AdaptHealth Corp. (AHCO) Earnings

Management highlights

• Completed transition of hundreds of thousands of active patients to platform under new capitated agreement, established 35 de novo locations and now exclusive HME provider for over 10 million new members. • Progress on infrastructure investments with AI-enabled initiatives and patient-facing digital platform reaching milestones. • Refinanced credit facility in April with improved terms. • Bleep Health net revenue grew 13.3% y-o-y with Pap New Starts setting new record. • Respiratory health net revenue grew 7.6% y-o-y with oxygen new starts up 12.8%. • Diabetes health net revenue grew 2.4% y-o-y with strong resupply results. • Wellness at Home net revenue declined on reported basis but 11% organic growth after adjusting for dispositions. • Interest in capitated arrangements among payers increasing. • Regulatory environment evolving benefiting scaled, compliant operators. • Balance sheet strengthened by refinancing credit facility, with flexibility to pursue tuck-in acquisitions. • Technology investments improving patient experience and time to therapy, conversational AI platform handling live calls, patient portal MyApp crossed 412,000 users in Q1.

Guidance

• Raising full year net revenue projection by $10 million to $3.45 to $3.52 billion. • Maintaining full year guidance for adjusted EBITDA of $680 to $730 million and free cash flow of $175 to $225 million. • Expecting Q2 2026 net revenue of $840 to $860 million and adjusted EBITDA margin of approximately 19%. • Anticipating acceleration of organic growth in Q2 due to entire quarter of capitated revenue growth.

Segment performance

First quarter revenue of $819.8 million grew 5.4% versus prior year quarter. On organic basis, 9.1% growth. Bleep Health net revenue $358.5 million grew 13.3% y-o-y. Respiratory health net revenue $178.1 million grew 7.6% y-o-y. Diabetes health net revenue $142.2 million grew 2.4% y-o-y. Wellness at Home net revenue $141 million declined 10.3% on reported basis but 11% organic growth after adjusting for dispositions. Capitated net revenue made up 9.2% of total consolidated net revenue. Capitated membership increased seven times y-o-y to about 15 million.

Analyst Q&A

• Q: On the organic revenue side, are you realizing all the revenues from the capitated arrangements, the 9.1%, or should we assume acceleration into Q from those levels? And also, any color on what organic revenue growth would be excluding the capitated arrangements?

  A: This is Jason. So on the organic split, a little over 4% growth in the core business, X capitation, X the new contract, And to your question on Q2, we do expect acceleration, specifically of capitated revenue. That is where we are providing the raise of net revenue for the full year. So we do expect, as we'll be assuming an entire quarter of capitated revenue growth from this new contract in the second quarter, that we will accelerate organic growth.

• Q: You talked about the $8 million of variable labor from the acceleration and $4 million of right-sizing. This is a lot more sort of moving parts, and it's been a little sort of challenging, you know, 4Q and 1Q to sort of model EBITDA. So can you give us some color on how EBITDA should ramp 2Q and then ramp into 3Q and 4Q just because of all these moving parts around these costs?

  A: In our Q2 guidance, we're projecting $840 to $860 million of revenue at an adjusted EBITDA margin of approximately 19%. So that translates to a little over $160 million of EBITDA for the second quarter. The reason for the big ramp is really twofold. Firstly, we will have an entire quarter of revenue from the new capitated arrangement, very different from Q1 where we had portions of that revenue as the staggered start dates rolled out. And so that revenue is going to come in at a very high margin as the fixed costs are already in the P&L as we enter Q2. The second component is really around putting controls around the labor spend. Certainly, as we were exiting March, we had a surge in variable pay, so incentive pay, bonuses, contract labor. And as such, to support the transition, that came with a lot of call volume as patients were moving from the incumbent provider over to ADAPT, and a lot of questions about how to continue to access their care and how to work with ADAPT Health going forward. So as that volume settles down as we're moving into Q2, we do expect to get some of this cost out that we referenced in Q1, and we expect to get all of it out at the time of Q3.

• Q: You said you missed Q1 EBITDA by roughly $7 million, but you also said that labor expenses are moderating. Is there anything else improving in the underlying EBITDA Outlook X contract onboarding, meaning whether it's mix, you cited some AI initiatives, just trying to understand if those are helping the underlying trends as we see the ramp over the course of the year or if it's just simply the onboarding stuff?

  A: Yeah. Well, it's certainly the onboarding, Kevin. Secondly, as we get into Q2, we typically see a little over a point of improved collections and therefore lower reserves on our revenue. So that number alone is about $10 million, and that all drops to the bottom line as it's pure collections and rate. on the revenue side of things. The AI that we referenced this morning, Suzanne may expand on a little more. It's important to see that we're moving out of pilot phase and first starting go-lives as we were exiting the first quarter. So that's gonna take some time to scale over the course of the year and into 27, but maybe Suzanne wants to add some color on the specifics. The technology that we're deploying has been the goal has been to improve the patient experience and time to therapy now obviously referencing things like going scheduling 25 touch list does come with some benefit we have been reinvesting that back into the business where we we have gaps and so i've been you know, out there saying that any benefit from tech, financial benefit from implementation of technology will be back half of the year, but really more of a 2027 story because we've needed to make some investments in the rest of the business as we right-size places that we're under-invested in.

• Q: Have you seen any changes to sleep apnea coverage amongst payers? Did anything hit in one queue that was different?

  A: No, that's all consistent. Sleep apnea has enjoyed a stable quarter. Nothing on the horizon that we see in terms of changes at this point.

• Q: With the capitated contract expected to reach 20% EBITDA margin at full ramp and the base business continuing to improve, what's the right way to think about a DAF steady state EBITDA margin over the next two to three years? Is there a path to low 20% on a sustained basis?

