Greetings, and welcome to the AdaptHealth Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 second quarter ended June 30, 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 Q2 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 a number of risk factors and uncertainties which are discussed at length in our annual and quarterly SEC filings. AdaptHealth Corp. shall have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, we will reference certain financial measures such as EBITDA, adjusted EBITDA, and free cash flow, all of which are non-GAAP financial measures. This morning's call is being recorded and a replay of the call will be available later today. I'm now pleased to introduce 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 June 30, 2022. As always, we are indebted to our 11,109 employees for the contributions they make every day to AdaptHealth's success. As we move into our second year together, we are very pleased with how well AdaptHealth and AeroCare have integrated operations and continue to take advantage of our scale as a full-service nationwide HME supplies provider. Results for the second quarter were consistent with our expectations and were characterized by many of the same themes that we've experienced in recent quarters. Our record revenues of $727.6 million, the sequential growth in our second quarter sleep business, and the improvement in our EBITDA margin give us confidence that we are entering the second half of 2022 on a strong trajectory to achieve our guidance for the year, despite inflationary pressures and supply chain issues that have affected us. Turning to the sleep business, we are pleased to report at quarter end, our census is up 16% from February 2022 when it hit its lowest level since the Philips recall began in June of 2021. 13 months into the recall, we have worked with our manufacturers to gain greater capacity and accelerate delivery of machines, thus enabling us to get more patients onto therapy in Q2. While we do not expect Philips to be back in the market any time before early 2023, the increased production we have started to see from other suppliers has become more reliable, and we have substantially increased our capacity to schedule and set up patients. We are, of course, incurring additional shipping costs and other incremental expenses, but we expect those costs to decline as normal supply returns to the market. We continue to drive double-digit growth in our diabetes business. Consistent with the market, for the year-to-date non-acquired growth is 17%, and we continue to expect solid growth for the remainder of the year. Even though growth in our non-acquired business was flat for the quarter, we feel comfortable with our guidance for overall non-acquired growth of 4% for the full year, largely driven by increased census in our sleep business and our continued growth in our diabetes business. Like most companies, our company is challenged by inflationary pressures and other supply chain issues. While these issues, especially shipping costs, including the price of fuel for our 2,400 vehicles have impacted our results, I'm pleased that we've been able to mitigate the impact of these pressures through our purchasing scale and use of technology to drive efficiencies. Further, the labor synergies we achieved with the AeroCare merger have minimized the effect of broad labor inflation, as demonstrated by our labor holding steady as a percentage of revenue. As a result of these factors, our gross margin has stayed relatively stable over the past few quarters. Finally, we are largely insulated from higher interest rates since more than 75% of our debt is fixed. Therefore, our cost of capital has remained favorable. I will now turn the call over to our President, Josh Parnes, for further details and an update on our strategic developments.

