Good day, everyone, and welcome to today’s AdaptHealth Fourth Quarter and Full Year 2023 Earnings Release. 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]. Today’s speakers will be Richard Barasch, Chairman and Interim CEO of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth; Josh Parnes, President of AdaptHealth will join Richard and Jason for the question-and-answer portion of today’s call. 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 the 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 morning’s 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 call – this morning’s call is being recorded, and a replay of this call will be available later today. I am now pleased to introduce the Chairman and Interim CEO of AdaptHealth, Richard Barasch.

Good morning, everyone, and thank you for joining us this morning to review AdaptHealth’s fourth quarter and full year 2023 performance. Stated simply, we had a terrific fourth quarter and ended 2023 with a great deal of positive momentum throughout our business. For the year, our net revenue grew by 7.7% and adjusted EBITDA grew 13% compared to the prior year. This is the fourth year in a row that AdaptHealth grew both top and bottom line, and it’s especially notable that nearly 95% of the 2023 revenue growth was non-acquired. We finished the year with a very favorable quarter, driven by continued strength in our sleep and respiratory product lines and the expected improvement in our Humana contract. It’s also noteworthy that adjusted EBITDA grew faster than revenue, largely as a result of the cost-out program and technology-driven operating improvements. Another highlight of 2023 was a significant increase in cash flow from operations and free cash flow, even absorbing elevated interest rates on the floating rate portion of our term loan. As a result, our net leverage decreased from 3.69x to 3.16x and we expect to be below 3x before the end of this year. We have a favorable debt structure with a good portion of our debt in longer terms at attractive fixed rates. But as we generate further increases in free cash flow in 2024, we will lean into reducing our overall indebtedness. Turning to our product lines, our sleep product line was the primary driver for a full year and fourth quarter performance. Jason will give you more detail, but our top line for the year grew 16%, powered by a 12% increase in our resupply census which resulted in record volumes. Based on reliable industry data, we have yet again increased our market share and…

Thank you Richard and thanks to all for joining the call. Like Richard, I was very pleased with the fourth quarter results. We made significant investments in the business during the year and they are beginning to bear fruit. We will look to build on that momentum across the business in 2024. AdaptHealth's net revenue grew 7.7% over 2022 and non-acquired growth was 7.3% led by our sleep and respiratory product categories. Adjusted EBITDA grew 13% over that same period as we delivered on the cost management program that we announced in early 2023. Cash flow from operations of $480.7 million grew 28.6% over the prior year. Free cash flow of $143 million improved significantly over 2022, led by DSO improvement of 1.5 days and significantly improved CapEx management. Our net leverage ratio finished the year at 3.16 times, down half a turn from 2022. Turning to fourth quarter results: Net revenue of $858.2 million increased 10.0% compared to the fourth quarter of 2022. Sleep revenue of $328.8 million grew 15.2% compared to a year-ago. Patient demand for new PAP equipment was steady and up a touch from the third quarter. New starts for PAP equipment met our expectations. Our adherence performance met our expectations and resupply continues to be very strong. Our resupply census has reached 1.55 million patients with electronic reordering now over 40% of total orders. Not only is electronic reordering easier for the patient but it also drives more efficiency in our operations. Respiratory revenue of $151 million increased 10.1% year-over-year. Our oxygen census is the highest it has ever been, now over 315,000 patients. For oxygen as well as for non-invasive ventilation, industry data shows that we continue to take market share in these important categories. Our diabetes revenue was down 3.8% against the fourth…

Thank you, Jason. And now like to add some color to Jason's remarks on 2024 guidance. We know that one of the risks in healthcare is reimbursement changes and the non-expansion of the 75/25 rate relief masks growth rates that would have been more expected in 2024 considering the tough comparables in sleep and respiratory. Here's how we can improve on these numbers over the base that we've established for 2024 and into the future. We can close on the strategic relationships in our pipeline, none as large as Humana, but certainly large enough singly and in the aggregate to boost growth. We continue to pick up share in the sleep and respiratory categories. We can bring our diabetes category back to market rates of growth, and finally, we can continue to get more efficient. If we accomplish this basic blocking and tackling, we can achieve our target of mid- to upper-single digit non-acquired growth in 2025 and beyond. Before I turn it over for questions, I'd be remiss if I didn't thank our nearly 11,000 employees who are focused on improving the lives of the 4.1 million people who rely on us for needed medical devices and supplies. Operator, please open the line for questions now. Thank you.

Thank you. [Operator Instructions] We'll take our first question from Brian Tanquilut with Jefferies. Your line is now open. Brian, please check the mute function on your phone.

