Q1 2022 Adapthealth Corp Earnings Call

[music].

Greetings and welcome to the adapt health first quarter 2022 financial results conference call. At this time all participants are in a listen only mode. A brief question and answer tax follow the formal presentation.

One should require operator assistance during the conference. Please press star one on your telephone keypad.

As a reminder, this conference is being recorded.

My pleasure to introduce your host Chris.

Thank you Chris you may begin.

Thank you operator.

I'd like to welcome everyone to today's adapt Health Corp Conference call for the first quarter ended March 31 2022.

Everyone should have received a copy of our earnings release earlier. This morning, if not I'd like to highlight that the earnings release as well as a supplemental slide presentation. Regarding Q1 2022 results is posted on the Investor Relations section of our website in a moment, we'll have some prepared comments from Steve Greg <unk>, Chief Executive officer of adapt.

Well, Josh Parness President of adapt health and Jason Clemens Chief Financial Officer of adapt health well 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.

For 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.

<unk> Corp shall have no obligation to update the information provided on this call to reflect such subsequent events.

Additionally, on this morning's call, we'll reference certain financial measures such as EBITDA, adjusted EBITDA and free cash flow all of which are non-GAAP financial measures.

This mornings 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 <unk>.

Thank you Chris Good morning, everyone and thank you for joining us as we review our results for the quarter ended March 31 2022.

We are very pleased with our strong start to 2022 and the excellent performance of our 10910 employees.

Our revenues of 706 million reflected in the organic growth rate of three 7%, which improved approximately 100 basis points from the fourth quarter of 2021.

<unk> Q1.

2022 results reflect the continued strong growth of our diabetes business as well as the resilience of our home medical equipment business as we saw strong performance in our respiratory ventilation and home medical equipment operations.

We were pleased by the improvement in our supply of C paths as the quarter progressed and with the successful expansion of our patient set up capacity by our operations teams across the country. We saw patient setups in March at or near their 2021 levels. This momentum has continued in the current quarter.

As setups remained strong in April .

We hope our suppliers will be able to maintain this level of CPAP shipments consistently over the balance of the year. We're nonetheless pleased with how Q2 setups have continued to be strong.

As with all health care providers, we are operating in an inflationary environment that includes continued workforce wage pressure increased operating cost and rising interest rates.

While these factors impacted our margin in Q1, the execution of our technology transformation program should generate operating efficiencies to offset many of these expense pressures on the debt front more than 75% of adapt health's indebtedness, either fixed rate or hedged thus limiting the effect.

Of recent interest rate increases.

While we do not expect these pressures to abate in the near term I am confident that we can continue to deliver expected results, while we manage through them primarily through continued growth and technology improvements.

My confidence was reinforced in April may by the more than 1000 adapt health leaders I met over the course of 10, two days sales and operation meetings held in nine cities across the United States. These.

These meeting showed we are coordinated and committed to empowering our patients to live their best lives at home. This collaboration amongst our teams from these meetings makes it clear to me that the unique strength of adapt health is our ability to deliver flexible locally focused patient care, which leverages our efficiencies occur.

Cross our national platform.

I believe our ability to deliver a wide range of home medical equipment to insured beneficiaries differentiates adapt help from other home health providers and we'll continue to drive our sales growth and operating efficiencies.

We believe our core strengths position us well to take advantage of rapidly changing health care delivery models throughout the United States.

Over the next five to 10 years as government agencies and commercial payers turn to.

To population health and outpatient home centric care models adapt health broad home medical equipment and supplies offers offerings and our ability to design custom delivery solutions will help to make us a partner of choice for those payers healthcare systems and physicians managing care for their pay.

<unk> our products when properly monitor unused generate important real time data usable by our physicians and managed care partners to control cost and improve outcomes.

As a national leader in sleep, respiratory and diabetes servicing $3 9 million patients annually, we are well positioned to capitalize on the demographic growth and the expected U S population that is living longer and more actively than ever before as we learned from the past two years navigating the COVID-19 pandemic.

These trends are also favorable for health care providers, such as adapt health who are critical in the management of chronic conditions and can deliver care to the home.

I will now turn the call over to our President Josh partners to elaborate on our commitment to expanding our presence in outpatient and at home services.

Thank you Steve.

I will provide a brief update on our Q1 M&A activities as well as an update on our fast growing diabetes business and some additional color on the company's ongoing technology transformation and progress with respect to our strategic opportunities.

M&A continues to be a growth opportunity for adapt health and while we are active in the market. We are being more selective about how capital is deployed in Q1 2022, we focused intense integration efforts on our 23 transactions completed in 2021, particularly community surgical our largest HMA acquisition.

Other than Aero care, which was completed in late December 2021.

We have been very pleased with the performance of community versus expectations and the integration of their talented team is already yielding some nice wins in our New York and New Jersey markets.

This year, we have closed six transactions, while these transactions have been smaller in terms of revenue than in previous years, each acquisition with contiguous to an existing adapt health branch operation and is expected to generate very attractive synergies. Once integration is complete for example in April we acquired key medical products.

