Q3 2022 Adapthealth Corp Earnings Call
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Yeah.
Greetings and welcome to <unk> Health third quarter 2022 financial results Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please first star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host 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 third quarter ended September 32022.
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 Q3 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.
Josh barns, president of adapt Hell, and Jason Clemens Chief Financial Officer of a desktop we 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 2022 and beyond actual results could differ.
Really 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 health Corp shall have no obligation to update the information provided on this call to reflect subsequent events. Additionally.
Additionally, on this mornings call, we will reference certain financial measures such as EBITDA, adjusted EBITDA and free cash flow all of which are non-GAAP financial measures. This mornings call is being recorded and a replay of the call will be available later today I am now pleased to introduce our Chief Executive Officer, Steve <unk>.
Good morning, and thank you for joining our call.
<unk> is a full service nationwide provider of products and services for our patients at home and in the community empowering them to live their healthiest lives I would like to express my appreciation to our 11033 employees, including more than 1000 health care professionals, who work daily to serve.
Our $3 9 million patients.
I am very pleased to adapt held today reported record net revenues of 756 million for the third quarter of 2022.
Our performance reflects our revenue growth of 15, 8% over the third quarter of 2021 with non acquired growth of six 1% for the same period.
This reflects strong sequential improvement from the second quarter and supports our full year non acquired growth expectation of approximately 4%.
The highlights for the quarter or the much better than expected performance in our sleep business continued strong growth in diabetes and the increase in the supply chain.
And our sleep category, we continue to regain the ground. We previously lost to the Philips recall during the third quarter, we had 34% more starts in the first quarter of the year, resulting in a record number of setups for the company in.
In addition, our Pap sensors also record has grown 27% over the lowest point in February 2022.
The increased census, bodes well for the future revenue as the patients continue to use their Pat machines and will need supplies on an ongoing basis. Our performance in past setups has continued in October and based on supply and demand. We expect strong path setups to continue for the balance of the year.
Our Q3 performance in Pep setups was driven by our ability to source more units. This allowed us to quickly ramp up our past setups to serve our patients, especially those who have been waiting.
As a result, we have incurred some additional cost, especially in commissions and expat expedited delivery and setup, which pressured the bottom line, but will benefit us going forward as we believe that our efforts are resulting in growth in our share of the sleep.
I'm also pleased to report that we resumed mid teens growth in diabetes and this reflects a notable increase from our second quarter growth rate, we continue to be confident in the sustained growth potential in diabetes, given the expanding acceptance of CGM as a critical component and managing diabetes and related Comorbidities and <unk>.
Further reflected in Cms's proposed expansion of coverage for CGM.
Yeah.
Our supplies to the home product lines also outperformed expectations due to the commencement of an exclusive supply arrangement with a payer that we hope will lead to a broader value based arrangements across more supply lines of business.
These revenue increases give us confidence in the continued strength of our business and our solid foundation to build upon to reach our 2025 net revenue target of $4 billion. While we are very pleased with our Q3 results and confident in the strength of the <unk> business heading into the fourth quarter and into next.
Year, we aren't immune from the general inflationary pressures facing all health care providers today, and we continue to deal with disruptions to our supply chain from manufacturing delays and product recalls in addition to the increased costs incurred to expedite path set ups. The quarters results were pressured by the unexpected recall.
<unk>, Pat bask related to deficient safety labeling in August while we're able to quickly mitigate three calls disruption we did see a loss of past supply revenue in Q3, while those mitigation plans, we're gaining traction.
In a few minutes, Jason will provide more color on our financial results and I can say that we are pleased to see sequential improvement in our adjusted EBITDA margins for the third quarter, although the improvement was not as much as we would have liked I am confident in the initiatives. Our team has in place for the fourth quarter will result in further improved mark.
Yes.
Finally, before I turn the call over to our President Josh Paris, I would like to provide an update on the supply of perhaps as a result of the ongoing Phillips recall as expected our Pap partners have continued to expand their manufacturing capacity and beginning in August 2022, we saw our supply of Pap units.
<unk> begin to exceed pre recall levels.