Can you hear me, guys? Can you hear me?

Yes. Yes, loud and clear.

Oh, there you go, awesome. Congrats on the quarter. I guess first question I would ask just for Richard, as we think about kind of like a normalized run rate as we get past 2024, how are you thinking about the growth rate for the business, maybe either by product category or just in totality?

What I said in my prepared remarks is our target is mid- to upper-single digit growth in 2025 and beyond. I don't want to get more specific than that, but I kind of alluded to some of the building blocks, and one of the key issues for us is to bring diabetes back to closer to a market rate of growth, maintain our dominance in sleep and then respiratory as an example, was a pleasant surprise for us this year. We think we have the tools to continue. So we can talk about the broad though. Let's get through 2024 to get to the specifics thereafter.

I appreciate that. And then maybe, Jason, just as I think about the cadence for the year, I know you gave guidance for Q1. Anything to call out as it relates to cash flow in terms of how – any seasonality factors there that we need to be considering? Thank you.

Nothing unusual for 2024, Brian, we should expect approximately a third of our free cash to get generated in the first half of the year and the remainder to be generated in the second half of the year, much like we did in 2023. If you're getting down to the quarter level, certainly q1 is pressured, as we called out. Q2 is historically stronger as there's no interest payments that quarter. Q3 has got interest, so there's a shift there. And then Q4 as usual is the big quarter, as we just demonstrated.

Awesome. Thanks and congrats again.

Thanks, Brian.

Thanks, Brian.

Thank you. We'll take our next question from Eric Coldwell with Baird. Your line is open.

Thanks very much. I have a couple here. First one on pumps, in the past you did give some revenue numbers and headwind expectations for 2023. I was hoping we could get the final tally on pump revenue in 2023 and how much that was down? And then in 2024 what your expectation is for the full year? How much of a – I assume a net headwind still, but maybe not, just hoping you could give us some color on that?

Sure. Eric, this is Jason. So firstly, as we have reported previously, pump revenue in 2022 was about $160 million and we expected about $120 million in 2023. So we came right in line with that expectation. We had briefly talked about a $35 million to $40 million headwind and it literally came square in the middle of that. We think, as we stand here today that the headwind in 2024 will be about half that, so called in the range of high teens to $20 million. We do think that the second half of the year will do a bit better than the first half. The reason for that is, as discussed in the prepared remarks, some of the transition is stabilizing. So in other words, if you were on a tube based pump and you wanted to move to a tubeless pump, you've made that decision already. And then secondly, we are growing our tubeless pump revenue. We had a solid quarter in new starts related to tubeless pumps and for the first time we overcame tube of based pumps in terms of new starts. And so again, it'll take some time for that to work through the system, if you will. But those are the thoughts on pump and pump supplies for the year.

That's great detail. Thank you. And then on the sleep and mid-single digit growth, not a surprise there at all, but I am curious how does resupply or sales growth compare to rental performance in 2024? I would think the resupply would be up stronger than mid-single digit rental, maybe flat to down, but I was hoping to get a little more detail on that if you will?

Yes. You got that exactly right, Eric. We're expecting higher-single digit in the resupply operations as we just continue to increase the average sales price and number of products per order as well as improving our adherence rates. So just continuing to compound that census, so we feel great about resupply in 2024. To your point of rental, our new start growth is strong, patient demand is strong, frankly as strong as it's ever been. Within rental revenue the nuance of the 13-month rental cycle means that the record setups we reported in the first half of 2023 are rolling off of that rental revenue in 2024 and so it's creating just a tough comp. Rental revenue is probably around flat is what we're expecting for the year. But again, this is not anything other than a tough comp period and just larger number of patients rolling off from a year ago.

That's great. And then last one for me. Thank you for all the details here. The efficiencies you've cited in patient CapEx, could you dig into that a little bit? Was there any unusual timing or items in the fourth quarter? And then what are the major structural or thematic changes in your CapEx requirements that perhaps could be sustainable?

Sure. So maybe start with a level setting of 2023 by quarter. In Q1 2023, CapEx represented 12% of revenue. And as reported, that was related to a purposeful stockpiling of CPAPs that we felt was necessary to meet the continued demand in sleep therapies. And then that dialed off to kind of high-10%, mid-10% and then low-10%, 10.3% for Q4. And so that kind of mid-10% range is a good run rate. We think we'll get half a point out in 2024, which is why free cash flow conversion is up half a point. Structurally, what's changing here is technology really related to the Oracle fixed assets and inventory digitalization project that we've been hard at work on for about a year now. That is taking hold. We just went live within the last few weeks in our first sites for HME, and we're finding benefit there of compressing our day's hand on inventory and just getting more efficient about the way we order, how we order, and just kind of what we're comfortable with in terms of min to maxes [ph]. And we expect to bring more improvement throughout the year.

