Good day, everyone, and welcome to today's AdaptHealth Third Quarter 2023 Earnings Release Call. At this time, all participants are in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions]. It is now my pleasure to turn today's call over to Richard Barasch, Chairman and Interim CEO. Please go ahead.

Good morning, everyone. Thank you for joining us today to discuss AdaptHealth's third quarter performance. 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 2023 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. AdaptHealth Corp. should have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this call, the company will reference certain financial measures, such as EBITDA, adjusted EBITDA, and free cash flow, all of which are non-GAAP financial measures. This morning's call is being recorded, and a replay of the call will be available later today. We are pleased with the results of the third quarter. Powered by our Sleep business, we generated 6.3% growth over last year, leading to record revenues for the quarter. Equally important, we generated cash flow from operations of $98.8 million and free cash flow of $21.7 million. Adjusted EBITDA fell short of our expectations largely as a result of unplanned delays in the implementation of the Humana contract. Jason and I will get into more detail on why this happened, but these results do not reduce our optimism that this will be a profitable contract for AdaptHealth nor does it diminish our enthusiasm for more enterprise sales of this time. Other than this contract, we would have met our expectations for revenue, adjusted EBITDA, margins and cash flow in the quarter. Our sleep product line continues to…

Thank you, Richard, and thanks to all for joining our call today. Let me begin by reviewing our third quarter results. We achieved record revenue of $804.0 million, an increase of 6.3% over the third quarter of 2022. Other than the Humana details that Richard described, this quarter met our expectations for top line growth and adjusted EBITDA, and cash flow exceeded our expectations. Our total sleep revenue of $315.4 million increased 17% against a year ago, driven by PAP equipment setups and increasing resupply. Our new PAP equipment starts were consistent with our expectations in the third quarter. Our PAP resupply business achieved record order volumes, our resupply census now totals over 1.5 million patients and our electronic ordering utilization broke company records. Respiratory revenue of $151.1 million increased 8% over the third quarter of 2022. As we continue to revamp our diabetes product category, CGM census was up 4.3% year-over-year, resulting in flat CGM revenue. As expected, pump and pump supply revenue was down $9 million year-over-year as our tube-based pump volumes remain under pressure from tubeless pumps. We expect this pressure to continue into the fourth quarter. As Richard said, we are bolstering our sales force and focusing on growth in the government sector. Outsized growth in our sleep product category largely offset a shortfall in diabetes and a modest increase in operating expenses. So overall, except for the unexpected losses on the Humana start-up, our top line and bottom line results were in line with our expectations for the quarter. The primary reason for the shortfall on the Humana contract was a delay in patient transitions and corresponding capitation deductions, resulting in a $10 million top and bottom line miss against our expectations. It will take longer than originally expected to transition to all patients, but…

Thank you. [Operator Instructions]. And we have our first question from Brian Tanquilut with Jefferies.

Good morning. You've got Taji on for Brian. Thank you for taking my question. So going back to the Humana contract, I really appreciate the color on the updated implementation timeline. But as we think about the profitability ramp, maybe you could provide some detail around your expectations around that and maybe outline the levers that will drive profitability at an accelerated rate?

Thank you for the question. We're delayed. We're talking about that. But we think once the transition occurs, we're going to hedge them more had to a situation where the profitability of the contract is more consistent. We are ramping up our efforts to transition this quarter. It's likely going to take us through the beginning, perhaps next quarter, but we feel very good that once that happens, we will resume the contract as we had originally planned it.

And Taji, this is Jason. I would say that at a unit economic or a patient level from this stage forward profitability as a percent will ramp very rapidly. The reason for that is, a cap deduction on, let's say, an oxygen patient, the allowables, the fee schedules for that patient is around $120 a month. So for a full quarter, you got $360. You got thousands and thousands of patients on that oxygen allowable from competitors that still need to be transitioned. So as each and every one is transitioned, that entire amount is -- it comes back as CAP [ph] revenue for us, and it drops 100% to our bottom line. So we do expect a good ramp from this stage forward as we continue staying focused on transitioning patients.

Appreciate the detail there. Just another follow-up. As I think about your guidance, looking at the midpoint, it implies a margin step-up in Q4. Just curious, the different puts and takes that are going to help you get that margin accretion in Q4?

