AdaptHealth Corp. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• One Adapt Initiative: Assembled a team of talented leaders, including new Chief Commercial Officer, Chief Legal Officer, and SVP of Supply Chain. Moved to segment structure for managing the company with general managers appointed to each segment. Empowered employees to participate in training for process improvement.
• AI and Automation: Introduced self-pay feature in myAPP and CPAP self-scheduling feature. These initiatives simplify patient experience and streamline work.
• Clinical Relevance: Investing in adherence programs and leveraging patient-generated data from in-home equipment to deliver actionable insights.
• Organic Growth: Realigned sales organization under new Chief Commercial Officer, implemented sales quotas, and focused on resuming growth in Diabetes Health segment. Commenced diagnostic review of Diabetes Health underperformance and made operational changes like remodeling patient outreach program.
• Balance Sheet Strengthening: Reduced debt outstanding by $170 million in last year, including $50 million in Q4 2024. Net leverage ratio stood at 2.8x at year end 2024. Exited non-strategic product lines, including selling custom rehab assets and reaching agreement to sell incontinence assets, with plans to divest additional non-core product line in 2025.

Segment Performance

• Fourth Quarter 2024:
  • Revenue was effectively flat vs prior year quarter but beat midpoint of Q4 guidance range by 3%. Sleep Health revenue increased 3.4%, Respiratory Health increased 1%, Wellness at Home declined 0.8%, and Diabetes Health declined 7.3%.
  • Adjusted EBITDA contracted 2% from prior year quarter but was well above high end of guidance range; adjusted EBITDA margin was 23.4%, modestly narrower than prior year quarter's 23.8%.
  • Free cash flow was $73 million in Q4, up 10% from prior year quarter and well above high end of guidance range.
• Full Year 2024:
  • Net revenue was $3.26 billion, grew 1.9% vs prior year. Sleep Health grew 4.5%, Respiratory Health grew 6.0%, Wellness at Home grew 1.9%, and Diabetes Health declined 6.9%.
  • Adjusted EBITDA was $688.7 million, up 2.7% from 2023; adjusted EBITDA margins were 25.8% for Sleep Health, 30.7% for Respiratory Health, 9.9% for Diabetes Health, and 12.3% for Wellness at Home.

Guidance

• Full Year 2025:
  • Expected revenue of $3.22 billion to $3.36 billion (negative 1% to positive 3% growth).
  • Expected adjusted EBITDA of $670 million to $710 million, with adjusted EBITDA margin approximately 21% (in line with 2024).
  • Expected full year free cash flow in range of $180 million to $220 million.
• First Quarter 2025:
  • Expected revenue to be down between 3% and 4% vs Q1 2024.
  • Expected adjusted EBITDA margin of 16% to 17%.

Risks

• Actual results could differ materially from forward-looking statements due to a number of risk factors and uncertainties discussed in the company's annual and quarterly SEC filings. These include potential market changes, competitive pressures, and regulatory uncertainties.

Question and Answer

Q: Can you talk more about the conversations you've been having with carriers over additional capitated arrangements? Specifically, are we at a point yet with the Humana arrangement? You can kind of dig demonstrate the payors, clinical outperformance, reduction in admissions or other data to support more incremental adoption of those capitated programs?

A: Yes, thanks for the question. I'll first start with that. So, two parts. We have ongoing conversations going with a variety of proposed capitated arrangements in our pipeline that are progressing well. In terms of the data and conversations with Humana, that relationship remains very strong. We meet regularly and review our performance, including some of the data about how we're managing their patients. And they've been very complimentary about the performance that we're having.

Q: If you can just squeeze one more in real quick. You noted revenue cycle and inventory measures as well as normalization and DSO following the change outage. Can you talk more about your kind of working capital outlook? How much cash flow improvement we can expect from your various efficiency initiatives and timing to reach those targets?

A: Sure, Ben. Well, first I'd say, we're incredibly pleased with our free cash flow performance in 2024. Really all levers of working capital have made progress. Now, on the DSO front, certainly we were handicapped by the change out earlier in the year, but revenue cycle in AR is starting to normalize following that impact. So, we expect same or better DSOs over the course of 2025. On the payables front, we had some significant move in payment terms throughout the course of the year. Now, certainly we're not expecting all that to recur in 2025, which is why you'll note at that at the midpoint, we're committing to $200 million in free cash flow. And then on inventory and CapEx, Suzanne talked about our new Chief Operating Officer that joined us very recently. We're thrilled to have him and the team that he's brought with him as well as the rest of the folks that are here at adapt and he leads every day, and we're making demonstrable improvement in inventory management and CapEx management.

