AdaptHealth Corp - 1782060 - ADAPTHEALTH CORP

Good afternoon, everybody. Welcome day two, UBS Healthcare Conference. I'm Kevin Caliendo, UPS Healthcare IT and Distribution Analyst, and we are very proud and happy today to have with us management team from Adapt Health and featuring Suzanne Foster, the CEO. Suzanne, thank you so much for joining us again this year. Maybe before we start, you want to give a quick sort of overview of the last quarter or anything else you want us to talk about? Where we're at as a company. Where are you at as a company? Yeah, so where we are today is coming out of, I think, a transformational last year, really. It was about a year ago that we announced that we were taking on a large capitated agreement with Kaiser Permanente. I'm happy about that, winning that RFP, and that set us on quite an adventure. As I sit here now, being we went live essentially in February, we've learned a lot. There was a lot going into the agreement that we didn't anticipate, but we've been able to prove ourselves, and we'll get into it in a minute. But we're working with our partner to make sure that it's a financially viable contract and good not only for their members but for ADAPT. So that's been the headline of our company. Underlying that, we're coming out of two years of pruning our portfolio. To remind anyone who's new to this story, we were a company that was a roll-up consolidator of about 150 small HME, DME companies. And a couple years ago, we set out to prune parts of the portfolio that came in through all of those acquisitions so that we could become a focused sleep and respiratory business with a supportive, what we call wellness at home supplies business. That work is essentially done with the completion of us selling our diabetes segment to Cardinal Health, which will happen in the first half of 2027. So we're excited about getting that behind us. And then the last thing I'd say is we have just been on this two-year journey of real operational improvement. As you can imagine, as a roll-up, we had a lot of disparity around the way we operated, and so these last couple years has been around standard work, bringing discipline and precision to kind of that service element of what we do. Let's start with Kaiser. It's been the overriding until the ResMed stuff, but the Kaiser contract, you saw a real turnaround in the third quarter after some hiccups and delays and something's not your fault, for sure, we understand, as we've learned. But you moved in the first quarter in the second quarter from negative margins to positive margins. maybe talk through a little bit, I think it was roughly 10% margin. Is that what you were quoted as? End of the quarter. End of quarter. With a 14% run rate, yeah. You're exiting September at a 14%, right? You've reiterated a 20% margin target by late 2027. Maybe take us through what happened, what flipped, and what are the steps that you need to get to to hit your targets? What needs to happen? Sure. Just real quickly on what happened. So a fixed fee or capitated arrangement in our industry, there's two essential requirements when you enter into those. One is good claims data, so you know exactly the utilization. And the second is the environment in which the referral comes over. And so going up until the eve of taking over that business from an incumbent who had it for 21 years we the partnership I think both adapting Kaiser thought we had our arms around that and as it turned out there were some fundamental flaws not only in the utilization data but also in the workflows of how referrals come over those are two buckets when we now with the benefit of hindsight and seeing the the data from when this first initiated in 2023 to go live in 2026 we had some gaps in the data that we didn't see when I last reported in q2 through the partnership we now see all that data and there was two things that happened the first thing was that there was greater than expected utilization increase from the time we bid it to the time we went live and that's what we're working on on adjusting to get the right jump off point but there was also what we saw a little bit and we've talked about this is that pent-up demand, decreased utilization a few quarters from when we, before we took over the contract, that landed on us in the first four months that we took the contract on. So service had been compressed. We sent out letters to 12 million patients and said, we're here, we're your new provider, and we got a lot of response. We didn't expect that. that is behind us. So what you saw in the improvements, the financial improvements, was one, that bolus of utilization is behind us. We're renegotiating on the jump-off point what it should be from the increased utilization from the time we bid to the time we went live. And on the cost to serve, I call it, the part around the environment, we have, through the partnership, made a lot of improvements. We've reduced urgent orders. We have worked on what we call the cleanliness of the order, how complete it is. So through that partnership, we've made a lot of improvements that allowed us to really get after in Q3 the labor and the OPEX. And that's how we were able to turn those margins from negative four to now run rating in September at 14%. It was mostly labor and OPEx that drove that. So the relationship is very stable. We're in active negotiations to right-size the financial profile ahead of schedule of what we promised to the street when we didn't have all this information. So you're in negotiations now. You've talked about this before. Is this something that could wrap up by the end of the year? Do you want to get, do you need 12 months of data to feel comfortable, or is