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Good afternoon, everyone. Welcome to the Baird Conference, and thanks for joining us. I'm Eric Coldwell. We have a surprise guest with us this week, Harris. I mean, it's going to be really, I'm going to grill you the most. I'm sure you know everything about the company. Harris recently joined, very recently joined as CFO. And of course, Suzanne Foster, CEO. We're going to go straight to Q&A, I believe. Sure. Let's tee it up, and I'll base my opening comments on that. All right, great. Well, let's just jump right in. Welcome to the company. Thank you. How the heck did you get here? A long, arduous process, but I made it, and I'm excited about the opportunity here at the company, lots of growth opportunity, lots of opportunity to implement a lot of what I'm really good at with over two decades of public company operational experience and controls, process, procedures, structure and all the rest and so i'm looking forward to being able to apply a lot of that knowledge and the scars and bruises that i developed over that long period of time and bring it to adapt how did you how did mean what was what was the process if you can share that yeah sure um so the process was you know at some point uh jason clemens who many of you know who i I want to formally thank for almost seven years at Adapt Health. Had brought the company through very significant changes and times and maturity. But the conversation had started around just like a new pitcher, you gotta put a new guy on the mound. And so we started having conversations about what Adapt needed in its next CFO. And what I was looking for was public company experience. Someone who's been there, done that. Someone with, what I put out to the network was a very strong, operationally-minded, proven CFO. Where Adapt Health is is we, you know, 160 acquisitions over the years, we've made great progress in integrating, but the maturity of our finance team needs to go to the next level, all the way down to the bottom. And so bringing in someone who could be process-driven, use predictive analytics, think about what the numbers mean, reduce surprises, have real-time visibility, was the type of profile I was looking for. Sent word out and through the network, discovered Harris. He has worked alongside our chief legal officer for seven years at Luminex, Richard Rue, and called Harris up and said, is this something worth looking at? And as he tells the story, he said that you know Harris didn't say immediate yes which the chief legal officer didn't like that answer but by the end of the day have time to dig into the financials look at our company in a little more depth and said this is an incredible opportunity and so that's why he's here we got got to know him proven proven operational leader that's great I've been living out of a suitcase I didn't have a chance to catch up with the company when the news had you did not however um recommit to the existing guidance i'm not asking you to do something different on stage but maybe talk about the thought process on that when we might hear something it was simple as you know um don't read through good or bad it wasn't intended to do that it was given the last couple quarters and where we are i i really wanted to set harris up for success we're on the eve of the close of the quarter, so why jump it? So it's not a read-through in any way. It was literally it's a new day, and out of respect for Harris and getting his arms around the business, I didn't think it was the right thing to do. I want to spend a lot of time on competitive bidding, and I think first off, it might be a good level set, the Medicare DemiPost supplier enrollment moratorium. It's a long phrase. I believe that expired a couple of weeks ago. It sure did. We're good to go now? We are good to goes. Talk about what that means. Yes. Yeah. So what that mean is, well, first of all, you had two things in there. On the competitive bid, let's just put that to rest. We've sidestepped that with the future disposition of our diabetes business. I mean, we're keeping a small portion of what we call our PCS business and our wellness at home, really in service to our enterprise, our hospital accounts, and capitated. So we will bid, but it's such a small piece of our business. So let's just put competitive bid. It's really not an issue for ADAPT, okay? Yeah. You've removed what could have been, if nothing else, it was a sentiment thematic overhang. For us. Could have been a fundamental overhang, but- Sure. It was clearly a sentiment overhang and that's, what now, two, 3% of the company? I don't even know. How small would that be in 2028 at this point? The diabetes business? Well, with diabetes gone, what would your overall exposure to competitiveness even be, if anything? Oh, yeah. No, it's immaterial. We have a couple remote item delivery products that we're keeping in service to our hospital accounts. Because we got out of that, we announced that in Q2. Stopped proactively selling it. So, I mean, it is literally not anything for us anymore. But the moratorium was a big deal. And the reason for that is when we won the Kaiser contract and we started going live, we stood up 40 brand-new locations in the West Coast, predominantly in California. And we were doing that in November, December, January for a go-live date of February 1st and March 1st. On February 24th, the government came out and said, no more new Medicare billing enrollments. It's called the DME moratorium. Well, we had strategically made the decision to bring on the Kaiser business, establish our footprint in California as a result, because we wouldn't have entered California without Kaiser, because whoever owns that population, right, owns California. So we saw it as a strategic move to get into California, where you're getting, you know, $280 million a year to establish your footprint. The footprint we built prior to knowing about the moratorium was big enough to take on additional business. And on February 24th, the moratorium says no more additional business. You don't get a billing number. And it's a six-month term. And history would have told us that that would have been extended because usually those things extend. Fortunately, on August, it expired, which was great news for us. And it expired because they were concerned about the competitive bid and how they had slimmed down the amount of providers that they were kind of double-dipping on narrowing. and they wouldn't have the right number of providers. So we got the news on August 24th. We had heard rumors, and we were ready to go with our filings on August, the end of August. So we have submitted for those 40 locations what's called our PTAN numbers. The reason that's important is because right now that fixed infrastructure in California is 100% burdened to Kaiser. Only Kaiser business is running through it. We have a lot of capacity left in there. So as soon as we get these, which the government says is about a six-month processing, I'm begging for something sooner, then we can capture what we would refer to as the strategic halo effect that we intended when we went into California, which means the percentage of patients that run through a Kaiser hospital that aren't capitated or Kaiser members. We we would be able to now take that business and we'll also be able put salespeople around that 40 location footprint and bring in other business So that was really good news for us in August and at this point though. It is still a six-month Yeah, as far as we know it's a q2 second half of next year unless you know these these applications get expedited Do we have any hope in our health care system right now and there's backlog of them but we're hoping with adapt and the alphabetical order maybe i mean yeah we could have a side story on alphabetical order after this um so west coast capitated deal you've said kaiser um it was a bit of a headwind for other reasons not just your ability to leverage that platform once you had it built out and it came in a couple of different areas so on one hand there was a big jump maybe an unexpected jump in CPAP resupply demand there was some internal demand that came in there was also some operational surprises or nuances with urgent orders that are anything but urgent perhaps when you need to go to the commode it might feel like an urgent order but maybe commodes don't have to be in a driveway in four hours all of the time. So can we parse these one by one and maybe give us updates on where you are with each of those customer-specific, contract-specific issues? Yeah, let me reframe it now at the value of time, you know, to make it a little bit more understandable. There's kind of three buckets that is driving the cost overruns. And the first one has stuck wholly in our control, which we're making tremendous progress on. That's just, you know, 40 new locations, 1,800 new people, new country for us, right? And that work of just getting our people in the right place at the right time and operationalizing our business, I feel really confident about because we know how to do this. We know how do sleep and respiratory and HME. So that work is underway and we're seeing the benefits of that already kind of starting to come through so put that one aside Last quarter when I said that there were cost overruns that would require a conversation with our partner Kaiser. Those are in two buckets One of them is the cost to serve So what we learned there wasn't data prior to the arrangement what we've learned, you know As we got into it was ordering patterns were call it and we talked about this publicly, that the way that their prescribers were prescribing to us in an urgent way was out of the norm of what we see across the country, to surprise to both of us. In partnership, we have made progress and are continuing to work that problem together. But we've been able to quantify that and say, here's the cost if we continue down that path that needs to be adjusted for. So that conversation is ongoing. The biggest thing we're working on with our partner is the utilization. And we've talked about it, whether it's sleep, resupply, or enteral, it doesn't matter. What matters is in the categories of products, the utilization, actual utilization in a couple categories is higher than what would have been anticipated. And you may say, well, how did that happen? Well, part of it is because in a capitated agreement, you rely on the data that comes in past claims utilization data, and our stepped-up service, if you will, the way we're servicing the agreement, means that we're surfacing at a better rate, that the claims data historically was lower. You following me? So we're hitting our SLAs. We're performing really well, which means that we're improving the utilization based on the prescriptions coming in. in partnership what we're saying is we adapt shouldn't bear that burden our partner's saying okay like we have actual data now let's baseline off of that and we're in discussions to figure out what that looks like from a pm pm or an economic adjustment or whatever it may be i hope you followed that no i i do maybe too well so it's it's to me this has always been the concerning part of capitated, right? If you're doing your job, Kaiser or whomever the customer is wants their patients to be getting the best medical care, high adherence, high compliance. The doctors are prescribing. They're Kaiser doctors. They want the patient to have a CPAP, let's say. Patients