Q: On the guidance for this year, you talked about the 40 bps drag due to the disposal of assets. That’s just the assets in the fourth quarter and not the planned disposal of one additional line in 2025, correct?

A: Yes, you got it.

Q: And then on the Diabetes business, I’m curious what you’re thinking about for the contribution to 2025 guidance. You’ve got somewhat improving trends in pumps the last several quarters. I’m curious how that progressed during the fourth quarter? And then also very obvious improvement in CGM. Curious what you’re baking in to the guidance this year?

A: Sure. So for pump and pump supplies, in the third quarter, we reported some modest growth for the first time over the prior year by the tune of about $1 million, it might have been $2 million. In the fourth quarter, it was about the same. We were down $1 million, but effectively flat. So I think as it relates to pump and pump supplies, we’re at a stable revenue jump-off point and we do expect to start showing some modest growth in pump and pump supplies. As it relates to CGM, which is the largest part of the Diabetes segment, we said last quarter that we’re not going to commit to growth in that segment, frankly, until we’ve proven it. We don’t want to get too ahead of ourselves. There are a lot of moving pieces. It’s a big business. We are making progress and we intend to do that for the balance of 2025. But we’re not getting ahead of ourselves. We’re not committing yet to growth in the Diabetes segment until we’re able to prove it.

Q: You mentioned revenue cycle and inventory measures as well as normalization and DSO following the change outage. Can you talk more about your kind of working capital outlook? How much cash flow improvement we can expect from your various efficiency initiatives and timing to reach those targets?

A: Sure, Brian. So regarding free cash flow, yes, at the mid, we are showing about a $35 million less free cash flow in 2025. I mean, really, that’s a result of the payment extensions, payment term extensions that we talked about in 2024. We did a lot. We really moved the needle in important ways there. But to do that a second year in a row, it’s just not possible, frankly. And so we’ve adjusted that free cash flow expectation for that reason. I mean, I think to the ups on free cash flow, look, we’re going to have considerably less interest in 2025. I mean, we’re making significant progress there. And this is the first quarter and the fourth quarter in a long time. I mean, interest expense was under $30 million [ph]. And we intend to keep going and we intend to continue to fuel the cash flow machine that we’re building here. I’d say, in terms of margins, look, we feel that we put out a very appropriate guide. I mean, certainly, if we can get revenue going and growth going in some of these areas of the company and that will help contribute and should flow through at higher margins. But it’s early in the year. We’ve made some key investments. There’s a lot of new people here in the company and we think they’re all incredibly talented and they’re going to do great things, but we just got to let that play out a little bit.

Q: Can you, Suzanne, just talk a little bit about the changes you’ve made there, the reworking of the resupply outreach program and then process of rebuilding that trust from the referral standpoint?

A: Sure. Thanks for the question. So we started with the new leadership team. We put in a very experienced operator, Gary Sheehan, who was the CEO of his own company and then did some remarkable work here at Adapt. So he brought that HME thinking, if you will, and structure and organization to the business. So there was a lot of just great blocking and tackling and getting back to the basics of how you run a business that he brought on early in Q4. In addition, at that same time, shifting the resupply business over to Matt Cox in Nashville with our Sleep Resupply. That engine was well – had a good foundation for us to put in the Diabetes business. And what I mean by that is that team understands that patients like a variety of different outreaches. And we had in the former diabetes resupply business allowed our processes to get out of control where we were excessively contacting patients and not providing the right loop back, if you will, information to how to reach us back, but rather just continuing to reach out, which caused frustration on their end and there was a lot of attrition. That has stopped. And it was remarkable to see how quickly that bleeding stopped. But more importantly, with the right outreach program, how we were able to win back patients fairly quickly within the quarter. So I’m incredibly pleased with the expertise that that team down in Nashville has been able to do. On the – so that’s around attrition and retention. On the new starts, our new sales leader, Graham Ward, came in, has focused the team on better selling techniques, but more importantly, has partnered with our very large HME team and has taken a One Adapt approach where they’re going in and selling our value prop to hospitals, improving the way that we communicate about what we need for a good referral. Sometimes we were getting information that we just couldn’t process. And so that team has been retrained on how to get the appropriate information so that we can move that referral and get that patient the product that they need. So that team is partnering the 50 or 70 or so salespeople with our several hundred HME team and they’re now out there in force together. So on all fronts, both on the new starts, the resupply and then the leadership under Gary, I’m pleased with the progress of just basic blocking and tackling and strong execution.