Thank you, Steve. On the strategy front, we continue to look for ways that we can leverage our infrastructure to address the broader needs of the 3.9 million patients that we serve. We were able to do that by deploying technology that optimizes efficiencies, developing capabilities to identify gaps in care, and making sure patients are getting what they need when they need it, as well as offering a comprehensive range of products and services to help patients wherever they are on their home health journey. In addition to driving better outcomes by keeping patients at home and out of the hospital, we can add value as an extension of their referring physician offices. We believe these investments position us well to advance our strategy beyond the traditional HME business model into more risk and value-based payment arrangements. For example, during the second quarter, we signed two new agreements with value-based managed care payers, one on the East Coast and one on the West Coast. We are leveraging our complete product offering, our geographic footprint, and our patient-centric technology to simplify and improve the experience for both payers and patients. This will add to our existing value-based portfolio, and we will continue to pursue similar creative arrangements. We remain committed to investments in technology that transform the HME experience for our patients, payers, and referring physicians. For example, our e-prescribe platform continues to make home health easier for our referring providers by allowing them to eliminate the hassle and paperwork of outdated and error-prone ordering methods, such as fax. We continue to see greater than 50% adoption in the regions where this technology is rolled out, as well as quarter-over-quarter growth of 7.5%. Our new e-ordering capabilities are improving patient experience by providing a channel of choice communication. Approximately 50% of all PAP and diabetes resupply orders in Q2 were processed electronically via our digital patient portal. Our e-delivery platform greatly increases transparency for order delivery, enabling every customer to rate interactions in real time and by providing real-time order tracking. 84% of deliveries in Q2 leveraged this technology. This system also facilitates real-time patient satisfaction survey results, allowing our branches to address any patient concern more timely. In addition to improving the experience for users, our combined digital platform for prescribing, ordering, and delivery helps control operating expenses, which we believe is particularly important given the current inflationary environment. We continue to believe that these technologies will allow us to keep our costs in line even as we scale and continue to grow. By making home health easier and more accessible for payers, patients, and providers, we can continue to gain share and volume within the broader home health industry. As we look down the road, these proprietary tools are the foundations for both improving our patient satisfaction as well as operating efficiencies and will help open the door to greater collaboration with our payers on alternative payment arrangements. With that, I'll pass the call over to our CFO, Jason Clemens, to review our financial results.

Thanks, Josh. Good morning and thank you for joining our call. I'll discuss the second quarter operating results, our cash flow performance, and capital allocation and conclude with a discussion of our 2022 outlook. We were pleased to again deliver revenue and adjusted EBITDA consistent with internal expectations, despite the ongoing impact of the Philips recall, inflation, and supply chain challenges. For the second quarter ending June 30, 2022, AdaptHealth reported net revenue of $727.6 million, representing year-over-year growth of 17.9%. Total company non-acquired growth was a decline of 30 basis points for the quarter. We were particularly pleased with the growth in Sleep, by far our largest product category. PAP rental census is growing faster than we forecasted. The first quarter outperformance in our PAP resupply business continued in the second quarter. Our respiratory and diabetes categories slightly missed topline targets, but we continue to believe that non-acquired revenue for the entire company will achieve our 4% guidance for the full year. We have not been immune to inflation and ongoing supply chain challenges, but we are very proud that our efforts to become more efficient and the scale and synergies resulting from the AeroCare merger have offset these pressures to a great degree. Specifically, the cost of goods, which includes freight and fuel, held steady as a percent of revenue against the first quarter. Additionally, despite a tough labor market, salaries, wages, and benefits were also flat as a percent of revenue against the first quarter. We believe our operating results for the second quarter demonstrate that we are accelerating operating leverage by driving costs and inefficiencies out of our business model. We remain confident that we will achieve our full-year guidance that implies a 21.9% adjusted EBITDA margin at the midpoint, which already reflects the impact from a temporary mix shift toward sales revenue away from higher margin rental revenue. Free cash flow, defined as cash flow from operations less capital expenditures, was $26.3 million for the quarter, surpassing our expectations. Capital expenditures of $77.2 million remained in line with our guidance, representing 10.6% of revenues. We converted more inventory into sales, we compressed days sales outstanding by three days and as planned, we decreased accounts payable. So we are very pleased with cash performance. At the end of the quarter, we had cash of $119 million and an undrawn revolver with net leverage, as defined under our bank covenants, of 3.4 times and trailing 12 months leverage essentially unchanged at 3.5 times. As previously announced, our Board of Directors authorized a share repurchase program. During the second quarter, we've repurchased 199,000 shares for $3.4 million pursuant to this program. Turning to guidance, as noted in the press release, we are maintaining the outlook we provided last quarter for revenue of $2.840 billion to $3.040 billion and adjusted EBITDA of $615 million to $675 million. Consistent with previous periods, our guidance does not include contributions from acquisitions that have not yet closed. I'll now pass the call back over to Steve for some final thoughts before we open it up for Q&A.