should have aCPAP, and they should be replacing that mask and tubing and whatever they need to replace every three months or whatever the schedule is. In an ideal world, you're doing those things to maximize adherence compliance startups that also hurts you if you're an upper member per month contract and the prior provider had less adherence and less compliance and people weren't happy they weren't taking the product they were dropping off of the product the patient wasn't getting a good outcome the doctor was wasting their time writing the script but you're the one who got penalized and I always worry that the the vendor is the one who pays the price in these deals and that's my underlying concern but if so the the contract in future state takes care of that because you have corridors okay right so if you're working off an appropriate baseline and let's let's for the purpose of illustration say you have a six month baseline and then in six months some prescribing habit changes that drives it up there are quarters in place that fix that or drives it down so in future stay the contracts capitated contracts take care of it this is a unique situation because it was utilization data prior to and you don't have a mechanism to adjust for that the benefit we have is because we share this purpose of patient first they are you know kaiser is beautiful about member patient first and we want that business we share that vision we are not going to let a patient fall through the cracks even at our own financial detriment in the short run and we will fix that we have an aligned interest to not have us back off of the superior service that we're providing right now because when we if we drop off on service which we have made this incredibly effective we are performing so well the upstream cost to them if we pull back in our service levels is they have delayed discharges patient member dissatisfaction provider dissatisfction and so when we're at the table there is an aligned contrast to saying we want to enjoy this level of service and we want to right-size the economics holistically as you continue to pursue capitated business and there you've recently announced another win um what texas south florida i think it was humana expansion in texans and south florid um as you're going after that business has there been a learning experience with the kaiser on boarding that would actually change how you write that contract or go to market up front to say, look, give us a six-month, you pay us fee-for-service for six months, let's get the corridor set. I'm making this up. You get the corridors set. The difference is we brought on, I think it was close to 500,000 Humana members last quarter in Texas and Florida without a hiccup, because it's just like what we do if you look even at Kaiser that is across the country right the majority of it is what we do meaning non-Kaiser hospitals and providers if you narrow it down into the problem that we're trying to solve together with Kaiser it is Kaiser hospitals and so when you look at other capitated agreements or capitated business that we have that's in the normal course of things it's because the the the you know in the humanas there is no humana hospital and so that onboarding last quarter was just it's already performing as it should these other smaller capitated deals that we bring on from time to time kind of we know how to do that because the humana learnings the uniqueness of kaiser is literally focused on that california hospital discharge performance. Any timeline where we might get an update on how this could reset or rebase for the next 12 months, the next several years? Well, I can guarantee if it's not in our earnings script, you're going to ask the question. So we're going through fine. If it's still in progress or if it is resolved, obviously we will come out with that. If it is not resolved, we will find the right words to tell you where we are in that discussion you another topic that came up on the last update was a unexpected what what appeared to be an unexpected sort of overnight manufacturer price increase um correct me if i'm wrong my understanding is this the in this particular case that contract was due for renewal on june 30th which was the manufacturer's fiscal year end is that not the case not the case okay it was it was an annual contract it wasn't due until it wasn t on a 12-month fiscal year it was in annual so it happened midstream okay um what can you tell us about negotiate and you know you can't negotiate in public it's a hard question to ask but what can tell us well just at a higher level i can tell you you know the way our industry works is we have volume rebate structures um and you know that was a you're always in discussion with your manufacturing partners right and and trying to achieve certain levels and with the build-up of our inventory system and where we were and we are trying to balance cash and ebita etc you know we we we had there was a question on on how much we want to take advantage of the rebate structure in that quarter and somehow wires got crossed as we were trying to talk through that and on June 30th you know a email came in announcing a next day price increase it was unfortunate I think both of us need to do better to make sure that doesn't happen and as you know we were tying to work through it the other unfortunate thing was the timing of the earnings call and even though you know know we had to get that resolved we couldn't leave that risk out there that in the event we didn't. So we called out that risk with a promise that we're going to go back to the negotiation table as that manufacturer's largest customer and obviously an incredibly important manufacturer to us and get to the table and make this