This has allowed us to begin to work through our backlog of Pap patients impacted by the equipment shortages over the past 15 months.
Assuming this level of supply for manufacturers continues past November December and current indications suggest that they will we expect to substantially address our backlog in early 2023.
Now I'd like to turn the call over to Josh to provide further details and an update on strategic developments.
Thank you Steve as we discussed during our capital markets day in mid September our ongoing conversations with payers make it clear that there is a growing amount of interest in value based care and what adapt health can bring to the marketplace through its national presence patient data and broad product offering combined with.
And an efficient operating model.
Our recent value based agreements with two payers in large metropolitan markets have grown very nicely in a short amount of time and initial results are very promising with high level technology integration, resulting in greater care transparency and higher levels of patient satisfaction.
For example in connection with one of these opportunities adapt health application design team developed an integrated portal, allowing to payers care and claims management teams to seamlessly order and monitor patient services. These integrations have allowed both parties to reduce the administrative expense.
Ta'd with providing care for more than 20000 patients.
This technology is scalable and proprietary and available to deploy on behalf of additional payers.
Accordingly adapt is increasing its focus on additional opportunities of innovative care models in the home.
Consistent with the technology roadmap, we shared at capital markets day adapt health recently rolled out my App, which is a comprehensive patient app, enabling channel of choice communication with the patient as well as the ability to place and track orders and facilitate clinical coaching.
My App will allow patients and physicians to access their data on their connected medical devices, which will help improve clinical outcomes at lower costs for our $3 9 million patients.
Initial data is showing strong adoptions by our patients with close to 5000 downloads from the Apple and Android App stores and hundreds of digital orders processed in the initial 30 day launch with our diabetes patients.
These investments are part of adapt health strategic plan to facilitate a complete digital path for all our constituents.
By expanding the use of E prescribing as well as our payer portal technology and the adapt health My App, we will provide full transparency with respect to what's being ordered when and where it's being delivered and access to health care data on connected devices.
This information will allow physicians patients and payors to collaborate to drive better clinical outcomes, while allowing adapt helped to reduce the administrative costs of maintaining service to the patient.
These efforts are part of the initiatives underway to continue to increase productivity across all work streams and part of the reason that our revenue per employee today approximately $262000 per employee is at its highest level ever and we expect to become even more efficient as we head into the new.
Year as.
As cost pressures continue adapt will benefit from its scale as we will be able to leverage our technology to take market share from less efficient competitors with that I'll pass the call over to our CFO , Jason Clemens to review our financial results.
Thanks, Josh Good morning, and thank you for joining our call.
I'll discuss the third quarter operating results, our cash flow performance and capital allocation and conclude with a discussion of our 2022 outlook.
For the third quarter, ending September 30th 2020 to adapt health reported net revenue of $756 $5 million.
On a year over year growth of 15, 8%.
Non acquired net revenue growth was six 1% for the quarter.
We were pleased to see continued improvement in trends within our largest product category sweep where the non acquired growth continues to exceed our previous forecast.
At the end of September 2022, our Pap rental census was 27% higher than the Pap rental census in February 2022, our lowest census month. Following the June 2021 restaurants recall.
Our Pap rental census growth and the compounding nature of the Pap resupply business gives us confidence in increasing our revenue guidance for 2022.
Our diabetes category delivered mid double digit non acquired growth, reflecting sequential improvement relative to last quarter.
While our respiratory category experienced an expected decline in non acquired growth. The Q3, 2021 census was elevated due to COVID-19 cases.
We were encouraged to see modest sequential growth from Q2 2022 levels.
Accordingly, we are raising our guidance for net revenue.
Turning to profitability, while modest inflationary headwinds negatively impacted adjusted EBIT margins in the quarter. We were pleased that we were able to sequentially expand Q3 2022, adjusted EBITDA margin to 21, 2% versus 26% in the second quarter.
As Steve mentioned earlier adjusted EBITDA was also negatively impacted by lost revenue from delays in Pap pre supply shipping related to the restaurant ex recall in August 2022 of certain Pap resupply products due to deficient warning labeling.