Thanks very much. Nice seeing the good progress here. Congrats.

Thanks, Eric.

Thank you. We'll take our next question from Matthew Blackman with Stifel. Your line is open.

Good morning, guys. This is Colin on for Matt. I thought I'd start by asking for a bit of a state of a union of sorts on the diabetes franchise, particularly on the CGM side. Are you seeing any lift from basal patients, particularly the Medicare, coverage decision that went through last year, or any new centers like the G7 launch? And is the government mix going to stabilize this year? What are your thoughts around that? I know that's still a priority.

Hey. It's a compound question. Let me start. And then this is Richard. I'll turn it over to Jason. We're not seeing the benefits yet from the extensions in Medicare and in some of the other governmental programs. But we think we will in 2024. So that's a pillar of why we think we can ultimately get back to more growth so that we see as upside for going forward. Jason, why don't you repeat? You asked a compound question. Jason's got it.

Yes. I'd say, Colin, as it relates to newer products and those trends we are distributing the newer models for both DexCom and Abbott. They've been great partners and we're continuing to run that transition frankly faster than we had planned for expected. And we think that's a good thing obviously for our patients and then certainly for our economics. I guess I'd say in terms of the government split, we think that we will grow that government census a touch more in 2024. And the reason is the doubling of the sales force is really intended to go after geographies that we've never been in before. And so as you'd expect a lot of data and analysis went into where the business is, what we think these geographies, particularly urban areas will produce. And we're pointed directly at a primary care sale, which happens to be a very heavily government patient population. And so again we do expect to grow in that area in 2024, and particularly in the second half of the year we expect to get back to growth mode.

And then I had one follow-up on the gross margin outperformance during the quarter. Was that primarily a function of the Humana dynamic or any one-time items, or was it just the underlying business and the COGS efficiencies that you've put in place this year? How should we think about that kind of progressing into 2024? Thanks.

I'd say all the above, Colin. I mean, we were just pleased. Frankly we beat on essentially every assumption, every measure. Humana, to your point we have done a good job transitioning patients, and we have gone faster than we committed to, which is resulting in a big improvement in Q4 over Q3. Secondly, in reference to the cost management program when you look across labor, OpEx and G&A, I mean, Q4 is essentially flat over the prior year. And so the company was able to deliver on that that cost containment program and then also deliver what I think is about $80 million of growth over the prior year. So, I mean, it's really those couple of factors that drove the performance in the quarter.

Thank you so much.

Thank you. We'll take our next question from Pito Chickering with Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking my questions. Going back to sleep rentals for a second, I understand the flat growth guidance for 2024 just due to really tough comps in 2023. If I just plug 2024 into a CAGR from 2022, it's about 12%. Is that the right growth we should be thinking about for 2025 for sleep rentals?

Well, I'd say Pito the sleep as a category mid- to upper-single digit as Richard alluded to across the enterprise, we think that sleep growth will continue to be healthy. Once you get to a point that your comparable period is clean, then yes, I mean, both whether it's rental or resupply, it should grow at approximately the same rate.

Okay, great. And then a few follow ups here on diabetes. What percent of your pumps today are tubeless versus tubed? What's the cost difference for patients if they get a tubeless pump and a pharmacy versus a DME? And then where do you think that the pair mix ends the year?

For 2024?

Yes.

Yes. I'd say to take that last part first. It's probably up a point or two. So the 79% that we just reported, we think it's up a couple of points as we exit 2024. Regarding pumps, the tubeless pumps that we are putting out, which are Omnipod 5s as well as a new entry, Beta Bionics, I mean, we're running those through the pharmacy. I mean, we're tapping our pharmacy capability and running those through the pharmacy channel today. So there really is no differential versus like a DME channel because those products are really going through pharmacy.

So what percent of your revenues for diabetes are pharmacy versus DME? And I guess if you're guiding the whole sector to be flat for the first half of the year and the growing loads in the back half the year. Any sort of color on, how would you think about DME growing versus pharmacy?

