AdaptHealth Corp. (AHCO) Q1 2022 Earnings Call Transcript


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AdaptHealth Corp. (AHCO 30.01%)
Q1 2022 Earnings Call
May 10, 2022, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, and welcome to the AdaptHealth first quarter 2022 financial results conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Joyce. Thank you.

Chris, you may begin.

Chris JoyceGeneral Counsel

Thank you, operator. I’d like to welcome everyone to today’s AdaptHealth 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 the 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 Griggs, chief executive officer of Adapthealth; Josh Parnes, president of Adapthealth; and Jason Clemens, chief financial officer of Adapthealth, we’ll 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 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. Adapthealth 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 morning’s 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 Griggs.

Steve GriggsCo-Chief Executive Officer

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 10,910 employees. Our revenues of 706 million reflected an organic growth rate of 3.7%, which improved approximately 100 basis points from the fourth quarter of 2021.

Adapthealth 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 CPAPs as the quarter progressed. And with the successful expansion of our patient set up capacity by our operations teams across the country, we saw patients setups in March at or near their 2021 levels. This momentum has continued in the current quarter as set ups remain strong in April.

While 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 healthcare providers, we are operating in an inflationary environment that includes continued workforce wage pressure, increased operating costs, 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 Adapthealth indebtedness is 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’m 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 and May by the more than 1000 Adapthealth leaders I met over the course of 10 2-day sales and operation meetings held in nine cities across the United States. These meetings showed we are coordinated and committed to empowering our patients to live their best lives at home.

This collaboration among our teams from these meetings makes it clear to me that the unique strength of Adapthealth is our ability to deliver flexible, locally focused patient care, which leverages our efficiencies across our national platform. I believe our ability to deliver a wide range of home medical equipment to insured beneficiaries differentiates Adapthealth from other home health providers. And will continue to drive our sales growth and operating efficiencies. We believe our core strengths position as well to take advantage of rapidly changing healthcare delivery models throughout the United States.

Over the next 5 to 10 years, as government agencies and commercial payers turn to population health and outpatient home centric care models, Adapthealth 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 payors, healthcare systems, and physicians, managing care for their patients. Our products, when properly monitoring used, 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 in the expected U.S. population that is living longer and more actively than ever before.

As we learn from the past two years navigating the COVID pandemic, these trends are also favorable for healthcare providers such as Adapthealth, who are critical in the management of chronic conditions and can deliver care to the health. I will now turn the call over to our president, Josh Parnes, to elaborate on our commitment to expanding our presence in outpatient and at-home services.

Josh ParnesPresident and Director

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 AdaptHealth. 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 HME acquisition other than AeroCare, 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, and 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 was contiguous to an existing Adapthealth branch operation and is expected to generate very attractive synergies once integration is complete.

For example, in April, we acquired key medical products, an HME and respiratory provider operating in the [Inaudible] market. A nice complement to the Spiro operations that we acquired in Q2 2021. Switching to operations, market conditions have forced Adapt to become an even better company. Adapthealth continues to be a leader in promoting e-prescribe among facility and physician refers.

And in Q1, as we continue to roll out e-prescribe to more regions, we are 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 and billing efficiencies, which result from increased e-prescribing 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, our labor expense as a percent of revenue increased less than 1% year-over-year. This technology also puts us inside the position offices and patient homes, which we believe will improve physician and patient engagement. Supply chain challenges let Adapt to building redundancies to mitigate shortages.

We’ve sourced more product directly and built out their competency. The CPAP shortages have forced us to drive more utilization out of existing devices and asset recovery. The integration of AeroCare in middle of a pandemic forced an upgrade on ERP and internal systems. All of these things have made Adapt better today and 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 expansion into CGM Supply and Diabetes Services in 2020 is a good example of a strategic expansion into a new market. We believe this is a core differentiator for Adapthealth. Prior to July 2020, Adapthealth had no presence in the fast growing diabetes market.

Our strategic review of diabetes services and in particular CGM, confirmed that many of the drivers of that business were similar to those we found in our CPAP resupply business. This review also — 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 a plan to aggressively move into the diabetes market with the acquisition of Solara in July 2020, followed by six additional acquisitions in diabetes space over the next 18 months. As we have integrated Solara and our other diabetes supply acquisitions, we have successfully implemented many of the technologies used in our HME resupply business to increase revenue and improve operational efficiencies.