<unk> and <unk> and respiratory provider operating in the new England market, a nice complement to the spear operations that we acquired in Q2 of 2021.

Switching to operations.

Conditions have forced to adapt to become an even better company.

<unk> continues to be a leader in promoting E prescribe among facility and physician refers and in Q1 as we continued to rollout a prescribed to more regions, we're seeing approximately 50% adoption on new orders.

As well, we have been investing in our digital ordering and digital reordering capabilities and in Q1 more than 55% of diabetes and 38% of CPAP resupply orders were generated through proprietary digital portals, the cost reduction in billing efficiencies, which result from increased E.

<unk> and digital ordering are significant and allow us to allocate workforce and other resources much more efficiently.

As an example of this efficient allocation note that despite the broad labor inflation or labor expense as a percentage of revenue increased less than 1% year over year.

This technology also puts us inside the physician offices and patient homes, which we believe will improve physician and patient engagement.

Supply chain challenges led adapt to build and redundancies to mitigate shortages.

We have sourced more product directly and built out their competency does.

CPAP shortages have forced us to drive more utilization out of existing devices and asset recovery.

The integration of Arrow care in middle of a pandemic forced an upgrade on ERP and internal systems. All of these things have made adapt better today and we will continue to drive efficiencies going forward.

In addition to our ongoing technology transformation, we are constantly assessing strategic opportunities to leverage our core competencies and increase our revenue either through expanding service offerings from one region to another or by entering into new markets. Our.

Our expansion into CGM supply in diabetes services in 2020 is a good example of a strategic expansion into a new market. We believe this is a core differentiator for adapt health.

Prior to July 2020, adapt health had had no presence in the fast growing diabetes market, our strategic review of diabetes services and in particular CGM confirm that many of the drivers of that business were similar to those we found and our CPAP resupply business.

This review also knows noted a substantial degree of overlap between chronic sleep and respiratory patients and those in the target demographic for diabetes services based on these conclusions we executed on our plan to aggressively move into the diabetes market with the acquisition of Solera in July 2020, followed by <unk>.

Additional acquisitions in diabetes space over the next 18 months.

As we have integrated <unk> and our other diabetes supply acquisitions, we have successfully implemented many of the technologies using our <unk> resupply business to increase revenue and improve operational efficiencies.

As communicated by <unk> common Abbott the pharmacy shift is largely done and as we have said consistently patient volumes have grown throughout.

Further our ability to drive longer term adherence to our CGM patients is being recognized as a critical piece in the successful CGM therapy of a diabetic living at home.

Turning to strategy adapt now services $3 9 million patients annually.

Many of these patients are poly chronic having some combination of diabetes, COPD CHF and sleep apnea.

These are the patients that drive extremely high health care costs and are the subject of numerous programs to control spending.

Adapt regularly engages with these patients through setups resupply orders frequent deliveries and in person interactions.

Real opportunities exist to transform these interactions to drive patient behavior change given the connectivity of these devices as well as how frequently adapt interacts with these patients.

We are one of few companies that have the breadth of the relationships and engagement with our poly chronic patients in their homes and are setup to ingest the data and coordinate between the patient the doctor and the Payor.

Adapt sits at the crossroads of these key stakeholders in the health care continuum and has the infrastructure to be able to effectuate better outcomes of chronic diseases without much additional cost we are now focusing talent and resources to establish partnerships and innovative programs focused on lowering health care costs for chronic disease patients in the home.

With our already broad offering of connected medical devices in the home. We believe we are well positioned to be the leading edge of driving better outcomes for a lower overall cost of care.

More on these initiatives will be discussed in future quarters.

With that I'll pass the call over to our CFO , Jason Clemens Jason.

Thanks, Josh Good morning, and thank you for joining our call I will discuss the first quarter operating results, our cash flow and capital allocation activity for the first quarter and conclude with a discussion of our 22 outlook.

For the first quarter ending March 31, 2020 to adapt health reported net revenue of $706 2 million representing year over year growth of 46, 5%, including a full quarter's contribution from the <unk> acquisition that closed in February 2021 versus two months contribution in the year ago quarter.

Organic growth for the quarter was three 7% improving about one point from the fourth quarter of 2021.

Non acquired growth was also a three 7% for the quarter and as expected organic growth and non acquired growth are converging as we lapped our larger acquisitions, including <unk> and <unk>.

As Steve noted, we were pleased with our ability to deliver revenue and adjusted EBITDA consistent with internal expectations. Despite the ongoing impact of the Philips recall and supply chain challenges.

Results for the first quarter also reflected strong performance from our diabetes products, which benefited from better than expected patient volumes and a solid performance in our HMA and sleep categories, particularly in Pap resupply despite the path device shortage.

As expected higher costs and supply chain challenges have impacted our results. However, as Stephen Josh described we are taking steps to mitigate these pressures by leveraging and scaling of our technology.