Thanks, Jason. Over the past year, our employees from the legacy operations of AdaptHealth, AeroCare, and many of our acquisitions have come together as one AdaptHealth. I would encourage you to visit our website and click on the 'We Are AdaptHealth' video which highlights the many accomplishments of our fully integrated organization. So again, I would like to thank our 11,109 employees for their united commitment to our mission of empowering our patients to live their best lives. We are pleased to announce our Capital Markets Day on September 16, when our team will demonstrate how this commitment leads to superior results and create significant opportunities for our company and our shareholders. We will present specific achievable targets for the next few years and demonstrate how we are preparing for the unique opportunities beyond the current time horizon. With that, operator, please open the line for questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Brian Tanquilut with Jefferies. Please proceed with your question.

Hey, good morning. I guess my first question is for Josh. You called out sort of the weakness, the relative shortfall in diabetes, and I know that's always been a strong spot for you guys. But maybe just any color or thoughts you can share on what is driving that and how you're thinking about the recovery in that segment line?

Yeah. Thanks, Brian. So I think, in general, we look at this kind of quarter-to-quarter and generally from a year-to-date we're pretty happy where things are and kind of in line with our forecast. We do see some movement quarter-to-quarter as well as depending on where we were at last year. Last year we had a lot of acquisitions that came on ramping up the resupply, and obviously, the first six months this year not having much in the way of acquisitions is going to affect the growth rate there. But in general, we're not seeing anything structurally there that's concerning overall kind of performing where the market is right now.

Got it. And then I guess for Jason. I know you said in your prepared remarks that the expense lines and overhead basically came in line with your expectations, but any thoughts on the ability to perhaps bring down G&A a little bit going forward, or is that just operating leverage that we should wait for as the top line comes back with sleep and diabetes recovery?

Sure, Brian. So you might recall, I guess, two quarters ago we spoke about planned investments within G&A, specifically technology, we've referenced Oracle, also upgrades to the infrastructure for our OTL or e-delivery technology as well as the e-ordering platform that Josh referenced in his remarks. So at that time we also had planned for about 5% of revenue to be spent in G&A. And when you account for kind of add backs related to transaction costs, we’re spot on that number. So I wouldn't expect any operating leverage out of G&A until the end of next year, but again, these are planned investments. We are very confident these investments are going to get operating leverage out of the core part of the business. And so, we think they're smart ones.

Thank you. Our next question is from Kevin Caliendo with UBS. Please proceed with your question.

Thanks, and thanks for taking my question. I just wanted to ask a little bit about the backlog. It sounds to me like your commentary suggests that maybe things are loosening up a little bit more than maybe you had expected a quarter or so ago in the second half, you're getting more supply. How does that compare to where you were before in terms of how much of the backlog you might be able to work through this year and how big do you think that backlog of patients sits now versus where it was last time you gave us an update on that?

Yeah, thanks. This is Steve. Great question. So the backlog generally maintained its level, but in this past quarter and in the first month of this quarter, we have at least been able to set up what we've been able to get as new referrals. So the backlog stayed. We look to have a pretty successful third quarter as more product is available. So it's definitely ahead of expectations, both on ResMed and other suppliers. ResMed with their card to cloud certainly has helped considerably with that, and then other suppliers coming on the market have also helped. Then if that can continue, then what you see is the compounding effect of those increased CPAP setups continue to grow our revenue, rental revenue, and our resupply revenue, just as we've seen in the compounding effect negatively for the first nine months of the recall.

I know you, I think, done six acquisitions year-to-date. If you are getting more comfortable about supply coming back to the market, does that make it easier to do further M&A going forward, because I know that we had been somewhat hamstrung you in terms of getting deals done?

Well, yes, that certainly was a big factor in there. So I think we will be looking for more acquisitions and considering those more. I think we're past the Oracle conversion. That was part of it too. Getting caught up on all the activity we did in 2021. So we're in pretty good shape. And so, if we see something that's attractive, I think we'll be much more attentive to it than we were in the first half of the year.