This recall and related supply chain disruption negatively impacted results by several million dollars, but we do not expect this to impact our operations in the fourth quarter.
Within cost of goods sold distribution expense remained elevated specifically fuel cost incurred by our vehicle fleet and by some of our suppliers and careers.
Although we expect this cost to normalize over the next 12 months, we do anticipate negative pressure on adjusted EBITDA related to elevated fuel cost for the fourth quarter.
On the labor side.
<unk> associated with our over performance in Pep setups increased costs for the quarter, but this added cost will be offset over the next few quarters by the increased rental revenue related to our record setups.
Additionally, we believe that the continued decline in the impact of the Covid pandemic has resulted in an increase in our employee benefit utilization over prior year as employees return to more normalized utilization of elective and preventative medical care.
As we entered the 2023 open enrollment season, we are working to optimize our plan offerings, while balancing this increased utilization.
The combined labor dynamics added about $6 million of expense in the quarter and we expect this trend to continue through the fourth quarter, resulting in the guidance update we announced this morning.
For Q3, 2022 cash flow from operations was $107 million.
Free cash flow for the quarter defined as cash flow from operations less capital expenditures was $12 9 million.
Capital expenditures of $94 $2 million reflected considerable CPAP procurement activity and we were very pleased with CPAP availability in the quarter.
Turning to working capital, we had cash on hand of $110 $7 million and an undrawn revolver at quarter end with trailing 12 months leverage of three five times consistent with the second quarter.
At the end of the third quarter, 78% of our debt was on fixed rates.
DSO was 44 days for the third quarter down from 51 days in the third quarter of 2021.
The technology and workflow investments, we made over the past year are driving these results.
We continue to increase adoption of E prescribe and we made additional investments in hardening our claims editor engines.
These changes are resulting in cleaner claims lower denial rates and more cash.
Additionally, our patient pay collection rates continued to improve as we deploy our E ordering any delivery workflow to get more accounts on autopay.
Inventory was up $22 $7 million from the second quarter and we prepare for the typical reordering demand that occurs in the fourth quarter.
During the third quarter, we completed $10 $6 million in share repurchases under our previously announced buyback program.
Turning to our 2020 to guidance as noted in the press release, we are updating the outlook to reflect year to date performance and anticipate an ongoing impact from the temporary Cogs and labor issues mentioned earlier.
We now anticipate revenue of $2 $95 billion to $3.01 billion.
Versus our previous range of $2 $84 billion to $3.04 billion.
And adjusted EBITDA of $620 million to $650 million versus our previous range of $615 million to $675 million.
This revised guidance translates to a Q4 2022 revenue range of $760 to $820 million and adjusted EBITDA of $172 million to $202 million.
Consistent with previous periods. Our guidance does not include contribution from acquisitions that have not yet closed.
I'll now pass the call back over to Steve for some final thoughts before we open it up for Q&A.
Thanks, Jason.
Over the past two years adapt health has undergone a significant transformation starting with the impact of the COVID-19 pandemic and a combination of two large organizations both of which will further complicated by the loss of a major supplier to our sleep business.
We would like to once again, thank our tremendous employees for their patience and persistence as we have overcome these and other challenges as we look forward to the fourth quarter of this year and 2023, we have high expectations for the company as these challenges recede.
We expect our sleep business to return to normalized growth with continued opportunities for us in the diabetes business to continue to benefit from greater adoption and regulatory acknowledgment of this important therapy.
We also expect our respiratory business to return to its pre COVID-19 growth levels, but with a greater appreciation for clinicians and regulators as an important role HMA suppliers play in the critical care of respiratory patients.
We are also optimistic that our supplies of the home business will benefit from the fact that we are full service HMA buyer and its ability to meet the broad HMA needs of our referral partners and payers will ensure sustainable growth for <unk>.
Operator, please open the line for questions.
And <unk> in there your guidance assumes more of a normalization in the fourth quarter. So not only I guess question is what happens to <unk> and why should not continue.
How should we think about for Capex.
Capex as a percent of revenue in 'twenty, three that's all been going up or down with diabetes growing faster, which is which is a better sort of EBITA capex conversion yep.
Yeah. Good question, Peter but I'd say that firstly, we were thrilled and a bit surprised at how many pops where available so that fell and so that's what we're seeing is.
Huge increase in capex related to past, which.
We'll be glad to spend that money all day long.
So for $94 million of Capex during the quarter.
More normalized that probably would've been about 80%, maybe 82 something like that so that's what you are seeing the increase we expect that will continue in Q4 based on what we're seeing in the supply chain.
I would expect that will continue in the first half of 2023 now.
As we get the second half 'twenty three we think that Capex spend will come back down to normal levels. So certainly we'll guide capex.
As part of our guidance release.
The coming weeks, but.
That's the way to think about the roll off of the Capex.
Great. Thanks, so much.
Yes.
Thank you. Our next question is coming from the line of Kevin Caliendo with UBS. Please proceed with your question.
Hi, Thanks for taking my question.
You've talked about script backlog.
<unk> for devices in the past.
$1 million or 900000, or some numbers that have been thrown out has that number changed at all.
And how should we think about now that we're at maybe a couple of months closer to the 23.
Should we think about.
The way that backlog is fulfilled through the course of 'twenty three and the impact of.
Maybe how the year progresses.
Yeah, so that backlog when we mentioned that as an industry backlog of 900000 and that was assuming.
That continued operations from the beginning of the year to the end of the year.
<unk>, obviously have changed dramatically so really the.
The not getting enough to the market pretty much ended mid this year, probably August ish, and so you could probably cut that backlog back by a third maybe.
For the industry. So we are we are.
<unk> into our backlog as we speak today and suspect that will be out of it early 2023.
Depending on where other suppliers, depending on where you are at with your backlog how much youre able to.
Mitigate along the way we were pretty successful in minimizing <unk>. Some other people may have may take a little bit longer to get through theirs.
That's helpful. In the context of thinking about that against your normalized sort of eight ish percent enterprise growth that you've outlined in the past how does how does this impact how we should think about and I'm not asking for guidance for 'twenty three but just how the way. This backlog has progressed and played out.
How that might impact the sort of 8% enterprise growth.
Are you still with us.
Yeah.
Yes could you hear me I'm sorry.
Operator, do we lose Kevin I know Kevin is on the line just to confirm are you able to hear me as well.
Yes, I can hear you can you hear me Kevin I can hear you, yes. It seems like maybe we're having some issues with the speaker line just one moment. Please.
Okay.
Operator did we lose Kevin there.
Can you hear me now, yes, we can hear you yes.
Okay Sir.
So the question was as we think about the way you've just described the backlog and how that's played out how it how does that impact what is typically a more normalized than what you've talked about 8% enterprise growth that you've outlined in the past I'm not asking for 'twenty three guidance I'm just trying to think about how the way. It is backlog has progressed versus what would traditionally be.
Your enterprise your normal enterprise growth that you would normally expect.
Sure Kevin Great questions. So I'd start with as we outlined the 4%.
Non acquired growth target in our original guidance for the year.
That assumed path would be down so sleep overall would be down about five or 6% for the full year.
Well for Q3, I mean, we were up.
High single digits I mean, we were just thrilled.
With the performance and so the way I would think about it as you know our typical seven 9%.
Growth in sleep that will likely outperform over the next several quarters as we're working through backlog and then come down to more of a more of a normalized range. So I mean again, we'll give specifics when we guide that's the right way to put it.
Okay, great. Thank you.
Okay.
Thank you. Our next question is coming from the line of Richard close with Canaccord Genuity. Please proceed with your question.
Yes, thanks for the questions and congratulations on the quarter.
Maybe you could talk a little bit about the CMS.
Proposed coverage expansion in diabetes, and just thoughts on how that's going to potentially impact growth.
Okay.
Sure Richard the states and so there they are expanding the coverage for type two diabetics.
And our proposed assuming it passes.
And then that just opens up a whole new avenue of patients that are available on Medicare basis, and we suspect that many of the commercial plans will follow suit.
I think everybody believes that that the growth rates that we've seen in the past two or three years on the CGM.