As such we saw the expected increase in technology expense for the quarter. We've highlighted these investments when previous calls, including our patient delivery platform <unk> as well as Oracle and other strategic technologies.

Although these investments increased G&A expense, we are very confident that we will accelerate operating leverage as we utilize these tools to drive cost and inefficiencies out of our labor pool and out of other operating expenses.

We anticipate adjusted EBITDA margins to rebound from current levels in future quarters, and we remain confident in achieving our full year guidance that implies 21, 9% margin at the midpoint.

As previously noted we are no longer reporting adjusted EBITDA less patient equipment Capex.

This is in an effort to simplify but it also reflects the continued evolution in our business has diabetes with very little Capex increases as a percent of total revenue mix.

We'll continue to guide to total Capex and focus on generating free cash flow and eliminating the impact of equipment lease financing.

Like most other health care providers first quarter cash flows are historically light through a variety of factors in the revenue cycle patient ordering patterns, the payroll cycle and the timing of interest payments.

<unk> held firm at 47 days with no change from the fourth quarter of 2021 and cash paid for interest was $44 million.

Overall cash flow from operations was $66 4 million up from $18 $4 million a year ago.

Total capital expenditures were $77 $2 million as.

<unk> Capex was higher than historical spend due to inflation and freight surcharges and represented 10, 9% of revenues consistent with our guidance for 9% to 11% of revenue.

Free cash flow was negative $11 million this.

This includes the nonrecurring outflows related to the cares act recruitment of $5 2 million.

Accounts payable was a $35 million use of cash during the quarter, which relates to our ERP implementation. This.

This activity will continue in Q2, but it will be done by the end of the quarter. We expect this work will pay off starting in Q3 as we leverage our prompt pay discounts. So we will realize an ROI on this use of cash.

In spite of these items that should improve throughout the year, we remain on track to convert 5% to 6% of revenue is free cash flow for 2022, which should improve to 7% to 8% of revenue next year and beyond.

Quarter end, we had cash of $119 million and zero balance on the revolver.

Net leverage as defined under our bank covenants was three four times and the trailing 12 months leverage was three six times.

Turning to the 2022 outlook, we are updating our guidance range, primarily reflecting the small acquisitions that we completed in the first quarter and the extension of the public health emergency by another 90 days. Additionally, one additional point of sequestration relief is included in the quarter.

Specifically our revenue range is now 2840 to 3.040 billion.

Up from the previous range of $2 825 to $3.0 billion to $5 billion and our adjusted EBITDA range is now $615 million to $675 million up from the previous range of $610 million to $670 million.

Recall that the guidance we provided in February already assumes that it will take the entire year before respironic equipment is back on the market and that we would not return to prior allocations with resumes until the back half of the year.

As is customary our guidance does not include contribution from acquisitions that we have not yet closed.

I will pass the call over to Steve for some final thoughts before we open it up for Q&A.

Thanks, Jason I'll finish by first thanking again, our 10910 employees for everything they have done and continue to do to address the needs of our patients and our communities in a safe and carrying manner.

Their efforts are greatly appreciated by the entire executive team.

And before we turn the call over to the operator for Q&A. There are two additional things I would like to cover.

First is an update on the restaurants recall and Pap shortage.

This will ultimately be solved by a combination of rest products coming back to the market with new devices.

Greater availability of computer chips, and other suppliers, increasing their offerings and capacity.

We expect the backlog of patients waiting to be set up on CPAP will continue to grow until the supply pressures are reduced.

This is consistent with our own experience in March and April were adapt health CPAP backlog continued to grow despite strong patient setups.

Just on published remarks, we continue to believe it is unlikely we will see new CPAP units for sale by Respironic before January 2023, and our guidance reflects that assumption.

However, we hope that other suppliers will be able to address their supply chain issues. This year as such we continue to invest management time and resources.

Into efforts to reduce historical turnaround times associated with CPAP equipment delivery and patient setups to ensure we maximize our market share when an adequate supply of CPAP units return to the market.

Finally as noted in our earnings release. This morning adapt <unk> board of directors with the support of our Bank group has authorized a share buyback program of up to $200 million of adapt health common stock.

This buyback program demonstrates our confidence and adapt health outlook and a belief that our common stock continues to trade at a discount to its immediate prospects and long term value with that operator. Please open the line for questions.

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, a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star one.

One moment, please while we poll for questions.

Thank you. Our first question comes from Brian <unk> with Jefferies. Please proceed with your question.

Hey, good morning, Congrats on the quarter I guess, Steve just to hit on that last part of that you've talked about with the rest of our artist regarding the backlog maybe if you can share with us any color that youre seeing in terms of the backlog build and maybe even some of the conversations you're having with the manufacturers and how you think this will all play out in terms of market share shifts.

And maybe even.

Supply is shifting as things start to normalize presumably at the end of the year towards early next year.

Yes sure Thanks, Brian for the question.