Thank you. Our next question is from Joanna Gajuk with Bank of America. Please proceed with your question.

Hey, good morning. Thank you so much. So a couple of questions, I guess. So first a follow-up on the 4% growth for the full-year organic growth that you also continue to expect. So can you talk about how the Sleep business is tracking organically? Because it sounds like things may be a little bit better than expected, so any change there in terms of your expectations before I talk about, I guess, a 5% to 6% decline for the year. So, kind of where you stand versus that for Sleep, specifically inside your guidance?

Hi, Joanna, it's Jason. I'd be happy to address that. To start, we had anticipated the second quarter to be about flat in terms of non-acquired growth year-over-year. This expectation stems from comping against a period that is not truly comparable, as it was before the Philips recall when there was a full supply of PAPs available. While it's comparable from a financial standpoint, operationally it was quite different. We did expect flat results for Q2. Looking at the bigger picture, when reviewing the product lines, we noted a slight miss against our internal targets in both respiratory and diabetes. The respiratory segment was affected by the ongoing decrease in COVID-related census, resulting in a small miss internally. On the diabetes front, although we had a strong performance in Q1, Q2 was somewhat softer. Overall, we are pleased with the 17% growth. On the other hand, regarding Sleep, we significantly exceeded our internal expectations. We discussed the setups, as Steve mentioned, and we remain optimistic through July. The reason we are confident in achieving the 4% growth target for the full year is that we have some variabilities to consider. While respiratory and diabetes may continue to slightly underperform, we believe that the Sleep segment can outperform and bridge that gap.

Great. That's good to hear. I guess regarding the guidance, the PHE extension is a couple of million?

Yes. Yeah, the way to think about that is $3 million to $4 million a quarter, we had referenced that in previous calls. Frankly, $3 million to $4 million on a $3 billion business, that alone, there was no M&A that we have done since the last call. So in the aggregate, it just didn't hit the threshold that we felt that was important to raise the guidance. But that is a tailwind that we will have for Q3.

Thank you for that update. It sounds like you are making significant progress with value-based purchasing and adding more contracts, which is encouraging. Can you provide additional details about the scale of this initiative? I'm curious if you could share an overall sense of the size of this business in terms of volumes and revenues, as well as any insights regarding margin expectations for that segment. Thank you.

Hey, Joanna. I'll start on kind of the math side and then I'll pass it to Josh on the framework, which we think is important for folks to understand of those contracts. And so, in terms of the percent of the business, value-based arrangements were kind of non-traditional fee-for-service arrangements. They account for about 3% of our total revenue. We are pleased with that part of the portfolio. The margin profile, to your question is very consistent with the overall margin profile for the rest of the company. But the stickiness of these contracts is very, very good because of the benefits and the value that we offer to payers and patients. So I'll pass to Josh to explain a little more.

Yeah. So just touching a little bit more on that. So from a macro perspective, in terms of the opportunity, as you know, kind of a lot of these contracts, the sales cycle is generally pretty long. So a lot of discussions and others have been for a while and continue to happen, and we continue to build our pipeline out. What I think is unique here is that our ability to leverage some of the new technology that's come online internally, matching it up directly with the payer to be able to offer cost savings and kind of a value-based arrangement that allows us to take some risks on these patients. A lot of these contracts are kind of ramp, initially, you'll take them on with a kind of pilot period, not necessarily pilot, but a Phase 1 where you get one product line, and the fact that we have multiple product lines allows us to feed more product lines into that value-based arrangement as we go further along. So again, initially exciting, but we'll continue to look for these to ramp over time as well as, like you said, look for other opportunities and continue to push on that front.

Our next question is from Pito Chickering with Deutsche Bank. Please go ahead with your question.

Hey, good morning guys. Thanks for taking my questions. And apologies if I missed this, and you mentioned the diabetes organic growth rate of 17%. But can you walk us through the organic growth for each product division during 2Q and what you assume in the back half of the year to get the 4% organic growth.

