Q4 2021 Adapthealth Corp Earnings Call
[music].
Greetings and welcome to the adapt Health's fourth quarter 2021 financial results Conference call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation finally, what should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the call over to Chris Joyce General Counsel. Thank you you may begin.
Thank you operator, I'd like to welcome everyone to today's adapt Health Corp Conference call for the fourth quarter and full year ended December 31, 2021, 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 a supplemental slide presentation regarding Q4 and full year 2000.
'twenty one results is posted on the Investor Relations section of our website.
In a moment, we will have some prepared remarks from Steve Greg <unk>, Chief Executive officer of adapt.
Josh <unk> as president of adapt health and Jason <unk>, Chief Financial Officer of a desktop will then open the call for questions before we begin I'd like to remind everyone that statements included in this conference call and in our press release May constitute forward looking statements within the meaning of the private Securities Litigation Reform Act. These statements include.
But are not limited to comments regarding our financial results for 2021 and beyond actual results could differ materially from those projected in forward looking statements because of a number of risk factors and uncertainties, which are discussed at length in our annual and quarterly SEC filings adapt healthcorp shall have no obligation to update the information.
<unk> on this call to reflect subsequent events. Additionally on this mornings call, we will reference certain financial measures such as EBITDA adjusted EBITDA and adjusted EBITDA less patient equipment Capex all of which are non-GAAP financial measures. This mornings call is being recorded and a replay of the call.
I'll be available later today I'm now pleased to introduce our Chief Executive Officer, Steve Griggs.
Thank you Chris.
I want to begin with a review of 2021, and then provide an outlook for 2022.
For the past two years the worldwide pandemic has directly impacted every part of our business. Despite this and the added stress caused by higher supply supply chain related cost and the reduction in supply of CPAP devices I am very proud to report our business has grown and prospered.
<unk> more than doubled in size in 2021 as measured by a 102% increase in net revenue and a 99% increase in adjusted EBITDA.
We now provide needed and often lifesaving equipment and supplies to approximately $3 8 million patients. Each year every day more than 32000 patients received delivery of our products in order to live healthier lives and their homes.
We now have 11049 team members across 757 locations in 47 States and is a testament to their hard work resilience and creativity. They were able to carry out our mission and I. Thank them all for their continued dedication.
Adapt he'll always strive.
To serve the needs of our patients and referral partners in spite of any short term disruptions.
The February 2021 merger with Arrow care was the most significant driver of our growth in 2021 by all metrics, including the achievement of projected synergies. This transaction has been a great success for <unk>.
Aside from the financial improvements. We also brought together enhanced both companies' best in class technology solutions with the Arrow care merger and the 22 other acquisitions. We did in 2021, we are now truly a national company, thereby enhancing our value proposition for managed care partners and referrals.
In addition.
We also expanded our direct to consumer E Commerce operations in 2021.
I think it's also worth noting how our capital structure evolved to fund these acquisitions and to begin to simplify our balance sheet.
Since July 2021, we have raised $600 million in fixed rates debentures as rates have begun to rise that transaction looks increasingly attractive in retrospect. Some of these proceeds were used to retire expensive debt that adapt health had incurred as a private company with a balance used to make accretive acquisitions.
The most significant challenge we faced in 2021 and they continue to face with the June 2021 films Pap device recall, the resulting reduction in supply of pad machines, which.
Which has had a more negative effect on our business than originally contemplated.
Unfortunately, Phillips, who will be unable to provide new CPAP devices for longer than we originally anticipated and other manufacturers have been unable to make up for the shortage.
The demand for these products continues to be robust, but we were unable to fill the needs of all of our patients in the fourth quarter and are projecting a continued shortfall in devices through 2022.
This shortage will end at some point hopefully by the end of this year and when it does adapt health will be well positioned to resume its historic organic growth.
As these situations improve we believe the actions we've taken and the investments we've made to ensure patients and referral sources are taken care of position us well to gain market share going forward and now I'll pass the call over to our President Josh Paris.
Thank you Steve I'd like to add my thanks to our adapt health employees for their hard work throughout the past year and their ongoing dedication to improving the health of the $3 8 million patients we serve on an annual basis.
In an environment of increased cost and supply chain challenges. It is even more important for us to be best in class operators as measured by efficiency in cost over the past 12 months, the arrow care and adapt health teams have worked side by side to integrate our businesses bring together, our best in class technologies and maximize financial.
And operational synergies for example, we implemented an enterprise wide delivery tracking system that allows for real time updates to patients waiting for their equipment as well as a consolidated sales reporting platform, which gives our sales teams continuously updated patient orders statuses that are vital to our physicians and facility referral partner.
This produces a measurably better customer service experience for our patients.
As Jason will also touch on a bit later, we're excited to have also launched our enterprise wide Oracle ERP system on February one, which will dramatically improve visibility into our business and its trends.