  A: Yeah, sure. This is Jason. I guess I'd start with our expectations for 2026. You know, at the midpoint of our guidance, we're showing just a touch over 20% for our adjusted even margin. And as we get into 2027, a couple of key items to note. Firstly, in the first quarter, of course, we'll have a full quarter of capitated revenue versus the first quarter of 2026. And The variable labor that we discussed and some of the fixed costs that we saw in the first quarter, we expect at that point that we'll have pulled that back out of the P&L, thus increasing margin profile as we get into 27 and beyond. And I think just adding on to that, you know, how we think about it is assuming a fairly stable fee-for-service reimbursing landscape coupled with increased capitated revenue over the next couple of years driving additional census and the underlying operational improvements, including the technology I referenced, those things over the next 12 months, really into 2027, will allow us to hold that EBITDA and slightly improve it as we move forward.

• Q: Do you have any update on the pipeline or timing of potential new capitated arrangements? Are you seeing any acceleration in inbound interest?

  A: Yeah, sure. Well, like I said, we're very positive about the movement of our pipeline. You know, it's moving through. And you should expect that we'll be coming out with an announcement, you know, soon on that.

• Q: Maybe I'll ask for some of the de novo. I think you mentioned the expansion with the de novos as well ahead of guidance. So just curious what you can share with us in terms of what operational milestones kind of like allow this acceleration during the quarter?

  A: You're talking top line, right, Brian? Yeah, yeah, yeah. Yeah, yeah. So, you know, this capitated arrangement came in multiple stages or phases. As we stand here today, all phases are complete, but they were staggered. And so they were back half-weighted to the first quarter. That's really why we're seeing the raise of revenue, particularly in the second quarter, as we'll experience, you know, the entire quarter with that full revenue flowing. So at this point, the contract is fully operational across all eight states. And as Suzanne said, 35 new locations in support of that business. And so we're very pleased to report the successful delivery, and we're looking forward to moving forward. In the milestones that we, you know, focused on, remember this was a three-way transition, and so all three parties had to be ready. And given that the other two parties were ready, we agreed. we had to step up and make sure that we accelerated our go-live. And so getting all the new employees in place, a lot of the labor that was in one region or allocated to one phase of go-live, we had to repeat. very quickly so we couldn't use, you know, they were not done onboarding the first phase and we couldn't use them for the second phase so we had duplication in onboarding based on the region.

• Q: Just thinking of free cash flow here, I think you said in the prepared remarks it's in line with expectations, but also you mentioned some of the assets purchased have slipped into Q1. So just curious how we should be thinking about the makeup of free cash flow for the quarter and how we should be thinking about the cadence of it for the rest of the year?

  A: Sure, Brian. So for the first quarter, we came right in line. We had guided negative 20 to negative 40. And so at negative 27.5, we were pleased with the cash flow performance, despite the additional cost on the P&L. I'd say as we get into Q2, we are signaling a step up in CapEx for the second quarter versus where we were 90 days ago. Again, that's to support the capitated arrangement and just ensuring that we've got all inventory locations stocked and fully ready for all new patient volumes that are coming in. So that's going to steer the second quarter down from what we were originally thinking. We still think we'll be positive for the second quarter, but it'll likely be modest. As we get through that normalization of CapEx, we're very confident that the third and fourth quarter will both be very strong in the neighborhood of $100 million in each.

• Q: just maybe hitting on a potential new capitated business going forward obviously a large portion of this most recent agreement was you know, relatively new territory for you. So as you think about, you know, potential announcements of new business, you know, this year, next year, how are you thinking about the level of investment that that's going to require, you know, for any potential new wins?

  A: Sure. You know, Richard, on the investment side, we do see elevated capex, particularly as we're starting up the arrangement. Now, the reason for that is if that business is – taken or one from an incumbent provider, of course, there's patients that are still in service. So, you know, there's a CapEx requirement typically to start up the arrangement. And then there's an ongoing CapEx commitment that is priced right in line with our standard CapEx, so call it 11% to 12% of revenue is what to expect for ongoing operations for those businesses. But it does require some startup CapEx to get into the new market. And let me address the part about how and where we're looking at this. So, you know, this, the one we referred to today, our new agreement, was primarily in a geography new to us, which we knew we had to make investments to set up the fixed costs and locations, et cetera. And obviously, long-term, right now, those new locations are only servicing our new strategic partner. And over time, as we stabilize, it'll give us a footprint to expand upon, of course. With the pipeline that we have in place and now with this new footprint, there's very little area where we don't already have existing locations with teams that know how to do this business. For example, when we took on the first phase of this new capitated agreement, it was on the East Coast where we had a dense area. grouping of locations, and really without a blip, we were able to onboard that effectively. And so as we consider new capitated agreements, we're looking at where do we have locations or can we buy locations to pick up operations, and we expect that it will be a much different and obviously a much smoother than opening up 35 de novo locations to service hundreds of thousands of patients on day one.

• Q: Just on diabetes, obviously progress there, can you talk how you're thinking about diabetes business as we progress through the rest of the year? Any updates would be helpful.

  A: Sure, so we're super happy with the team, positive growth. As I mentioned, I can't applaud them enough for digging in. All of the improvement has been on execution. We're not seeing anything different in the marketplace. It's pretty much the same in terms of pharmacy and med benefit, referral patterns, all of that. So the improvement that the team has made over the last year has been the internal focus on us doing the best job possible. You know, I have said that diabetes is, in the past I've said first we've got to fix it, which to check the mark, and two, we're always looking at do these, what in our portfolio is strategically fitting for ADAPT Health, and we'll continue to, you know, review diabetes for a strategic fit as we do all our portfolio.