All right, we'll go ahead and get started. I'm Richard Close covering digital and tech-enabled health services here at Canaccord. Thank you for joining the conference. Excited to have Adapt Health here. A lot going on in the business, to say the least. So from the company, we have Suzanne Foster, CEO, Jason Clemens, CFO, also Luke Montgomery of IR here as well. So thank you for joining us. Obviously, a lot going on. So glad to have you here. You reported last week, so it's probably worth it. just, you know, go over last week's results, what the main takeaways there, obviously some volatility. So, you know, maybe what investors are missing or, you know, some of the points that came up would be great.

Great. Well, thanks for having us. And thanks for the opportunity. So I think, you know, to understand Q2 results, I'd like to just take a minute to talk about, give some context to anyone who's new to the story around what we've set out a couple years to accomplish. I won't go into too much detail but I think it's important to understand where we are in our journey. So Adapt Health, a couple years ago I came into the role and at the time what we found was we were a company that was made up of over 150 acquisitions, small acquisitions that came together. The company was founded about a decade ago in a time when durable medical equipment and home medical equipment were going through one of the first consolidation times. The government had come in, put in a competitive bid. The industry was made up of a lot of mom and pops. ADAPT saw an opportunity back then to consolidate and bring these companies together because they figured size and scale mattered. You fast forward to a couple of years ago, the acquisition strategy had been very successful. We had become the number one in terms of size and scale, but a lot of the integration work, the workflows, the inner operations of the business, really we were still operating not as one big company, but as a bunch of little parts, and we've been on this journey to integrate that and establish more standard work. in a market where we saw that there was tremendous growth. And so we had set out two years ago to say the first thing we need to do is drive organic growth. We had stalled in our growth really from a capacity perspective. Without that standard work, we couldn't quite drive the capacity we needed. We also had, through that acquisition strategy, acquired a lot of technology or product portfolio that was subscale. and the and we we had to pay down debt that was kind of the key mission we were on so over the last two years what we did is we immediately set out on a product portfolio rationalization which is really came to a conclusion in Q2 you know in Q2 we announced the sale of our diabetes business for reasons I can go into later our e-commerce business we we spun out we exited some of our supplies, dropship business that is subject to future competitive bid, and that followed a series of dispositions over the last two years, all with the intention of focusing the business on sleep, respiratory, and supporting home medical equipment. And that strategy is because we believe the sleep market is enjoying a very good time right now. Sleep awareness, all of the GLPs, the wearables, it's driving awareness, And that market is growing, evidenced by our growth of 15% this last quarter. We're, we're breaking records in terms of referrals coming in. And then respiratory, the same thing. That is a steady business growing with the population. And so we have very strong clinical value propositions in those two mark, in those two segments. Um, so Q2, if I, if I summarize, we had a lot of moving parts in terms of the portfolio, um, completing that portfolio rationalization that I just talked about. talked about, but there were two isolated situations that we're working through. So the base business is performing well, 16% growth atop across the board, 10% coming from our new West Coast expansion and a contract with a big IDN out there, an integrated delivery network, and over 5% coming from the base business. But the two issues that we're wrestling with was one, we finished our first full quarter of taking on the new capitated contract. We service, we're responsible for 13 million of their members, and we onboarded all of that into 40 new locations, new people, new sites. And there was just things in our assumptions a couple quarters ago that didn't go the way we thought they would. We have experience in capitated, but there was things that we just missed in the first two quarters of how that onboarding would happen. So we're working through that to get that profitable and stabilized. The second issue we had is we announced that we had a supplier manufacturer situation where on June 30th we couldn't reach or we didn't have the opportunity to reach the right terms and given the timing of earnings call we had to announce the risk we saw if we couldn't reach the right outcome in terms of a rebate volume structure. So those were the two things we highlighted. And that really, I think, is the summary of Q2.

You hit on a lot of the stuff I was going to ask. But let's hit the diabetes first, because we sat down in early June and talked about where the business was or is and where you are positioned in it. So, you know, it wasn't, I guess, too surprising to see something happen with the diabetes maybe sooner rather than later. It came sooner rather than later from that standpoint. But, you know, talk a little bit about the decision to get out of diabetes. Obviously, a lot of change has happened in that product category over the last handful of years.

