AdaptHealth Corp.

Please stand by. Your program is about to begin. If you need assistance during the conference today, please press 4-0. Good day, everyone, and welcome to today's ADAPT Health fourth quarter 2024 earnings release. Today's speakers will be Suzanne Foster, Chief Executive Officer of ADAPT Health, and Jason Clemons, Chief Financial Officer of ADAPT Health. Before we begin, I would 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 the Private Security Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2025 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. It is now my pleasure to introduce the Chief Executive Officer of Adapt Health, Suzanne Foster. Please go ahead. Good morning, everyone, and thank you for joining the call. As we close out 2024, I'm encouraged by the progress we've made towards strengthening our foundation and positioning the company for long-term success and growth. Before I get into that, I'd like to take a moment to review our fourth quarter results. We are pleased that revenue, adjusted EBITDA, and free cash flow each exceeded the high end of our guidance ranges for the fourth quarter of 2024. acknowledging that this followed on the reduced expectations we shared in early November. Fourth quarter revenue was effectively flat versus the prior year quarter, but beat the midpoint of our Q4 guidance range by 3%, as our sleep health and respiratory health segments delivered year-over-year growth, offsetting contraction in our diabetes health segments. Compared to prior year quarter, five segments, Fourth quarter sleep health revenue increased 3.4%, respiratory health increased 1%, wellness at home declined 0.8%, and diabetes health declined 7.3%. Fourth quarter adjusted EBITDA contracted 2% from the prior year quarter, but was well above the high end of our guidance range. While our adjusted EBITDA margin was 23.4%, modestly narrower than the 23.8% reported in prior year quarter, free cash flow was strong in the fourth quarter at $73 million, up 10% from prior year quarter and well above the high end of our guidance range. As you know, last August, we identified five areas of focus. which included our One Adapt initiative, accelerating the application of AI and automation, increasing our clinical relevance, delivering organic growth, and strengthening our balance sheet. And I'm pleased that we are already making progress on all fronts. Starting with One Adapt, we're taking action to standardize work and cultivate a mindset of continuous improvement to ensure that we deliver exceptional service and quality of care to patients. We began by assembling a team of talented and experienced leaders, recruiting several senior professionals to the company over the last seven months. This includes new leaders for operations and strategy who both joined in the second quarter. It also includes the appointment of a chief commercial officer, a new chief legal officer, and an SVP of supply chain this past quarter. And this coming month, we are looking forward to welcoming our newly appointed senior leader to build out our ADAPT operating system or AOS. We made all of these additions while holding the line on our adjusted EBITDA margin. Just as important, we are empowering these individuals and the teams they lead through an organizational structure that prioritizes accountability, coordination, and trust. Among other changes, Starting in the fourth quarter, we moved to a segment structure for managing the company, with general managers appointed to each of these four segments. This new structure provides visibility into the needs of our customers, coordinates our efforts around service excellence, drives accountability throughout our organization, and allows us to measure and improve our business performance. Further, we are harnessing the abundance of talent and experience in our workforce. by enlisting employees across all levels of the organization to participate in training on problem-solving methods, by challenging them to proactively identify opportunities for improvement in our processes and operations, and by inviting them to work with their colleagues to implement changes that will increase the quality of the work we perform. OneAdapt is about superior execution. It is about being the best operator in the industry and building an unrivaled reputation for patient service excellence. In short, it's about being the best version of what we already are. And at the same time, we recognize we must evolve how we do what we do today. And that means leading the home health industry in innovation and expanding the value we deliver for patients. A prime example is our focus on harnessing the power of automation and AI. we have several initiatives underway that will simplify the patient experience, streamline the work we do for them, and free up resources that could be reinvested in creating additional patient value. To name just two, in October, we introduced a self-pay feature in our mobile application called MyApp. And following through on an initiative I mentioned last quarter, in December, we launched a CPAP self-scheduling feature in MyApp. Our self-scheduling feature eliminates the need for patients to interact with a customer service representative to schedule a CPAP setup. These new features provide additional convenience and simplicity. Similarly, we see an immense opportunity to increase clinical relevance. We are already investing heavily in our adherence programs, helping more patients stay on critical therapies for longer and reducing the incidence of costly