Yes, sure, Taji. So firstly, we do historically enjoy a step-up in patient demand, particularly in our resupply categories. As insurance plan changeovers that occur in January as well as deductible resets, patients are hoping to get in front of that and stock up the resupply they need to carry them through the end of the year and into the New Year. So we are expecting, in our resupply lines, specifically sleep and diabetes, to be up over $20 million sequentially in Q4 from Q3. We expect that to flow at our typical purchase margin, call it about 40% of that, stepping down. So that's the first sequential step-up in profitability in Q4. The second, Humana, as we said, kind of patient-by-patient. As we are transitioning patients, we do expect a material step-up in CAP payments and that bottom line that we spoke about as we've made key investments just over the last several weeks in additional resources and capability to ensure smooth patient transition.

Great. Appreciate the time.

And we have our next question from Matthew Blackman with Stifel.

Good morning, everybody. Thanks for taking my questions. I've got two 2-parters. And maybe, Jason, if I could just start with you. Just curious to frame the guide down on revenues. How much of it was diabetes versus the Humana contract delay? And then the same impact on EBITDA? And the second part of the first question is, did the Humana contract disproportionately impact any specific franchise? And does it impact any specific franchises in 4Q as we think ahead? And then I'll wait for the follow-up.

Yes, sure, Matt. So the first part of that question is the vast majority as we look towards Q4 is Humana-related. Diabetes, we did expect out of CGMs a little bit more in the third quarter, so we fell a bit short of that. So certainly, we're rolling a touch of that into Q4. But again, the vast majority of this was Humana-related, just rolling the timing. And you've got the compounding effect going into the fourth quarter. And for the second -- can you rephrase the second part of your question?

The Humana -- and when we think about the revenue…

How the franchise…

yes, does it disproportionately impact any specific franchise?

Well, I don't know that I'd say it impacts any franchise in terms of the guarding power and the go-forward. I will say that when you think about the second quarter revenue that we earned from the 33 states and the District of Columbia, where we won the Humana HMO contract, there was substantial revenue earned within the second quarter prior to the contract going into effect. And so much of that revenue was in the rental lines, specifically respiratory and then a little bit in PAP sleep and HME. And so starting July 1, 100% of that revenue is eliminated, right? It's no longer a fee-for-service revenue that will go into Humana. And it converts to a patient per month revenue-wise. Of course, you've got the new patients coming on that also generate PMPM, but it does create a timing disconnect of your dropping out top and bottom line rental revenues. And until you convert the competitor patients to bring that into the census, you're left with this gap that we're focused on today.

Got it. I appreciate that. And then second question, part one. Can we zoom in a little bit more on the diabetes franchise? And I appreciate some of the color you gave us on the pump and CGM franchises. But just what are you seeing in terms of new patient starts and attrition? Is there anything that stands out? I think specifically on the attrition side relative to historical trends, just given all the noise we're hearing with GLPs. And then the second part to that question is, what does have to happen for you to be able to push more aggressively into the pharmacy channel? Are you specifically horse-trading anything with payers? And to the extent that this does ultimately play out, is that patient worth a little bit less from a revenue and profitability standpoint through the pharmacy channel versus the DME? Just help us think through that opportunity and what sort of the moving parts are. Apologies for the long-winded question, but thanks.

Okay. This is Richard. First off, we're not seeing any attrition and any effect in diabetes relative to any perception of GLP-1 utilization. The issue that we have been dealing with is the shift in channels more than any attrition. What our strategy is to work in the pharmacy channel with payers, but the key to that will be to add value in the way that we generate data for the utilization of the payers. We believe that both manufacturers and payers will care about this and will help us to improve our margins in the pharmacy channel.

Yes, Matt, I'd add a little color. Certainly, at the top and bottom line financials on a unit economics of a pharmacy patient is typically less than the traditional medical benefit or DME channel. But as Richard said, we see tremendous value in aggregating patients and covered lives within diabetes, In Richard's prepared remarks, he spoke about the first steps that we've taken this quarter in actively monitoring CGM data produced from devices of our patients. We have deployed certified diabetes coaches with that data, engaging with patients. Initially, we really focused on sensor and overall utilization. And so what are the reasons that a patient was set up last month, and you'd expect a new sensor to be applied in the first 10 to 14 days, depending on the manufacturer. But a month later, we're not seeing the data communicated on that CGM. And so we're working hand-in-hand with those patients, and we're learning a lot about patients that are on initial setup that might not be in compliance. So compare this to the capability we already have with over 350 sleep coaches in our business that all day, every day are monitoring data produced from equipment and these devices to help patients along their journey with resupply. We intend to do more there, additionally monitoring A1c levels, hypoglycemia levels, just the rich level of information that's produced from these CGMs. We don't think that needs to be a medical benefit channel strategy or a pharmacy channel strategy. We think it's an all-encompassing diabetes strategy.