Im also excited to announce the December 31st close of our acquisition of community surgical supply a clinically focused homecare equipment and services provider with over 50 years of healthcare experience headquartered in Toms River, New Jersey community surgical is the largest HIV and respiratory acquisition and adapts history.
Outside of the Arrow care merger, adding approximately $100 million in annual revenue.
This transaction further expands adapt health already robust product offering and the New York, New Jersey, MPA markets as well as many surrounding states enhancing patient service levels response time as well as deepening our relationships with local referral sources.
Consistent with many of the transactions, we complete community surgical brings not only strong operational and financial performance, but also experienced sales and executive leadership, we have known and competed with this team there for 20 years and we are thrilled to be joining forces. This combination brings the complementary strengths of both.
The organizations together.
The integration is well underway and we expect a smooth transition with high expectations for improved performance in patient care.
<unk> continues to invest in innovative workforce solutions and technologies that not only enhance our operating efficiencies and leverage our capabilities, but also continued to move us up the chain of value based care.
The company already has over $50 million and programs underway with managed care payers based on shared savings and value based reimbursement models and as these programs prove themselves out through improved cost of care as well as better patient outcomes and satisfaction, we anticipate the opportunities with Payors will continue.
To increase.
We believe that as the last mile provider into approximately $3 8 million patient homes across all 50 states. We are uniquely positioned to add significantly more value in the coming years to the health care continuum.
We will do this by continuing to work with our payer and referral partners to improve clinical outcomes through the connected therapies and devices that we provide and we're excited about what the future holds on that front.
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 will discuss the fourth quarter operating results, our cash flow and capital allocation activity for the fourth quarter and full year 2021, and conclude with our updated guidance for 2022 for.
For the fourth quarter, ending December 31, 2021, adapt health reported net revenue of $702 million representing year over year growth of 102%, including contribution from the <unk> acquisition that closed in February 2021.
Organic growth for the quarter was two 7% and non acquired growth was two 4% as outlined in our earnings supplement.
As Steve noted we were pleased with our ability to deliver revenue ahead of expectations. Despite the ongoing impact of the Philips recall.
However, our profitability was negatively impacted by these factors.
Leading to adjusted EBITDA and margin below our expectations, specifically adjusted EBITDA was $158 million for the quarter, representing adjusted EBITDA margin of 22, 5%, which included the onetime benefit of $11 million in Prs funds.
While we had anticipated some cost pressures related to these factors our margin performance was further affected by lower than expected availability of taps for manufacturers, which resulted in lower rental revenue.
Even though <unk> resupply in diabetes products outperformed these businesses carry significantly higher cost of goods relative to the rental business, thus, reducing our overall EBITDA margin.
On the positive side, we were pleased to see sequential improvement in cash flow performance for the quarter.
Recall third quarter 2021 cash flow was lower than normal due to a temporary spike in dsos, partly related to the consolidation of billing operations in connection with the integration of the <unk> era care acquisition.
As expected <unk>.
Collections improved sequentially contributing to free cash flow of $37 million during the fourth quarter up significantly from negative $33 million in the third quarter and representing just over 5% of fourth quarter net revenues.
Additionally, the company increased inventory levels in order to mitigate continued supply chain disruption and we anticipate that inventory levels and they are will remain elevated in the short term and convert to cash over the next few quarters.
For the full year cash flow from operations was $276 million and free cash flow was $72 million, we estimate that the recruitment of cares Act funding and other factors represented an approximate $70 million reduction to cash flow for the year.
We expect $13 million of final recruitment and approximately $10 million of other onetime impacts in the first half of 2022.
Even with this continued recruitment of the cares Act funding, we expect to improve free cash flow conversion and we remain comfortable with our long term target for free cash flow of approximately 6% to 7% of net revenue.
We also remain confident that our acquisition strategy is adding significant shareholder value.
Note that for the 22 transactions, we completed outside of Aero care. The average multiple on last 12 months EBITDA was under six times and year, one performance has exceeded that through synergy.
That being said, we acknowledged in an escalating rate environment will be increasingly important for the company to exercise discipline with capital allocation decisions.
At the end of 2021, our net debt to adjusted EBITDA leverage was just under three two times as defined under our bank covenants and leverage on trailing 12 month EBITDA was three seven times avail.
Available liquidity was approximately $585 million, including cash on the balance sheet and the revolver.
Turning to our 2022 guidance, we are updating our outlook based on the latest developments and what we are seeing across the business lines.
As discussed in this morning's press release, we now anticipate fiscal 2022 net revenue of $2 85 billion to $3.0 billion to $5 billion.
Versus our prior range of $2 7 billion to $2 9 billion.
And adjusted EBITDA of $610 million to $670 million versus our prior range of $635 million to $695 million.
We continue to anticipate total capex, representing 9% to 11% of net revenue.
Although we believe the organic growth for our business in a normal operating environment is at least 8% given the performance in the fourth quarter and the continuing impact from the recall, we think it is prudent to set 2022 organic growth at a midpoint of 4%.