it a run rate that you, what does this entail? Yeah, we are, the partnership has committed to what we're both trying to work towards is having certainty going into the new calendar year for budgeting reasons. So we are aiming to having this done by the end of the calendar year that right-sizes the financial profitability for ADAPT. Do you have downside protection, too, or upside participation? Because when we thought about capitated contracts, it was at-risk. We healthcare investors hear capitated and say, are you taking risk? Are there better guidelines or guide wires around where you can go with the profitability? Well, you know, and it's funny because I think the at-risk language doesn't really apply to capitated agreements in our world because the way these deals are structured is it's a fixed fee within a corridor. And the corridor protects against massive under or overdue utilization. Now, it didn't work here because we didn't have a baseline to go off of. So, like, in this world, let's say utilization was just as we expected when we took over the contract, and let's say two years from now, all of a sudden there was a spike, we would have been protected in that case because of the corridor. The problem we got into is the data prior to go live did not accurately reflect the actual utilization. The actual baseline. So the baseline was off. So the corridors were not capturing what was happening. And so as soon as, and that's why there's a commitment on both sides. They're saying, we got to get your jump off point right, of course. And that's what we're working through. So now you feel very comfortable with the baseline and it's just a matter of identifying what the guidelines okay the Kaiser contract was a massive lift do we know 40 new locations if I have that right thousands of new hires you have two new newer regional capitated wins you just announced with I think 70,000 plus lives those look more like the Humana contract right it's a simpler less risk like how do we people heard this and you know oh my god they're still doing this, like what's happening? Yeah, those are, you know, just like Humana, they go on our footprint we already have. And so you bring them in, it's just another method of which you're paid. So rather than submitting for every widget or fee for service, you're basically just getting a per member per month, and nothing changes in the footprint. So those come on, I mean, just, like, in Q1 or Q2 when we announced the expansion of Humana in Florida and Texas without a hiccup, right? Those just come on. I think that was like 50,000 lives, maybe more, I'm recalling. And so those are things that we're equipped to do. Kaiser's an N of one, just because of the new location in California and Kaiser Hospital specific. They operate differently. So when we take on a cap deal with any other payer, it's in all the hospitals, you know, across the United States. So it normalizes. We know how to operate those. Are margins on these deals, how do we think about them relative to corporate average? Not Kaiser necessarily. You gave us those guidelines. We've said at or better. At or better? Yep, because there's less administrative costs. You don't have a sales force. You're not pushing utilization. You're just getting what the patient needs when they need it. So we like them because they're predictable, cash up front, low bad debt, at or above enterprise margins. Are there a lot of these opportunities still out there for you? We have a strong pipeline out there. These are, you know, particularly it's interesting, more focused on the West Coast seems to promote these more, West Coast payers. But we have a stronger pipeline, and a lotof the pipeline timing has to do with just the IT integration that's required because they're new to a loto payers, but we do believe that this will be a growing part of our business. Now that Kaiser is established, and I know it's not done, but will that be a leverageable asset for you now? Meaning you have the infrastructure there, you're talking about West Coast. Kaiser is massive, so I get that there's not a lot of market share that Kaiser doesn't have in their markets. But is it a leverageble asset such that you're saying West Coast? Yeah, sure. Sure. So, I mean, remember, the original strategic intent in going after that business was we were primarily, you know, Midwest, East Coast business. We didn't have a lot of presence on the West Coast. And what this afforded us was the opportunity to stand up a West Coast operations and really be the only national player out there. So the strategy here was we went out and we set up 40 locations from Washington State down. like you said hired a couple thousand people all new fleet got the capex investment in place and the intention was that we would go grow other non-kaiser business in that footprint a little wrinkle happened in february of 2026 where they announced the the moratorium on medicare billing numbers so our strategy was a little bit halted but what that allowed us to do was to first get the operations under control so now that that moratorium has been lifted and we're pending our Medicare billing numbers. In the second half of 2027, that allows us to do what we call the halo effect. We can put in salespeople and go get non-Kaiser business in that footprint because Kaiser's carrying the full load of that footprint right now. And we can do that for the most part without any incremental investment because there's capacity sitting there waiting. How meaningful is that opportunity? We believe it's pretty meaningful because you have, particularly in California, not really a national player. I mean, we're really the only national player right now with scale