We'll continue maybe not quite as high but there'll still continue throughout the next two or three years.
Okay, and then can you go into a little bit more detail with respect to the.
Exclusive payer relationship that you highlighted I think there was an HMA.
How that came about and other opportunities may be like that.
Sure Kevin This is Josh thanks for the question.
Yes.
These are actually two payer contracts with fairly large providers on both coasts that.
Really we're interested in doing something less traditional than fee for service in terms of value in and looking at trying something getting a foot in the water seeing how we can connect with them through our payer portal.
Really what they were looking for more than anything was a better experience.
On the customer side and on the payer side better better claims utilization better better management.
<unk> of the patients better case management, so really a lot of a lot of the discussions started around what we can do for them from a technology perspective, and really it's evolved into if we take admin cost out from from both sides in terms of the prioritization functions and some of the some of the other admin expense that typically happens between a provide.
And a payer.
There were some savings to be add there and really.
Like I mentioned in the prepared remarks.
It's gone very well and they're looking to expand that with us and we feel this could be a good base case, and we're having discussions with other payers around the similar structure.
Is there any opportunity to.
To share in those savings.
Sure. Yeah. This is this is a shared savings model where.
Essentially we're taking out admin expense by integrating directly with the payer.
And then we're sharing in the savings with the payer.
But also getting a broader a broader share of their wallet.
Okay. Thank you.
Thank you. Our next question is coming from the line of Joanna <unk> with Bank of America. Please proceed with your question.
Thank you. This morning, so a couple of follow ups, So I guess.
And Oh on the guidance I understand your waste revenues and lower the margins can you talk about.
The items there what about the phe expansion of the public health emergency does that.
Change anything in your guidance.
Yeah.
Hey, John it's Jason.
So similar to last quarter, we had mentioned about a $3 million to $4 million improvement from from Pag. So that is that's rolled forward for this quarter.
So.
That's how to think about PHA.
Okay.
Second part of the guidance.
Please your Capex, obviously, you have a lot of.
Fly over to machine so it's good.
Should we think about the free cash flow like I said previously you talked about 5% to 6% of revenue. So I guess, that's coming down but does things.
<unk>.
When you think about your 7% to eight long term targets for free cash flow.
No certainly nothing changes in the long term.
The short term alright bigger capex, obviously results in less free cash flow.
If you look at the quarter of the $13 million that we printed.
Call it about $20 million of accelerated capex spending due to perhaps and so when you when you kind of take those numbers net youre looking at about a 4% maybe a touch over 4% free cash as a percent of revenue for the quarter.
I would remind you Q3 is a.
As one of our cash interest.
Quarters, much like Q1, and so there it.
It's typically a lower quarter so.
Throw out in the mixture and we're feeling good about Q4 typically are.
Our strong cash quarter and Big picture there is nothing to change our overall view.
Okay, Great and I guess to that and previously talk about.
With the sleep supply improving that at some point.
There will be more deals to be done question visibility would improve so any commentary around that.
Yes, I mean, I think what we're seeing.
From what we saw so far in Q3, and what we're looking forward to in Q4 as a normalizing somewhat normalizing we hope of the of the sleep market.
We're probably a quarter or two before sellers.
Feeling really good about supply and putting their businesses back on the market.
I think what you know just in terms of market dynamics on M&A, obviously, not just us but theres a lot was deals that are going on with the rising interest rates. We are actively pursuing pipeline deals. So we're still working pipeline deals in terms of M&A opportunities.
From an ability to integrate I think we're positioned very well and we're looking for the right opportunities both regionally and also what could drive good synergies in terms of product lines.
So we're out there on the market, where we're involved in a lot of kind of deal.
Just looking around and seeing what's available in the market now, but I think from a from a pap perspective, some of the pop sellers you'd probably see.
Come back online mid next year.
Great. Thank you so much.
Thank you once again, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad.
Our next question is coming from the line of Eric Coldwell with Robert W. Baird. Please proceed with your question.
Thanks, Good morning, I was hoping to hit on your expectations for the CPI U Medicare update coming in December and maybe on a.
