AdaptHealth Corp.

Good day, everyone, and welcome to today's ADAPT Health second quarter 2026 earnings release. Today's speaker will be Suzanne Foster, Chief Executive Officer of ADAPT Health, and Jason Clemens, 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 the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2026 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'm now pleased to introduce the Chief Executive Officer of Adapt Health, Suzanne Foster.

Good morning everyone and thank you for joining our call today. I'm going to cover three topics this morning. First, we delivered 16% organic growth with record volumes gains across the business. Second, we made significant progress sharpening our portfolio and focusing on the core business, announcing the sale of our diabetes business, exiting other non-core products within Wellness at Home, and contributing our e-commerce business into a new joint venture to improve how we serve the direct-to-consumer market. And third, I'll speak to two near-term profitability challenges we're navigating. are West Coast capitated contracts and a material price increase from one of our largest manufacturers. Starting with our financial results. Given the agreement we signed to divest our diabetes health business, I'll walk you through our results on a continuing operations basis, which excludes diabetes health, including for prior year period comparisons. Revenue remains a bright spot. Second quarter net revenue from continuing operations was $740.3 million, up 12.7 versus the prior New Year quarter, and 15.9% on an organic basis. Our West Coast capitated contract contributed 10.7 points of that organic growth, with 5.2 points coming from our base business. Leased health net revenue was $386.5 million, of 15.5% versus the prior year. Respiratory health net revenue was 194.4 million, up 14.1%. Wellness at home net revenue was 159.4 million, up 4.9%. Total capitated revenue grew to $103.3 million in the quarter and now represents approximately 14% of our continued operations net revenue. This is more than three times the prior year with our West Coast capitated contract driving nearly all of that increase. Second quarter adjusted EBITDA from continuing operations was $132 million. with an adjusted EBITDA of 17.8%, driven by elevated West Coast capitated contract costs, which I'll speak to later. Now turning to the work we have done on simplifying and focusing our business. Over the past two years, we have systematically reshaped Adapt Health around our core sleep, respiratory, and supporting home medical equipment businesses. Parts of our portfolio where we have the strongest value proposition and the clearest path to growth. In July, we took the most significant step yet in that effort. We signed a definitive agreement to sell our diabetes health business for $235 million, a move that we expect will ultimately improve our growth rate, enhance our margin profile, and allow us to sidestep looming industry risk. We also took a further step in focusing our portfolio on the core by discontinuing proactive sales of certain product categories within our wellness at home segment. This action removes non-strategic, low growth, and low margin product lines from our portfolio. And last week, we signed an agreement to contribute the CPAP Shop, a direct-to-consumer e-commerce business we've built within our sleep segment, into a newly created joint venture with a leading e-commerce competitor and a telehealth prescriber network. The JV will have an unrivaled set of capabilities to fulfill its strategic ambition to reach the vast undiagnosed OSA population through home sleep testing and a digitally enabled path from diagnosis to treatment. Our growth strategy is focused on improving our service levels in our core business. Expanding our capitated relationships where it makes sense and growing the number of large health systems we serve. This quarter, we made progress on all three fronts. In May, we signed a new capitated agreement with Humana One Home, successfully transitioning 478,000 new members in South Florida and Texas without disruption. Our capitated relationship with Humana now spans 33 states plus the District of Columbia and South Florida. We have a proven track record of successfully serving Humana patients under capitation over the past three years and we're building on that experience as we take on this expansion. Our newly formed enterprise sales team exclusively focused on large health systems secured preferred provider agreements with several multi-hospital health systems. These customers recognize the clinical expertise we bring, the value of having our liaisons embedded in their systems to coordinate access to our services and care, and the operational excellence that shapes how their patients experience it. Now let me turn to the more difficult part of the quarter, starting with the challenges we are facing with our West Coast Capitated Agreement. Having spent the first half of this year executing the largest patient transition in the history of home medical equipment, we spent the second quarter working to stabilize that operation on the West Coast. Standing up a new geography this quickly, new buildings, new routes, new inventory, new people, and a new customer relationship has posed new challenges, some of which we did not fully anticipate. but which have become clearer as the contract fully scaled. Throughout, we refused to compromise patient care and have remained fully committed to serving patients, whatever it took. With the benefit of a full quarter of operating this contract, here is what we know. Order volumes are running higher than expected, primarily in sleep resupply and enteral products. The outsized sleep resupply volumes largely reflect transition-related pent-up demand and should prove