AdaptHealth Corp.

everyone, and welcome to today's Adopt Health third quarter 2024 earnings release. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may do so by pressing star 1 on your telephone keypad. Today's speakers will be Suzanne Foster, Chief Executive Officer of Adopt Health, and Jason Clements, Chief Financial Officer of Adopt Health. Before we begin, I'd like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of 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 Corp has 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, adjusted EBITDA margin, and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in the presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of Adopt Health, Suzanne Foster.

Thank you, and good morning, everyone. Thank you for attending our third quarter earnings call. Before we start, I want to acknowledge the extraordinary efforts our team displayed during the recent weather events in the southeast. Prior to the storms, we contacted more than 40,000 patients from the impacted areas to confirm they had the medical equipment they needed before the severe weather moved in. In advance of the storm, we made sure to deliver oxygen where needed. As a result, there were no material service interruptions. I want to thank the team again for their exceptional performance. Now turning to Q3 results, we are pleased to report another consistent quarter. with results in line with our expectations for revenue, adjusted EBITDA, and free cash flow. Compared to the previous year, revenue was flat with our two larger products, sleep and respiratory, delivering growth that offset a decline in diabetes. Sleep increased 3.5%, respiratory was strong, increasing 8.6%, while diabetes decreased 11.8%. Rounding out the numbers, which Jason will cover more in depth, we delivered an improvement in adjusted EBITDA margin and had a positive quarter for free cash flow. We completed the non-core asset sale we announced last quarter, refinanced our senior secured credit facility, and paid down another 50 million of debt. As a result, we are now committing to de-levering further. with a new multi-year target set at 2.5 times net leverage. Over the past quarter, our focus has been on establishing a one-adapt approach to operating this business, which means rolling out standard work, new operating structures, and identifying growth opportunities. Let's start with sleep. According to the American Academy of Sleep Medicine, there are approximately 30 million adults in the US living with obstructive sleep apnea. but only 20% have been diagnosed. This market is large and it is growing rapidly, partly because of increased awareness of OSA and the negative health implications by going untreated. As detection technology evolves, we believe more people will be prompted to seek treatment for OSA, with many of those patients seeking CPAP therapy. There are reasons Adapt Health is the number one market leader in sleep. It's because our respiratory therapists and sleep coaches provide best-in-class adherence programs. And our resupply team delivers a highly reliable and convenient experience to more than 1.6 million patients. The opportunity for growth in sleep is to increase new patient conversion rates. Right now, approximately 75% of the referrals we receive are fulfilled. We are working on opportunities to improve this conversion rate by introducing a new self-scheduling feature in MyApp, thereby eliminating the need to reach the patient by phone and standardizing workflow processes to eliminate the back and forth of getting services for new patients approved. Turning to respiratory. Based on data from the American Lung Association, we know that more than 35 million people in the U.S. are living with chronic lung disease like asthma and COPD. Supporting these patients requires a commitment to excellence, which we have. Our clinical coordination team is unique in the market in that we have multiple levels of respiratory therapist care. As a result, we deliver strong clinical outcomes designed to help lower hospital readmission rates. It is this level of clinical support that differentiates us in results and growth. To maintain our position as the number one market leader in this area, we are focused on optimizing our workflows and exploring opportunities to expand our product portfolio to better help patients living at home with respiratory conditions. Our sleep and respiratory product lines currently make up the majority of our revenue, and we expect continued solid performance in these areas. We must, however, fix our performance and execution issues that we have in diabetes, which currently represents 17% of revenue. Following last quarter's results, I turned my attention to our diabetes product line and found the outlook was much worse than I thought after my first two months. The reality is the market is growing, our competitors are growing, and we are not. We acted immediately by dismissing several members of the diabetes leadership team. And through a series of diagnostic reviews, we uncovered systemic operational issues that we need to fix. We have taken swift actions to turn this around. First, we appointed a new leadership team. One, a former CEO of an Adapt Health acquisition with a background in delivering exceptional service in sleep and home medical supplies. and we brought in a seasoned