Gross basis as well as a net basis after the adjustment factors, what you're expecting and then looking at the slides 26, 3% of our sales are government how much of that is tied to CPI you directly or also indirectly and what are your thoughts on commercial payers following.
CMS has lead next year. Thank you very much I have one more follow up after that too.
Thanks, Steve.
<unk>.
From our data that we see that our calculation for the Dms space on the inflation is drive around.
9%.
And we would expect that to get some sort of adjustment to that that would bring that down less than that so I think that common.
Agreement amongst doses for look at around eight seven but again were.
We're going to wait for that data, that's kind of consistent with what we've seen in like providers that get similar calculations to us. So I suspect it's going to be within tenths of a 0.1 way or the other of that.
And then Jason you want to comment on the yes, I mean just.
Based on that math.
Caution everyone. On this is that this is our view, but I mean, who knows how this will play out we'll know we'll know in another market that.
That could trend.
Upwards of $80 million top line.
2023.
Your question on the kind of the flow through.
Yes, and then just it was more on the flow through because I've had some some of your compatriots in the market have suggested maybe a bigger peco adjustment or other adjustments this year that could bring the the net benefit down to maybe a couple of three points or so so I'm. Just curious if you have that similar thought process.
Well.
The PHA when that ends there is some benefit that the industry has had particularly in what we'll call the non bid on rural areas.
That is about $30 million $35 billion for us.
And so that would go away unless that is theres. Some legislation proposed that extends it but that doesn't go through.
And then the whole health care industry is working on the sequester government from 2% to 6%.
So la that happens.
Sure.
People generally expect that to go away.
Delayed but as of now there is nothing that says that and that would be another.
30, plus million dollars for us so it still end up being a net benefit but it would be much smaller depending on those three factors those are the three factors that.
Makeup.
The differences in the Medicare adjustment as far as commercial payers.
And some increases in some adjustments as more of a line by line product basis, There's no wholesale Inc.
Increases that we've seen yet we continue to negotiate with them.
But its more been about.
The other things that Josh has already mentioned I think that's kind of the more of the topic now.
And just better improvements in making the efficiencies in the <unk>.
System, I think they're more committed to that and even price increases decreases or increases excuse me today.
Yeah, I've been I've, probably been a little more constructive on the reimbursement and regulatory environment than some but.
Despite my better judgment I have to bring this went up because im still getting questions on it love to get an updated thought on competitive bidding I mean seven weeks from now we'll be in 23 looking at 'twenty four.
I'm not aware that the government really has a framework for competitive bidding in 'twenty four but.
Maybe you've seen something more recently that would give you some.
Some thoughts.
I would say.
I wouldn't say impossible, but close to logistically impossible for it to happen in 2020.
For the beginning of 2024.
So I think one out of the pandemic.
The pandemic is over we'll know it into this month, whether it gets extended and administration is committed to the health care industry to give them 60 days notice.
They are still committed to that but I think once post pandemic happens and they have transition of patients from post pandemic to.
From pay limit to post pandemic.
There might be able to start looking at that kind of stuff. So I guess they start looking at it mid 'twenty four 'twenty three excuse me and so because possibly something happen.
I mean, 25, I guess, so but right now it's on.
In our discussions with CMS is pretty far back burners. They have so many other things that they need to work on.
Predominantly.
What happens post pandemic.
I think it's mainly on their on their mind right now.
Alright, thanks, very much guys.
Yeah, Kevin just to add on the competitive bidding thing just.
One other thought that I think it's important for people to know is that.
The reality is with price inflation, that's happened over the last year.
We even saw when CMS came out in 2021 with competitive bidding that they basically pulled it back because prices went up.
I don't see how that dynamic potentially it doesn't happen again.
If the theoretically were to rollout competitive bidding like Steve says in 'twenty four 'twenty five.
The reality is with price pressures in place in gas prices product prices up.
I don't know that there's supplier.
Suppliers are not coming in now I don't see that and really bidding much lower.
And then what the current rates are so our general sense is that there is a floor to the rates and there.
Theres really not that much more room for people to go in terms of giving back but again, we'll see but that's something else to consider there.