transitory, while enteral volumes will require further intervention. As we solve these two items, we believe gross margins will recover toward our original expectations. Second, there are inefficiencies in the inherited workflows, including the non-standard use of urgent orders. These are contributing to unanticipated logistics costs downstream, which in turn have caused labor costs to remain elevated. We have met these elevated demands, but doing so at this level is not a sustainable model. We are working with our partner to align ordering practices with the original assumptions of the contract, while rapidly introducing technology to streamline the workflows, shifting more of our fulfillment to drop ship rather than in-person delivery, and right-sizing our fleet and labor accordingly. The combination of these items represents 40 million of expected impact on profitability relative to our prior projections for the second half of this year. We remain confident that with sustained work and additional time, the contract will be a strong contributor to our profitability. Our long-term profitability outlook for the West Coast contract has always assumed we'd be able to use the footprint we built to serve additional business beyond the current capitated membership. Currently, we are only able to serve our existing patients through our 40 new West Coast locations, and that will remain the case until the government-imposed DME moratorium put in place last February is lifted and we can secure new PTANs which are the Medicare billing numbers required to serve fee-for-service patients from these locations. Once that happens, we see substantial opportunity to serve patients who use our customer's health system but are insured through other payers and to sell proactively to other customers located near or within our new footprint. That incremental fee-for-service revenue will help absorb the fixed-cost infrastructure we've built out on the West Coast. To help offset the cost pressures I just described, we made the difficult decision in the second quarter to restructure our workforce, delivering $19 million in annualized savings while maintaining full operational delivery across every function. This required real sacrifice from our team who took on more so that we could continue serving patients without interruption. The other lever we're pulling on is technology, using it to fundamentally re-engineer the patient journey from diagnosis to treatment, improving patient experience and accelerating cost efficiencies along the way. We are already seeing what a digitally enhanced patient experience looks like in practice. Our MyApp platform, now connects nearly the entire patient journey. Let me walk you through it. It starts with a digital front door. Patients can enter our platform before they are even officially a patient. It's as easy as scanning a QR code. From there, AI-powered intake walks them through insurance setup. They receive real-time order status tracking, and they can instantly self-schedule a virtual or in-person PAP setup without a phone call. Order supplies in the app and access live or AI-powered chat support. And this quarter, we added our newest feature, an AI-powered mask fitting tool, which converted 92% of in-app scans to completed orders in its first two weeks, with early signs that it has reduced reduced mask refittings that delay therapy. These features and the ease of use are driving rapid adoption of MyApp, with users standing at 512,000, up 56% since the end of 2025, and an App Store rating of 4.8 stars. This and similar work to re-engineer the patient and provider experience share a common thread, By removing the human intermediary from routine, repeatable steps, it frees up our people to focus on higher value, higher touch work, and in return supports our efforts to improve our cost basis. Addressing the team manufacturer price challenge I mentioned earlier, we were notified on June 30th by the manufacturer of their decision to terminate our contract and impose an immediate price increase, effective July 1st. As it stands, this results in a 30 million impact in the second half of the year. We are actively working with the manufacturer to secure improved pricing and terms, but at this point, we've reflected the full impact in our outlook. That brings me to guidance. Our underlying base business continues to grow and is performing in line with our expectations. However, between the portfolio actions we've taken The challenges we currently have with our West Coast capitated contract, as well as the manufacturer's price increase, we must reset our full year outlook. Let me close with how we're thinking about the road ahead. Everything we are doing is to enhance the important role we play within a critical part of the healthcare ecosystem upon which millions of patients depend. The portfolio actions we've completed position us as a more focused company built around sleep and respiratory, where we have the strongest value proposition. Our rapid growth demonstrates that healthcare providers see the clinical and economic value of the services we provide. And in addition, with all the realities facing our industry, we are well positioned to benefit from the industry's ongoing consolidation with the size and scale to take on significant volumes. We acknowledge that growing this fast over a short period of time has stressed our cost structure. These near-term pains come with a silver lining. Our growth is pushing us to think differently, to leverage technology and innovate in ways we never thought possible. These innovations are benefiting patients and providers today and over time will lower our cost to serve. Ultimately, these growing pains will make us a stronger, more efficient company. And with that, let me turn it over to Jason to review the financials.