Yes. I'd say, Pito, we haven't. We're not ready to put out a split of revenue on pumps – tubeless versus pump here, I am sorry, tubeless versus tube-based. But I will say for the quarter our new starts, it was outweighed in tubeless and so that will take some time as you get a pretty long length of stay for pump patients. That will take some time for that to start equalizing. In terms of getting back to growth in the second half, really you got two factors. You got the pump pressures we think will be heavier in the first half and lighter in the second half. And then secondly, in CGMs, we think growth will be lighter in the first half as sales team starts ramping, and then we'll deliver in Q4, so Q3 and Q4. So we think the second half is going to be stronger than the first.

Okay, great. And then sort of – two more sort of quickies here. The other revenues are sort of pretty big driver in the quarter. Can you just remind me what other is? And then free cash flow conversion, is this like the right ratio for the next couple of years about sort of 24% free cash flow conversion versus just an EBITDA?

Yes. On free cash, that’s an easy one. And the reason is we think that conversion from EBITDA down to cash flow from operations and then just better CapEx efficiencies, you’re getting to that same place. And I’m sorry, Peter, the first part of the question was related to…

It’s revenues in other, I guess can you just [indiscernible] this quarter?

Yes. So historically and currently other included items such as e-commerce, hospice, orthotics. So it’s kind of a grouping of various lines of business. Since July, it also includes the PMPM revenue from capitated agreement. And so that’s why you’re seeing a large growth in Q4 over Q3 sequential.

Makes sense. Thank you very much.

Thanks, Peter.

Thank you. We’ll take our next question from Kevin Caliendo with UBS. Your line is open.

Hi, good morning, everybody, it’s Andrea Alfonso in for Kevin. Thanks so much for taking the question.

I actually, just as a follow-up to those last set of questions. I guess on free cash flow, you talked about some of the moving parts there that underlie your expectations for 2024. If you sort of just single out certain improvements like cash collections for example, how do you think about the next tranche there of capturing some of those benefits? And maybe if there are any working capital commitments from the ramp of Humana, how do you balance those improvements against that? And then I had another follow-up question.

Sure. Andrea, good morning. I’d say firstly in terms of DSO and kind of on the AR side of things, I mean, we brought DSOs down considerably over the last 12 months. And as previously discussed, that was really a result of big investment in technology, particularly in claims editor engine that we built as proprietary tech that we own and operate. And that was just a home run of an investment. And that’s really the people and the processes within the rev cycle have brought down DSOs. We are not anticipating much of a shift in DSOs versus the 2023 by quarter. We are however actively investing in particularly the denial management portion of rev cycle. We’ve got big tech and new process going in there and so we’re not ready to talk about it. But again, we’re investing millions and we will expect DSO improvement from that point. But you’re really looking more 2025. When you look at the other areas of working capital, you’ll know inventory a little better job in inventory management over the course of 2023, particularly at the end of 2023. We’re expecting that, whether you call it inventory management or CapEx improvement, we’re expecting half a point better on revenue over the course of 2024.

Thanks. And just again, a follow-up question on Pito’s prior question about the other revenue line. So if I look at kind of that $77 million or so that you reported on the sales line. Is that – how do we think about the cadence going forward? Was there some sort of a capture of an accelerated benefit that’s not expected to recur? Thanks so much for taking my question.

Sure. So that other revenue category, if you look at the third quarter of 2023 sales other, we reported $64 million of revenue, and that’s now up in Q4 to $77 million of revenue. So again, the PMPM revenue from capitated agreements is inside of that category. And so as we far outpace the patient transitions that we committed to as part of a key agreement in Q4, those cap deductions came down significantly. And that’s a top line and bottom line impact. So both good guys. So that’s the predominance what you’re seeing there in that sales other growth.

Thanks so much.

Operator – excuse me, operator, is there another question?

Yes. There is. I apologize. We’ll take our question from Ben Hendrix with RBC Capital Markets.

Hey, thanks, guys. I wanted to just get a little deeper into the Humana contract conversion. Just want to get an idea of where we are in that process. You said you’ve had some good success lately, and getting that ramped up. If you could quantify perhaps the PMPM contribution to that $77 million. And then again, just how that does – how you expect that portion of it to track through the year?

Hey, Ben. This is Jason. We won’t comment much on the economics of the arrangement, but to help out, I would tell you that we have committed to being substantially complete with patient transitions by the end of this quarter or the end of this first quarter. And if we are able to execute on that, you’ll see a fully loaded quarter that we’ve essentially removed those cap deductions. So it’s in other words, kind of a fully loaded quarter. And then you can run the math from there.

Okay. Thank you. And then just to follow up on the diabetes and pharmacy channel shift commentary, if you could describe a little more detail about your efforts and the penetration into the pharmacy channel, what does that look like? And kind of where are we in that process and timing?