right. And so, you know, inter-quarters, we sit here today. I'm looking forward to updating you, you now, next quarter on how that's progressing. What was the magnitude of the, on an annualized basis, and I know there could be a gross cost and then maybe you did or didn't build in some offsets into the 30 million that was highlighted on the call for the back half of this year, but what was the actual percentage increase all in? We haven't. I don't think we've said. We can do rough math. But I can take $30 million, multiply it by two, build in some growth, divide it by 90% of a segment, plus or minus five points, and I can do the math pretty quickly. But am I missing anything here where the growth, maybe the gross impact was greater than what you highlighted, but you assumed some offsets in terms of cost actions? It was significant. Like you said, you can do The Math. And basically, when backed into the corner, what are you guys going to do to offset that? should you not be able to resolve that that you're out of contract and you're just buying at these elevated costs the only thing a company like ours can do is we can you know take that unbranded script and move share and we've never been a company that really intentionally has played that game because we believe that the manufacturers go out and sell their product and the benefits and clinical value to it and that we are a service business and we try to stay neutral to that now we have to protect our bottom line so should we not come to terms in any of these future situations or this one we would have to look at the portion of unbranded scripts and put that to a lower cost supplier and that was how i described you know how we mitigate against this should we have to beyond let's say let's presume this is you know a category where the other big supplier of the past is not currently in the marketplace um maybe can come back next year maybe not nobody really knows but a lot of rumors that possibly next year could be a an interesting time the other players here are kind of secondary tertiary players they're pretty small market share one has had some uh some warning letters some you know not not safe not the best news even if it wasn't as big of a deal as it might sound like. But is the market receptive to the other manufacturers in this category? And how much capacity do they have? I mean, yeah. So my understanding on capacity is that it's there. I mean I guess until proven otherwise. And I think to your point is the marketplace receptive. the market is receptive to the I would say to the exact amount of unbranded scripts that come in right and we know that what is that come on Eric like I was hoping to get you at the end of the day yeah you'd get me I mean it's it's a material amount right and that is why this industry works off rebate volume tiers because they want to protect yeah from that unbranding script so So, yeah, it's significant. All right, I'll shift it up. I'll throw a curveball at you, Harris. Great. Because he's getting a lot of no from me. What's your philosophy? Let's suspend disbelief and say that you came to a material resolution, not 100%, whatever. We can come up with something that feels like, hey, Wall Street would like to have this news. What's the philosophy on transparency? on an 8K mid-quarter press release versus just, you know, leaving us dangling until November? I mean, yeah, if it's a material adjustment to the financials and I'll have a contribution in the current period, then I would tend to get it out there as fast as I can. If it's not going to affect the current year, that we're talking about, then I'd wait for the earnings call and broadcast that at that point. And you realize why that's important, right? because you could actually resolve this issue on the last day of the quarter but not be compelled to report that until sometime in November when you're reporting. I'm assuming it'll be a November earnings report again. And so Wall Street could assume that the absence of an 8K means nothing good has happened. They can, but you're in effectively what's a quiet period after you've closed your results and working towards your earnings relief. So it's going to have to be material information to just material on which maybe you file an amendment to the document or if it's material to the ongoing operations of the company. So I would certainly there's an opportunity that you might hear something. But I think the likelihood is that you would hear it in the conference call. Yeah. And I just the point I'm trying to get across is that the last thing I need is going to be 100 phone calls from people saying I didn't see an 8K. It must be bad news. No, sure. You actually we should we should give you grace. We should giveyou till the end of till reporting. Sure. But you're also assuming that. September 30th is a drop dead date for getting this resolved. it may get it could get resolved october the 7th right whatever as we go and so you the closer you get to the earnings call the less likely you are to say anything because it doesn't matter again unless it's going to cause a material adjustment to the expectations and the analyst projections of the company for the quarter in which you are reporting if you're going to have a material difference and you got a pre-release you got to say okay guys let me tell you where you're way off because we resolve this issue favorably and they're going to give us a lump sum payment of water million dollars you know I'm just make it up a number if that was coming then yeah you probably would see an AK around wrapped around fair enough there were three minutes left iPad somebody's somebody's run off with my iPad so I can't take investor questions if there any in the room raise your hand