AdaptHealth Corp. Q3 FY2025 earnings call

• Last year, AdaptHealth realigned its business into 4 reporting segments to focus on patient service and operational efficiency, leading to mid-single-digit organic growth in each segment this quarter. - In Q3, the company completed substantial operational improvements, with revenue of $820.3 million, up 1.8% from the prior year quarter, and adjusted EBITDA of $170.1 million, up 3.5% from the prior year quarter, with an adjusted EBITDA margin of 20.7%. - Reduced debt by $50 million during Q3, bringing year-to-date debt reduction to $225 million, with net leverage ratio at 2.68x. - Completed implementation of standard field operating model and organizational structure, consolidating from 6 to 4 regions, and consolidated call centers into a new national contact center with a single patient services technology platform. - Actively pursuing and piloting AI and automation to drive service excellence and operational efficiencies, with automation reducing reliance on offshore labor by approximately 5% in Q3. - Working on a large capitated agreement with a large integrated delivery network, requiring approximately 1,200 employees, 30 locations, and 300 vehicles, with the partnership off to a strong start.

In the third quarter, AdaptHealth's revenue was $820.3 million, up 1.8% from the prior year quarter. Organic revenue growth was 5.1%. The Sleep Health segment had net revenue of $354.8 million in the third quarter, up 5.7% from the prior year quarter. Sleep new starts were up nearly 7% and set a new record in 2 years, with patient census also reaching a new record. The Respiratory Health segment had net revenue of $177.0 million, up 7.8% from the prior year quarter. Despite softer oxygen new starts, oxygen census set a new third quarter record. The Diabetes Health segment had net revenue of $150.1 million, up 6.4% from the prior year quarter, marking the first year-over-year growth since Q1 2024. CGM census grew for the third consecutive quarter, and pump and pump supplies revenue continued to grow. The Wellness at Home segment had net revenue of $138.4 million, down 16.0% from the prior year quarter, including the impact of disposing certain noncore assets.

• Maintain full year 2025 revenue guidance, expect to come in very modestly above the midpoint. - Maintain full year 2025 adjusted EBITDA guidance, but expect to come in at the bottom end of that range as investing in infrastructure, technology, and labor for the new capitated arrangement. - Maintain free cash flow guidance at $170 million to $190 million. - Anticipate 2026 revenue growth of 6% to 8%, with slower growth in the first half and acceleration in the back half due to the ramp of the capitated contract and asset dispositions. - Expect 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even with early 2026 investments in new capitated infrastructure, and the fully ramped capitated contract to produce at least $200 million of annual revenue.

• CMS' competitive bidding program may lead to industry consolidation if it retains the proposal to limit contract awards, with rate compression not a foregone conclusion. - Government shutdown holds potential to delay the final rule of CMS' competitive bidding program.

Q: Eric Coldwell with Baird asked about the large capitated deal, specifically the transition timeline and impact of a competitor's announcement.

A: Jason Clemens said they are conservative with ramp expectations, focusing on having infrastructure in place before patients arrive, and Suzanne Foster noted distinction between exclusive capitated agreements and preferred provider agreements, stating AdaptHealth will earn business via service excellence.

Q: Brian Tanquilut with Jefferies asked about the market moving to capitation and progress with payers.

A: Suzanne Foster said the capitation model is beneficial for the industry as it aligns incentives for seamless patient handoffs and accountability, and they are working to convince more hospital systems, IDNs, and payers of the benefits.

Q: Richard Close with Canaccord Genuity asked about details of the new contract announced and geographic overlap.

A: Jason Clemens said the new contract has strategic implications, is not as large as the other major contract, but has potential for growth in geography.

Q: Kieran Ryan with Deutsche Bank asked about Diabetes segment details and Sleep segment mix headwind.

A: Jason Clemens and Suzanne Foster provided details on Diabetes' improvement in retention and sales efforts, and that the Sleep segment mix headwind will be mostly comped out by the end of 2025.

Q: Whit Mayo with Leerink Partners asked about 2026 revenue细分 and RAC audits.

A: Jason Clemens said they will unpack 2026 revenue by segment with organic growth expectations and that RAC audits have had no change or impact.