Got it. Thank you and apologies again for the chunky questions. Thanks so much.

[Operator Instructions] And our next question comes from Pito Chickering with Deutsche Bank.

Hey, good morning guys. So I apologize for another question on Humana. Maybe I'm just being dense here. So for that, I do apologize ahead of time. But is a capitated arrangement and you capture the patients back to competitors in order to build PMPM, and that's where you sort of mismodeled. So if I understand it, to get the CAP payments, you have to go recap this payments back within Adapt. I'm just saying like how are you able to shift those patients? Can you do that without patients consent? Patient perspective, if provider for one or two years, I guess, why would they want to change?

Sure, Pito. Good question. Well, firstly, if you've been the DME provider for a number of years, you absolutely will not want to change. However, as part of the mechanism of the contract, those competitors in these 33 states in the District of Columbia as we stand here today are not authorized. I mean, they're out of network, right? They're not authorized to build fee-for-service for these patients. On the rental lines, however, that's really where the nuance is. The lifting and shifting a patient is -- it is more complicated than we anticipated. Now we, in some cases expected just either better or more thorough documentation maintained by competitors that just isn't there. And so in that instance, that requires us to work directly with the patient and with the patient's provider to work backwards, if you will. Like an oxygen patient tracking down the saturation testing to support the therapy and the referral. And so without getting into just layers and layers of detail, that is an example of what needs to happen in order to transition those patients. But we have invested in additional resource and capability just in the last several weeks, and we are already seeing ramp week-over-week in our patient transitions.

Okay, fair enough. And then shifting to diabetes, it's going to be sort of multipart, so I apologize again. What percent of revenues in diabetes are CGM versus pumps at this point? What's the breakout between commercial and Medicare sort of within the segments? And if I look at CGM, what did Medicare CGM grow this quarter, what did commercial CGM grows this quarter? I'm trying to bridge DexCom's U.S. revenue growth sort of what you guys saw in the Medicare book of business?

Sure, Pito. Yes, that's a complicated question. I'd say firstly, the delineation between pump and pump supplies versus our CGM business. We've been on record saying that pump and pump supplies was about $160 million of revenue last year and that we believe it will be about $120 million of revenue this year. That's the $30 million to $40 million compression we've been talking about, just that headwind created by the med tech and the tubeless based pump on the market. The rest of the business is CGM business. As Richard said in his prepared remarks, government payers made up now 79% of that census. So that's up another two full points sequentially from the second quarter. I mentioned that CGM census was up 4.3% in the third quarter and resulted in about flat revenue. And so what you're seeing there is continued but less reimbursement pressure created by a movement of traditional government payers and the medical benefit channel versus commercial. So as we're taking care of fewer commercial patients in exchange for taking care of more government patients, we will continue to see a reimbursement headwind. But for this quarter, our volume was enough to offset that pressure.

Okay. Just specifically looking at CGM Medicare. I guess, how much did that grow -- that segment grow year-over-year?

It was up about higher single digits, and then offset by lower single-digit commercial. And then you've got the rate equation to get you to about flat revenue.

Okay. So from a market share, again, only focusing on Medicare, ignore sort of commercial MA for a second. Do you think you're gaining or is losing share within the Medicare CGM market? Thanks so much.

Sure. We are gaining patients certainly. I think it's tough to delineate are we gaining share or not from that. But certainly, we're gaining patients. We are very aggressively recruiting new sales reps for really selling CGM and other diabetes products. We're really selling CGM in just key markets, key geographies. We spend a lot of time thinking through the data over the last two quarters about where we want to go strong in adding sales reps. So we do expect that government business growth to resume in the fourth quarter.

Great, thank you so much.

We have our next question from Richard Close with Canaccord Genuity.

Yes, thanks for the questions. Jason, I'm just curious if you've reaped all the benefits from the system upgrades and restructuring from the last couple of years. If you can give us an update there?