out in the West Coast. You have some regionals, but there's pockets where, you know, we could come in and take that business. So, yeah, they're a big payer in that region, but they're still a lot of business to go get. Despite all of the Kaiser headlines, headaches, you know, that you've had to deal with, organic growth was still okay. But did it affect the Kaiser, the effort to fix Kaiser? Did that affect the rest of the company in any way or your ability to invest or maybe, you know, other non-Kaiser related markets? Yeah, our base business year to date has grown 4%. And the reason for that, really two things. This year, the storyline for all of us was get diabetes ready to sale, you know, do the work that we got to do there. We couldn't, because it's in disc ops, we couldn't take out cost. We just had to keep as is and run it so that the sale goes through. So we couldn'T leverage any cost out of there. To subsidize this Kaiser ramp, we basically asked the base business to subsidize it. And so, you know, the organic growth being double-digit this year, mostly as a result of Kaiser, of course, but we said growth is good for the year, and we held on investing in the base business. So 4% came with us, not backfilling salespeople, not putting more respiratory therapists on the street, you now, really just holding the line until we right-sized the cost structure of our West Coast expansion. So coming into 27, as this contract stabilizes, we now can refocus and we'll look at this on a consolidated basis and fund where we need to elsewhere to increase the base business growth because the end markets are strong. We think sleep is doing well, respiratory is doing its thing, and then our wellness at home segment is in support of. So with all of the product pruning and portfolio pruning that we did to get rid of the low margin stuff and the stuff that we weren't really in the market, one or two market leader, we got rid of all that over the last two years. We're super focused now. And the focus has become all these different parts of the portfolio to the segments in which we sell to. That's why you've heard me talk about more capitated where it makes sense. Our enterprise sales team, we've stood that up this year where we have a strategic accounts initiative where we're signing, you know, a handful of preferred provider agreements every quarter now with big, large health systems and then protect our fee-for-service business. If I'm just thinking about this, you have Kaiser contract that year-over-year should look better. You had core growth of 4% despite not being able to really invest the way you wanted to. You have other opportunities to lever the infrastructure that's in place. Like, I mean, I don't want to – I'm not asking, Harris. I'm Not Asking. Promise. us. But I mean, he's getting out of his chair. But just thinking about this, that's a pretty good setup, right? Are there any other things to think about in terms of investments? Or I know obviously diabetes is no longer going to be part of it, but those are all incremental above and beyond core growth opportunities. Is there anything I'm not thinking about here? No, I think you have it right. 27 for us is going to be an exciting year where West Coast expansion, as we've talked about, is going to be a priority for us, based business investment, and then just manageable size organic growth, meaning accounts, whether it's a preferred provider agreement or more cap, but it is going be straight down the fairway, so to speak. We're lapping a lot of those one times. It'll be true comps. I mean, it's going to be a, this year was transformative and one I don't think any of us want to live through again, but it definitely challenged us, but taught us a lot. 27, all of those lessons come to be. The one sort of headwind, I think, is the diabetes business being sold. You had talked about there being sort of 30 million of costs that go away, but 30 million are stranded costs. Now there's not going to Be any revenue associated with 30. how do we think about that is there how do how do we how do model that or how do think about how long will that take to go away so yeah so the problem was because we were you know corporate allocation cat corporately allocating based on revenue diabetes was allocated pretty heavily and so there's 30 million of costs that go away a third of that but almost on day one that don't go with the transaction that we can just take out, you know, think about it, like your parachute fees and just that kind of stuff through the course of 2027, the rest of the other two thirds of that 30 come out. So we've, we've said publicly that that first 30 comes out within 12 months, but primarily in 2027 if the deal goes through mid Q1, let's say. So we'll work to take out the real estate and the labor and the perjuring cost, as Harris likes to say. Those come out. The other 30, which are true stranded, those we're going to grow through over the next couple of years. So you'll try to use those to lever? Yeah. We believe that the growth is going to be sufficient over the next couple years to grow true those 30. We'll nibble around it, and obviously we're going to continue to improve our margins and our infrastructure and drive leverage where we can, but no massive moves because we think we can offset that through growth. I'm guessing that's people costs, if it's leverageable. Okay. Got it. Since Harris joined in September, you've redeemed your highest cost senior notes. You had a delayed draw term loan. You reaffirmed your net leverage targets. These are all good things. With the diabetes proceeds, you'll be, I think, below that 2.5 or at 2. 5 leverage, roughly. Am I right? Not yet. Not when we pay. We'll be at three. Yeah. So recommitting to the 2.5, but we'll take the proceeds of diabetes. That'll put us at about three. And then we'll continue to use, you know, free cash flow to continue to target that 2. 5 is where we want to be. Okay. And if we think about the free cashflow, at least the way we model it, you can get there pretty quickly. do you at that point when you get to that target and assuming everything else is going the way you hope for what do you do next is it do you start to is there m&a is there share buybacks should we just continue to pay down debt until and be opportunistic so that you have this much up you know as much leverage as you want i think it's probably going to be a balance of all three you know I think at 2.5 we've got a healthy leverage profile so I don't know you know we might want to go a little lower but I don'T think that that'll fall down to maybe number two or three as opposed to number one share buybacks would be on the table and M&A would be opportunistic I donT see in the near term any transformative M&a required I think that the road ahead is we can accomplish a lot of our growth by through organic there will be opportunistic m&a not so much from a brick and mortar perspective is my philosophy but more in kind of in a acquiring of of patient care meaning resupply patients that need ongoing care i think our footprint is pretty solid and there may be some west coast geography holes that we have but it'll be sleep and respiratory. We know our resupply engine and operations is super strong. So when you can take a smaller provider and put it in our sleep resupplied, patients get better care and that's good financially for us. So that would be the focus. But this industry, as everyone knows, is continuing to consolidate, but I'm not sure how much we have to be a consolidator of it and how much of it will just naturally happen. I mean, we have had the benefit of sidestepping competitive of bid, you know, with the product portfolio pruning that we did. So we've sidestepped that risk. And if we stay in our lane of sleep and respiratory focused on, you now, cap, enterprise, and maintaining fee for service, I think our growth will kind of take care of itself without any kind of massive transformational M&A that we need to do in the next couple years. We have one public peer of yours who's struggling financially right now. What's the industry dynamic in terms of the health of your competitors, not just the one that we know about because we know the market is incredibly fragmented, but you do have an attractive financial profile. Your leverage is not high. You are generating cash. There are benefits to being adapt health in the marketplace right now relative to peers. Is that a real thing in terms of market share? Are you able to flex a little bit right now compared to the market? Do we even contemplate that as a part of the algorithm? Yeah, well, I mean, where we're able to flex, right, is the volume. As we continue to drive volume, we got some, notwithstanding last quarter's comments around one of our larger manufacturers. But, you know, we've got purchasing power. And so we look at a lot of smaller competitors, P&Ls through, you now, diligence and such. And what we do see is that scale does matter in this industry. And so our purchasing power is one. The other one is that you have payers who are saying, you know, I want to consolidate the network, and they're doing it in one of two ways. They're either going, you Know, they're using us or they're Using this convener model, which we fall within network anyway, so we get the benefit of them consolidating the market and us consolidating it through just driving, you Know, getting big accounts. So that's playing in our favor. and so the other thing that i don't think people recognize is one of the reasons that we have been able to stay stable in this environment is a few years back you know really over the last five years adapted already went through all the hard work of the tech infrastructure so you know we're on oracle we're on bright tree we have snap we have a snowflake layer that sophistication allows us more confidence in our billing, minimizes risk there. The administrative burden is lesser. I think a lot of our peers in the industry just haven't got to that point where they've used that strong technology backbone to be a mature company. And we're through that. And so now our investments are things like growth. It's not an investing in Oracle or an ERP or something like that. That's all down, that's behind us as we became a public company. So that sophistication, I think, is really helping us right now. And it allows us when we go to a customer or a big payer, or even like Kaiser, you know, do you have a disaster recovery plan? Do you have, you know, these things that they want to see if they're going to put all their eggs in one basket? And we're able to say, yes, we do. Where I don't think a lot of our competitors in this industry have that sophistication. Good answer. Let's talk a little bit about what happened with the the manufacturer uh obviously it was shocking to everybody and you said you know finding out the last day of the quarter and the way you found out was was horrific um it seemed like things moved forward can you maybe give us an update on where we are with can we can we use their name or not you can i can't i guess res med um maybe a quick 30 second synopsis of what happened and then the update and maybe if you can even update further because i know there were things are still in progress so so um yeah it was an unfortunate um situation because we have had an incredible partnership you know we are um up until that one moment and so