sales leader with experience in diabetes. Second, we integrated the resupply of our diabetes products into our sleep resupply center of excellence to leverage its leadership, replicate processes, and increase performance. Third, we know that acquiring new CGM patients and being able to timely service them is the single most important thing we need to do. Notwithstanding a dynamic market environment, executing here is within our control and we are taking the necessary actions to improve across the board. Our diabetes improvement efforts are now underway, yet we expect that it will take us a few quarters to demonstrate results. Therefore, we are guiding the balance of the year down based on what we learned and to provide an appropriate amount of time for our actions to have an impact. Unlocking growth in diabetes is an imperative. The American Diabetes Association reports that more than 38 million Americans have diabetes, with almost 100 million being pre-diabetic. If we put all these numbers in perspective, there are more than 100 million potential patients for Adapt Health to serve in the United States. Today, we probably serve 4.2 million patients a year. In simplest terms, growth is about providing exceptional service to the increasing number of patients that need our support. Another topic I would like to update you on is the progress we are making on the technology front. Last quarter, I mentioned that we were doing a few low-cost experiments with AI and automation. I am happy to report that this is moving quickly. and we have moved from inception to production. The mission was to use AI to deal with the massive amount of incoming unstructured data we receive, which is an ongoing healthcare challenge. With the way things are done, we receive more than five million pages of faxes every month, and we rely on a combination of people and technology to get the information in those faxes into the correct workflow. In a matter of weeks, we successfully automated parts of the workflow and our new automated process enabled by AI has proven to be 99.6% accurate compared to 89% with our legacy process. This was the first step to prove we can do so with accuracy. We are optimistic about our ability to rapidly deploy this technology across our workflows in a way that is responsible. we see AI as a viable option for us to improve our performance, reliability, and efficiency. We are prioritizing use cases that will improve our ability to deliver exceptional service. I think it's good to note that due to improved operational rigor and successful cost management initiatives this past quarter, we were able to invest in people and technology while delivering improved bottom line results. In addition, this is the last We will report results as a single segment. We are moving to a four segment reporting structure that consists of sleep health, respiratory health, diabetes health, and wellness at home. This shift to segment reporting will allow for increased transparency and insight into our performance. Most importantly, it will enable us to focus our resources and architect our growth in each segment. I continue to be optimistic about the road ahead. We have identified growth opportunities. We are assembling a high-performing team and investing in areas that allow us to serve even more patients in their homes. Our focus is on execution and continuously improving every day. And with that, I will turn it over to Jason.

Thanks, Suzanne, and thanks to all for joining our call today. For the third quarter of 2024, we delivered against our expectations for revenue, adjusted EBITDA, and free cash flow. We also made considerable progress in strengthening our financial position, disposing of non-core assets, refinancing our senior credit facility, and paying down debt. During the quarter, we completed the previously announced transaction to sell certain custom rehab assets to a third party. As a reminder, the annual revenue for these assets was about $30 million, so that comes out of our HME revenue run rate going forward. We continue to consider alternatives for a couple of similarly sized product categories that do not fit strategically into our core businesses. In aggregate, they represent less than $100 million of annual revenue, and we will provide updates as we make progress with those initiatives. Third quarter net revenue of $805.9 million was up 0.2% compared to the third quarter of 2023. Sleep revenue of $326.4 million increased 3.5% over the prior year, in line with our expectations as we faced a very high comparable in 2023 due to record starts from fulfilling the backlog following a manufacturer recall. For perspective, over the past two years, sleep revenue grew 55.8 million against 270.6 million in the third quarter of 2022, representing 9.8% of compounded annual growth. Although CPAP starts experienced the typical sequential deceleration from Q2, as July and August vacation schedules impact sleep testing and referral activity, we were pleased to once again surpass 120,000 starts. sleep resupply census now stands over 1.63 million patients, up another 29,000 from the previous quarter. Our CPAP survey indicated 15% of respondents were using GLP-1s to manage diabetes or weight loss, up from 12% last quarter. Now a year into our surveys, we are detecting a very slight uptick in CPAP adherence versus patients not indicating