rehospitalization. The next phase in our evolution is harnessing the massive quantities of physiological, behavioral, and environmental patient-generated data from our in-home equipment and using that data to deliver actionable insights to patients, physicians, and payers. This is the direction we will follow to build a best-in-class health services business that drives improved health outcomes and reduced costs to benefit all of the stakeholders in the U.S. healthcare system. While we are in the early stages of realizing this ambition, we view our recent success with capitated arrangements as a strong vote of confidence in our ability to appropriately manage patient care and a solid indication that we have a path to an expanded role. Which brings me to the next area of focus, delivering organic growth. In the fourth quarter, we realigned our sales organization under our new Chief Commercial Officer, Russ Schuster, who brings a wealth of experience and proven track record of growing large businesses and who will oversee our commercial strategy and revenue generation. Under Russ's leadership, we also implemented sales quotas for the first time in many years. These quotas will provide clear performance benchmarks and inject the proper incentives needed for driving sales effectiveness. Further, we are strengthening the connective tissue between our commercial and operations teams, who are partnering to improve workflow around order intake and conversion of orders to revenue. We are also focused on resuming organic growth in our diabetes health segment. To this end, we commenced a diagnostic review of the causes of our underperformance. Notwithstanding structural reimbursement pressures that have linked on all operators in the medical benefit channel, we simply weren't keeping pace with the competition. Among other causes, our review determined that we had lost focus on how we manage patient interactions. Excessive patient outreach elevated our attrition rates with existing resupply patients and depressed Diabetes New Start by damaging our standing with referring physicians. As I mentioned last quarter, we made swift moves to course correct our diabetes business. We installed a new leadership team for the segment, aligned under an experienced general manager, and we integrated diabetes resupply into our sleep resupply operations to leverage the experience and leadership that has made sleep resupply our center of excellence. In the fourth quarter, we remodeled our diabetes patient outreach program using best practices from our sleep resupply operations to deliver an experience that makes sense for patients. I am pleased to report that we are beginning to see promising signs that these actions are working. On the resupply side, we grew orders year over year in December. Our Q4 2024 attrition rate was the lowest we have seen in two years. and we exceeded our Q4 2024 diabetes resupply revenue forecast, albeit on top of our reduced expectations. On New Start, we are working hard to rebuild trust with our referral sources, and we were encouraged to see a sequential increase in new diabetes patients during Q4 2024, which contrasts with the sequential contraction we saw in the prior year course. One quarter does not make a trend, and it's going to take some time to improve performance. But I have confidence that the team is executing well on its plan to shore up the processes, and we are cautiously optimistic that diabetes will become less of a drag on our overall organic growth rate over time. Also related to delivering organic growth, we continue to see opportunities to grow our business through capitated fee arrangements with payers. And we are encouraged by how our existing arrangements are performing in terms of outcomes, cost, and satisfaction for both payers and patients. In fact, I am pleased to announce that this past week, we agreed to a multi-year extension of our capitated contract with Humana. Finally, turning to our objective of strengthening our balance sheet. In the last year, we reduced debt outstanding by $170 million, including another $50 million in the fourth quarter. And at year end 2024, our net leverage ratio stood at 2.8 times. Also during 2024, we refinanced our senior secured credit facility to extend our maturity and reduce our interest expense. Further, we have continued to exit non-strategic product lines. In the third quarter, we completed a transaction to sell certain custom rehab assets. In the fourth quarter, we reached a definitive agreement to sell certain incontinent assets to a third party. And in 2025, we will continue to explore the potential divestiture of an additional non-core product line. We expect these divestitures, in aggregate, to be accretive to our adjusted EBITDA margin and to generate proceeds for further debt reduction. In closing, our five areas of focus are just the first steps along our journey to realize our full potential as a healthcare services company. In many respects, it is an execution roadmap designed to help our new leadership team lock arms and to keep us focused on what we need to accomplish in the near term. Undoubtedly, all of you are keenly interested in understanding more about the strategic direction of the company, and I can assure you that is forthcoming. Our strategy team is already sharpening our vision for how best to create value from our opportunity and establishing a plan for resourcing and executing that vision over the next several years. I look forward to sharing more about that as 2025 progresses. With that, I will turn it over to Jason.