Q: On this purchase versus rental situation, I just like, I'd like to dig in a little bit. Why is it happening? What is happening? What segment? It looks like, if I understood the commentary correctly, you've got something in the ballpark of a, I don't know, maybe $25 million, $30 million impact in Q1 revenue and then I assume that revenue starts coming back in Q2 and beyond. But just hoping you could dig in on that one a little bit.

A: Sure. Eric, it's Jason. Well, firstly, it is really focused in our sleep business. I mean all components, across all product lines. I mean they're reimbursed differently for different reasons. I would say, that as technology has evolved over time, components that in the past might have been separatable, but as tax improves, they're really now core to the pieces of equipment, that's changed the way, not the way that we get reimbursed, but does change the way that we account for that revenue. And so, in sleep, as an example, as you know, most products are appreciated over about 13-month cycle. And so that's what we're looking at here, it is really changing that mix. And so, the revenue, you've got that couch correctly at about $25 million to $30 million top line. We really expect that to be delayed. So, it'll be a bigger impact in the first quarter, it'll wane in the second, the third and over the course of the year until we pass the 13-month cycle.

Q: I was hoping we could get a final tally on the impact of 75/25 for the year and the fourth quarter. And just confirming that or checking that there's no other reimbursement or regulatory changes, things out of DC, post-PHE impacts that are material to 2025 and beyond or if there are, what might those be?

A: Sure. So, we previously discussed about a $25 million top-line and bottom-line pressure in 2024. We came right in that area for the fourth quarter, frankly, just due to more revenue activity than the other quarters in the year that represented close to 30% of that pressure in the fourth quarter. And so as we look at 2025, we would frame the reimbursement environment as stable. There was a demi post-fee schedule increase awarded in early December that went effective in January of this year. That's accounted for entirely in our full year guidance. And then across the fair landscape, just normal course operations. We're working on, contract by contract to get reimbursed what we think we're, we think deserves reimbursement. But overall, we view it as very, very stable.

Q: You had a competitor that recently alluded to a change in one of their capitated contracts, an expected change. That seems like a bit of a headwind to them. You've just extended the Humana deal and have announced some other wins. You sound very happy with them. I'm curious, are there any, is there any color you could provide on the renewal here in terms of, pricing concessions, term changes, limitations, expansions of products or states? Is there any update or was it pretty much a we like what we're doing, we're going to keep doing it for longer agreement?

A: Yes, Eric, I don't know that we have comments on any of our competitors and their contracts. I will say for us, the pipeline continues to be robust. We got a full dedicated team that focuses on, selling the value proposition of these arrangements every day of pricing them, of tracking, utilization management. We have built a real, core capability here at AdaptHealth and we're not accounting for any new wins per capitated arrangements in our 2025 guidance. However, we are hard at work at it.

Q: Just wanted to start on diabetes. I think you've commented on kind of the new starts and resupply sales dynamics already. Can you just talk a little bit about that other factor you called out in 3Q around pricing pressure from the shift to all pharmacy for certain payors? Just wanted to know if that was in line with your expectations for the quarter, and if we should see that continue at a stable rate into 2025 absent any other expansion there.

A: Sure, Kieran. I mean, if we look at 2024 as a whole, payor reimbursement for diabetes when largely as we expected. We spoke about a couple of key states that within their Medicaid agencies made determinations on reimbursement and that again played out as expected. I think as we stand here today, we believe that any shift to, any kind of shift to pharmacy reimbursement will be muted versus what happened last year. But certainly as we hear policy change, if and when it occurs, we'll be sure to update that in our guidance. But as we stand here today, we feel very good. It seems like a stable environment.

Q: And then just on that sales first – rental dynamic, if there's any color puts and takes you can provide around how we should think about 2025 growth there coming off some, a few quarters in a row of really strong underlying demand. Just want to understand how you're thinking about kind of the range of outcomes in fleet for 2025?

A: Sure. Kieran, I mean, we just introduced our segments. I mean, we're not in a position to guide segments in any way. I mean, what we can offer for perspective when you look at the enterprise growth for 2025, we do expect compression in diabetes. We intend to do better. But that is what we have modeled in our assumptions. We do expect respiratory and wellness at home to produce some modest, but compounding and consistent revenue growth each quarter over the prior year. And, we do expect sleep to make up a difference from diabetes to the enterprise. So that's what we can offer. We're looking forward to a solid year in sleep any other site.