Yeah. Sure, Pito. So diabetes running a touch light against the 18% that we've got included in guidance. As we stand here today, do we think Q3 and Q4 will be above 18%? I don't know that we're confident enough to say that. I mean, standing down a potential recession and those are high-priced products. So we have a very insulated portfolio we believe from overall recession, but if there is a potential drag, it's likely in that diabetes products. So don't misinterpret that as we don't think we're going to get close to 18%, but I don't know that we're going to beat it. In terms of respiratory, we're running a bit light. We talked about 5% within respiratory. Again, that's COVID census rolling off, they are rolling a little faster, we will lap that probably mid to late Q3. And so we expect Q4 to be back in line, so we feel pretty comfortable there. The HME and other product lines, we forecast that at 3% to 4%, it's running about in line, maybe a very touch light. I mean, I know everything we've seen on electives is a minor slowdown. I don't think it's anything that we're losing sleep over in terms of the overall delivery. But the big news I think for the quarter is Sleep. I mean we had projected a negative 5% to negative 6% non-acquired growth rate for Sleep back when we produced guidance. We think we're going to beat that, maybe handling. I mean we were a touch positive for Q2, which against a very difficult comparable comp period that we talked about. I mean, we were thrilled with that. So if the themes continue, we're very comfortable with 4% for the full year.

Thank you. Our next question is from Whit Mayo with SVB Securities. Please proceed with your question.

Hey, thanks. I might follow on that last question maybe a different way. I mean, Jason, sitting where we are halfway through the year, you've got a pretty wide range out there. And I mean, do you feel like you're tracking to be closer to the low end, the midpoint, the high end just trying to maybe take your temperature on where you feel you're tracking within the guidance range? I mean, the low end looks like you could be flat year-over-year and the high end, up over 20%. So I don't know any help or color around just how you feel about where you're tracking within the guidance range?

Yes, sure thing, Whit. I mean, I guess I'll probably give you an expected answer. I mean straight down the middle is where we are tracking. Now kind of the gives and takes that could change that throughout the balance of the year, of course, we were thrilled with the sleep performance in Q2. So if supply remains steady and/or increases, which as we stand here today, we believe it will, that's going to be a tailwind, both top line and certainly bottom line. I would say the next factor is arguably diabetes; if all things remain equal and we are kind of steady as she goes. We think we're right at that mid. Now do we accelerate in the second half as some of the manufacturers have indicated they believe will happen? Well, that's obviously to the good and if recession is more than expected, and that's a drag on the business, that's more to downside. But as we stand here today, I'd say mid is where we feel comfortable with diabetes. So, I don't know, Steve, Josh, if you got anything to add on that?

No, I think the big swing could be the continuing of the PAPs. As we sit right here, July was a great month, August should be a great month but we don't know our allocations for September, October, November, December. Last year, if you remember, we were expecting this boom in December and our allocations were pitiful. So we feel like a lot of that's been corrected and suppliers have a lot more confidence. But they're not willing to guarantee anything to us. So we still have to live on that apprehension at least for the next few months.

Yeah, for sure. And I think there are a few folks jumping at the bid on this question, because we were thrilled with the performance. Integration is a component, as you referenced. You might recall, DSOs spiked to 50, even 51 in Q3 of last year. That was a lot of change over to a single tax ID for the AeroCare and the AdaptHealth merger activity. But then following July 1, I mean, we had about 15 or so acquisitions that we also brought in. And so you've just got that dynamic of onboarding a whole lot of business from a whole lot of operating system. So big picture, that's what you're seeing as we move into Q3 and we've integrated the Rev Cycle operation and we're delivering the performance that we're seeing. I mean, you want to talk a little dynamic patient pay or other factors, guys.

Yeah, I mean. Well, first of all, we'd like to brag on our RCM team. They are fantastic. They've done an incredible job, and the process is something that we look forward to continue to improve and continue to do, but the process is much better. But this was a new process for a significant part of the company, certainly for the AeroCare folks and certainly for any kind of new acquisitions that come in there. And just to get used to how that works. And as a flow paperwork and getting paperwork in the system quicker, faster, better, getting this to the payer quicker, faster, and better, and getting resolutions quicker, faster, and better. And so that team, we're very proud of them, again, they're doing a great job. And so we expect continued great results from them throughout this year and certainly beyond.

Okay. Great. Thanks guys.

Thank you. Our next question is from Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Hey, thanks guys. Quick question on your investments in technology. You had mentioned that your e-prescribe platform had 50% adoption in regions where it's rolled out and that 50% of your PAP and diabetes resupply were electronic. Can you discuss maybe the gating items that govern adoption going forward and increase penetration of your technology platforms? Kind of how you see timing unfolding and what that could mean for margins? Thanks.

Sure. Thanks. So this is Josh. As you know from an e-prescribed perspective, a lot of that is our sales team has shifted from kind of sales reps that go in and introduce themselves to the doctors to really working on the technology side with the physicians' offices and driving change management there. As you know, e-prescribe in the HME space is really serving to document the entire medical necessity lifecycle of that order, and therefore there is a fair amount of training and change management that needs to go into that. So the fact that we have 50% plus adoption in areas where this is rolled out is pretty monumental if you think about the amount of work and change that needs to happen both at the physician practices and at the hospital case management level. So we're very proud of the team to really be able to take that initiative and drive that change. On the e-order front, on the resupply and the diabetes, a lot of that evolution is driven by two things: number one, the technology development, and as that gets more intuitive. I referenced channel of choice communication with the patient. So a lot of that is really identifying where the patient likes and is more comfortable getting communicated with and being able to drive resupply and general communication to that channel where that patient or customer is more comfortable ordering products. And then secondly, really there is a change management aspect from a patient perspective where they're used to getting calls or emails or even postcards back in the day to ordering digitally. And when you're dealing with a little bit of some of the senior population on some of these product categories, being able to drive adoption there is somewhat of the gating item. But number one, as the baby boomer population ages, as well as our technology gets more intuitive, we're going to see more adoption in those categories as well.

Hi, this is Colin stepping in for Matt. I want to follow up on M&A. Has there been any change since last quarter in your approach to mergers and acquisitions? You made several acquisitions during the quarter, but those were announced during the first quarter call. Should we expect that reaching the historical range of $100 million to $150 million in acquired revenue includes the Community Surgical acquisition you completed at the end of last year?

That's the right way to think about it, Colin. I believe it's primarily for tax purposes and other factors. You can consider that as a deal from 2022. It was completed on the last day of the previous year, but most of the integration work and significant efforts have been our focus throughout 2022.

Right. And then a quick one on the other segment. You mentioned hospice, orthotics, and home infusion really being drivers here. How should we think about those businesses ramping up and what would be a good sustainable growth rate that you believe is realistic, or would that be more of a question for Analyst Day?

Yes, it's more of an Analyst Day, but we really like that business. The orthotic side is very strategic for us to connect with health systems and expand into other areas. I think that segment will grow significantly, likely in the low double digits. We're still in the early stages with the infusion businesses; growth will mainly depend on the operations we have post-acquisition. We've significantly expanded that area, but I wouldn't expect major growth there. Everything ties into what Josh mentioned. As we secure contracts and strengthen relationships with health systems, we can provide these products to them with relatively low sales costs. This aspect is what we are most excited about, as it also holds growth potential for us.

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

Well, once again, we just like to thank our fantastic employees who have done a great job over these past few years, in particular, now with not just the pandemic, but also the Philips recall and having to deal with taking care of our patients and sticking to our mission, which is to empower our patients to live their best lives. And we appreciate the support of all of our shareholders and appreciate the support of the people on the call and thanks again.

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