Thank you, Suzanne, and thanks to everyone for joining our call. Today, I'm going to review full year and fourth quarter 2024 results. I'll follow that with a review of our balance sheet and our plans for capital allocation before finishing with our outlook for 2025. Starting in the fourth quarter, we moved to a multiple segment structure for recording our results to align with how we are now managing the company. We believe this reporting change will increase transparency into our business performance, and I look forward to sharing our segment results for the first time today. For full year 2024, net revenue of $3.26 billion grew 1.9% versus the prior year. Notably, our 2024 revenue growth overcame pressure from the divestiture of certain custom rehab assets and the termination of the public health emergency 75-25 blended reimbursement rates originally introduced in response to the COVID pandemic. Underneath these headwinds, we produced growth from new capitated revenue and strong sleep resupply volumes, partially offset by weakness in the diabetes health segment, which reflected payer shifts to the pharmacy reimbursement channel for diabetes and, as Suzanne discussed earlier, operational missteps that we are in the process of correcting. By segment, net revenue growth for full year 2024 was 4.5% in sleep health, 6.0% in respiratory health, and 1.9% in wellness at home, offset by a revenue decline of 6.9% in diabetes health. Our fourth quarter revenue was roughly flat versus the prior year quarter, but landed just above the high end of the guidance range we provided in November. Our sleep health business continues to be an area of strength. Sleep health net revenue increased 3.4% year-over-year to $356.5 million. Sleep health New Start surpassed $120,000 for the third consecutive quarter, and our sleep health census now stands at $1.66 million, up another $23,000 sequentially, and up 6.5% from year-end to 2023. Our CPAP survey now indicates that 15.3% of respondents are using GLP-1s to manage diabetes or weight loss. We are still seeing a modest increase in CPAP adherence for GLP-1 patients versus non-GLP-1 patients, and we continue to see an immaterial difference in resupply work patterns between the two cohorts. Respiratory health net revenue was $165.3 million in the fourth quarter. up 1% compared to the prior year quarter. Despite a slower than normal start to flu season, our oxygen census set another record, now surpassing 330,000 patients actively on service. We continue to help patients reduce time spent reordering tank refills by providing tools that eliminate the need to interact with an ADAPT customer service representative, including new technology launched in the ADAPT Health MyApp. Fourth quarter diabetes health revenue of 171.3 million decreased 7.3% from the prior year quarter. However, sequential growth of 30.2 million over the third quarter was the most produced in the last three years. we are not satisfied with that performance results were better than we anticipated due partly to some early results from the operational changes suzanne mentioned earlier being characterized by better than anticipated starts and patient retention for wellness at home which includes all other product categories fourth quarter net revenue was 163.5 million down 0.8% from the prior year quarter, driven by revenue disposed with the sale of certain custom rehab assets. The remaining products in this segment grew as expected. Turning to profitability, and starting with our full year results, adjusted EBITDA was $688.7 million for 2024, up 2.7% from full year 2023, and about 2% above the high end of the guidance range we provided in November. We held the line on adjusted EBITDA margin, which was 21.1% for 2024 versus 21.0% for 2023, even as we made investments in leadership, technology, and processes that we expect to support our long-term growth. By second, adjusted EBITDA margin for full year 2024 was 25.8% in sleep health, 30.7% in respiratory health, 9.9% in diabetes health and 12.3% in wellness at home. Our sleep health adjusted even margin contracted 120 basis points, driven predominantly by product impairments. Our respiratory health adjusted even margin expanded 190 basis points as a result of a full year of key capitated contracts. Our diabetes health adjusted EBITDA margin contracted 220 basis points on lower revenue as we maintained sales and operations capacity in anticipation of receiving revenue growth. Wellness at home adjusted EBITDA margin expanded 200 basis points, also benefiting from the full year of key capitated contracts, as well as the disposition of certain custom rehab assets with lower margins. For the fourth quarter, adjusted EBITDA was $200.6 million. Adjusted EBITDA margin of 23.4% contracted 40 basis points from Q4 of 2023, primarily driven by increased labor costs, reflecting the aforementioned investments we are making to support growth. Moving to cash flow, balance sheet, and capital allocation. For full year 2024, cash flow from operations