As communicated by Dexcom and 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 a CGM position 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 healthcare costs, and are the subject of numerous programs to control spending. Adapt regularly engages with these patients through set ups, 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 the few companies that have the breadth of the relationships and engagement with the poly chronic patients in their homes and are set up to ingest the data and coordinate between the patient, the doctor, and the payer. Adapt sits at the crossroads of these key stakeholders in the healthcare 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 healthcare 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?

Jason ClemensChief Financial Officer

Thanks, Josh. Good morning, and thank you for joining our call. I’ll 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, 2022, Adapthealth reported net revenue of $706.2 million, representing a year-over-year growth of 46.5%, including a full quarter’s contribution from the AeroCare acquisition that closed in February 2021 versus two months contribution in the year ago quarter.

Organic growth for the quarter was 3.7%, improving about a point from the fourth quarter of 2021. Non-acquired growth was also 3.7% for the quarter. And as expected, organic growth and non-acquired growth are converging as we lapped our larger acquisitions, including AeroCare and Solara. As Steve noted, we were pleased with our ability to deliver revenue and adjusted EBITA 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 HME and sleep categories, particularly in CPAP resupply despite the device shortage. As expected, higher costs and supply chain challenges have impacted our results. However, as Steve and Josh have described, we are taking steps to mitigate these pressures by leveraging and scaling our technology. As such, we saw the expected increase in technology expense for the quarter.

We’ve highlighted these investments on previous calls, including our patient delivery platform, OTL, as well as Oracle and other strategic technologies. Although these investments increase 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 isn’t an effort to simplify, but it also reflects the continued evolution in our business of diabetes with very little capex increases as a percent of total revenue mix. We will continue to guide to total capex and focus on generating free cash flow and eliminating the impact of equipment lease financing. Like most other healthcare providers. First quarter cash flows are historically light to a variety of factors and the revenue cycle, patient ordering patterns, the payroll cycle, and the timing of interest payments.

DSOs held firm at 47 days with no change from the fourth quarter of 2021. In 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 expected, 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 includes the non-recurring outflows related to the CARES Act recoupment of $5.2 million.

Accounts payable was a $35 million use of cash during the quarter, which relates to our ERP implementation. 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 and 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 as free cash flow for 2022, which should improve to 7% to 8% of revenue next year and beyond.

At quarter end, we had cash of $119 million and zero balance on the revolver. Net leverage, as defined under our bank covenants was 3.4 times and the trailing 12 months leverage was 3.6 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 $2.840 billion to $3.040 billion, up from the previous range of $2.825 billion to $3.025 billion. And our adjusted EBITA 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 a respironics equipment is back on the market, and that we would not return to prior allocation with ResMed 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’ll now pass the call over to Steve for some final thoughts before we open it up for Q&A.

Steve GriggsCo-Chief Executive Officer

Thanks, Jason. I’ll finish by first thanking again our 10,910 employees for everything they have done and continue to do to address the needs of our patients and our communities in a safe and caring 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 respironics recall and patch shortage. This will ultimately be solved by a combination of respironics 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, where Adapthealth CPAP backlog continued to grow despite strong patient setups.

Based on published remarks, we continue to believe it is unlikely we will see new CPAP units for sale by respironics 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, AdaptHealth Board of Directors, with the support of our bank crew, has authorized a share buyback program of up to $200 million of Adapthealth common stock. This buyback program demonstrates our confidence in Adapthealth’s 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.

Questions & Answers:


Thank you. We will now be conducting a question-and-answer session [Operator instructions]. Our first question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Brian TanquilutJefferies — Analyst

Good morning. Congrats on the quarter. I guess, Steve, just to hit on that last part that you talked about with the respironics on the backlog. Maybe, if you can share with us any color that you’re 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 know market share shifting and maybe even supply shifting as things start to normalize presumably at the end of the year or toward early next year?

Steve GriggsCo-Chief Executive Officer

Yeah, sure. Thanks, Brian, for the question. Definitely the backlog for not just us, but for everybody in the industry continues to grow because there’s just less paps even the record supply that we’ve had the last couple of months that doesn’t meet up with the demand. So the backlog is going to continue to grow until those factors that I describe are solved.