We should have something more significant to say about this in the first quarter. We’re working in first quarter call. We’re working diligently to identify appropriate partners to work with us on this. Entering the pharmacy channel is not a small enterprise for us. We’ve got a 50-state pharmacy, but we do need the backup tools and pipes in order to do this as efficiently as some of our competitors. So we are going to, we are, in fact, spending time and resources to get ramped up in this quarter and hope to have something to talk about in a couple of months.

Thank you.

Thank you. We’ll take our next question from Joanna Gajuk with Bank of America. Your line is open.

Hi. Good morning. Thanks for taking the question. So I guess first to follow up on, excuse me, on the – questions around the Humana contract and the other revenue. So there was the $92 million, I guess, revenue in this quarter four [ph], but sounds like there’s still more ramp ups. So the question is, is this $92 million a good starting point or there’s more. And I guess when it comes to thinking about this being a strong quarter overall, was there some sort of pull forward of this revenue from Humana or some adjustments from 2024 into 2023 into Q4?

There were no adjustments or unusual items in the quarter. The $92 million you’re referencing the total other revenue, I think earlier we were talking about the other sales revenue at $77 million. But as we said, Joanna, we expect to be substantially complete with patient transitions before the end of the first quarter 2024. And if we’re able to execute on that, that should give you a good run rate within that sales other category of what we believe is our baseline, our new baseline.

Okay, great. Thank you. I appreciate it. And so I guess just coming back to the performance in the quarter. So you said – you came and EBITDA came in well above your higher end of your range. And you said your revenue that came with higher margin. And obviously the Humana contract and a couple of other things. Any way to quantify any of these things or you would say that they equally contributed to the outperformance?

Yes. A little bit here, a little bit there, a little everywhere. It adds up to some real numbers, I guess. I’d say if we look back at what we said in Q3, we had expected sleep and diabetes sequentially. Their resupply growth to be about $20 million. I mean, it was 40, right. And so you’ve got all the flow through on that. We had various other lines that beat. And like I said, it’s kind of a couple of million here, a couple of million there. Certainly on labor and OpEx, we put out conservative expectations and we beat them. So that was about another $5 million of sequential improvement across labor and OpEx.

Thank you. And another, I guess, follow-up, when it comes to the expiration of the 75/25 rule, which I guess product category will be hit the most. Would it be, I guess, respiratory and steep?

Yes. I mean it would generally fall in line with the size of those businesses, right. So sleep being almost about 40% of our revenue would arguably be impact most. But this is down at an MSA level and actually a product HCPC [ph] level. And so there’s a lot of detail and nuance there. But for a proxy, it’s safe to assume that it spreads across the business based on the size of the products.

All right. Thank you for that. And just talking about, I guess, the government exposure as it relates to diabetes business, right. So you talk about the census being almost 80% and I guess growing from here. So when you talk about these government payer exposure, how much I guess in that bucket is from Medicare fee-for-service versus Medicare Advantage, Managed Medicaid, and also when it comes to these payers, Managed Medicare and Managed Medicaid, are those payers largely in the pharmacy benefit or medical benefit? Is there, I guess, still potential for some movement in some of these payers that are actually in the government bucket, but they have more flexibility versus the fee-for-service? Thank you.

Joanna, I’d say that, I mean, we’re not going to provide a lot of detail of the components that kind of that you’re asking for to make up the total. The reason that we’re categorizing it as government sponsored payers is that we believe that this part of the business is fairly well insulated from the risks that you’re highlighting. And so that’s the reason we’re reporting it that way.

Thank you. Thanks so much for taking the question.

Thanks, Joanna.

Thank you. We do have a follow-up from Eric Coldwell with Baird. Your line is open.

Thanks. I wanted to go back to the reimbursement and regulatory environment. In the recent past, CMS has issued a few private final rules that help rein in Medicare Advantage and Managed Medicaid programs for things like improper denials, unnecessary or improper prior authorizations. Also, CMS is forcing these plans to cover everything covered under fee-for-service, provide faster appeals resolution, and also more transparency. I mean, it would seem like those would all be good guys for adapting the [indiscernible] in payer behavior since this came out and what are you expecting? Thank you.

None that we haven’t seen nothing so far, but your intuition that this is all positive for us is, I think, correct.

Have you incorporated any forecasting of a potential lift or benefit in your guidance? Yes. So anything that happens would be upside potential.

That’s right.

Okay.

Yes. You got it.

Great. Thanks very much.

Thanks, Eric.

Thank you. And we have no further questions in the queue at this time. I would now like to thank everyone for joining today’s call. You may now disconnect your line at any time.