you know sometimes things just go sideways and so kind of in through the middle of our organization overnight we we got an announcement that you know our price our rebate structure and tiered volume pricing would be canceled and that we would just go to a straight on all products price increase. Obviously, that forced the parties to the table in recognition that we're important to them, but they're also very important to us. And so we were able to recover quickly to, you know, within the quarter to say, hey, neither one of us want this. This isn't the right thing for us. A lot of that, you now, got resolved and we got back to normal course of business. And what does normal course of business mean. That means that we have always had an annual rebate tiered structure with them. So we were able to get that back in place for the remainder of the year. And you saw the same levels in the lake? Yep. Well, different tiers. I mean, we negotiated a new kind of third quarter, fourth quarter, but digestible and fair to both sides with the recognition that through that period of time, like we normally would this time of year, we work on the following year. And so that's where we're at. It's just back to normal course of business. So it was an unfortunate hiccup that because of the timing of earnings calls, you know, got displayed out in the public market, but it was a real risk that we also couldn't back away from. Now, in terms of the go forward, you Know, people have asked, well, what does that mean? We have never played the game of shifting share or anything like that, because we believe we sell service. They sell the clinical value. And so we've been able to just continue to do our thing because everyone's playing fairly. And then you have next year rumors of new entrants. And so that's going to be an interesting dynamic that happens in the sleep space because that hasn't been the case for many years. And companies like us, we have to make sure that if we get a script that's branded, we Have That product. So we're going to have to look at what that means in terms of managing our suppliers to make sure we have room for everybody to go out and sell their clinical value, and then we provide the product and the service. So there was concern that the third quarter, fourth quarter dynamic resolved, but come 1-1, there would be another, like it's a different contract, or they could raise the price again dramatically. Like that was a fear in the marketplace. There was some question and concern around that. It doesn't sound like that's where we are? No, I think that, no, I don't. I think, you know, we, there's, there has always been that negotiation in our business. But it's just a matter of what you want to sign up for in terms of price and volume. And we're back to normal course of business or we extend, you know, that that's happened in the past too, where we just say, you don't, we like, we'd like where we are today. We'll just extend that. So you have that option too. So I think the bigger thing is just us getting back to our normal inventory buys and CapEx is percent of revenue. And, you know that's what you should measure on and really this little hiccups behind us and one we hope to avoid ever again so how does the new the other narrative was of course that if the new market player was coming to market and there's been chatter or however you want to describe it they could be coming back even in the first quarter we don't know if that's true maybe you can provide us an update if you know um how does that affect negotiations with resmed does it even do do they want to guarantee a certain amount of volume now that there might be a competitor coming to market like how does that i'm guessing from your point it helps your leverage if there's another player sure well i want i i won't speak i i don't know their strategy uh but two points is i think um the other player has been very forthcoming um in announcing that the last piece of what they have to clear is they have to declare their injunction and everything else has been resolved And so as soon as that clears, but they can't forecast plan or price plan or anything until that happens. So they can'T really even announce it until that's removed. So I think that we all know that that's where they're at. For us, I mean, our leverage as a company, regardless of what, you know, respiratory or sleep or wherever it may be, is obviously price and volume. And so the more players, the more leverage a company like ours has. But at the same time, we're in negotiations now. and who knows, you know, when there'll be additional players in the market. So we have to make sure that we have the right terms for what we know today. Got it. Keeping your options open is always a good thing. But I have faith in our supply chain and our procurement team. Can you remind us, prior to them falling out of the market, what your market share was or what percentage of your business came from Phillips, Respironix, and or Resmin? Oh, before? like years ago yeah oh i wasn't here then um we were probably i were we were probably whatever the market split was because i think i think historically the way to think about us because we've never played that game is our supplier base is typically a reflection of the market split okay so you it wasn't like you it's not give a preference one or the other you don't know yet not my not my tenure we have not played that gain because we think all our partners are important and so we have basically held true to you know the script comes in we we service to that and then the unbranded scripts we call it you know we have a little wiggle room there based on either patient preference or you know that's when maybe