Thank you, Suzanne, and thanks to everyone for joining our call today. I'll cover our second quarter financial results, followed by a review of our balance sheet, capital allocation, and outlook. As Suzanne noted, Given our agreement to divest diabetes health, all figures I'll discuss are on a continuing operations basis, including prior period comparisons, unless otherwise noted. For the second quarter, net revenue of $740.3 million increased 12.6% versus the prior year quarter, with organic growth of 15.9%. Second quarter adjusted EBITDA was $132.0 million versus $136.4 million for the prior year quarter. As Suzanne discussed, this reflects continued elevated costs associated with the West Coast capitated contract ramp. Second quarter adjusted EBITDA margin was 17.8%. His continued operations produced approximately $23 million of adjusted EBITDA, covering $14 million of corporate overhead expenses that remain in continuing operations. The West Coast Capitated Contract missed our expectations by $15 million, so we are adjusting for this run rate in full-year guidance that I will cover later. Turning to the balance sheet and cash flows, we ended the quarter with a consolidated total leverage ratio of 3.06 times, After quarter end, we triggered the $325 million delayed draw term loan secured as part of our April refinancing and used the proceeds to redeem our 6.125% senior notes due 2028. This action eliminated our highest cost tranche of debt and extended our overall maturity. We intend to prioritize repayment of our revolving credit facility over the remainder of the year and remain committed to our net leverage target of two and a half times. We intend to direct a significant portion of the proceeds from the diabetes health divestiture for further debt reduction. Regarding goodwill, the diabetes health divestiture required us to reallocate shared corporate costs previously carried by that segment across our remaining reporting segments. and the resulting revision to respiratory health and wellness at home triggered a $144.2 million non-cash goodwill impairment. Free cash flow was negative $20.9 million for the Corp., driven primarily by $166.2 million of capital expenditures to support the capitated contract, including approximately $25 million of one-time equipment and vehicle purchases. I'll note that our diabetes health divestiture closes cash flows from that previously reported segment will continue to be presented on a consolidated basis with the cash flows from continuing operations. Our capital allocation priorities remain unchanged, investing to accelerate organic growth, reducing our leverage, and pursuing disciplined, smaller token acquisitions. Turning to guidance. On a continuing operations basis, our full-year 2026 net revenue projection is $2.85 to $2.89 billion, which excludes $630 million of the anticipated full-year revenue from diabetes health that is moving into discontinued operations. At the midpoint, this represents an increase of roughly $15 million from our prior guidance, reflecting the net impact of second quarter revenue outperformance, The revenue contributed to the e-commerce JV that will no longer consolidate, and the revenue disposed with the exit of certain non-core assets in Wellness at Home. On a continuing operations basis, our full year EBITDA guidance is $490 to $520 million, and let me bridge that to our prior guidance of $680 to $730 million. First, the impact of the diabetes health divestiture is $100 million. which includes approximately $40 million of the anticipated full-year adjusted EBITDA moving with that segment into discontinued operations and an additional $60 million of corporate overhead that had previously been allocated to diabetes health but will remain with continuing operations. We expect roughly half of that stranded cost to be removed within 12 months of closing the deal. Second. 55 million of guide down relates to our revised full-year 2026 expectations for our largest capitated contract, which includes a miss of 15 million versus our prior expectations for Q2 and 40 million of revised projections for the second half of 2026. We continue to view a margin of 20% as the right long-term target for this contract, though reaching it will take continued work and additional time. We expect sequential improvement over the next several quarters, reaching run rate profitability next year. Third, as Suzanne mentioned, we recently received notification that a large supplier has increased prices effective July 1st, which we anticipate will have a $30 million impact in the second half of 2026. Finally, we are reducing our second half projections by $15 million for other intentional actions we took to focus and strengthen our portfolio. As Suzanne described, we recently made the decision to wind down certain non-core wellness products. The company has already started the process of shutting down sales channels for these products, so revenue will quickly decrease. However, the cost of servicing our existing census will continue until we transition patients to other providers over the next few quarters. Stepping back from the current year financial expectations, we want to provide perspective on how to think about these areas beyond this year. We believe that we will eliminate roughly half of the stranded corporate overhead within 12 months of closing the diabetes health transaction. We expect to achieve our long-term profitability target for our West Coast capitated business next year. We expect to negotiate the recent notification by a large supplier and take actions to otherwise mitigate the impact. And finally, for wellness at home, we will reduce our labor and operating expenses as patients transition. For the full year 2026, we expect free cash flow of 80 to 120 million, which as noted, includes cash flow from our diabetes health segment. For the third quarter of 2026, we expect net revenue of 720 to $740 million. We expect modest sequential growth to offset approximately 20 million of revenue coming out of the second quarter run rate following the JV and portfolio management actions. We expect an adjusted EBITDA margin of approximately 17.9%, and we expect free cash flow to be approximately $50 million. That brings us to the end of our prepared remarks. Operator, please open to the call for questions.