AdaptHealth Corp.

Good day, everyone, and welcome to today's ADAPT Health first quarter 2024 earnings release. At this time, all participants are in a listen-only mode, and later you will have the opportunity to ask questions during the question-and-answer session. To register for a question, simply press star and 1 on your telephone keypad at any time during today's meeting. Today's speakers will be Richard Barish, Chairman and Interim CEO of ADAPT Health, and Jason Clemens, Chief Financial Officer of ADAPT Health. Josh Parnes, President of Adapt Health, will join Richard and Jason for the question and answer portion of today's call. Before we begin, I'd like to remind everyone that statements included in this conference call in the press release issued today 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 financial results for 2024 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 the company's annual and quarterly SEC filings. ADAPT Health Corps should have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will 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 am now pleased to turn the floor to Chairman and Interim CEO of AdaptHealth, Mr. Richard Barish. Please go ahead, sir.

Thank you. Good morning, and thank you all for joining AdaptHealth's first quarter 2024 earnings call. Simply stated, we had a terrific first quarter, highlighted by 6.2% non-acquired revenue growth and an 18% increase in adjusted EBITDA over last year's first quarter. Our sleep and respiratory product lines continue to deliver strong results, and we're pleased to see our diabetes business start to improve as well. We continue to de-lever and are on target to hit our cash flow targets for the year. Jason will go through the numbers and details. So I'd like to discuss some of the underlying improvements that give us confidence that our performance is sustainable. During the past year, Adapt Health faced several internal and external challenges, and the company has addressed each one in a constructive way. This is in a victory lap and our new CEO of applying to do and the opportunity to put her own mark on the strategic future of the company. However, I'd like to highlight some of the more impactful improvements that have occurred, which have served the company well going forward. Adapt Health originally built its business on M&A, which was facilitated by attractively priced capital. Opportunistically, we took on mostly long-term debt at very attractive rates, but our overall leverage was more than desired, especially in the newer higher interest rate environments. As a result, the entire company successfully galvanized around generation of cash flow, which has allowed us to reduce our leverage ratios and our absolute level of debt. Even with the difficulty of the changed healthcare issues, we yet again paid down debt in excess of required payments and expect to have meaningful additional cash to deploy through the year for further deleverage. I'm quite confident that we'll meet our 2024 goal of less than three times leverage in short order. Over the past year, we've discussed the challenges in our diabetes business. We still have a way to go, but the improvements have been tangible. We have strong new leadership and are building an efficient operating platform that will support our growth ambitions. We have more than doubled our sales force and can finally state that we are activating the pharmacy channel to supplement our growth. Our sleep business continues to perform well, but we're mindful of the challenges that may arise from GLP-1s. We are now actively surveying our more than 1.5 million sleep patients for evidence of change in behavior. So far, we have not seen any material changes, but we'll be vigilant to address any issues should they occur. We note the real-world study described by ResMed that shows a positive correlation between GLP-1 usage and CPAP compliance. I was also delighted to see the recent Lillian announcement that described the enormous size of the addressable OSA market more than double the already large estimates of undiagnosed OSA patients provided by the American Academy of Sleep Medicine. Our underlying thesis is that increased awareness of OSA is going to more than offset any potential impact to our sleep business. After a slow start, the Humanity Contract is performing both operationally and financially as we had originally projected. We are pleased to report that the patient transition is essentially complete. This experience gives us confidence to actively market to potential payers as an important component of our growth plans. I would expect to see additional contract wins in the near term. Pairs and providers want to see that the therapies we provide are having a positive impact on their members and patients. We have nearly a thousand professionals who work with our patients every day to improve their experience with the equipment and devices we provide. We are highly focused on adherence to therapy as the essential first step to better outcomes. and we believe that our adherence statistics for sleep are the best in our industry. We are especially proud of the work that our advanced respiratory therapists do to reduce avoidable hospitalizations, and we are developing the tools and data to show that we are positively affecting outcomes. Finally, we have put to bed the lingering concerns about permanent leadership. The long and diligent search for a new CEO was well worth it since we found the ideal candidate. Suzanne Foster joins us from Danaher Corporation, where she served as president of Beckman Coulter Life Sciences. She has over 25 years of healthcare experience, including experience in the HME business, and has a strong track record of leading growth businesses in the healthcare market. Our board made a very wise choice and the management team is looking forward to welcoming Suzanne to Adapt Health. I will be around to help Suzanne have a smooth transition to her new role. Now I'm going to turn it over to Jason.

