AdaptHealth Corp.

Good day, everyone, and welcome to today's ADAPT Health's first quarter 2025 earnings release. Today's speakers will be Suzanne Foster, Chief Executive Officer of ADAPT Health, and Jason Clements, Chief Financial Officer of ADAPT 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 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, and 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 ADAPT Health, Suzanne Foster.

Good morning everyone and welcome to our call. Amid elevated uncertainty in the external environment, we at Adapt Health have stayed the course with a relentless focus on improving our business and providing exceptional service to the 4.2 million patients that depend on us. Reflecting that focus, in Q1 2025, we delivered another quarter of solid results and we continue to make progress on several areas of focus. Starting with our results, First quarter revenue exceeded midpoint of our guidance range by 13.1 million, despite declining 1.8% from the prior year quarter. This was driven by stronger than anticipated revenues in our respiratory health segment, as well as in our diabetes health segment, which, while still contracting, continue to demonstrate signs of improvement. First quarter adjusted EBITDA was in the upper half of our guidance range. despite declining 19.3% from the prior year quarter, while our adjusted EBITDA margin was in line with our expectations at 16.4%. Free cash flow was negative 0.1 million in the first quarter compared to negative 38.9 million in the prior year quarter. Importantly, we remain on track to achieve our free cash flow guidance for the full year. Over the last several months, we have been reviewing and refining our long range growth plan. This work confirms that we have a tremendous opportunity to deliver consistent, sustainable, organic growth by simply staying on course with our current strategy. Our plan has been and will continue to be to remain focused on our four core segments and to combine our geographic reach and operational scale with industry-leading patient service excellence to capture market share. The addressable markets within our four segments are large, and we believe are growing in aggregate by mid-single digits, driven by meaningful tailwinds. These include an aging US population, increasing prevalence and diagnosis of the chronic conditions our services and products help treat, and the ongoing shift to home healthcare, which is expected to outstrip growth of overall healthcare spending by roughly 200 basis points over the next decade. Even as the industry leader in our markets, we still have a significant untapped opportunity for organic growth. We are addressing this opportunity from a position of competitive strength. We have the broadest geographic footprint in the industry with over 660 locations serving 4.2 million patients across all 50 states. Our expansive geographic reach and operational scale uniquely position us to lead the transformation of the home health industry. This is most clearly demonstrated in the opportunities we are addressing in managed care and with large health systems. We believe payers and providers will increasingly turn to Adapt Health to leverage our scale and industry-leading adherence programs as part of their efforts to better predict and manage healthcare costs and drive better health outcomes for patients. These dynamics are fueling our growing pipeline of active discussions around new capitated arrangements, especially as payers look to Adapt Health for help managing utilization inside their expanding Medicare Advantage businesses. Despite our competitive advantages, we haven't yet realized our full organic growth potential, but that is well within our grasp. We have brought together a group of exceptional leaders. We have scrutinized our workflows to pinpoint our most meaningful organic growth levers, and we are enabling the organization to activate these levers through the discipline of our ADAPT operating system and a set of targeted initiatives. The common thread running through these initiatives is a commitment to patient service excellence, which means delivering superior quality with speed at a competitive cost to serve. One example is the process improvement we are introducing to improve CPAP order conversion. Our operations team has been working hard to automate intake, streamline referral documentation, optimize scheduling capacity to reduce setup delays, and enhance patient communications. These initiatives will help us convert more referrals to orders. They will also meaningfully improve the patient experience by expediting their access to the critical therapies they need. And ultimately, a better patient experience will help us drive increased census and revenue growth. Delivering patient service excellence at scale is how we will win. Our industry remains highly fragmented with service levels that vary widely and often fall short of expectations. We have an immense opportunity to take market share. Capturing