Definitely the backlog for not just us but for everybody in the industry continues to grow because they are just less paths even at a record supply that we've had the last couple of months that doesn't meet up with the demand.

So the backlogs continue to grow until those factors that I described are solved and the main factors chips.

With ships a lot of this can be solved by other people. Besides respironic, but we won't rest products back in the market because they will bring chips into the market as much as anything else.

So with that.

<unk>.

What we're trying to do is we're trying to minimize.

It gets up as many paths as we can to minimize our portion of the backlog of our approach at <unk> share of the portion of the backlog. So when they do come available we'll be in the best position to fill not only our backlog, but also increased demand thats out there from these levels.

So with that Youre seeing other providers come in or other manufacturers coming in there Ross Med has announced their card to cloud.

Products, that's going to add more products in there they won't have the connectivity they won't have the modem. So that puts additional work on the physician's offices.

But it's really important to get these patients as many as we can out there with that technology. So it's an older technology, we did it before so we can do it again.

But it'll be in there since 11 machine to have all of that beneficiary benefits to it.

But just won't have that modem capability.

Gotcha, and then Josh.

In your prepared remarks, you talked a little bit about.

Being more prudent on the acquisition front are slowing down a little bit or be more picky. I guess is probably a better term any thoughts on why maybe you can share with us. What you are seeing that prompted you to do this or also on the flip side what is it doing to the valuations in the market as you've pulled back a little bit from the acquisition game.

Yes, so I think some of this is kind of evaluation based on some of it some focus base. So some of it is related to.

Real real work that we're doing on integrating the many acquisitions that we did last year and lots of opportunity that we have internally in terms of driving additional profitability free cash flow and technology improvements on the businesses that we acquired.

So some of Thats, just kind of the natural course of digesting, what we took on last year and others related to really the market shifting in terms of.

We don't know and I think a lot of focus on a reevaluation shake out in terms of there's still a decent amount of of product on the market for us to acquire companies that are that are looking but you also have this kind of in between state of where valuations were pretty high going into this year and really there is somewhat of a reset in terms of where the mark.

It is in terms of inflation in terms of the Philips recall, some companies were impacted more than others in terms of the Philips recall, if their sleep base. So some of that is a little bit of evaluation reset for some of these folks that's kind of playing out.

And the negotiations, but but really that's kind of what we're seeing at this point, but.

We're I guess opportunistic in terms of seeing really good opportunities that we feel like we could get easier synergies out of if it's end market or it's adjacent to some of the branch office operations that we have so we're looking at those obviously is a priority.

Just because of the amount of work in the synergies and the upside that are there are going to take priority of some or all of the deal.

Got it and then last question for me if I May John you talked about care management quite a bit there just wondering how youre thinking about monetizing that or what benefit it brings to the overall enterprise as you get bigger in that service category.

Sure. So I mean, initially really what we're doing now is really just trying to leverage our existing distribution our existing relationship with the patient in the home to drive a better outcome. We were already doing this on CPAP and CPAP resupply in terms of adherence lengthening out the amount of adherence that will do with CPAP patients.

<unk> drive a longer term better outcome, but now we're looking at that on diabetes on on COPD and CHF and some of the other chronic diseases that we're managing.

In terms of monetizing I think it's really going to be a value add for adapt to be able to get into more value based contracts and more value based agreements to drive outcomes in those chronic diseases without much additional cost because I'll remind you. We don't have the cost of acquiring the patients or of establishing the infrastructure to connect with that patient and interact and ultimately drive a better <unk>.

Outcome, we already have a connected device in the home and our ability to leverage that and really establish and get that data.

And also communicate that to the other stakeholders like the doctors and the payers is really going to allow us to drive a better outcome without much additional investment.

In terms of infrastructure. So we got a number of things in the work that we'll discuss in the upcoming quarters.

Awesome. Thanks, guys.

Thank you.

Thank you.

Thank you. Our next question comes from Joanna <unk> with Bank of America. Please proceed with your question.

All right. Thank you good morning, So I guess first a follow up on the rest of the learnings we call. It I guess.

FDA.

As proposed forced Phillips.

Kind of a pace of affirmed.

We called ventilator, So I don't know whats this refund part <unk> part of the equation here is that newer I guess.

This to happen how would that kind of flow through.

You know for that.

Customers that bought that device.

How will that flow through to adopt.

Well, yes, the refund.

We'll be on the older products, and we will probably utilize those refunds to get replacement products. So it will be.

Newer capex to come in there at a lower price is where youll see it hitting the financial statements.

I don't think this is a significant.

Amounts yet.

But we're still doing the math.

And the FDA has also continued to put pressure on Philips as we are too about how to do some room in duration of the general devices.

Okay. Thank you and I guess related somewhat but on the capex. So.

The year I guess your face you maintain the ratio lineup.

Yes.

It went up.

So it seems like.

You don't feel like there's a need to adjust for for high fuel prices is that the way to think about kind of capex maybe.

It may be raised for our for the acquisitions, but nothing incremental in terms of destock.

Surcharges and whatnot.

Hey, John It's Jason Yes, the Capex line, that's the right way to think about it.

Came in at 10, 9% of revenue for the first quarter.

We think we will get a little relief.

Logos on particularly later in the year.

Regarding fuel some of that is really up in the Cogs lines.

Did see several million dollars of Av.

And frankly, just gas prices for our fleet of 2400 vehicles.

That just came out of the boiler was hard to hard to predict.

And then in terms of the the added freight that we are incurring freight forwarding from our centralized locations two are.

So our distribution network.

That's up a touch versus prior year, but it's all it's all baked in our guide and we're feeling comfortable with what we're seeing so it is contributing to higher Cogs.

Up within within the gross margin, but we're feeling comfortable with what we're seeing and what we've guided for the year.

Okay. That's good to hear because I can start.

Those fuel prices went up I guess since you last spoke but but I guess, if I can just a very quick last one on that on the six acquisitions.

Way to quantify the magnitude in terms of the revenue annualized revenue contribution and EBITDA. Thank you.

Yes sure sure Joanna So we raised guide at the topline by $15 million.

Little over two thirds of that is related to acquisitions and so all of those acquisitions.

Acquisitions announced and there was one really of size and the other ones were very small, but but great great deals we believe in our hub and spoke model.

So of the 15 call it 11.

10, five to 11 is from acquisitions. The other three five to 4 million topline is from the.

The extension of sequestration. So of course, we get an additional point through the balance of Q2.

<unk> added some topline as well as the Pag extension for the next 90 days. So sequestration Phe, we've got about three $5 million to $4 million topline that certainly flows through entirely to the bottom line. So overall $15 million topline raise due to acquisitions and government programs 5 million bottom line raise.

Due to the flow through of acquisitions and government programs.

Thank you.

Thank you. Our next question comes from Andrea Alfonso with UBS. Please proceed with your question.

Hi, Good morning, guys as Tom Andrew on for Kevin Caliendo UBS.

Jason just a quick question given sort of the trends that you've seen quite good.

And then from the commentary you provided on sleep apnea.

Could you maybe just give us a feel for how you are thinking about similar.

Expected EBITDA step down that you.

Telegraphed last quarter for 2022 is that still I think 45 billion.

The number that was discussed is that still a range that you're comfortable with.

Yes based on everything we've seen in Q1 as well as for the month of April we're very comfortable with with the guidance were comfortable with the margin profile.

I don't know that I would call a bottom yet on pop rentals, but I'll direct you to slide five in our earnings supplement.

You will see that the.

The $66 million of sleep rental revenue that we produced in the second quarter of 'twenty. One. So this is before.

The recall in the past shortage.

You do see it stepping down quarter by quarter.

We produced $58 million of sleep rental revenue in this quarter and could that be off another million or two next quarter, possibly but I think we're getting close to hitting the bottom on the rental side of the equation because as we get to Q3, we got an easier comp and we think we will be growing out of that now the other dynamic.

I'd point out is that despite that rental census, shrinking on account of having less.

Packing split out I mean, our sleep resupply operation is just timing I mean, it continues to grow quarter over quarter again, youll see that that same slide five.

All of our highlights for the quarter. That's the one I think that we're just we're just thrilled about I mean, we continue to be efficient and grow that top line and the sales revenue. Despite what we're seeing on the on the product side and on the rental side. So overall, we're very happy with that.

Got it. Thanks, so much and then just if I could sneak in a second question.

As I think about the drivers of better organic growth in the quarter.

Curious if that's a benefit from entering new business lines or underlying demand in some of your higher growth markets improve for example, and the reason I ask that is other revenue in the quarter is becoming a bigger percentage of the business is strong again.

Going to <unk> year over year, it's up.

In the mid to high teens sequentially.

How are you thinking about sort of those ancillary business lines longer term.

Sure. So I'll answer the number side of the equation I think pass it to Steve to talk about the ancillary programs.

I'd say big picture, 4% was our guidance for organic growth for 2022, we feel very good with that.

The three 7% for the quarter was a reflection of diabetes, beating again.

You had put up 18% as a target for 2022, we came in above that number and we're just thrilled with that business on the growth.

That was offset by by the supplies business, we underperformed there by a little more than we expected but it.

At the end of the day, we're running a portfolio of products and we're feeling very very good about organic growth for for the corner regarding the other product lines. So some of the.

Some of the products that are in there.

There is we have a nice hospice business business in there which is predominantly <unk>.

Products, we've also got a.

Terrific Orthotics business that we've been it's been growing like a weed.

We're very very happy with that program the organic profile of that of that program is excellent.

Somewhat of a new entry is home infusion.

The acquisitions over the course of 'twenty, one and even into early this year have come with home infusion components. So it is a growing and a nice nice part of the business, we like that part of the business. So what youre seeing there is some acquisitive growth and some organic growth within that category, which is why a double year over year Steve.