That includes about one point of pricing from the dummy post fee schedule and about three points from volume growth.
We also added approximately $100 million of revenue through the community acquisition discussed earlier.
As it relates to our previous guidance, we are now estimating a $45 million greater reduction in our EBITDA from the Phillips recall and Pap supply challenges and the resulting impact on our rental mix.
This was partly offset by contribution from the community acquisition that was not in our previous guidance.
Although we believe the pops shortage as discussed on this call will alleviate by the end of 2022, we believe it is appropriate to rebase our guidance with the assumption that it will take the entire year before a restaurant ex equipment is back on the market and that we will not return to prior allocations with our main supplier until the back half of the year.
As is typical our guidance does not include contribution from acquisitions that have not yet close with that I will turn the call back over to Steve.
Before we start the Q&A I would like to make a few additional comments about the past supply situation, where now you're the first or second largest provider of perhaps in the country.
So the current shortage of supply will affect us, but only as long as this temporary situation persists.
We estimate that over 2 million paths are delivered in a typical year, but with a shortage of supply that began last year, we estimate that only approximately 70% of the patients who will need machines will receive them.
This suggests that at the end of 2022 after a year and a half of reduce Pap supply there will be approximately 900000 patients diagnosed with OSA waiting for delivery of path device to begin their prescribed therapy.
Given our leadership position in the industry, we expect to capture a significant share of this backlog and benefit from the historic organic growth of the sleep sector.
Operator, please open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of <unk> Chickering with Deutsche Bank. Please proceed with your questions.
Hey, good morning, guys. Thanks for taking my questions I guess going back to the 2022 EBITDA Bridge, you said that the.
'twenty two guidance.
Guidance came down at the midpoint by $25 million, you said that CPAP.
It was actually 45 million worse can you just sort of get back to that if rates are where we were before.
What are the good guys and bad guys here, just so we understand better sort of what what occurred.
40%.
Got it.
Hi, Peter Good morning, this is Jason.
Sure I'd be glad to address that so.
To help shine a light on the trend we saw in Q4 I'd point you to slide five in our supplement.
Yeah.
That sleep rental line is really where the big impact is and we just missed on the Philips expectations. I mean, we tightened the band last quarter to expect about a $10 million hit and the reality is that came in closer to 30.
Plus another five in oxygen noise really just we had we had a bit of a COVID-19 spike in Q3, and those patients fell off faster than we thought so that was that was about $5 million, but the $30 million on the sleep side. If you look at Q2 2021 that that sleep rental run rate was about $66 million well.
It is declining but not as not as rapidly as it might appear because certainly we have acquisitions that are that are piling in there. So what we should have expected on a normal.
Both rate of about 152% sequentially per quarter.
That's 66 should have been closer to about 69 in Q4 and that same unit portfolio. If you will and delivered 52, so ended up missing by.
17, and then there is a compounding effect within within sleep resupply so.
That's some of the gory detail what we're seeing in Q4.
As we bridge to 2022.
Yes, we brought guide down by $45 million. So most of that is the.
The negative impact of the recall and the continuing trend that we saw in Q4.
At least for the early part of 'twenty two.
We haven't we have noted some upside for dummies supposed to be scheduled and kind of pag.
<unk>.
And then $20 million for community, so that that'll that'll bridge out to six the 640 <unk> and our midpoint.
Got it so I mean, so fundamentally actually ironically, the guidance would be going up if you guys did not increase the <unk>.
Pat Pat headwinds, which should fade when Phillips gets their act together.
No question, Yes without question I mean, we had last quarter. When we reported November 4th we thought the impact of the recall in 2022 would be in the neighborhood of $20 million. So kind of the same as the same 20 million. We added back out 21, we thought that that would be about 20 million first half 'twenty two.
And now just with a much bigger Miss in Q4 that number is closer to 65.
No.
FAP rental impact in 'twenty, two so yes without the impact we would have been up.
Appointing but its just where we are okay.
One more quick question here can you walk us through looking at 'twenty. Two we've obviously seen a lot of manufacturers face both wage and raw material inflation are you seeing any vendors trying to push through price increases to you guys. How should we model gross margins until 'twenty two thinking about comments you have your long term contracts versus manufacturers.
Push price thanks, so much.
Yeah sure Peter I mean, I'll start on the numbers side, and then I'll pass it to the guys to talk operationally what we're what we're seeing so first the <unk> schedule was announced in mid December so that was around.
Ballpark, 5% increase and we've accounted for that in our guidance on the top line. So we brought we brought topline up about a point.
Maybe a touch higher.
As you heard in my prepared remarks.
But that that Medicare dummy plus fee schedule increase I mean, that's a very heavily inflation based metric.
Which is a good thing because we're certainly seeing inflation as you said so.
There is some dollars pass through of that but.
Downstream, if you will at the manufacturer level.
There are certainly seeing inflation and surcharge on raw raw materials and so.