Thanks, Richard, and thanks to all for joining our call. In the first quarter of 2024, we built on momentum from last year across a few key areas that we'll review today. First, we'll cover some details regarding the change healthcare situation that Richard touched on. Starting at the end of February, we began holding claims for certain payers where one of our third-party software providers utilized Change Healthcare to process claims. Health claims peaked at approximately $150 million a few weeks later. As related, cash flows decreased. We drew $75 million on our revolver and carried that balance as we ended the first quarter. Our revenue cycle team has acted swiftly and decisively to mitigate that impact. Since the end of the quarter, our claims for this matter have compressed to approximately $30 million. As a result, cash inflows have started to normalize, and we paid off the balance on the revolver near the end of April. With delayed payments largely caught up, we are reiterating our free cash flow guidance for the first half of 2024 and for the full year. Now, turning to our results. Net revenue of $792.5 million increased 6.4% compared to the first quarter of 2023. Sleep revenue of $306.2 million grew 4.0% compared to a year ago. Sleep sales revenue was up 5.6%, driven by our resupply census, which reached a new record of 1.58 million patients. Leap rental revenue was flat over the prior year, and we were pleased with that result following the record setups from late 2022 through mid-2023. Diabetes revenue of $149.3 million was up 2.0% against the first quarter of 2023, outperforming our expectations and resulting in our first year-over-year increase since the second quarter of 2023. DGM performed significantly better than expected, driven by increased patient census. We are making steady progress, ramping up our new Salesforce team members, and new technology deployed in our resupply operations is resolving in more touchless reorders. As expected, we absorbed $4.3 million of revenue pressure in our pump and pump supply categories as the market shifts towards tubeless pumps. Encouragingly, we again delivered more revenue from tubeless pump starts than from tube-based pump starts. Oxygen and noninvasive ventilation new starts continued to be very strong, building on the momentum from the end of 2023. As Richard mentioned, the transition of Humana patients is substantially complete. Starting this quarter, we are now reporting revenue from capitated arrangements in a separate revenue category. This includes Humana as well as several other existing capitated arrangements. Turning to profitability, first quarter adjusted EBITDA of $158.5 million reflects an adjusted EBITDA margin of 20.0%, a 200 basis point improvement over Q1 of 2023. This improvement was driven by three things. Number one, improved cost of products and supplies as a percentage of revenue, resulting from continued efforts to drive efficiencies in our supply chain. Number two, improved salary, labor, and benefits as a percentage of revenue, reflecting the flow through of our 2023 cost management program. And number three, expected increases to other operating expenses related to continuing infrastructure investments in fleet and warehouse operations. Cashflow from operations of 49.0 million was impacted by the change healthcare matter covered earlier. CapEx of 87.9 million representing 11.1% of revenue was almost a full point better than the first quarter of 2023. Although free cash flow for the first quarter was negative 38.9 million, we are reiterating our full year free cash flow guidance of 150 to $180 million. And we are reiterating our expectation to deliver at least 55 million of that in the first half of 2024. We continue making progress towards our plan to get leverage below three times before the end of 2024. In fact, even with the changed healthcare impacts, we compressed net leverage from 3.16 times at the end of 2023 to 3.12 times at the end of Q1 2024. During the quarter, we paid $25 million towards our TLA balance exiting Q1 at $695 million. After the end of the quarter, we paid an additional $15 million toward the TLA balance, and we expect to make our $10 million required payment before the end of next quarter. We expect the TLA balance to be $670 million at the end of Q2, down $80 million from the balance at the end of Q2 2023. For Q2 2024, we expect revenue growth of about 1% over the prior year, surpassing very tough 2023 comparables. Additionally, we're keeping a close eye on extended shipping lead times for certain sleep resupply products, which could impact growth for the quarter, so we're accounting for that risk in these numbers. Adjusted EBITDA margin of approximately 20.5%, up from Q1 2024 margin, but pressured by added expense associated with recovering from the changed healthcare situation discussed earlier. These expenses should dissipate in the coming months, but we do expect an impact in Q2. free cash flow to be at least $94 million, which meets our expectations for the first half. For the full year, we are maintaining our original guidance and expect revenue to be in the range of $3.25 to $3.35 billion, adjusted EBITDA to be in the range of $650 to $710 million, and free cash flow to be in the range of $150 to $180 million. With that, I'll turn it back to Richard for closing remarks. Thanks, Jason.