Steve you want to talk a little bit about what's happening operationally and so with the pandemic, there's ups and downs, we benefit from some things we lose on other things and so its a net net pretty net neutral.

<unk> out that.

But what we've been able to do and we're very very proud of the $700 million. We produced in the fourth quarter and then produce another $700 million in the first quarter was quite an accomplishment. When we said on this call just two months ago.

We didn't really have that clarity in there that came through in the March and the team really worked hard so our teams out there selling what they can control today and they're focusing on stuff that they can control today and not worry worried about stuff they can't control and that's been the message that we've been able to deliver to them and then our teams out there have performed tremendously.

So there is plenty of products out there that patients need and the referral sources want for their patients and we can provide those and thats what were doing today.

Thanks, so much for all the granularity.

Thank you. Our next question comes from Peter Chickering with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my questions a follow up to Jo Ann's question about the guidance raise you said that the guidance raise is due to the deals and the government extensions.

Implying that despite for the increased fuel costs.

See the inflationary costs, we're seeing that there is zero impact on your original guidance due to strong cost controls.

Yes, that's what we're saying.

Fuel in Q1 was a touch under $2 million of unexpected costs. So the.

We got to find a way to curb that we've got various levers within the other operating expense lines that we are pulling in some probably need to pull faster, but there is improvement in those lines year over year as a percent of revenue and we are confident that we will execute on that so overall the only change to guidance is what we communicated on.

On government programs and on the acquisitions.

As you know I mean, we took a we took a big chunk out of guide in the last in the last call and we feel very very comfortable with what we put out.

Excellent.

Diabetes, typically because of the seasonality first quarter scrap.

Revenue typically are in the sort of 20% to 22% annual revenues. So if I look at the $1 55 that would imply as a diabetes revenues of 740 range for the year is that the right way of thinking about diabetes.

Yes.

Might be a little heavy on that but you're in the ballpark. Yes. It is the right way to think about the profile.

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

Yes so.

Peter.

When we put out the guide we talked about a 4% weighted average for total topline we call a point of that rate and three points volume.

Rea predominantly from the dynamic, let's reschedule increase as well as some of the.

Some of the changes that came with the <unk>.

Final rule.

In terms of products, we had put diabetes at an 18% organic growth rate and we feel very confident with that if anything we'll do a touch better than that over the course of the year.

We had pegged sweep at about a negative 6% I think we had 5% to 6% negative we're doing a touch better than that because of the outperformance in the resupply that I mentioned.

The other product lines respiratory we had at five points.

We're in that ballpark and then <unk> other than supply for the home we had at 4% as mentioned suppliers is dragging a bit but overall, we feel great about the 4% at the portfolio level and and we think Q1 demonstrates that.

So on the sleep sales revenues year to your point about the resupply versus the rental and they were sort of incredibly strong I guess, how sustainable is are these levels was that more of sort of getting backlog of people that weren't ordering it during the fourth quarter or do you think that this this re supply as a sustainable level going forward.

Well, yes, Peter this state yes, they are very sustainable I mean, we just keep improving that program. Our team has done an incredible job with re supply just in electronic ordering we've over the past three years have gone from.

Under 10% to now over 40% of our patients ordering electronically through us now and that and we haven't cut back our staff and so we were able to use our staff to focus on the remaining 60% of the patients that need more time.

Need more attention and stuff like that and so all of that is just continues to increase our orders that the patients and their compliance with the machines that we are able to work on that and get that set them. So this is very sustainable in fact, we believe it is going to continue to improve great. And then last quick question for me on capital allocation I understands for lack of.

Feeling sort of extra large deals as it gets integrated in the valuations sort of normalize out here I guess, what's your view between share repo and reducing debt. Obviously, you guys put through the turnaround our share repo just curious how you guys view buyback your own shares today versus deleveraging from here. Thanks, so much.

Yeah. Thanks, Peter the first thing I'd say is if you look at our trailing 12 net leverage I mean, we did come down one.

From Q4, we think that that will continue as we grow.

And produce cash.

In terms of the authorization I mean, we'll be opportunistic I mean, we think acquisitions and other uses of investment internally are just excellent uses of cash, but frankly at the trading levels.

We just thought and the board thought it was appropriate to authorized program and we'll use it as we as we see fit.

Going forward, but I think in terms of capital allocation, you'll continue to see us do do tuck in deals I mean, we're going to be very methodical and just go on that.

And youre going to see the continued investment in technology and then obviously the share repurchase program guys on if you got anything to add to that.

Yes.

The acquisitions are still a big part of our story, but.

The comeback of.

Path availability to us which will come back.

We need to be focusing on that and using our capital in that to take advantage of this this once in a lifetime opportunity for us to not only get those get our backhaul.

Backlog, but also possibility to shifts in market share, we're a leader in paths.

And Haley of this historic opportunity as a leader in paths to actually increase our market share pretty significantly coming out of this and so a lot of the focus is on that and we want to make sure that we have the product and.

The people in our focus to be able to do that it's probably the biggest opportunity we've seen in a long time and HMA and so.