And the main factor is chips. With chips, a lot of this could be solved by other people besides respironics. But we want respironics back in the market because they will bring chips into the market as much as anything else. So with that, what we’re trying to do is we’re trying to minimize gets up as many paps as we can to minimize our portion of the backyard or our pro rata 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 the increased demand that’s out there from these levels. So with that, you’re seeing other providers come in, our other manufacturers coming in their rest matters, announce 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 positions offices and it’s on us. 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 will be in there since 11 machines have all that beneficiary — benefits to it. But, just won’t have that modem capability.

Brian TanquilutJefferies — Analyst

Gotcha. Then Josh, in your prepared remarks, you talked a little bit about me being more prudent on the acquisition front or slowing down a little bit or be more picky, I guess, it’s probably a better term. Any thoughts on why you can share with us what you’re seeing that prompted you to do this? Or also, on the flipside, what is it doing to valuations in the market as you’ve pulled back a little bit from the acquisition game?

Josh ParnesPresident and Director

Yeah. So I think some of this is valuation based on some of its focus base. So some of it is related to just real, real work that we’re doing on integrating the many acquisitions that we did last year and the 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 that’s just 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 folks don’t know where valuations shake out in terms of — there’s still a decent amount of of product on the market for us to acquire or 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’s somewhat of a reset in terms of where the market is, in terms of inflation, in terms of the Philips recall, some companies were impacted more than others in terms of the Philips recall of their sleep days. So some of that is a little bit of a valuation reset for some of these folks that’s playing out in the in the negotiations.

But really — that’s what we’re seeing at this point. But the — 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 in-market or it’s adjacent to some of the branch office operations that we have. So we’re looking at those obviously as a priority just because of the amount of work and the synergies and upside that are there are going to take priority of some of the other deals.

Brian TanquilutJefferies — Analyst

Got it. And then last question for me, if I may. Josh you talked about care management quite a bit there. Just wondering how you’re thinking about monetizing that? Or what benefit it brings to the overall enterprise as you get bigger in that service category.

Josh ParnesPresident and Director

Sure. So, initially, really what we’re doing now is really just trying to leverage our existing distribution or 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 the CPAP patient to really drive a longer term, better outcome. But now we’re looking at that on diabetes, on COPD, and CHF and some of the other chronic diseases that we’re managing.

So I think 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 costs of acquiring the patient or establishing the infrastructure to connect with that patient and interact and ultimately drive a better outcome. We already have a connected device in the home, and our ability to leverage that and really to 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’ve got a number of things in the works that we’ll discuss in the upcoming quarters.

Brian TanquilutJefferies — Analyst

Awesome. Thank you, guys.


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

Joanna GajukBank of America Merrill Lynch — Analyst

Thank you. Good morning. So I guess first, a follow up on the respironics recall. I guess, FDA has proposed to force Philips to their repair, replace or refund the recalled ventilators.

Was this refund part always part of the equation here? Is that new or I guess if that was to happen, how would that flow through for that customers that bought the first device? And eventually, how would it flow through to Adapt?

Steve GriggsCo-Chief Executive Officer

Well, yeah, the refund will be on the older products and we’ll probably utilize those refunds to get replacement products that will be newer capex that come in there at a lower price is where you’ll see it hitting the financial statements. We don’t think this is a significant amount yet, but we’re still doing the math. And FDA is also continuing to put pressure on Philips as we are, to about how to do some reiteration of these interim devices.

Joanna GajukBank of America Merrill Lynch — Analyst

OK. Thank you. And I guess the related somewhat, but on the capex, so for the year, I guess you base or you maintain that the ratio of the revenues with the revenues went up a tiny bit. So so seems like you don’t feel like there’s a need to adjust for high fuel prices.

Is that the way you think about the capex maybe raised for the acquisitions, but nothing incremental in terms of these freight surcharges and whatnot?

Jason ClemensChief Financial Officer

Hey, Joanna, it’s Jason. Yeah, the capex line, that’s the right way to think about it. We came in at 10.9% of revenue for the first quarter. We think we’ll get a little relief as the year goes on, particularly later in the year.

Regarding fuel, some of that is really up in the COGS lines. We did see several million of, frankly, just gas prices for our fleet of 2,400 vehicles that just came out of the blue. It was hard to predict. And then in terms of the added freight that we are incurring, freight forwarding from our centralized locations to our distribution network, that’s up a touch versus prior year.

But 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 the gross margin. But we’re feeling comfortable with what we’re seeing and what we’ve got it for the year.

Joanna GajukBank of America Merrill Lynch — Analyst

OK. That’s good to hear because, I guess, those fuel prices went up, I guess, since we last spoke. But I guess if I can just very quick, the last one on the other six acquisitions. Any way to quantify the magnitude in terms of the revenue annualized revenue contribution and EBITDA? Thank you.

Jason ClemensChief Financial Officer

Yeah, sure, Joanna So we raised guide the top line by $15 million. A little over two thirds of that is related to acquisitions. And so of those — of the acquisitions announced, there was one really of size and the other ones were very small. But great, great deals.

We believe in our hub and spoke model. So of the 15, call it $11 million, $10.5 million to $11 million is from acquisitions. The $3.5 million to $4 million top line is from the extension of sequestration. So of course, we get an additional point through the balance of Q2, which added some top line, as well as the PHE extension for the next 90 days.

So sequestration, PHE, we’ve got about $3.5 million to $4 million top line that certainly flows through entirely to the bottom line. So overall, 50 million top line raise do the acquisitions and government programs, $5 million bottom line raise due to the flow through of acquisitions and government programs.


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

Andrea AlfonsoUBS — Analyst

Hi. Good morning, guys. It’s Andrea on for Kevin Caliendo here at UBS. Jason, just a quick question.

Given the trends that you’ve seen quarter-to-date and then some of the commentary you provided on sleep apnea today, could you maybe just give us a feel for how you’re thinking about some of the expected EBITDA step down that you telegraphed last quarter for 2022? Is that still, I think 45 million was the number that was discussed? Is that still a range that you’re comfortable with?

Jason ClemensChief Financial Officer

Yeah. Based on everything we’ve seen in Q1 as well as for the month of April, we’re very comfortable with the guidance, we’re comfortable with the margin profile. I don’t know that I would call a bottom yet on pap rentals, but I’ll direct you to Slide 5 in our earnings supplement. You will see that the $66 million of sleep rental revenue that we produced in the second quarter of 21.

So this is before the recall and the pap 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 get an easier comp and we think we’ll be it 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 [Inaudible] put out, our sleep resupply operation is just humming. It continues to grow quarter-over-quarter. Again, you’ll see that in that same Slide 5.

Of all of our highlights for the quarter, that’s the one I think that we’re just we’re just thrilled about. We continue to be efficient and grow that top line in 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.

Andrea AlfonsoUBS — Analyst

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 an 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 of strong again, growing to X year-over-year. It’s up in the mid to high teens sequentially. So, how are you thinking about those arbitrary business lines longer term?

Jason ClemensChief Financial Officer

Sure. So. I’ll answer the number side of the equation, then 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. That 3.7% for the quarter was a reflection of diabetes beating again. We had put up 18% as as a target for 2022. We came in above that number and we’re just thrilled with that business and the growth, that was offset by the supplies business.

We underperformed there by a little more than we expected. But at the end of the day, we’re running a portfolio of products and we’re feeling very, very good about organic growth for the quarter. Regarding the other product line. So some of the products that are in there, there is — we have a nice hospice business in there, which is predominantly [Inaudible] 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 that — of that program is excellent. Somewhat of a new entry is home infusion. Some of the acquisitions over the course of 21 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 you’re seeing there is some acquisitive growth and some organic growth within that category, which is why it doubled year-over-year. Steve, you want to talk a little bit about what’s happening operationally?

Steve GriggsCo-Chief Executive Officer

Yeah. And so, with the pandemic, there’s ups and downs. We benefit from some things we lose on other things. And so it’s a net net, pretty net neutral throughout 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 another $700 million in the first quarter was quite an accomplishment. When we sat on this on a call, just two months ago, we 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 the day 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’s plenty of products out there that patients need and referral sources want for their patients, and we can provide those. And that’s what we’re doing today.