Sizeable portion of that increase.
We'll hit our Cogs.
Guys you want to weigh in on what you're seeing with the main manufacturers operational.
Yes, certainly they have particularly the public ones that we deal with you have seen that their price raises that they posted so we're dealing with those.
Outside of that in the state by the way.
Outside of that.
Nonpublic ones have also tried.
And successfully raised their prices too.
The level of.
The increases that we've gotten so that's been good but the freight surcharges increased freight expenses certainly are being passed on to us and we look for those as post supply chain issues and steps that should be start come.
<unk>.
Coming off.
Towards the later part of 2022.
Certainly into 2023.
This is Josh I'll just jump in for one second here a little color. So what we baked in also for for 'twenty. Two was not only on the shortage of the past and therefore affecting the rental sensors, but also.
We're spending a fair amount of money expediting.
Whatever product, we could get our hands on because strategically we want to be positioned coming out of 'twenty two to be able to capture market and be able to capture a referral sources that stuck with us or didn't get perhaps from other vendors. During during this Phillips recall issue that we expect the last kind of mostly most of the 22 with the back half improving a little bit but jen.
Early we baked in a more kind of conservative approach to how quickly we feel thats going to resume but theres a fair amount of airfreight.
Airfreight and other very expensive freight forwarding costs that we're incurring strategically because.
Because we feel that obviously this is going to impact us in 'twenty, two but we really want to be positioned to jump out of the gates in 'twenty, three and beyond to capture that backlog.
Okay. Just one question on the exposure.
Shipping.
On the CPAP or you have to do that on a diabetes, just because I know that the margin on diabetes center in ladies are expediting shipping that can really crushes margins I believe.
It's just on CPAP right now.
We're not having any kind of not having any access issues with other suppliers at this point.
Thank you.
Thank you. Our next question is come from the line of Brian Tanner correlate with Jefferies. Please proceed with your questions.
Hey, good morning, guys.
My first question just on CPAP, just stay on the topic.
Steve you talked about how there's backlog building here. So how do you envision that being recaptured I mean, obviously folks are still showing up in doctors' offices.
Is there a system that.
You guys are putting in place to keep track of that as you get the referrals or.
You know kind of like your thoughts on how this will all play out as we look past 2022.
Yeah.
Thanks, Brian Yeah. The backlog is going to continue we keep track of those patients. They come in there. They are being told that it's used to be at a.
A few weeks before we could get there Pat now it's a few months.
And they are going on that list in that list and unfortunately in the time to get on there is growing but they are doing on that side.
Doctors are sitting there, saying well I'm not sure I want to prescribe if with this long list them, we tell them well the list isn't getting any shorter as far as time periods. So let's get them on the list. So the doctors are continuing to prescribe but.
Doing a better job of educating the patients upfront of this <unk>.
This global supply chain, so they're on a lets now the reality is as we know.
Building.
Being in this business for as long as they are the longer between when something is order to when it's delivered the higher likely of a decline that's going to happen. So X amount of those patients will decide.
Boy I don't need this but that doesn't cure their sleep apnea.
So there's still going to have it so let's get back into the system later, but I think it's really really important to understand that approximately 1 million patients will be out there with a prescription for a path device.
And so they're going to be looking for somewhere anywhere get that solved and so right now it's just going to be on who can process to get that product. So we're all getting the same allocations of our historical demand. So we're just keeping track of them and we're getting them done as fast as they can and they just fallen into into the line in the queue and we keep them.
Formed.
Gotcha, and then I guess, Jason just to follow up on Peter's question from earlier.
Maybe looking past the CPAP discussion just because we've spent a lot of time on that already but as we think about the other product categories, how should we be thinking about.
What you are seeing their growth wise and then what youre seeing in terms of the margins I guess diabetes is one that we can focus on for a little bit here.
Yeah sure Brian So I'd say, there's no change in our guidance on the organic growth within each of these product categories.
Outside of sleep, so I'll start there.
Diabetes, we believe we will grow.
At 18% or more.
In 2022.
We believe that that respiratory will grow 5% in <unk>.
Thousand 22, and we believe that the.
The HMA and other categories will grow at.
At 4% in 2022, so there's no change there we think sleep when you look kind of big picture, it's probably down about five or 6%.
Year over year, and so when you run the weighted average of that you'll you'll land right at that four points in our mid.
So no change across the other product categories I mean, if it weren't for the recall I think we'd all be feeling pretty good about about about the quarter and where we're headed.
But outside of sleep and get our hands on paths I mean, it's all it's all systems go.
In terms of margin.
Youre seeing deterioration in <unk>.
Q4, as well as into 'twenty two.
Again on that sleep wine.
New us of the rental product lines and the billing that comes with that and just the accounting that comes with that is.
Rental revenue doesn't drop the margin the same as a dollar of sales revenue.
So on the rental side of dollar rented.
Rental revenue drops essentially 100% to EBITDA, I mean, probably 95% or so because yellow equipment depreciation in there but.