Sure, Richard. I would tell you that from the last year specifically, yes. During the third quarter, we have met the earnings commitment, the cost-out commitment of $25 million in year for 2023 and $40 million annualized. So that program, we put a bow on that. The final reductions were made in early September, and so those dollars will start flowing. In terms of the overarching ability to get cost out by leveraging technology. We absolutely believe there is more to go. We've made reference in the last 90 days of when we guide in 2024 -- or for 2024, we will expect to have a commitment on cost management. And as you said, it's a result of these technology investments that we've made as well as the heavy integration work that we've been focused on throughout the year.

Okay. That's helpful. And then with respect to the strategy on expanding enterprise sales. Can you just go maybe more in detail on that strategy and potentially sizing the opportunities there?

Yes, sure. This is Richard. The traditional Adapt sales model has been an individual sale generated by a referral from a provider which results in a prescription, which results in a fulfillment of a prescription. So we're dealing with literally millions of individual transactions. In enterprise sale, like what we are doing with Humana, aggregates patients in one place. And the issues that we've got with Humana, which by the way are going to be great learnings and just want to reemphasize that our relationship with Humana is in great shape of working together on all these issues. So I made that very, very clear. But by having a large relationship with a payer or a hospital system to aggregate all of the -- in a particular category, like CGMs, like PAPs, like respiratory, that we can achieve savings for the system, the most important -- most importantly, reduce friction by having a set of parameters that are not individual prescriptions being fulfilled by individual providers. So we think the market is large. We think every payer is a potential customer for this. We think that every health system is a potential customer for this. We're generating a pipeline, even in a very short time, that we're very happy with. And quite frankly, we expect to see a lot of good results in this category in 2024.

Great, thank you.

[Operator Instructions] And our next question comes from Joanna Gajuk with Bank of America.

Good morning. Thanks so much for taking the questions. I guess a couple, I guess different follow-ups, if I may, I guess coming back to diabetes. So I guess this quarter sounds like slightly lower than expected down 8% year-over-year in the quarter. And previously, you talked about kind of flat for the year, do you still expect it? Or is it more kind of down slightly for the year? And I guess for next year, how should we think about diabetes revenue? I guess, previously, you talked about a slight growth. And then I guess, as it ties to your previously expressed long-term outlook for that business growth. Any changes there?

Hi, Joanna, thanks for the question. This is Jason. I'd say, firstly, on the pump and pump supply revenue. Again, we expect about a $9 million or $10 million year-over-year headwind in the fourth quarter. As we think about '24 on pump and pump supplies, and I'll get back to CGM in a moment. I mean, I think we need to look towards the pump manufacturers insulate, but there will be five product that is continuing to take share. And we are indeed a distributor of OB5s [ph] on our pharmacy channel. So we do intend to continue to grow that. Medtronic and Tandem are continuing to come to market with upgrades to existing products. And all of that in the mix, we do think that pump and pump supplies will be another headwind in '24 over '23, but not as much as it was this year, so perhaps half. So that's still our expectation. In terms of CGMs, year-to-date, we're -- we grew about 3% year-over-year. Again, that's short of our expectation of where we want to be. We were flat in Q3, planning about the same, maybe up a point or two in Q4. But we do expect the effect of the big investment in Salesforce to start yielding results as we get into '24. I think it's a little early for us to comment on specifics of what we think CGM growth will be. But I do think it's safe to say with the large investment we're making, we do anticipate a return to growth for CGM in 2024. And that's the data that we're able to share today.

Okay. That's helpful. And I guess, sleep, obviously, much better, but I see tough comps for next year. So I guess, how should we think about the sleep business into next year when it comes to growth? Because I guess this year is shaping up to be a mid-teens or maybe even better for the year.

Yes, absolutely, Joanna. I would say that as you think about the full year, the first half, in particular, we'll have a tougher comp, particularly on PAP equipment, as we had record setup levels in the first quarter as well as the second quarter of 2023. Due to that 13-month, the reimbursement cycle, those patients will come off of the rental reimbursement However, they will come into our resupply reimbursement, and we're continuing to grow that double-digit year-over-year. So we certainly expect sequential growth in our census as we go from here until through 2024.