GLP-1 usage. So far, there is an immaterial difference in resupply ordering patterns. We will continue to monitor and report these trends as time goes on. Diabetes revenue of $141.1 million decreased 11.8% compared to the third quarter of 2023, driven by lower CGM revenue. Before we get into those details, we were encouraged to see stabilization regarding insulin pumps and related supplies, representing $28.4 million of revenue for the corridor, about flat against the prior year. For CGMs, we've previously discussed reimbursement channel pressure as some payers shifted reimbursement policy to 100% pharmacy in 2024. That landscape has remained steady over the year, But as we lost access to members in a handful of markets in early 2024, we failed to overcome that headwind with new sales orders. We also shipped fewer recur orders than expected, impacted by the operational challenges Suzanne discussed. Respiratory revenue of $164 million increased 8.6% compared to the third quarter of 2023, led by oxygen, exceeding our expectations. the first time in our history our oxygen census surpassed 325 000 patients actively on service most patients on oxygen need to order tank refills periodically and until recently that has been a time-consuming process during the quarter 7.5 percent of our o2 patients order tank refills without having to interact with an adapt customer service representative via new technology just launched in my app as well as chatbot technology recently launched in our interactive voice response telephone systems this tech was launched in the second quarter with only 1.5 percent of o2 patients ordering through these platforms 90 days ago so we are making progress quickly revenue from all other product categories of 174.3 million decreased 1.9% over the prior year, aligned with our expectations, driven by revenue loss from the sale of certain custom rehab assets. Turning to profitability, third quarter adjusted EBITDA of $164.3 million reflects an adjusted EBITDA margin of 20.4%, a slight improvement over the same period last year. This margin expansion was driven by revenue mix, meaning that higher margin products We were pleased to maintain labor expense year-over-year as we installed enough efficiencies to pay for merit-based salary raises and other labor inflation. Operating expenses and G&A were in line with our expectations. Cash flow from operations was $144.4 million. Paid sales outstanding for Q3 was 47.9, down from 48.9 in the previous quarter, as accounts receivable continued to normalize following the changed healthcare situation earlier this year. CapEx of $59.6 million represented 7.4% of revenue, down against 9.6% of revenue in the third quarter of 2023. Free cash flow of $84.8 million outperformed our target of $30 million. That $30 million estimate assumed that we would pay off the $40.7 million loan offered as part of Optum's temporary funding assistance program related to the change healthcare outage earlier this year. However, that payoff did not occur until mid-November, excuse me, mid-October. After adjusting for the timing of that cash outflow, we still produced strong cash flows for the quarter, so we are again raising full-year guidance. During the third quarter, we amended our debt agreement to lock a $950 million senior secured credit facility consisting of a fully funded $650 million term loan A and a $300 million revolving line of credit. Proceeds from the new $650 million term loan were used to fully repay without penalty the company's existing term loan due to reach final maturity in January of 2026. the new $300 million revolver replaces the company's existing $450 million revolving credit facility, which had no balance drawn at the end of the third quarter. The reduced revolver size decreases undrawn commitment fees. The interest rate pricing for the new senior secured credit facility decreased from the interest rate pricing in Adapt Health's existing bank credit facility, and the new maturity is extended up to September 13th, 2029. At the end of the third quarter, we paid an additional $50 million against the term loan A balance, resulting in a net leverage ratio of 2.87 times compared to 3.51 times in the third quarter of 2023. We are very pleased to have achieved our net leverage target of three times ahead of schedule, and we remain focused on paying down debt. so much so that we are introducing a new multi-year net leverage target for the company at 2.5 times net leverage as defined in our covenants. We expect to acquire home medical equipment providers in the future, as access and scale are important to us. But for the next few quarters, we expect acquisition activity to be limited. When and where it makes sense, we will acquire... but will otherwise remain focused on paying down debt and increasing our free cash flow conversion. For the balance of 2024, we are adjusting our revenue midpoint down $45 million and our adjusted EBITDA midpoint down $15 million, responding to recent trends in diabetes. Our updated full-year guidance is net revenue to be in the range of $3.22 to $3.26 billion, adjusted EBITDA to be in the range of $655 to $675 million. And even with these updates, given the continued positive trends in working capital, we expect free cash flow to be in the range of $175 to $195 million. With that, we'll open the call up for questions. Operator?