It essentially all drops down.
On the on the sales side, so if youre looking at diabetes or Pap resupply and supplies to the home.
Gross margins are depending on product anywhere between 30% to 50%.
Although we outperformed on those re supply lines and we felt great about that.
That's coming with a very heavy cost burden.
Mentioned in my prepared remarks, so only 30 to 50 cents dropping depending on the on the product.
And we lost rental and we lost rental big.
That 25 incremental.
Just that we mentioned and so that's all dropping down on accounts for when you take up the RF basically Mr made by $20 million.
And so that math is carried forward into 2022, you'll see that in our overall margin profile were shown adjusted EBIT of 21, 9%.
At the mid we've got every confidence that that will repair to the upper 20, three's pushing into the low 24.
Percents as we exit 'twenty, two and look ahead to 'twenty three.
So I appreciate it thank you.
Thank you. Our next question is coming from the line of Joanna Good Chuck with Bank of America. Please proceed with your questions.
Hi, guys. This is actually according fondue say Andre Joanna Thanks for taking the question.
So turning back to the inflation conversation you guys mentioned I think last quarter that you were seeing some minor staffing shortages in some back office positions like delivery personnel.
Can you just give an update on what youre seeing there now and I guess, what is the wage inflation for those physicians looking like.
Well certainly on that on what you have to pay people. The cost has gone up and so we are building in it.
2% to 3% there because we already took care of most of them in 2021, but going forward with both that and they're on.
On the personnel side.
We've had some challenges with.
Personnel and the beginning of 2021, but as the year has gone out and now with less cash.
Tap available that's actually freed up some people to be able to use split to use in different functions and different things. So.
As far as the personnel side its still we were still having a hard time getting people, but our need is just less in 2022, then it would've been.
With it.
Without the path to re supply issues. So that's kind of the offset of the good news related to we can certainly add more people to be able to perform the functions thats needed out in the field.
This is Josh I'll, just add a little color to that which is.
One of the things that we do with some more efficiencies on technology, we are essentially not as much of a people business. There's a lot of other folks in the home care business.
So back office revenue cycle management customer service positions are.
Are less impacted in terms of we can use technology and other things to drive efficiencies, there, which somewhat offsets the increase in labor as labor comes up and we get more efficient.
Really seeing labor as a percentage of revenue increase that much.
It's kind of that's a good story here that we feel like we have that at a good spot in terms of we don't expect any any any massive deterioration on the on the labor to net revenue line, yes add some specific numbers to that.
In Q3, our labor as a percent of net revenue was 26, 1%.
It's actually come down a touch.
So in Q4, Youll see when that when the K drops early next week.
We're down to 25, 3% now some of that is the outperformance of revenue specifically in diabetes and <unk> lines. So again, we feel great about that but.
We're holding firm at that 26% of revenue in terms of labor. So as Steve mentioned, we are facing some pressure and ideally we're not gonna grow labor at the same level of growing revenue that's not ideal but.
We're certainly not growing any faster.
Yes, that's really helpful and I guess, just one last one for me you guys mentioned that the recall impact is coming in worse than expected.
We have a longer overhang in what you were initially baking in so could you just talk to your kind of the cadence of what you are currently assuming in terms of how the supply chain improvement largely plays.
Plays out.
Yeah, so in our guidance, we show no product from Philips.
So Philips is able to produce product and for new patients in 2022 that would have been increased our guidance and our guidance also we show.
The historical allocation from our estimate if <unk> is able to produce more product than their historical that will improve our guidance.
But to date, they haven't been able to do that except for the last few months.
So.
That's what's going to change the guidance and looking forward I will tell you. This though the people at <unk> are working hard to try to figure out how to get more product into place. They have the manufacturing capacity to do it. They just don't have the components if they get the components they will get product out there to.
See there production beyond before before Philips gets there why because they will have a a permanent you know market share increase so they're desperately doing it at the same time Philips knows that so they're desperately trying to get the market back to market faster too.
It's just a race between those two if you will and we will be the benefactor of it I think it's important to realize that every path may.
We will be put out in 2022 every Pat made in 2023 will be put out and probably every Pat made in 2024 will be put out.
So there is a.
And the supply chain and the chips related to that won't last forever and when it does I think theres going to be plenty of product and plenty of patients waiting for that product.
Okay. Thanks, guys Super helpful.
Thank you. Our next question is coming from the line of Kevin Kelly <unk> with UBS. Please proceed with your questions.
Good morning, Thanks for taking my call.
Yes. My question is around the acquisition environment. When you have these kind of pressures.
And supply chain issues.
Does it limit or does that prompt you to want to slow down acquiring products like does that create more of a log jam for you. If you continue to buy or.
Or steady state in let's keep going in the plant isn't really for near term, but for long term can you sort of help us think about how this impacts your acquisition strategy.
Yes. It is.
Definitely going to affect our strategy, so, let's say, there's a provider out there.
That's a great provider, but they were a heavy Philips respironics customer.
So you know I.
I just don't think we can make a deal with them that they would accept it would have to get very very creative and that kind of.
And most of the smaller players out there are predominantly fill ups. If you look at the market share that <unk> had.
I think all the three major suppliers.
Well over what they what they were in the market share. So that means everybody else was predominantly.
Philips provider.
So when you go out there and look at those we just can't do that today. So if we had a great company. We looked at their heavy fill ups I just don't see how we can make a deal that they would accept so within that.
That limited assess and then we.
This great acquisition that Josh is leading and community that.
We feel very very great about it because it's right within our marketplace.
The deals that we'll be looking at will be smaller in nature that will solve specific needs in specific markets.
So yes, I think you did look to that that in a normal environment, our acquisitions would be a lot higher than we expect them to be in 2022.
Josh Yes.
Yes, I mean, I think I think like Steve said, you know, obviously Phillips have bee suppliers will be impacted in terms of both valuation and how we think about those deals in 'twenty two because it's essentially.
Even some of the deals that we did in 'twenty one.
Are those deals that that had a bigger philips kind of allocation of their business affected our total supply. So we're having to take whatever path, we could get our hands on and have to allocate to those acquisitions as well and that's why you're seeing some of the impact even in the core business is we're trying to feed some of these some of these acquisition.
That we did with product when they historically wouldn't have had had we not bought them that being said on.
On the diabetes front on other kind of respiratory HIV supply providers was worldwide wide breadth of products. We're still in the market kind of strategically looking at opportunities geographically looking at opportunities definitely we have a lot to digest I will say that we have community coming on in at a 100 plus.
Deal now.
Nice geography presence for us up in the northeast. So we feel really good about kind of being able to wrap our arms around that and utilizing kind of that clinical respiratory focus to grow in what's a very fast growing kind of end market at that size, but I think around the country are really looking at kind of alright, whereas our geographies that we want a little.
More density what products and teams are strategic are there any technologies that are embedded in any of these organizations, but I would definitely say kind of we're being more prudent focus and also focusing internally on digesting a lot of the deals that we've done in 'twenty, one and we feel really good about being able to extract some some real opportunities.
<unk> added those as well that we anticipated in terms of synergies and operating efficiencies. So we have our work cut out for us and you're still going to see us active but it's definitely a focus to digest a lot right now.
Fair enough if I could ask a quick follow up.
How should we think about cadence for the year.
Your expectation the backlog starts to get better as the year.
Now I'm going to look a little bit more back half weighted because of that or is there anything we should think about when modeling out the.
In the course of the year.
Hey, Kevin This is Jason.
Let me round this out.
But in terms of the numbers yet, yes, I mean, it's probably slightly more tilted than normal.
I think we've talked about 22% to 23%, maybe 20%, 24% Q1 <unk>.
Last quarter as a percent of kind of annual revenue that that probably comes off a point, maybe a touch higher.
Due to this now for the rest of the business I mean again, it's all systems go and everything is operating as normal and so.
This sleep rental as a percent of total is certainly going to tell us a little bit.
Again, a little lower in Q1 and ramping as the year there was a one.
Guys, you got anything to add there no I think thats right.
Alright, guys Thats been really helpful. Thanks, so much for all the info today.
Thank you. Our next question is coming from the line of Mathew Blackman with Stifel. Please proceed with your questions.
Hi, Good morning, everybody. Thanks for taking my questions just a couple for Jason Jason in the fourth quarter or is it possible to tease out.
And to get to sort of an adjusted for Colorado or in more normalized organic growth number the impact of Philips and also some of the contracts. He exited in early 'twenty. One I assume those were also a headwind can you give us sort of a more normalized organic growth number if that's relevant.
Yes, Matt sure be glad to do.
So I guess first I'd say on the exited contracts side Youll see youll see in our supplement we typically call out that impact from from Tcs.
That's that's dwindling as we expected in Q4, it was probably I don't know, maybe 2 million $3 million.
Compression over the prior year, you might recall that was closer to seven between seven and $8 million per quarter at the beginning of 'twenty one because of those contracts were exited late 2020 and early 'twenty one.
We're now we're now reaching a more normalized level with PCI. So theres a couple of Bucks there, but the big picture is really on Philips we talked about.
$10 million expected.
Miss in Q4 and that ended up being 35%.
So adding that back in and yes, you're going to be at a more normal upper single digit.
Call it 7% to 8% organic growth if you if you make that adjustment.
Again, we think it's prudent to expect closer to four.
Overall for 2000.
22, and certainly that changes.
We'll provide that update.
I appreciate that and then just on the guidance range is mostly on the EBIT EBITDA.
Range.
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It's still a sort of a toggle that gets you to the upper to the lower bounds or are there some other elements that.
That push you one way or the other that we should be keeping an eye on.
Yes.
What's the right way to look at the toggle.