And if I may, on the sleep business, so I guess you talk about some surveys you've done on the GLP-1 use by CPAP patients. And you did say something to the effect of potentially could at some point, I guess is the utilization of these drugs increases meaningfully could impact that business. But any thoughts in terms of how you think it might change your long-term growth outlook for that business versus how you were thinking about this previously? Does it change at all? Or at this point, you kind of still expect similar growth when we look out, I'm not talking next year, but longer term. Thank you.

I think what I tried to express is that there's a lot of speculation from a lot of people, including something that came out from Bank of America, which was the stat about the 3%, which we thought was incredibly good for thinking about the growth of our business going forward. But we just don't know. We just don't know how fast the adoption with the adherence of the adoption of GLP-1s is going to be. And we do know that, if there are fewer people who are obese, there are likely to be, on the margins, some level of fewer people who are going to use PAP therapy. What we need to do is to -- even if we assume that's the case, what we need to do is take steps internally to make sure that we don't lose from any reduction in TAM that might occur. And we've got tools. We're the largest provider of sleep equipment. So we start with a great position, of great strength. We can afford to keep investing in technology to get our costs down. We've increased share every year over the past several years. The investments that we made in 2022, as painful as they were at the time, are yielding have yielded benefits to us. We also are highly focused on patient adherence and retention, and there's a couple of different flavors to it. One is we want to keep these people as patients that we can keep resupplying to. But we also believe that we can, by increasing adherence, increased downstream results for these patients and reduce downstream cost. So all of the things we're talking about are geared towards keeping our business intact and growing well. but also using our size and our data capabilities to improve outcomes for our members.

Thank you. Appreciate the detail.

And we have our next question from Eric Coldwell with Baird.

Okay. Thanks. Just a technical on diabetes. I think you said pumps were down $9 million and CGM revenue was flat. But I'm seeing a $13.4 million year-over-year revenue decline. So I'm curious where the additional $4.5 million came from?

Yes, sure. Just a little bit of supply. So these are like traditional, like BGMs, test strips, wipes, things like that. That's continuing as expected to be just a smaller part of the business.

Okay. And then on PAP, the comments on first half '24 tough comparison on equipment. Are you indicating simply lower growth versus the tough comparison? Or actual revenue decline on the equipment side of PAP as the 13-month rentals start to phase out?

No, the former. We're just expecting, the 17% growth that we achieved in this quarter, right? I mean I don't expect we're putting up 17% growth in Q1 into next year on already very high comps. That's all we're saying, Eric.

Okay. And then on Humana, again, I think it was 1.1 million, 1.2 million lives that you inherited with the 33 states and D.C. You had some of those patients previously, and you're not doing all of the HME-DME for those patients. But if you'll bear with a difficult-to-ask question, I'm trying to get a sense on how many of those Humana lives that you have access to, how many of those people are actually using DME that you are going to be the exclusive on in those states? How many of those patients were you previously serving? And what is your penetration on the incremental opportunity? I don't know what the number is, but let's say just for a baseline. If it's 100,000 lives that you picked up incrementally, what percent of that have you actually onboarded at this point, so you're fully operational on?

Yes. Good question, Eric. A couple of things to offer. Firstly, utilization is in line with expectations so far. So that means in the 1.2 million patients or more we classified that as. And the number of them utilizing equipment, and then kind of the size and shape of that equipment by category is largely in line with what we modeled with the data that was shared as part of the award, and within our expectations. I would tell you that the number of patients is higher than anticipated. I mean, I know Humana reported, I think, last week, they're showing huge growth over 2022. So we've got some of that coming on as well, so just more patients than anticipated overall which frankly is a very good thing. It didn't help us from a timing perspective as it just creates more and more patients that we need to push through with the capacity we've got on transition. But overall, that's a very good thing as we expect to continue to grow with Humana. The last thing I'd say is in terms of the pace of that transition, I mean, we did expect to buy out equipment as well as the supporting records that came with that from several competitors. But frankly, some of those deals did not materialize. And so that means we need to work patient by patient on transition. So again, we're very confident that we will get through the transition in the early part of 2024, but that's a little more color on what's created more patients to transition than we expected.

[Operator Instructions] And at this time, I'm currently showing no questions in the queue. I'll go ahead and turn the call back over to today's presenters for any closing remarks.

Hi, this is Richard. Thanks. First of all, thanks to everyone for their very good questions that helped us articulate what we think are the very positive things that are going on in AdaptHealth. We look forward to more interaction and thank you for your time this morning.

This does conclude today's program. Thank you for your participation. You may now disconnect.