So that's part of our strategy is to get our backlog relative to our patients, lower than maybe other people in the marketplace. And if we can do that, then we can take advantage of this opportunity as it comes to fruition certainly, eventually it will, whether it be early '23 or mid-'23.

There are no further questions at this time. I would like to turn the floor back over to Steve Griggs for any closing comments.

Thanks all for attending the call and appreciate your attention. And thanks for the questions from the various analysts. And again, thanks to all of our employees out there that on a daily basis go out there and take care of our patients. So I appreciate everybody. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.