you had a few other items to talk about, a lot of moving pieces this quarter. Maybe we could speed date for three minutes here on the last three minutes of this. 100 million EBITDA reduction for diabetes divestiture, 40 million of EBITda, 60 million of stranded. Any updated thoughts on- Yeah, I'd love to clarify that. I wish that we were a little clearer on that. So the way that works with diabetes is, first of all, our corporate allocations were as percent of revenue. So you got to first start there 60 million we said is staying in continued operations where i want to really clarify here is that 30 million of that 60 comes out on or shortly thereafter the close of the deal because it's stuff that either transacts over to cardinal or we shut it down because we don't need it it's in service too so the true stranded cost is 30 million that is what we will grow through over the next two years and resolve and you could it would take an effort and an event but you could in theory make a couple of yeah respiratory or sleep acquisitions and fill in that hole on ebida at least pretty quickly for sure yeah it'll either come through organic growth or a couple smaller acquisitions, but we didn't spend a lot of time talking about our West Coast, but that should be a real growth driver for us that maybe we'll plug in a couple little things around there that will grow right through that. So we have a 60 million additional headwind, but really it's just getting to the close and 30 is pretty quickly gone. So So it's really 30 post-event. Yeah. I feel a lot better. Language matters and we apologize. That's not exactly how it was interpreted by everybody coming off of the call. Yeah, think of it as $30 million of stranded cost. Wellness at home, wind down, a couple of businesses there. Talk about those quickly. Just quickly, it was over the last two years, one of our folks has been prudent, portfolio management. the last two moves were some low margin competitive bid risk product lines that we stopped actively selling in diabetes that's going to complete our portfolio management at that point will become a pure play sleep and respiratory and HME provider we will keep access to a couple of those product lines in service to where we capitate business because that does help and our large hospital accounts like the broadness of that portfolio but we are not actively selling you know the ostomy wound care those type of lower margin products what I was trying to get to and with 30 seconds left we're not going to have a fulsome debate or discussion on this but a lot of noise this year some out of the blue we go into next year the year after it feels like you're completely rebooted company you're only in the categories you want to be in you've removed all of the competitive bidding risk tough tough luck bad bad outcomes this year on some numbers actually go away pretty quickly at points at some point in the future yeah so has anything strategically philosophically structurally changed in your view as we were talking earlier this year about the kind of robustness of the company after some point in calendar 27, the ability to be back on the path that you were thinking you would be on? No, I mean, I think, you know, we still see tremendous opportunity. I mean if you look at, you now, this industry has a lot of, you kno, dynamics going on right now, but we're operating with blinders on that says we want a clean portfolio and markets that make a lot of sense. We want to get out of these onesie-twosie products. We want to go after the enterprise sales, which in my language means big hospital health systems, which we've stood up an entire sales force for that. We want to get chunky business in the capitated where it makes sense. Now, we're not going to onboard another Kaiser, not that there is one or anything anytime soon, but I do have confidence that that business is going to hit its benchmark depending on you know, where we do what happens with Kaiser is just a matter of time. And then the smaller ones like Humana and the ones around that will continue, not because we're pushing it, but because the managed care and the payers want it. It's coming at us, whether we want it or not. They want to take that small amount of HME, DME spend, and they just want to run rate that. And so the inbound on that is really what's driving it. And so we're set up now to have an effective fee-for-service model, which we've proven. Our base business is performing at 5%, 6% right now growth at effective margins. We'll right-size the capitated Kaiser, really California. We'll grow on the West Coast. We've got the leadership team now in place. And so all of these moves that we've made over the last two years, as volatile as it has made us, If you take each and every one of them separately, including, like, our e-commerce spin-out, the PCS shutdown, all of that, I think you would say that each of the moves were the right moves, but they've just come at times with other little complications around them that we really believe we can minimize. and so as we move into 27 and 28 as a pure play home medical equipment and service provider and we focus on bringing on volume like that's the game we're playing is the more patients we can put on the adapt health system better purchasing power we have better negotiation we have with payers like that is how our P&L improves and that's what we're doing and that is what we are focused on the rest of it is all noise to us right now. Thank you for the extra two minutes. I thought that was useful. Yeah, I appreciate that. Good. Harris, nice to meet you. I look forward to... Sorry I was so provocative. Yeah. I got more than I was expecting. Please, please join me in thanking ADAPT for being with us today.