cost definitely comes into where we can provide the lower cost option one last sort of not you question but it affected you was the medline bed field action. We were a little surprised that it was a negative thing for you, but after you explained it to us, we kind of figured out why. It wasn't that you have any liability. It's just you're negatively impacted by this. Can you give us an update? Like, has it gotten, Medline's been talking about it? Like it's not. Yeah, I give them a lot of credit for talking about it and reassuring publicly that, you know, companies like us, because it's an industry, you know problem that they will stand behind the cost of repair replacement um so they're definitely out there saying and have told us personally that they have a make whole type of attitude towards this which is very good the reason we called it out was one um you never know in these situations and even though it's a small part of our business but um there was two really two things put around side medline there was either that the other suppliers couldn't ramp fast enough because not only do you have the voluntary the field action but they're not making them anymore and so we were concerned you know can the other manufacturers ramp and can we meet the demand of replacement and new now we do have that assurances from them that that demand will be met and in fact we have secured front of the line with them so as beds are coming off the manufacturing we have secured front of the line, which is good. So we do believe we'll be able to maintain both. And in fact- Is there a cost difference now for you? I mean, it's only 7% or 8% of your revenue. Yeah. It's not meaningful right now because interestingly, we had already started diversifying that supply chain before this was announced. Sometimes we did get lucky one time in 2026. But like anything, this could become an opportunity because if we have secured front of the line and if there is a shortage of beds and we're the ones that have them, this could be a benefit to us. Now, can't promise that, but we've done all the right things to make sure we're prepared for this swap out, repair, and replacement while keeping up with new demands. So we baked it into our fourth quarter guidance. Harris is the philosophy of he'll tell you. He baked it in to the low end of the guide. It would be more of a timing issue. We incur upfront costs. But at this point, we got our arms around it and we don't think it's that meaningful. It'll take some muscle, you know, but we're prepared to do that. They're heavy. In many ways, it's going to take some muscles. Yeah. When you came on, you talked a lot about how you can improve the operations of the company, investing in technology and logistics, and felt like businesses were run like businesses are running in the 1980s. And my app is up to 615,000 users. Your AI mask fitting tool is driving a 94% order conversion rate. How are these digital tools and others, like how is it working? Are you happy where we are? Is there more to do here? Definitely more to Do. We are learning fast and furious. So, you know, if you just step back and say where was our areas of focus, there was kind of three parts to it. Definitely the technology, which I'll come to, which MyApp is a big driver of, the AI mask fitting, our intake portal, the use of e-prescribe, all off and running, and there's definitely more to go. We have a goal of 2 million MyApp users in the next two years, so we are well on our way there. The other one was operationally. Like I talked about, all our locations kind of ran differently in standard of work. that team now is two years into their journey and you're seeing it in the ability to use drop ship to standardize the work to to to mature our supply chain and procurement like that work is going really well more to do we're still I'd call it you know coming from Danaher I would call us still in middle like sixth grade we're entering middle school but you know we came from kindergarten And I think that the team there has done a tremendous job in maturing our operations. And then the third leg of that stool was our commercial team. So two years ago, when we talked about that, our commercial team was reporting to operators. We didn't really have a standalone commercial strategy. And the way we've been able to put in quota systems, target now our cap, you know, our capitation fee, our managed care agreements, and then also these enterprise sales, that has all been towards this go find, acquire patients and drive chunkier, big, large prescribers as opposed to onesie twosies. So all of that work's been happening in the background. We transformed our portfolio and took out the low margin onesie, twosie stuff. And so I'm thrilled with where we are. And I think, you know, this year a lot happened and maybe too much for the market to kind of digest it once. But that's all behind us, because if you think about us going into 27 now, we've got a stable leadership team. Harris being the last addition of the leadership team, our operations is taking out massive labor and OPEX costs. Technologies help drive that. So if we can stabilize our KP and get that margin profitability where it needs to, that sets us out onto the West Coast expansion. The rest of the business is now just continuous improvement. There's no more big portfolio moves. There's not big transformative M&A. The end markets are strong. Blocking and tackling. It's a blocking and tackling, hopefully quiet, 2027. Regulatory risks are beside us. We're not threatened by competitive bid. Sounds like a good setup. a calming 2027. We wish that for you. We are out of time. Thank you so much. Thank you so great. Really appreciate it.