Think some may look and say well Gee, you're margins coming off so much.
Contemplating.
You know a material cost out initiative or something like that in our responses were not I mean, we know how to do that I think we've demonstrated that in the turnaround of Tcs and just other other cost out initiatives, we run over the years here, but.
<unk> com, we're not going to we're not going to we're going to have enough people, we're not going to have in our bodies enough trucks enough.
Everything we need to meet the demand that Steve talked about and so we think the right thing to do for this business is hold firm.
Keep the trains running and do what we do every day taking care of patients.
And wait this out I mean, that's our that's our view so you know as we get late in the year.
There's further disruption outside of what we're already thinking we contemplate something like that sure, but we just think where we are where we're going to need a lot more of everything we got if it could be perhaps come through.
Got it thank you.
Thank you. Our next question is coming from the line of David comment with J P. Morgan. Please proceed with your questions.
Hey, good morning, all thanks for the question I'm doing.
Sort of updates and ticking and tying to your new commentary. This morning I wanted to go back to your traditional metric of EBITDA minus patient Capex I see the total capex is wrapped around I think $300 million, but I wondered if you could comment on whether we could use.
A sort of a subset of that patient capex or maintenance capex, that's more sort of apples to apples on the whole 300.
Hey, David sure so.
I'll point you to the <unk>.
Yes release that came out this morning, the statement of cash flows you'll see the purchase of equipment of other fixed assets at $203 million.
In addition.
I don't think we have it in the press release, but you'll you'll see it in the K and in every time, we produce statement of cash flows theres a bit of a supplement at the bottom that will call out equipment that was acquired when leases.
That was it's been about $23 million through Q3.
So I'd really add those numbers together and call it two and a quarter maybe 230.
You'll also note when the K drops we had zero dollars of equipment acquired through leases.
We're really seeing that activity.
One it was just part of some deals that we cut at the manufacturer level earlier in the year and secondly, we just think it is going to provide a much cleaner view.
Free cash flow.
So overall, that's the two in a quarter, maybe $2 30.
And then.
In terms of kind of maintenance versus growth I mean, we generally run about a point so we're guiding 10% of revenue.
In terms of Capex for 2022, so 9% of that.
Would be from a patient equipment and called about another point from non patient equipment.
Okay, and even if that 9%.
It seems to be an uptick versus.
Just seems to be that there is some non maintenance in there I'm not trying to squeeze every last time out but to the extent that you can comment on how much that might be supporting growth or maybe I'm misreading that.
No I don't think Youre mystery at all David I mean, some of this is what we're seeing in terms of freight forwarding and surcharge activity and just the cost to acquire these units that is increasing now and so you've got this.
Technically get a benefit on capex that we're putting outlets perhaps.
No we're not happy about that because we want to put out where perhaps but.
There's a little bit of noise in there, but in general we're just seeing surcharges freight forwarding impacting that line, which is why we brought it up a point last quarter.
Very good thank you.
Thank you. Our next question is come from the line of Ben Hendrix with RBC capital markets. Please proceed with your questions.
Thank you Hey, guys. Just wondering if you could briefly go into little more detail on the community community surgical acquisition and kind of the impact on business mix and kind of what that acquisition looks like with regard to the charts you have on page four.
Yes.
Hi, This is Josh I'll take that so community search Bill is really a kind of clinical respiratory program that focuses on oxygen ventilation sleep and also full service at HMA.
They also have a nice amount of business in a couple of different visits which we feel is potentially attractive for us to be able to to grow into and learned that learned that model.
What's nice about that that business is that there's a lot of kind of.
Cross pollination opportunities with with a lot of our existing business in the northeast.
And so from a business mix perspective, I'd say, it's skewed respiratory again.
Felipe, but also ventilation they have a very nice ventilation business and they have a very nice kind of oxygen business. So.
Good growers there a good opportunity we think for us on both the sleep side. Once we once we exit the Philips challenges in kind of a sleep resupply side, but also there's an opportunity to take that high end kind of clinical respiratory expertise and pollinated across the rest of adapt over the next couple of years.
But generally kind of really good talent really good good good team there that can help us scale. So we're excited about it.
Thank you.
Thank you. Our next question is coming from the line of Richard close with Canaccord. Please proceed with your questions.
Yes, thanks for the questions. Josh you mentioned, some technology offsetting some of the labor wage pressures.
You also mentioned the enterprise tracking system and the rollout of the ERP.
How are those factored in.
Is there any benefit.
Associated with those systems here in 2022 factored into the guidance.
Sure I mean, I think I think what we're seeing is generally.
I would say more things coming to mark coming to operational capacity. After some some investment in 'twenty, one and 'twenty both.
The arrow care delivery system and technology system that we had as well as some of the adapt revenue cycle management systems that are not only being upgraded to support multibillion dollar organization, but also how do we scale. This thing further and what Youre seeing I think we didn't take it necessarily into the numbers, but I think we generally think about these things.
As offsetting labor increases as labor potentially tries to creep up our operational technology kind of brings more efficiencies, which brings labor down in line, which I think.
As a hidden benefit to kind of what our business model is that it's not extremely exposed to labor increases because there's inherent opportunity for more efficiencies in what we do particularly the back office revenue cycle management claims processing.
Customer engagement type of technologies, which are going kind of more digital and more automated and kind of we're at the forefront of that and I think we're benefiting from from being able to offset some labor dollars with that but generally we didn't bake it into any of that guide with that but Jason has I'll ask Jason can give a little more color sure hi, Richard So you know it.
Out here.
What we're seeing as we exit 'twenty one is the full integration of technology across the company and so we're seeing that across the revenue cycle platform. We've got common revenue cycle platform now.
We fully integrated it we talked about.
In Q3, the conversion activity that Dsos were up probably five six days and as we said we expected that to normalize as we exit Q4, you'll you'll note in our financials I mean dsos back down for days.
And correspondingly the cash is flowing in as we expected.
We're running we're running a touch over 5% of revenue and that that will continue to increase.
Secondly, we are on a common HCM or HR Ias platform for human capital <unk>.
Single platform for every employee of the company of 11000 plus.
And then finally Oracle is fully live enabled at all 750 plus locations.
As we stand here today requisitions are being placed there electronically.
Yes.
<unk> are getting matched electronically.
All flowing downstream and payments go out with chronically.
A new day in.
The company in terms of the way, we work, particularly in the back office.
And so that that's really going to show itself in cash flow and the generation of cash flow over the course of 2022.
I would say that between the cares repayment and the cost to achieve the synergies that we've talked about previously we had pegged out at $20 million you were looking at $70 million plus.
Cash.
Would have been generated in 'twenty, one and as you heard in my prepared remarks I mean.
Pushing 150 is what that number would have been without the cost to achieve and without cares recruitment.
So now as we're as we're looking at Q1 Q2, there's the remaining 13 million that will go out as part of carriers recruitment and that'll be done in final. So that'll be nonrecurring, we'll deal with that again and probably about another $10 million or so as we get Oracle finalize.
So I'm just general costs.
And ensuring that that are that we start extracting the value from these investments and as we lap that youre going to see cash flow.
A huge focus of the company will be reporting it out every quarter.
We think it's just such a core important part of our business that.
Frankly was misunderstood in 'twenty, one due to all the ins and outs. So it's hard to blame anybody for that because there are a lot of ins and outs, but but but as we stand here today, we feel great about the investments. We've made is about about where we're headed.
Okay.
I appreciate that and then my final question would be on the value based care programs.
Number was like $50 million can you just walk us through.
Your.
Your exposure on value based care, there, where you expect that maybe to go over time, and then just sort of the economics associated with that as compared to.
Regular business.
Sure Yeah. So the number we threw out there was $50 million is probably somewhere between 50 and 100 right right now today and essentially those programs do is with a plan kind of taking their their full kind of HIV respiratory and supply spend and then saying Hey, we're spending X number.
$1 a year, we want either P. M. P M. It or we wanted to give you, though the whole book of business and what could you underwrite. It in terms of outcomes in terms of patient satisfaction metrics and delivery times in different product mixes and things like that so that I'd say, we're well into it and essentially over the last year. We spent some time on.
We're engaging with a number of payers across the U S. In some different geographies that we operate in and essentially what it does is it allows.
It's to take cost out for the plan and essentially because we are.
Our product mix is really everything from supplies to respiratory to ventilation to custom rehab, we have a lot of capabilities to be able to offer plan sort of whatever flavor. They want in terms of being able to take cost out of some plans want to focus on improved customer satisfaction metrics delivery times.
Every plan is obviously different so this is not a one size fits all situation, but what we believe is obviously being an efficient and low cost provider and be able to do these products in the home as what we mentioned the last mile delivery plus we have a lot of connected devices, such as C. Pap cgm's and ventilators that are connected.
Do cellular modem those allow us to be able to be able to help drive outcomes in patients at a lower cost because essentially we have the existing pipes.
These patients' homes, we have existing relationships with the patients we have existing relationships with the doctors with the health plans with the health systems that they came out of so we sit in a very important crossroads between all the stakeholders in the health care continuum, and we feel like we're uniquely positioned to be able to not only take cost out but also be able to provide.
Better outcome overtime. So that's a core focus of what we're going to do we're going to spend time on it we're going to spend the investment in it both from a technology and human capital perspective.
Is that something that we're baking into 'twenty two guidance no, but we do believe that as we figure that out it could gain traction in the coming years look pretty quickly. So we're excited about it but we're we're not stumping our chest yet.
Okay. Thank you.
Thank you there are no further questions at this time I would like to turn the call back over to CEO , Steve <unk> for any closing comments.
Yeah. Thanks to all for your interest and your continued support and we look forward to updating you as things progress throughout the year I appreciate it and have a great day.
This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.