It's pretty high on our mind Needless to say great.

Great. Thanks, so much guys.

Yes.

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

Good morning, everybody. Thanks for taking my questions I've got two I just wanted to get after the M&A commentary one more time.

How do you line up.

Does that more selective commentary with call it that historical $100 million to $150 million in acquired revenue target just any way you could juxtapose sort of new commentary versus that historical trend then I got one follow up on diabetes.

Yes, so I'll take that so I think in general that's been our guide and we've exceeded it and and lowered it obviously as appropriate but again, that's still our guide I think that's what we're looking at there are plenty of deals in the marketplace for us to do.

Again, we're talking right now about our focus Q1 Q2.

Again in the back half of the year, depending on where CPAP supply gets in terms of availability of product, we could dial up or down our ability to do integrations and acquisitions. We have two very very powerful M&A team that came together from arrow care and adapt.

So in general like we keep that target.

In general we've hit it in all the last years that we've done it in pretty much where we're still thinking about that as a target opportunity for us in that range yes.

Matthew you should also realize that community acquisition was done in the last day of the year. So in all intensive purposes at least for US that's really a 2022 acquisition and I'm sure. If you add the revenue for that in the revenue we have already done.

We're already either at.

We're certainly exceeding the low end of those range targets and so we're still going to be in our mind very very active in acquisition and acquiring revenue throughout the year.

Got it makes it makes sense excuse me and then diabetes I'm just curious do you typically see any uptick in that business with new product launches.

With two new CGM on the market. This year, there's a new patch pump out there.

These products will probably likely somewhat skewed to pharmacy, but they are big launches and just curious if you see any typical changes in trajectory around new major product releases in the diabetes franchise.

Yeah. Thanks, Matt This is Josh so yeah in general I think a lot of the new innovation, that's coming to the market in diabetes is dry.

Giving more and more patients into the funnel and that's why I think we're seeing really strong underlying secular tailwind there in terms of patient demand I wouldn't tie it to any specific product.

Per say, but in general I think both doctors patients and the technology keeps getting better and you're seeing more adoption, you're seeing more adoption of patients in different disease states within diabetes in different levels.

Both cash pay out of pocket insurance space, There's a lot a lot of interest on the dock and diabetes supply and I think Thats why also our focus is as distributor is not just to distribute these products, but it's also how do we help that diabetic at home with that connected device leverage that technology to be able to connect them with their doctor.

With their health plan with their health system, and then really help them stay adherent to that therapy to drive better outcomes in the long term.

And I think that that's some of the advantage of going through distributors like ourselves and suppliers that really helped hold the patient's hand, but in general a lot.

Lot of those new technologies coming together are driving a lot of patient interest in dock their interest as well in getting patients on therapy.

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

Hey, thanks.

Jason maybe first one I wanted to.

Just kind of a lot of boring stuff going on with your ERP and systems conversion for most investors perspective, but I'm kind of fascinated with it can you just talk about some of the heavy lifting the movement behind the scenes just any update on those initiatives and any of the expected benefits or tailwind that you would expect to see end up in the next year or so.

Sure sure with so so youre referencing a boring my my CEO and President are rolling their eyes on me because I could go on and on about this stuff.

I'd say.

The heavy lift is behind US we went live on February one.

So we've got over 750 locations they are requisitioning and.

Requesting product locally.

It's done all electronically versus what used to be done a lot of phone calls and post notes and things like that.

I'd say in terms of the just sox adherence and leveraging that tack on three way match, we've caught all kinds of products coming in on invoice at prices higher than contracted or agreed to and so that's some of the beauty of leveraging the Tac to automap to throw out.

<unk> so our purchasing teams are working on that and so there's there's dollar savings there that will be realized over time.

I'd say next in terms of we spoke a little bit about payables I mean, we've probably another quarter comment I've just tightening up on the payable side some of that is to frankly avoid.

Even finance charges or late fees as well as <unk>.

<unk> right sized with our suppliers, but yeah. It was prompt pay discounts theres other EBIT drivers that we absolutely intend to capitalize on so that's very positive and then and then I'd say finally, some of these kind of category management programs. They can be run without a best in class ERP, but it just.

Makes it a lot harder and so when you turn on the visibility what we've got now is ability to manage category spend on the direct side and the indirect side.

We are launching as we speak we got an RFP out for <unk>.

Hundreds and hundreds and hundreds of locations that need everything from Internet service to utilities to waste management to security to all those boring stuff, but the dollars significantly add up over time so too.

Two quarters ago, we talked about we expected G&A to hit five points of revenue we came in right at that straight down the fairway.

And we think thats going to be money very very well spent in these programs as they start standing up and launching and we expect to get that operating leverage in our <unk>.

Cost of revenue line.

That's helpful and maybe just one other question.

I'm curious.

We look at.

The payers that youre working with and we're hearing various anecdotes across.

Subsectors around payers being a little bit more aggressive on claims at it's a pre roll through.

Or prior authorization is there anything that youre seeing that stands out as being new or different your AUR days looked pretty good. So there's not really anything that I can I can pick up in the quarter. So just curious about.

Just sort of your view around how payers may be changing their behavior.

Yes, I mean first days typically our AR days grow at the first quarter. The fact that they stay flat and accomplishment to our RCM team did an incredible job and so we're seeing from payers.

As certainly with the use of technology and the use of data, there's more and more interaction and more and more stuff that they can come in there and challenge but at.

At the same time, we are utilizing that data and making sure that our claims are filed accurately with the property. So the proper documentations. So net net yes, there's more activity, but net net we're ahead of the head of the insurance companies with.

Our data and our utilization of it.

So our data Lake and our data management and our data warehouse is fantastic and so we utilize that to make sure that.

Our denial rates are good.

Less each and every month as we as we put in rules to prevent those and added engines and all this kind of stuff that our CMT works on constantly and so that RCM team has done a fantastic job and it will continue to get better. So we're ahead of the curve, but we do see more of it coming.

Great. Thanks, Steve I appreciate it.

Uh huh.

Okay.

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

Thank you good morning, I'm going to have to dig at the bottom of the barrel for questions here at the end of the hour but.

Maybe a bit myopic.

First one.

In the conversation around the proprietary Puerto ordering you tied into that labor expense being.

Up less than 1% year over year, despite wage inflation labor challenges broadly.

Was that a comment specific to the folks in the back office involved in ordering or was that a firm wide conversation.

It's really firm wide Eric I mean are are just start head count last quarter to this quarter is down what about 140 or so yes.

Now and so that's pretty broad across the organization now in terms of the operating leverage and where we're targeting that G&A investment, yes, that's that's back office.

And not necessarily just people, just doing things better and cheaper and more efficiently.

But yes that was that was abroad. There was a broad stroke comment I mean, I will add that we had labor in at 26% of revenue for our guide.

We feel we feel comfortable where we stand today, we're into the 25% 25% range.

You'll see in the Q printed printing later today.

But we're feeling pretty comfortable with that this year is a bit of a crossover of the investment in G&A. So G&A is going to come up and then we do think we'll get that operating leverage as we as we exit the year.

Yes.

Eric Let me, let me add to that as we use our proprietary <unk>.

Delivery solutions, which we call <unk> that engages the patient in an electronic manner that is greater today than it was yesterday a prescribed engages the referral sources and electronic manner, it's better today than it was in the past and just those two and those are just two of many significant.

Reduce our cost and being able to get the product to the patient and get the bill out the door and the more correct manner and that's where the.

Cost is all the time and so we were confident that through these technology and keep getting more adapt adoption of them throughout our referral sources and our patients and that electronic communication is critical to our success and will continue to lower our cost of taking care of the pay.

<unk>.

That's helpful. Thank you and then.

You talked about the CPAP.

Business quite a bit today, you talked about the patient backlog and CPAP continuing to grow which I think we're hearing broadly across the market.

I'm curious if you can remind us how many patients you have on respiratory therapy in total whether thats CPAP specific commentary or just broadly and then what if you would be willing to what youre, a patient backlog actually isn't CPAP and how that compares to the past.

Yes, I'd say on the on the sleep side of the equation, Eric I mean, we've got.

Around 250000 to 300000 patients.

On rental census, the resupply census is well over $1 million.

Yes, it's probably pushing them.

4 million 5 million.

So thats really where the consistent recurring revenue stream is.

And then every month due to the 13 month rental cycle certainly we got patients starting in coming on census, and you've got you've got patients rolling off as part of that completing that 13 month rental cycle.

I think it was if I'm not mistaken.

If it wasn't you I apologize, but I think last quarter. You said you could see CPAP backlog approaching 1 million patients in the U S by the end of the.

By the end of the saga if that was you I hope it was could you tell us is that still the ballpark of where you see that backlog exiting the year.

Yes that was definitely yes, we are the one that brought that to life and.

We are very confident in that number that that will continue to grow unless there is.

<unk>.

Significant mitigation from that from the stuff, we had already talked about.

But there is a huge huge amount of patients that will be out there 900000, we said in that.

Very very comfortable in that number which means that number is conservative and those patients. So I'll have a script and are looking for a place to get a seat that and so as a leader in and Pat set ups out there and have a significant market share if you could guess our market share.

We can't give that out for a variety of reasons, but if you could get that and apply that to that that would be the starting point of this.

Of the backlog is related to us.

Now, we're able to supply more than probably the market does so that's our part of our strategy is to get our backlog relative to our patients lower than our than maybe other people in the marketplace and if we can do that then we can take advantage of this opportunity as it comes to fruition.

Certainly.

Eventually it will whether it would be early 'twenty three or mid 'twenty three.

That's it for me thanks very much.

Thanks, Eric.

Thank you there are no further questions at this time I would like to turn the floor back over to Steve Greg <unk> for any closing comments.

Thanks.

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

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

Okay.

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