was $541.8 million. up 12.7% against full year 2023. CapEx was $306.1 million, or 9.4% of revenue, down from 10.5% of revenue in 2023. And free cash flow was $235.8 million compared to $143.2 million a year ago. For Q4 2024, cash flow from operations was $150.4 million, CapEx of $77.3 million was 9.0% of revenue, down from 10.3% in the fourth quarter of 2023 and slightly below the full run rate for 2024. Free cash flow was $73.1 million, $41.1 million above the high end of our guidance range provided in November. Of the $73.1 million in free cash flow, we deployed $9.5 million to a tuck-in acquisition in the Southeast. and we used $50 million to reduce the balance on the term loan end. The remainder went to unrestricted cash, which stood at $109.7 million a year end. Day sales outstanding for Q4 2024 was 43.8, down from the previous quarter as accounts receivable continued to normalize following the changed healthcare situation earlier in 2024. We are working on opportunities to improve our revenue cycle management, streamlining financial operations improving inventory management and capturing cost efficiencies all of which are increasing the level of our cash flow as of year end 2024 net debt stood at 1.93 billion and our net leverage ratio was 2.79 times down from 2.87 times at the end of last quarter and down from 3.16 times at the end of 2023 as suzanne mentioned We've been using free cash to reduce debt, resulting in a $170 million reduction in our TLA balance over the last year. Recall that last quarter, we introduced a target of 2.5 times net leverage. Between the progress we made in 2024, our expectations for free cash flow generation in 2025, and our near-term capital allocation priorities, we're already well along the path toward achieving this target. In terms of capital allocation, our current priorities are investing to accelerate organic growth and reducing our debt to further strengthen our balance sheet. As noted earlier, last quarter, we completed a transaction to sell certain custom rehab assets. And in the fourth quarter, we reached a definitive agreement to sell certain incontinence assets to a third party. In 2025, we will explore the divestiture of one additional similarly sized non-core product line. In aggregate, these non-core assets represent approximately $100 million in revenue. For now, we expect M&A activity to be modest. Further on the horizon, we will continue to look for strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. Turning to guidance for full year 2025. we expect revenue at 3.22 billion to 3.36 billion or negative one percent to positive three percent growth this assumes approximately zero to 450 basis points in underlying room partially offset by a 40 basis point drag related to the disposition of certain custom rehab assets and a 90 basis point non-cash drag from changes in the mix of purchase revenue versus rental revenue. Rental revenue requires amortizing assets over their useful life, effectively deferring revenue to future periods. We expect this to disproportionately affect the first quarter and be smaller in the remaining quarters of 2025. We expect the shape of quarterly revenue to look similar to that of 2024. And as a reminder, our guidance does not include any impact from acquisitions or dispositions not yet close. We expect full year 2025 adjusted EBITDA of $670 million to $710 million. We expect an adjusted EBITDA margin of approximately 21% in line with full year 2024. We expect to see the aforementioned 90 basis point impact to flow entirely to the bottom line in 2025. Finally, we expect full year 2025 free cash flow in the range of 180 to 220 million. Similar to our results in 2024, we expect approximately one third of that estimate in the first half of the year and the remainder in the second half of the year. For the first quarter of 2025, We expect revenue to be down between 3% and 4% versus Q1 2024. We expect an adjusted EBITDA margin of 16% to 17% for Q1 2025. These expectations reflect ongoing weakness in our diabetes health performance, as well as the drag from the mix of purchase versus rental revenue, which, as noted, will disproportionately affect the first quarter and drops entirely to the bottom line. As usual, we expect Q1 2025 free cash flow to be modest. In summary, our fourth quarter results exceeded our expectations. We expect 2025 to be another strong year for free cash flow generation and are making good progress in our balance sheet. But we expect 2025 to be somewhat of a transition year program. We are executing on our five areas of focus to strengthen our foundation and are confident that we're on a path to accelerated growth in 2026 and beyond. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions?

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself at the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We will pause for just a moment to allow questions to queue. Thank you. Our first question will come from Ben Hendrix with RBC Capital Markets. Your line is open.