Andrea AlfonsoUBS — Analyst

Thanks so much for all the granularity.


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

Pito ChickeringDeutsche Bank — Analyst

Hey. Good morning, guys. Thanks for taking my questions. A follow up to Joanna’s question about the guidance raise.

You said that the guidance raise is due to the deals in the government extensions. Are you implying that despite the increased fuel costs, obviously the inflationary cost, we’re seeing that there is zero impact on your original guidance due to strong cost controls?

Jason ClemensChief Financial Officer

Yes. That’s what we’re saying. The — fuel in Q1 was a touch under 2 million of unexpected cost. So the– we’ve got to find a way to curb that.

We’ve got various levers within the other operating expense lines that we are pulling. And some probably need to pull faster, but there is improvement in those lines year-over-year as a percent of revenue, and we’re confident that we’ll 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, we took a big chunk out of guide in the last call.

And we feel very, very comfortable with — what we put out.

Pito ChickeringDeutsche Bank — Analyst

All right. Excellent. For diabetes, typically because of seasonality, first quarter days, [Inaudible] typically are in are 20 year, 20% annual revenues. So if I look at the 155, that would implies to diabetes revenues in the 740 range for the year, is that the right way of thinking about diabetes?

Jason ClemensChief Financial Officer

Might be a little heavy on that, but you’re in the ballpark. Yes. it’s the right way to think about the profile.

Pito ChickeringDeutsche Bank — Analyst

OK. And then let me follow up on that one. Look, when you guys break out the pro forma organic growth, is there any way you can do this by product line like sleep and diabetes?

Jason ClemensChief Financial Officer

Yeah. So, Peter, when we put out the guide, we talked about a 4% weighted average for total top line. We call a point of that rate and three points volume. Rate predominantly from the dynamic plus fee schedule increase as well as some of the changes that came with those 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 sleep at about a negative 6%. 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 were in that ballpark and then DME other and supply to the home we had at 4%. As I mentioned, supplies is dragging a bit. But overall we feel great about the 4% at the portfolio level and and we think you can demonstrate that.

Pito ChickeringDeutsche Bank — Analyst

So on these sleep sales revenues, the entire point about the resupply versus the rental, they were incredibly strong. I guess how sustainable is — are these levels? Was that more of getting backlog for people that weren’t ordering it in the fourth quarter? Or do you think that this this resupply is a central level going forward?

Steve GriggsCo-Chief Executive Officer

Well, yeah, Peter, this is Steve. Yeah, they are very sustainable. We just keep improving that program. Our team has done an incredible job with resupply 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’re able to use our staff to focus on the remaining 60% of the patients that need more time, meet, need more attention and stuff like that. And so, all that is just continues to increase our orders that the patients and their compliance with the machines, that they be able to work on that and get that stuff done.

So this is very sustainable. In fact, we believe it’s going to continue to improve.

Pito ChickeringDeutsche Bank — Analyst

Right. And the last quick question for me on capital allocation. I understand is for lack of doing [Inaudible] deals is you guys integrated in the valuations normalize out here, I guess, what’s your view between share repo and reducing debt, obviously as put through the tremendous share repo? Just curious how you guys view buy back your own shares today versus deleveraging from here. Thanks so much.

Jason ClemensChief Financial Officer

Yeah, thanks, Peter. The first thing I’d say is, if you look at our trailing 12 net leverage, we did come down point one from from Q4. We think that that will continue as we grow and produce cash. In terms of the the authorization, will be opportunistic.

We think acquisitions and other use as an 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 authorize the program. And we’ll use it 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.

We’re going to be very methodical in this on that. And you’re going to see the continued investment in technology and then obviously, the share repurchase program. Guys, if you have anything to add to that?

Steve GriggsCo-Chief Executive Officer

Yeah. We’re — the acquisitions are still a big part of our story. But the comeback of path availability to us which will come back are, we need to be focusing on that and using our capital on that to take advantage of this, this once in a lifetime opportunity for us to not only get those, get our backlog, but also possibility to shift some market share. We’re a leader in paths and how we have this historic opportunity as a leader and perhaps 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, and the focus to be able to do that. It’s probably the biggest opportunity that we’ve seen in a long time in HME. And so it’s pretty high on our mind, needless to say.

