AdaptHealth Corp. Common Stock Canaccord Genuity's 46th Annual Growth Conference

Great. Well, thanks for having us, and thanks for the opportunity. I think to understand Q2 results, I'd like to just take a minute to talk about, give some context to anyone who's new to the story around what we've set out a couple years to accomplish. I won't go in too much detail, but I think it's important to understand where we are in our journey. AdaptHealth, a couple years ago, I came into the role, and at the time, what we found was we were a company that was made up of over 150 acquisitions, small acquisitions that came together. Company was founded about a decade ago in a time when durable medical equipment and home medical equipment were going through one of the first consolidation times. The government had come in, putting a competitive bid.

The industry was made up of a lot of mom and pops. Adapt saw an opportunity back then to consolidate and bring these companies together because they figured size and scale mattered. You fast-forward to a couple years ago, the acquisition strategy had been very successful. We had become the number one in terms of size and scale, but a lot of the integration work, the workflows, the inner operations of the business, really we were still operating not as one big company, but as a bunch of little parts. We've been on this journey to integrate that and establish more standard work in a market where we saw that there was tremendous growth. We had set out 2 years ago to say the first thing we need to do is drive organic growth. We had stalled in our growth, really from a capacity perspective.

Without that standard work, we couldn't quite drive the capacity we needed. We also had, through that acquisition strategy, acquired a lot of technology or product portfolio that was sub-scale. We had to pay down debt. That was kind of the key mission we were on. Over the last 2 years, what we did is we immediately set out on a product portfolio rationalization, which has really came to a conclusion in Q2. In Q2, we announced the sale of our diabetes business, for reasons I can go into later. Our e-commerce business we spun out. We exited some of our supplies drop-ship business that is subject to future competitive bid. That followed a series of dispositions over the last 2 years, all with the intention of focusing the business on sleep, respiratory, and supporting home medical equipment.

That strategy is because we believe the sleep market is enjoying a very good time right now. Sleep awareness, all of the GLP, the wearables, it's driving awareness, and that market is growing, evidenced by our growth of 15% this last quarter. We're breaking records in terms of referrals coming in. Then respiratory, the same thing. That is a steady business growing with the population, so we have very strong clinical value propositions in those two segments. Q2, if I summarize, we had a lot of moving parts in terms of the portfolio, completing that portfolio rationalization I just talked about, but there were two isolated situations that we're working through.

The base business is performing well, 16% growth at top, across the board, 10% coming from our new West Coast expansion and a contract with a big IDN out there, an integrated delivery network, and over 5% coming from the base business. The two issues that we're wrestling with was, one, we finished our first full quarter of taking on the new capitated contract. We're responsible for 13 million of their members, and we onboarded all of that into 40 new locations, new people, new sites, and there was just things in our assumptions a couple quarters ago that didn't go the way we thought they would. We have experience in capitated, but there was things that we just missed in the first two quarters of how that onboarding would happen. So we're working through that to get that profitable and stabilized.

The second issue we had is we announced that we had a supplier/manufacturer situation where on June 30, we couldn't reach, or we didn't have the opportunity to reach the right terms. Given the timing of earnings call, we had to announce the risk we saw if we couldn't reach the right outcome in terms of a rebate volume structure. Those were the two things we highlighted. That really, I think, is the summary of Q2.

Sure. So our business, we report in four segments. There's about $600 million that sit in a diabetes business. And a couple of years ago, again, just the context here was we weren't sure there was a strategic fit with the rest of the portfolio for diabetes specifically. But we said to everybody, "We need to first fix this business." It was declining growth. It was in a lot of trouble. And we couldn't tell immediately if it was our execution or if it was industry dynamics. So what we said to everybody is, "First, we're going to get in there and figure that out, stabilize it, before we can even sell it." And sure enough, it was a combination. What was going on in the diabetes business is there was a shift to pharmacy, not medical benefit, so the big shift there.

The second thing that was happening later was that there was a competitive bid that came. Those two things were happening. But I said at the time, I don't think those were the things that were ultimately driving our results. Performance was a real issue. And if you listened historically, we talked about what we did to fix it, and I said, "Let us stabilize it. Let us fix it. We know how to do it. And then we'll make the strategic decision of whether it fits into our portfolio." So about six months ago, maybe a year ago, we realized the cross-sell opportunities, the hypothesis that originally existed when the prior regime bought diabetes in, brought it in, didn't hold true.

So as the competitive bid became a true fact that it was, when the government came out and said, "Yeah, there is going to be competitive bid for this," we thought, we're not the right owners for this, for two reasons. Because you have a warehouse distribution, so there's some margin that's taken out there. We'd have to invest in a pharmacy channel, a real one, in order to win. And the other markets we serve, sleep and respiratory, are much more attractive. So for us to take a dollar and put it towards building the capability that we would need to make diabetes profitable and successful just did not make sense with our debt profile and use of capital. So opportunistically, we started conversations with a buyer who has all that. They are the perfect owner for this asset. Cardinal Health's buying it. I used to work there.

I know this. They have a warehouse system that's dedicated to their at home. Perfect. Very scalable. They have a pharmacy channel. They had just purchased Advanced Diabetes Supply. They're buying into this market. The remote item delivery for competitive bid is going to really shrink this to a couple of key players. They are perfect to win in this market. It was essentially a win-win in our opinion, where it allowed us to exit it, put it where it belongs, allow us to take our capital and our attention and our focus by simplifying the business, and use that to pay down debt and to also put all the extra dollars we have in growing our sleep and respiratory business.