AdaptHealth Corp. Q3 FY2024 earnings call

• Acknowledged team efforts during recent Southeast weather events with no material service interruptions. - Q3 results were consistent with expectations for revenue, adjusted EBITDA, and free cash flow. Sleep increased 3.5%, respiratory 8.6%, while diabetes decreased 11.8%. - Completed non-core asset sale, refinanced senior secured credit facility, and paid down $50M of debt, committing to delevering to 2.5 times net leverage. - Focus on 'One Adapt' approach, rolling out standard work and new operating structures. - In sleep, market for obstructive sleep apnea is large and growing, with AdaptHealth as market leader due to adherence programs and resupply. - In respiratory, strong clinical outcomes help lower hospital readmission rates, focus on optimizing workflows and expanding product portfolio. - Addressed diabetes issues: dismissed leadership team, appointed new leadership, integrated diabetes resupply into sleep resupply center, focused on acquiring new CGM patients. - Made progress with AI and automation, moving from inception to production, improving workflow accuracy. - Moving to four-segment reporting structure: sleep health, respiratory health, diabetes health, and wellness at home.

For the third quarter of 2024, sleep revenue was $326.4 million, increasing 3.5% (contribution to revenue not specified but noted as a larger product). Respiratory revenue was $164 million, up 8.6%. Diabetes revenue was $141.1 million, decreasing 11.8% and representing 17% of revenue. Revenue from all other product categories was $174.3 million, down 1.9% over the prior year, aligned with expectations due to revenue loss from the sale of certain custom rehab assets.

• Revised full-year 2024 guidance: net revenue in range $3.22B-$3.26B, adjusted EBITDA in range $655M-$675M, free cash flow in range $175M-$195M. - Adjusted down revenue midpoint by $45M and adjusted EBITDA midpoint by $15M due to diabetes trends. - Expect acquisition activity to be limited in next few quarters, focus on paying down debt and increasing free cash flow conversion.

• Operational issues in diabetes leading to revenue decline. - Market reimbursement shifts, particularly pharmacy vs DME for CGMs. - Challenges in executing growth plans in diabetes despite market growth. - Potential impact of external factors on financial performance, such as payer activities and market dynamics.

Q: Kevin Caliendo asked about diabetes issues, including manufacturer collaboration and end-market dynamics.

A: Jason Clemens noted no specific manufacturer issues, continued pressure from pharmacy channel reimbursement changes, and operational challenges in new starts and recur orders. Suzanne Foster added partnerships with manufacturers are strong and operational issues internally can be fixed.

Q: Kevin Caliendo followed up on how diabetes issues impact 2025.

A: Jason Clemens said they plan to guide 2025 near end of February, guided down Q4 revenue due to not overcommitting, and focusing on resolving operational issues.

Q: Mathew Blackman asked about diabetes long-term growth prospects and organic growth opportunities.

A: Suzanne Foster talked about investing in national accounts and enterprise sales team to partner with large health systems and increase covered lives. Jason Clemens mentioned market growing upper single-digit to lower double-digit but Adapt not growing due to operational challenges.

Q: Eric Coldwell asked about revenue and EBITDA guidance changes being diabetes-specific.

A: Jason Clemens confirmed the guide down was entirely due to diabetes, with $45M revenue cut and $15M EBITDA impact.

Q: Brian Tanquilut asked about savings from app and call center operations.

A: Jason Clemens said focus is on growing top-line and improving patient experience, with tech installed in respiratory and data capture. Suzanne Foster noted strong tech infrastructure allows rapid deployment of myAPP features.

Q: Whit Mayo asked about Humana contract and payer conversations.

A: Suzanne Foster said Humana contract is doing well, and they are exploring more enterprise national accounts.

Q: Richard Close asked about team changes in diabetes and asset divestitures.

A: Suzanne Foster detailed new leadership, sales leader, and resupply integration. Jason Clemens talked about potential disposition of assets in wellness at home as they are low-growth and better owned by others.

Q: Pito Chickering asked about CGM reordering issues and market growth between channels.

A: Jason Clemens explained reordering delays due to integrating diabetes resupply into Nashville center, and focus on stabilizing and growing despite market growth.

Q: Ben Hendrix asked about channel shift transition.

A: Jason Clemens said no material impact yet, will comment after open enrollment and payer policy publication in January.