But you stabilized it. um you know consolidated the resupply to nashville and and saw some improvement there so why ultimately was this the right time to sell that business sure so um you know our business we report in four segments there's about 600 million that sit in a diabetes business and a couple years ago again just the context here was we we we weren't sure there was a strategic fit with the rest of the portfolio for diabetes specifically, but we said to everybody, we need to first fix this business. It was declining growth. It was in a lot of trouble. And we couldn't tell immediately if it was our execution or if it was industry dynamics. And so what we said to everybody is, first, we're going to get in there and figure that out, stabilize it before we can even sell it. And sure enough, it was a combination. there was what was going on in the diabetes business is there was a shift to pharmacy not medical benefit so you know that big shift there and the second thing that was happening um later was that there was a competitive bid that came those two things were happening we had more but I said at the time I don't think those were the things that were ultimately driving our perform our results performance was a real issue and if you listened historically we talked about what we did to fix it. And I said, let us stabilize it. Let us fix it. We know how to do it. And then we'll make the strategic decision of whether it fits into our portfolio. And so about six months ago, maybe a year ago, we realized the cross-sell opportunities, the hypothesis that originally existed when the prior regime bought diabetes in, brought it in, didn't hold true. And so as the competitive bid became a true fact that it was, you know when the government came out and said yeah there is going to be competitive bid for this we thought we're not the right owners for this for two reasons because we we don't just we don't you have a warehouse distribution so there's some margin that's taken out there we'd have to invest in a pharmacy channel a real one in order to win and the other markets we serve sleep and respiratory are much more attractive so for us to take a dollar and put it towards building the capability that we would need to make diabetes profitable and successful just did not make sense with our debt profile and the use of capital. And so opportunistically, we started conversations with a buyer who has all that. They are the perfect owner for this asset. They, you know, Cardinal's buying it. They have, I used to work there. I know this. They have have a warehouse system that's dedicated to their at-home, perfect, very scalable. They have a pharmacy channel. They had just purchased ADS. They're buying into this market. The remote item delivery for competitive bid is going to really shrink this to a couple of key players. They are perfect to win in this market. So it was essentially a win-win in our opinion, where it allowed us to exit it, put it where it belongs, allow us to take our capital and our attention and our focus by simplifying the business and use that to pay down debt and to also put all the extra dollars we have in growing our sleep and respiratory business.

Okay, that's helpful. With that transaction, there's some impact with respect to guidance, and you called out $60 million in overhead costs that remain with, you know, the go forward business. Can you talk a little bit about that $60 million? And there's some coming out over a period of time. What about the remaining? Can you get that out?

Real quick on that. I don't need context there. So $60 million staying with continuing ops. And we think half of that will come out within the first year. So think about this. There are things that are staying with the business that we will not need after we transact. And so we think fairly shortly after closing the deal, we'll be able to work on getting a majority of that out. But we've said, you know, over the course of the year, we'll get half of that out and the other half will get out through growth and tuck in M&A in our sleep and respiratory core in that second year.

Okay just to dive deeper into the capitation you guys have a pretty it's relatively new to the area or the industry over the last handful of years you've had success with Humana, um, and you get this great contract, uh, with a large West coast. Um, can you talk a little bit about confidence in capitation agreement, uh, agreements going forward and then how you're thinking about what has happened initially with this onboarding? It's the biggest ever, right? Um, so how confident are you with that book of business going forward?

Sure. So when it comes to capitation, I think, I believe, been in health care my whole career, that an alignment of interest is what you're trying to drive in health care. When you compare a capitated model to a fee-for- service model, just in the spirit of the administrative costs, the investment, the ease of doing business, the eventual cost per transaction of patient is much better under a capitated model and that is proven out particularly with our humana relationship if you were around the story back then there was a blip when we brought that on that was a big deal we went through a blip we thought we solved for all those problems in our new one but there were other problems that I'll come back to and so stepping back what capitation does for our business is it smooths out the transition from that patient from the prescriber to us. It allows us not to need salespeople around that business because it's an exclusive relationship. It allows us to go in, secure that volume of patients, and then get what we call the halo effect that imagine you're a referring provider in a location and two of the five or three of the five main insurers that you prescribe for, you have to use ADAPT. You just by habit start saying I'll use adapt that's what we call the halo effect and we've seen that happen and then specifically to our West Coast we were very concentrated in the East Coast Midwest East Coast company we had a really very little footprint in the California's Oregon Washington so when this opportunity came up to service this IDN with 13 million members we knew that we had to put in the infrastructure. They were leaving a company they were with for 21 years and they wanted to come over to us. We committed to building the infrastructure, but the other reason they wanted to come over is because they wanted better service and they wanted our technology. We can come back to technology later, but we believe we're leading the industry in the ability to have a digital engagement with a patient and the way that we receive the referrals from our hospital customers. And that was the value prop. So we went into this with the investment to stand up 40 new locations, hundreds of, not thousands of vans, our fleet, thousands of new people with this new partner. Even the best planning, there were things that the partner didn't even know. They had been in such a long-term relationship that they weren't even sure how their hospital systems were operating. So I've explained it as there's really two things going forward. One is the utilization data. We're coming to terms with them on what is the true baseline and how do we make sure that some of the startup utilization we share in that and we're having discussions so that we can get to a straight utilization that these are based on. The second thing is the way it's ordered. So even though they have a national footprint, in the West Coast, they own hospitals, and their ordering patterns in their hospitals is just stat or urgent, regardless if that patient needs it immediately. And so in the first quarter of servicing this business, we responded, and we went to the nth degree to make sure that our service levels were top-notch. That came with a cost, even though the patient may not have needed it. And so now what we're doing with our partner is realizing how we scale that back, things like drop ship, the use of technology, what can be ordered urgent and what cannot be ordered urgent. And so that's why I'm very confident we're going to fix the cost basis in this. And then the last piece of that West Coast expansion is the assumption always was that once we get in there and these 40 locations can be used to service just that customer and it's stabilized, that we would then be able to go in and get the fee-for-service business in the rest of that geography. And we haven't been able to do that right now. It's not a lever we can pull because the government has what's called a DME moratorium. You can't get a Medicare provider number right now. Now that is expected to hopefully get, there'll be news out in August around whether that expires or continues. We're hoping it expires because we believe the government realized that that goes against their competitive bid strategy. And if that happens, we can start now adding salespeople to bring in additional business into that. Now, we didn't need that for the outlook of that deal, but that will be, we are ready to take on your business on that footprint, and that will be incremental growth. Because remember, we've been driving this. We believe this is durable growth out there, and we've been driving it through thinking that we could build on that footprint.

Good. You covered a couple of my questions there that I had. And the halo effect is real. We've seen it with other companies we've covered have been on the wrong side of that. So looking forward to that. Jason, maybe on CapEx, I mean, to stand up this contract has been pretty significant in terms of the increase in CapEx in the first half of this year. Some of that's one time, I guess, one time maybe. Can you talk about what you think the right CapEx is for this business on a go-forward basis?

For continuing operations, we think just a touch above 13%. So between 13% and 14% of total revenue is the right way to think about CapEx on the go-forward business. I would say about 90% of that, given the quarter. is patient equipment capex um and then finally uh you know particularly in q2 there was considerable capex uh non-patient equipment uh about 25 million dollars mostly vehicles but also the build out of warehouses so some leasehold improvement racks and stacks and uh and those kind of things that are that are capitalized but but going forward we believe this is a 13 to 14 percent of revenue CapEx business.

Okay, perfect. Let's talk about some of the, we've covered some of the problems, but like what's going right in your business. And you talked about sleep, respiratory study. What's making the sleep market so good at the current moment? You also did a JV recently. So I want you to talk a little bit about that and what the opportunity is. But just on the sleep, you know, where can we go from here?

So we like this market a lot. What we're seeing is that, and you know, hey, listen, you can also listen to like ResMed's, you know, earnings that really talks about, I think they've done a really good job in terms of the clinical value of the product. So it always starts with the value proposition of the product, which I think is tremendous. And now with this rise in wearables and GLPs, there's hope for people with sleep disorders. And they're coming in and saying, okay, it's a multi-prong approach. I don't just have to wear a CPAP, but I can also go on GLPs that help me feel better. And now I'm sleeping better and it's this cycle. Wearables are alerting people that, wow, maybe I have it and I didn't even realize I wasn't sleeping that well. So those trends seem to be real and we're seeing that in record referrals coming our way. What we're trying to do is the way our business works is that the manufacturers are out there with sales forces pitching why use their particular product, right? So you'll have the React and ResMed and maybe eventually Philips or even, you know, Fisher PayCal. they're out there saying use our product doctor our sales force goes in and says when you decide then service that business through us we're the ones that will source the product we will build the insurance and we will get the product to the patient we're trying to make that as quick and easy as possible for the patient because a lot of time traditionally a patient would go in and have to have a sleep study within a sleep center they'd have to wait months right now to get that. What's also happening is there is this introduction of home diagnostic testing where literally you can take a test at home and you can have a CPAP sometimes within a week. And that's changed the market tremendously because the steps that were required even a year ago were long and onerous. After you took the sleep study you'd have to wait for the result, you see the doctor again, then we'd have to get a hold of you, play phone tag, you'd have to come in to a setting and be taught how to use it. All of that has changed. With home diagnostic testing, virtual setups, and what I talked about in the earnings call, this introduction of AI face mask fitting, you can do everything from your home now and be on therapy within days. And so we're trying to drive that streamlining of making it easier for patients to get on. And then And once they're on, we've built that digital engagement where you don't have to wait for a call from us to reorder every quarter. You can immediately now through my app, my Adapt Patient Portal. But I know for other industries, it seems weird that we're just getting an app, but yes. And you can go right on and order whatever it is you want. You can chat. You can ask clinical questions. So streamlining that, I think, is also driving adoption and adherence at a level that we've never seen before.

Can you talk a little bit about the progress with the technology and the MyApp in terms of the adoption?

Sure. So we set out about a year, a little over a year ago, to say we need to really strengthen this relationship directly with the patient. So we came out with MyApp, and each feature comes out literally monthly. monthly, we're coming out with new features. And the latest one, like I said, we're connecting into things like AI mask fitting that allows patient, well, I talked about that already, that allows for completion from, hey, do I have OSA? So they'll get the app right at the time before they're even a patient. We're building out that to say, first of all, you can decide whether or not you even have it, all the way through billing and resupply. And that's all technology that we've built into Maya.

All right. Should we think about customer acquisition costs or marketing and advertising?

No, because what we're doing is our sales reps now go out with a card that has a QR code on it. And essentially, they're leaving in the doctor's offices. The doctors love it because at the time they say, you know, hey, Richard, I'm going to prescribe you this. scan this qr code and from that moment forward you're already in touch with us and so we're taking that workload off of the patient i mean off of the doctor and so they're handing these out they have little things in their offices they also we are also partnering with home diagnostic testing companies that says here you can go refer be referred here so you're essentially bypassing in-person sleep clinic to some extent we're giving that option there's way too much demand. There's a long wait. And so we're trying to other ways to get people diagnosed early. We are investing in that through my app. So there isn't a customer acquisition cost. It's just educating the doctor that it exists.

We have a minute left. We should talk about capital allocation. You mentioned on the diabetes, using that proceeds to pay down debt.

Can you just you know give us some uh thoughts in terms of you know going forward what your capital uh allocation strategies yep super easy first it's you know continued organic growth the volume is out there the market is out there we're going to continue to um you know invest in our sleep and respiratory and where it makes sense in our whole medical equipment to support those two markets. The second one is pay down debt. We've committed to it two and a half times. We're going to hit that. And then the last one is any tuck-in M&A in the sleep and respiratory space focused on either geographies that we need or proximity to geographies that we already secure.

Good. Well, I think we're about out of time. Thank you. Obviously, a lot going on, So I appreciate you guys being here, but a lot of positive things going on as well. So thank you.

Thank you, Richard. Thank you, everybody.