that opportunity doesn't require major incremental investments. It also doesn't require capital-intensive M&A. It simply requires being the best operator in the markets we already serve. Which brings me to our diabetes health segment. We cannot deliver enterprise-level organic growth that meets or exceeds market growth if our diabetes health segment is underperforming. I'm pleased to say the diabetes health team has continued to execute on its plan to enhance our processes, and we continue to see positive signs that the steps they've taken are yielding results. Notably, we had a second consecutive quarter of sequential improvement in new starts, and our resupply attrition rate was the best we have experienced in two years amid a period of significant supply chain disruption. I would like to take a moment to commend the entire diabetes team for ensuring that our patients continue to receive their diabetes supplies during this disruption and for exceeding our internal forecast. It's still early, but the dedication of our diabetes health team and the progress they've made are increasing our confidence that the segment will return to growth. removing a key obstacle to delivering accelerated, consistent, and sustainable organic growth across our overall business. Moving on to another core focus, we continue to strengthen our financial position. During Q1, we reduced our debt balance by another $25 million, bringing total debt repayment to $195 million over the last five quarters. Further, we continue to exit non-core product lines, generating additional proceeds that are earmarked for debt reduction, while enabling us to sharpen our strategic focus. Specifically, in May, we completed a transaction to sell certain incontinence assets to a third party, and we signed a definitive agreement to sell certain infusion assets to a third party. Before I close, let me take a moment to address the concerns surrounding the potential impact of international trade policy on operators in the healthcare industry, including Adapt Health. Clearly, the situation is fluid, but based on what we know today, we believe our exposure to tariffs is contained and the impact on our business is likely to be very manageable. We have consulted with each of our major manufacturing partners to verify their production locations and to gather their perspectives on the potential impact of tariffs. There have been no indications from these discussions that tariffs are likely to pose a significant issue, and several of our large partners have referenced tariff exemptions in their public remarks. To date, we have not experienced any tariff surcharges, nor have we initiated any contract renegotiations because of tariffs. Given our current inventory levels, we do not anticipate any potential impact from tariffs to materialize before the second half of the year at the earliest. Given these considerations and our current assessment of the risks, We do not currently believe it is necessary to adjust our 2025 guidance for any potential impact of tariffs. In summary, the team delivered another quarter of solid results. We continue to improve our financial position by paying off our debt. The organization is laser-focused on driving service excellence at scale to deliver consistent, sustainable organic growth and our diabetes business demonstrated further signs of improvement. While we are monitoring the risks of government policy, we believe these risks will be manageable, and moreover, we won't let them distract us from the critical work we are doing to organize, execute, and improve day after day and quarter after quarter. With that, I will turn it over to Jason.

Thank you, Suzanne, and thank you, everyone, for joining our call. Today, I'm going to cover our first quarter 2025 results. I'll follow that with a review of our balance sheet and our plans for capital allocation before finishing with guidance for 2025. For first quarter 2025, net revenue of $777.9 million declined 1.8% versus the prior year quarter, which had one additional business day. Net revenue was $13.1 million above the midpoint of our Q1 guidance range, driven by the combination of strong volumes in our respiratory health segment and stronger than anticipated diabetes health segment revenues, more than offsetting sleep health segment revenues that fell modestly shy of our expectations. First quarter sleep health segment net revenue decreased 2.8% versus the prior year quarter to $316.4 million. We previously referenced a $30 million full-year headwind related to the non-cash impact of changes in the mix of purchase revenue versus rental revenue. As anticipated, approximately half of that impact came in the first quarter. Sleep health new setups, which are typically seasonally lower in the first quarter of the year, were approximately 113,000, slightly behind our expectations. Despite the lighter new setups, our sleep health census grew to 1.68 million patients, up another 19,000 sequentially. Our Q1 2025 CPAP survey indicates