Yes, I entirely agree on that too thanks, guys I appreciate the comments.
Thank you. Our next question is coming from the line of Whit Mayo with SBB Securities. Please proceed with your question.
Hey, Thanks, Jason last year, I think you sized what you thought the Pap headwind was around $30 million range I think coming into this year, maybe it was in the $30 million to $40 million range. What is what is the number that you're circling today for either the headwind the tailwind.
From from Pap earnings.
Yes so.
I recall, we had we had pegged it at about a $65 million.
Headwind in 2022.
We think that.
That will be we'll probably beat that by a touch but I mean.
I would still peg it at 55 to 65 for the full year.
And as you think about working.
Through the backlog at this point in time I wouldn't anticipate that you could.
Get a 100% of that back over the next 12 months or so but.
And how do you think about working through that $60 million headwind over time.
Yes.
Be careful just as the starts kind of linking into formal guidance discussion but.
If it's if it's 55 to 65.
This year of a headwind I think it's safe to assume 50% to 75% it feels very conservative to me.
Josh you have a different view there, but that's how I'd think about it.
I think that's right you know as you know it takes time as it took time for the effective of.
The sell three call to hit Us.
They will take time for the ramp back up but the ramp of continuous CPAP setups that are at this level and then the.
And then the.
Resupply, adding on top of that you know it's pretty powerful.
So I think Jason as you know.
Good.
Pretty good range that he has given you.
Yeah.
Jason looking on balance sheet, the inventories was up a lot over $20 million sequentially I mean, there's a little bit higher than the $10 million increase that you frame for I think Peter one on Capex for the increased Pat purchases anything else that's influencing.
That number.
Yes, sure I mean, if you look at our history I mean, we do typically run hot on inventory.
Q3.
So we're up over prior year I think it was up 12 to 13 million Bucks.
In terms of our cash cash usage.
Really that's that's planning for the typically large reorder activity across Pap resupply diabetes and supplies to the home that occurs in the fourth quarter and so.
We expect to liquidate most or all of that into sales for the fourth quarter.
Okay and one last one for me is I've been trying to think about kind of the pet market and the impact on <unk>.
The replacement cycle do you have a view on the percentage of.
Your patience today on census that have sort of hit that four five year, Mark where they're due for replacement.
Pat but haven't been able to obtain one given how the re prioritization efforts have been focused on on new starts I'm, just trying to sort of size kind of thinking about like the current census today and.
How we might start to see an upgrade play out over the next 12 months or so.
Well.
I don't think were prepared to give a percentage but.
Certainly we are prioritizing for 12 months new patients over.
Five year patients, but we were able to start giving some.
Five year replacement machines out this quarter and a little bit last quarter.
So I mean, I think that part of our backlog will start.
Creasing also fairly rapidly over the next.
Three to nine months.
Okay Alright.
Alright, thanks, guys.
Thank you.
Thank you. Our next question is coming from the line of Peter Chickering with Deutsche Bank. Please proceed with your question.
Hey, guys. Thanks for letting me back in just a couple of sort of quick ones. At this point for Q EBITDA range is pretty wide I just want to understand what what it takes.
To hit the bottom of the range. The high end of the range of where you think we should be modeling.
Yes, good question, Peter So I'd start with.
At that mid and it hit that implied 187 I believe it is the Q4.
Number so on the topline.
We put the mid at 790.
We believe we'll land $790 800 feels comfortable to us.
There is a flow through.
<unk> to gross margin.
Bottom line of about 55% on that is our assumption.
So that kind of bridges you out from 160 printed in Q3 to 180 and change.
In Q4.
Despite the kind of utilization of benefits and kind of other costs that we expect to continue from Q3, we did.
In the first week of October .
Make some pretty big.
Changes are countermeasures to both labor and operating expense and so we expect a pickup there.
For the rest of the year getting to the 187 mid so that's our base case, if you will.
To the downside.
Could we incur further costs than what we're seeing in Q3 possible but.
We feel that fuel benefit utilization.
Kind of incremental Pap setup cost, we think that's pretty low risk.
But it's a risk to the downside I would say to the upside it's really it's really top line.
If we continue to outperform.
If we get.
Really on the respiratory side kind of a clean exit from the prior year.
<unk>.
Mike and we grow sequentially and in respiratory more than we did in Q3 over Q2.
I think our levers.
On the top side in terms of.
A beep.
Okay, Great and then it's great news that resin is able to sort of crank through this this.
Backlog as fast I'm, just curious can you help us quantify what the pricing is for new CPAP machines sort of today versus say first quarter 'twenty, two and how we should think about CPAP pricing for 'twenty three.
Yes.
They've had that were under contract. So our contract is not up until January of next year.
Wait for the base unit. Its main this same thing they've had some surcharges for freight.
Which is still in there, which were I believe or seven to 812 bucks or something like that it wouldn't be exact number they've had those we've also had some freight costs that we've incurred tried to move product around faster. That's now discontinued that will approve our capex numbers next year.
Two pretty significant too.
$15 million to $20 million.
So that's all beneficial for us but.
<unk>.
We're interested in looking forward to our contract.
<unk> coming up a few months.
I guess, just any color on sort of how much of a headwind.
Pricing can be for next year.
Okay.
Well, it's an interesting conversation so I'd hate to I'd hate to.
Give my friends.
Any hints.
Alright, fair enough and totally understandable.
I guess.
Last question here again, I know, you're not giving 'twenty three guidance, but I'm just curious how would you think about the phe headwinds next year.
Just sort of a tailwind the new CPAP starts I mean phe in theory is there to help out when things arent normal just trying to figure out if we should be viewing them as a headwind as you bridge to 23 or if it's a relevant with all the ramp up of the new season that starts. Thanks, so much.
Yeah, and so I think it affects different products different ways.
Think on the CPAP.
Thank the pag is playing much of a factor I think smoker than supply, obviously and so now it comes out so we have ample supply.
Return to normal growth rates, you know sleep should be fantastic I think post phe for oxygen and respiratory I think it kind of peaked at <unk>.
The end of last year beginning of this year, it's come down. Since then we've had some sequential improvement from Q2 to Q3, So I think that gets back to normality in 2023 and diabetes.
You know I think is phe health diabetes, a little bit but this regulation. That's proposed right now should help it to going forward.
So that should be good.
Basic DMA I think hospital discharges are constrained right now because they are having a hard time discharging people. So I think that's going to get resolved DMA should come back supplies to the home, we feel like we're making great headwinds with with.
With our partners and Payors, So I think all of our product categories.
Positive outlooks for 2023.
As opposed to they're up both ups and downs in 'twenty to 'twenty, one so I think it's back to more normality.
And so that's fine for us because we do have the ability where operators who would have the ability to control costs and be able to get things off.
Operating more much more efficiently, we haven't been able to control some of our external stuff from supply chain.
And that appears to be going away. So it should be back to business as usual in 2023. So we're looking forward to it.
<unk>.
Thank you all are thinking about the jump off point.
Coming out of 'twenty two.
Topline.
I would probably throw it all in the mixer and say, it's a wash, but there's there's likely upside on WPS fee schedule.
<unk> headwind there theoretically there's a sequestration.
Headwind I mean, theres, a lot of ins and outs, but if you assume high level that's awash.
Then you add in top and bottom line the range I gave with one path.
So what do you think thats $25 million to $40 million or so based on the numbers I provided him.
That's a decent way to think about a jump off point and then from there as we said we think its normal operations when it comes to.
Non acquired growth in gist.
Margin improvement across the business and.
We're looking forward to a good 2023, and certainly will be specific here in the coming weeks.
Great. Thanks, so much guys.
And with that ladies and gentlemen, we have reached the end of our time for the question and answer session I would like to turn the floor back over to management for concluding comments.
Yes, thanks to everybody for attending our call. This morning, we appreciate the support and once again, we'd like to thank our fantastic employees out there they've been through a lot over the past couple of years.
We're all looking for a more normal environment, where.
Where we can do great things for our patients our referral sources and our payers. Thanks again and appreciate everybody.
Okay.
Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect at this time.