Pito ChickeringDeutsche Bank — Analyst

Great. Thanks so much, guys.


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

Mathew BlackmanStifel Financial Corp. — Analyst

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.

And how do you line up that more selective commentary with, call it that historical $100 million to $150 million in acquired revenue target. It’s any way you can juxtapose your new commentary versus that that historical trend that I got one follow up on diabetes.

Jason ClemensChief Financial Officer

Yes. 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 teams that came together from AeroCare and Adapt. So in general, like we keep that target and in general, we’ve hit in all the last years that we’ve done it and pretty much we’re still thinking about that as a target opportunity opportunity for us in that range.

Steve GriggsCo-Chief Executive Officer

Yeah. And Mathew , you should also realize that community acquisition was done on the last day of the year. So in all intents and purposes, at least for us, that’s really a 2022 acquisition. And if you had the revenue for that, the revenue we’ve already done, we’re already either at or 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.

Mathew BlackmanStifel Financial Corp. — Analyst

Got 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? You’re going to see new CGM’s on the market this year. There’s a new patch pump out. And these products are 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 that diabetes franchise? Thanks.

Josh ParnesPresident and Director

Yeah. Thanks, Matt. This is Josh. Yeah.

in general, I think, a lot of the new innovation that’s coming to the market in diabetes is driving more and more patients into the funnel. And that’s why I think we’re seeing really strong underlying secular tailwinds there in terms of patient demand. I wouldn’t tie it to any specific product per se, but in general, I think both doctors, patients and the technology keeps getting better and you’re seeing more adoption. You see more adoption of patients in different disease states within diabetes and different levels.

Both cash pay out of pocket, insurance based. There’s a lot of interest on the [Audio gap] and diabetes supply. And I think that’s why also our focus as a 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’s some of the advantage of going through distributors like ourselves and suppliers that really help hold a patient’s hand.

But in general, a lot of those new technologies coming together are driving a lot of patient interest and doctor interest as well in getting based on the therapy.


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

Whit MayoSVB Leerink Partners — Analyst

Hey. Thanks. Jason, maybe first when I wanted to. There’s a lot of boring stuff going on with your ERP and systems conversion from most investors perspective, but I’m 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 tailwinds that you would expect to see in the in the next year or so?

Jason ClemensChief Financial Officer

Sure, Whit. So you’re referencing at a boring, my CEO and president are rolling their eyes on me because I could go on and on about this stuff. So I’d say, the heavy lift is behind us. We went live on February 1st.

So we’ve got over 750 locations. They are requisitioning and requesting product locally done all electronically versus what used to be done a lot of phone calls and post notes, things like that. I’d say, in terms of the just socks adherence and leveraging that tech one on three way match, we’ve got all kinds of products coming in on invoice. That price is higher than contracted or agreed to.

And so that’s some of the beauty of leveraging the tech to automate and to throw out variances. And so our purchasing teams are working on that. And so 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.

We’ve probably another quarter coming up, just tightening up. On the payables side, and some of that is to frankly avoid either finance charges or late fees as well as just stand down right size with our suppliers. But yeah, there’s prompt discounts. There’s other even a drivers that we absolutely intend to capitalize on.

So that’s very positive. And then I’d say finally, some of these 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’ve got an RFP out for hundreds and hundreds and hundreds of locations that need everything from Internet service, to utilities, to waste management, to security to all this boring stuff.

But the dollars significantly add up over time. So 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 that’s 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 cost of revenue line.

Whit MayoSVB Leerink Partners — Analyst

That’s helpful. And maybe just one other question. I’m curious, as you look at the payers that you’re working with and we’re hearing various anecdotes across different subsectors around payers being a little bit more aggressive on claims that it’s a pre or all pre or prior authorization. Is there anything that you’re seeing that stands out as being new or different? Your days look pretty good, so there’s not really anything that I can pick up in the quarter.

So just curious about just your view around how payers may be changing their behavior.

Steve GriggsCo-Chief Executive Officer

Yeah. First day our days, typically RAR days grow and the first quarter the fact that they state flags an accomplishment to our RCM team that did an incredible job. And so what we’re seeing from payers is certainly, with the use of technology in 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 the same time, we’re utilizing that data and making sure that our claims are filed accurately with the proper documentation.

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 like in our data management and our data warehouse is fantastic. And so, we utilize that to make sure that our denial rates are less or get less each and every month as we as we put in rules to prevent those and edit engines and all this stuff that our RCMP works on constantly.

And so, that our team has done a fantastic job. This will continue to get better. So we’re ahead of the curve, but we do see more of it coming.

Whit MayoSVB Leerink Partners — Analyst

Great. Thanks, Steve. Appreciate it.


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

Eric ColdwellRobert W. Baird and Company — Analyst

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. The first one, in the conversation around the proprietary portal ordering you tied in to 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 firmwide conversation?

Josh ParnesPresident and Director

That was — It’s really firm wide, Eric.– Just our headcount last quarter to this quarter’s down, what about 140 or so. And so it’s 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 back office and not necessarily just people. It’s just doing things better and cheaper and more more efficiently.

But yeah, that was that was a broad stroke comment. I will add that, we had labor in at 26% of revenue for our guide. We feel comfortable where we stand today. We’re into the 25% low 25% range, as you’ve seen the Q printed in print 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 in and then we do think we’ll get that operating leverage as we exit the year.

Steve GriggsCo-Chief Executive Officer

Yeah. Eric, let me let me add to that. As we use our proprietary delivery solutions, which we call OTL, that engages the patient in an electronic manner that’s greater today than it was yesterday. e-prescribing engages the referral sources in electronic manner.

That’s better today than it was in the past. And just those two, and those are just two of many significantly reduce our cost and being able to get the product to the patient and get the bill out the door in a more correct manner. And that’s worth the upfront cost is all the time. And so, we are 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 we’ll continue to lower our cost of taking care of the patient.

Eric ColdwellRobert W. Baird and Company — Analyst

That’s helpful. Thank you. And then you talked about the CPAP business quite a bit today. You talked about the patient backlog in 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 that’s CPAP specific commentary or just broadly? And then what if you would be willing to, what your patient backlog actually is in CPAP and how that compares to the past?

Jason ClemensChief Financial Officer

Yeah. I’d say on the flip side of the equation, Eric, we’ve got around 250,000 to 300,000 patients on rental census. Now the resupply centers as well over a million. I mean that’s — it’s probably pushing [Inaudible] so that’s really where the consistent recurring revenue stream is.

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

Eric ColdwellRobert W. Baird and Company — Analyst

I think it was — if I’m not mistaken. I bet if it wasn’t you, I apologize. But I think last quarter you said you could see CPAP backlog approaching a million patients in the U.S. by the end of the year, 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?

Steve GriggsCo-Chief Executive Officer

Yeah. That was definitely us, and we were the one that brought that to light. And we are very confident in that number that they’ll continue to grow unless there’s some significant mitigation from that, from the stuff we’ve already talked about. But there’s a huge, huge amount of patience that’ll be out there.

900,000. We said in that’s — we’re very, very comfortable in that number, which means that number is conservative. And those patients all have a script and are looking for a place to get a CPAP. And so as a leader in patch setups 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 guess that to that, that would be the starting point of this of the backlog that’s 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 be early 23 or mid-23.

Eric ColdwellRobert W. Baird and Company — Analyst

That’s that’s it for me. Thanks very much.


Thank you. There are no further questions at this time. I would like to turn the floor back over to Steve Griggs for any closing comments.

Steve GriggsCo-Chief Executive Officer

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.


[Operator signoff]

Duration: 58 minutes

Call participants:

Chris JoyceGeneral Counsel

Steve GriggsCo-Chief Executive Officer

Josh ParnesPresident and Director

Jason ClemensChief Financial Officer

Brian TanquilutJefferies — Analyst

Joanna GajukBank of America Merrill Lynch — Analyst

Andrea AlfonsoUBS — Analyst

Pito ChickeringDeutsche Bank — Analyst

Mathew BlackmanStifel Financial Corp. — Analyst

Whit MayoSVB Leerink Partners — Analyst

Eric ColdwellRobert W. Baird and Company — Analyst

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