that the percentage of respondents using GOP1s to manage diabetes or weight loss was up slightly, to 15.7% in Q1 2025, from 15.3% in Q4 2024. Our survey continues to show an immaterial difference in adherence and resupply ordering patterns between GLP-1 patients and non-GLP-1 patients. First quarter respiratory health segment net revenue increased 3.3% versus the prior year quarter to $165.5 million. We saw stronger than anticipated oxygen new setups fueled by stronger field sales during an especially severe flu season. Our oxygen census of 325,000 patients was a new first quarter record. First quarter, diabetes health segment net revenue declined 8.0% versus the prior year quarter to $138.8 million. While revenue contracted, as Suzanne mentioned, we continue to see signs the segment is recovering. New starts improved sequentially for the second consecutive quarter. and our first quarter attrition rate was the lowest we experienced in two years. For the Wellness at Home segment, which includes all other product categories, first quarter net revenue increased 0.7% over the prior year quarter to $157.2 million, as growth and volumes all set revenue disposed with the sale of certain custom rehab assets in the third quarter of 2024. Turning to profitability, first quarter 2025 adjusted EBITDA was 127.9 million, slightly above the midpoint of our Q1 guidance range. Adjusted EBITDA margin of 16.4% declined from 20.0% in Q1 2024, but was within our Q1 guidance range. This reflected the combination of lower revenue and gross margins in our diabetes health segment and the anticipated impact of changes in the mix of purchase revenue versus rental revenue in our sleep health segments, all of which fell to the bottom line. Moving to cash flow, balance sheet, and capital allocation. For Q1 2025, cash flow from operations was $95.5 million. CapEx of $95.6 million was 12.3% of revenue, in line with our expectations. Free cash flow was negative $0.1 million, as certain cash collections anticipated in the first quarter were pushed into the second quarter. Unrestricted cash stood at $53.7 million at the end of the quarter. As of quarter end 2025, first quarter, net debt stood at $1.96 billion, and our net leverage ratio was 2.98 times, up from 2.79 times at the end of last quarter as a result of lower adjusted EBITDA. We've been using free cash to reduce debt, and we've reduced our TLA balance by $25 million in Q1 2025. As Suzanne mentioned, in early May, we completed a transaction to sell certain incontinence assets to a third party, and we signed a definitive agreement to sell certain infusion assets to a third party. Between these sales, which will generate further proceeds for debt reduction and our expectations for free cash flow generation in 2025, we are steadily tracking toward achieving our target of 2.5 times net leverage. Our capital allocation priorities remain unchanged. Our highest priorities are investing to accelerate organic growth and reducing our debt to further strengthen our financial position. followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. Turning to guidance, we are reducing our full-year revenue expectations by $40 million and our full-year adjusted EBITDA expectations by $5 million to reflect the disposition of certain incontinence assets in early May. There are no other changes to our guidance. As Suzanne discussed earlier, given our current understanding of tariff policy and based on the indications provided by our manufacturers, we expect that any impact of tariffs on our 2025 results is likely to be manageable, and we do not currently believe it is necessary to adjust our full-year guidance for tariffs. For full year 2025, we now expect revenue of $3.18 billion to $3.32 billion and adjusted EBITDA of $665 million to $705 million. Our revised revenue and adjusted EBITDA guidance implies an adjusted EBITDA margin of approximately 21%, in line with our prior expectations. Our free cash flow guidance range remains unchanged at $180 million to $220 million. For Q2 2025, we expect revenue to be largely flat versus Q2 2024 revenue of $806 million. Notably, the prior year quarter included approximately $22 million of revenue from certain disposed assets, as well as approximately $8 million from the non-cash impact of the revenue mix shift from purchases to rental in our sleep health segment. We expect an adjusted EBITDA margin of 18.3% to 19.3%. down from 20.5% in Q2 2024, reflecting the flow-through to the bottom line of the items just discussed and lower revenues in diabetes health. We continue to expect to generate approximately a third of our full-year free cash flow in the first half. In summary, we are on track to achieve our revenue, adjusted EBITDA, and free cash flow guidance for 2025, and we're making good progress on our balance sheet, As we enhance operational effectiveness and advance key initiatives, we are confident that we are building momentum in the business. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions?