Good day, everyone, and welcome to today's AdaptHealth Third Quarter 2024 Earnings Release. [Operator Instructions] Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. 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 Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2024 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 has 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, adjusted EBITDA margin and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in the presentation materials accompanying today's call, which are posted on the Company's website. This morning's call is being recorded and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Thank you, and good morning, everyone. Thank you for attending our third quarter earnings call. Before we start, I want to acknowledge the extraordinary efforts our team displayed during the recent weather events in the Southeast. Prior to the storms, we contacted more than 40,000 patients from the impacted areas to confirm they had the medical equipment they needed before the severe weather moved in. In advance of the storm, we made sure to deliver oxygen where needed. As a result, there were no material service interruptions. I want to thank the team again for their exceptional performance. Now turning to Q3 results. We are pleased to report another consistent quarter. With results in line with our expectations for revenue, adjusted EBITDA, and free cash flow. Compared to the previous year, revenue was flat with our two larger products, sleep and respiratory, delivering growth that offset a decline in diabetes. Sleep increased 3.5% respiratory was strong, increasing 8.6% while diabetes decreased 11.8%. Rounding out the numbers, which Jason will cover more in depth, we delivered an improvement in adjusted EBITDA margin and had a positive quarter for free cash flow. We completed the non-core asset sale we announced last quarter, refinanced our senior secured credit facility and, paid down another $50 million of debt. As a result, we are now committing to delevering further with a new multi-year target set at 2.5 times net leverage. Over the past quarter, our focus has been on establishing a One Adapt approach to operating this business, which means rolling out standard work, new operating structures, and identifying growth opportunities. Let's start with sleep. According to the American Academy of Sleep Medicine, there are approximately 30 million adults in the U.S. living with obstructive sleep apnea, but only 20% have been diagnosed. This market…

Thanks, Suzanne, and thanks to all for joining our call today. For the third quarter of 2024, we delivered against our expectations for revenue, adjusted EBITDA, and free cash flow. We also made considerable progress in strengthening our financial position, disposing of non-core assets, refinancing our senior credit facility, and paying down debt. During the quarter, we completed the previously announced transaction to sell certain custom rehab assets to a third party. As a reminder, the annual revenue for these assets was about $30 million, so that comes out of our H&E revenue run-rate going forward. We continue to consider alternatives for a couple of similarly sized product categories that do not fit strategically into our core businesses. In aggregate, they represent less than $100 million of annual revenue and we will provide updates as we make progress with those initiatives. Third quarter net revenue of $805.9 million was up 0.2% compared to the third quarter of 2023. Sleep revenue of $326.4 million increased 3.5% over the prior year, in line with our expectations as we faced a very-high comparable in 2023 due to record starts from fulfilling the backlog following a manufacturer recall. For perspective, over the past two years, sleep revenue grew $55.8 million against $270.6 million in the third quarter of 2022, representing 9.8% of compounded annual growth. Although CPAP starts to experience the typical sequential deceleration from Q2 as July and August vacation schedules impact sleep testing and referral activity, we were pleased to once again surpass 120,000 starts. Sleep resupply census now stands at over 1.63 million patients, up another 29,000 from the previous quarter. Our CPAP survey indicated 15% of respondents were using GLP-1s to manage diabetes or weight loss, up from 12% last quarter. Now a year into our surveys, we are detecting…

[Operator Instructions] And we will take our first question from Kevin Caliendo with UBS. Please go ahead. Please go ahead, Kevin Caliendo, your line is open.

Sorry, I was on mute. I apologize. Thanks for taking my question. I just want to go through the diabetes issues a little bit more in-depth. How much of this is related to issues with manufacturers, is -- does it require more collaboration? Is it more of a market where the end-market, what's happening there in terms of moving pharmacy versus DME? Like any help around what's really happening in the end-markets and what's happening with your clients would be would be great.

Yes, Kevin. A couple of comments. No, we have not identified the compression in revenue to any specific issues with manufacturers. In fact, you know, the CGM manufacturers as well as all of the pump manufacturers have been very good parties to work with and good partners over the year -- over the years. I mean, they have supported various integrations of data and technology coming from their devices inside of our four walls. If you've done that kind of work before, you know that that takes frankly, a tremendous amount of collaboration working across different companies. We certainly are continuing to face pressure from the pharmacy channel reimbursement changes. So we referenced that in our prepared remarks. We have not seen this quarter really any shift in major payer activities against what we saw in the second-quarter or against what we saw in the first-quarter. And so even though we do have some pressure to overcome from the prior year, that environment has remained relatively steady. What we are saying is that the new starts that we had expected from adding sales folks, we are not pulling through, frankly anywhere near our expectations and the growth that we believe is there in the market. And then on the recur side, we do have some operational challenges that have been unpacked and we are deploying our sleep resupply operation towards improving. I mean, just a minor tick or two in recur since it represents such an overwhelming part of revenue. If you degrade performance, it can have a big impact and that's what we're absorbing here in the third quarter.

I'd just double down on that to say I think our partnerships with the manufacturers are strong and continuing to get stronger when meeting regularly and I am happy to see that that partnership is taking on a whole new life, so I think that is positive. The reimbursement shift actually -- obviously has been a headwind but with the message today is we should be able to grow through that given what we know about the end markets and we're not growing through it as a result of our own operational issues internally that I believe we can fix over the next couple of quarters.

That's helpful. If I can ask a quick follow-up then, I think a logical one is how much would you think this will impact '25? If we think about the bar for '25, the revenue growth is around 5%, not asking for guidance, but this -- the issue with diabetes that you're having now, does that spill over into '25 and that could that be an incremental headwind as we think about that?

Well, Kevin, I think I'd say that we'll -- we plan to guide '25 at the -- near the end of February when we'll report the fourth quarter. When we think about the fourth quarter, I mean, we took down top line by $45 million. I mean there are ins and outs to that, but essentially what we're saying is we delivered $140 million of revenue here in the third quarter. We're not committing to more than that in the fourth quarter. I mean, we have guided down, which creates a $45 million compression against the fourth quarter of last year because we don't want to overcommit. We do have, we believe, the right people in the right seats with the right organizational changes, more specifically reorganizing all resupply operations out of our resupply center in Nashville that has produced incredible performance in our sleep business for many, many years. And so we are focusing on that, but we're just not going to commit to any more growth even sequentially until we know that we're confident in doing so. So, how that impacts '25, I mean, I think it goes without saying we -- as we stand here today, we anticipate some pressures in '25, but we got another 90 days ahead of us and we're going to do our work and we'll come back with updated guidance at that time.

Appreciate the color. Thanks.

Thank you. And we will take our next question from Mathew Blackman with Stifel. Please go ahead.

Great. Good morning, everybody. Thank you for taking my questions. I'm also going to touch on diabetes here. And maybe sort of frame it this way, it does sound like you're still bullish on the long-term prospects of this business. I think in the recent past, you've talked about diabetes maybe growing higher single-digits. Is that still in play perhaps, of course, over a longer timeframe? And then maybe a follow-up question. I was just hoping to understand how you better get after new patients in the CGM franchise. Obviously, there's been a sales force expansion, but just practically speaking, how do you execute on getting new patients into the business? I would be interested in hearing your thoughts there. Thank you.

Okay. I'll start with the second part of the question and Jason will go back to the numbers. So the third point of the plan around obviously increasing CGM new starts is the number-one thing we need to do literally across the business. And the plan there is you cannot, in my opinion, just go continue to put out more and more salespeople and expect a different result. They can only sell as good as we are on the operational side. And so what I've uncovered this quarter is that we have to beef up or improve the timeliness and ease in which you can order a CGM for us, how we bring that new patient in. And so we're pushing on two fronts. One is our operations team is looking at how do we streamline the processes, make it easier so that when our salespeople go out to a referring provider, we can promise service levels that are more in line with the market. And unfortunately, over the last couple of quarters, we have been lagging behind in the timeliness of delivering on that promise. And so we're stabilizing the sales force, making sure we're going out and having a high-touch white glove experience with our referring providers. And at the same time, our operators are charged with streamlining the workflows and their performance so that we can deliver with speed and quality.

I think, Matt, in regard to the question about the end market and the growth, we'd offer two different ways to look at that. Firstly, I think if we consider the Q3 comments from the CGM manufacturers, I think one reporting very low-single digits and the other reporting mid-20% growth. They're not 50-50 in the marketplace necessarily, but when accounting for that, I mean you're going to be in a -- whether it's 10%, 12%, 9%, somewhere in that ballpark. The second data point is that, look, some of our public competitors have recently reported what we believe to be upper single-digit growth for the quarter. I mean as a segment producing 5% to 6% growth and when asked, diabetes is leading the way, implying they're growing faster than us. So those two data points alone, we do believe that the market is growing upper-single digit, perhaps lower double-digit. And in fact, we compressed almost 12% this quarter. So like Suzanne said in her prepared remarks, the market is growing, our competitors are growing, we are not. And so that's the work that we're putting in to fix these operational challenges.

Got it. And if I could just squeeze one follow-up, maybe, Suzanne, and organic growth, I think in particular, you've sort of identified, you said, opportunities for organic growth. I think in the past, I've heard you talk about things like national accounts and contracting. Can you maybe just give us a sense of some of the other opportunities or if you want to talk a little bit about national accounts and what kind of opportunity that could be for Adapt as we think about the organic profile of the company over the next several years, would be interested in hearing that. Thank you.

Appreciate that question. Yes. So, as I said at the end, we were able to continue to improve bottom line even though we made technology and people investments. Those people investments this last quarter did come from beefing up our national accounts or what we're calling enterprise sales team. And the reason for that is, I believe there's two additional organic growth drivers here. One is in larger health systems. We do a very, very nice job in certain geographies around partnering with large health systems to have a seamless experience when patients are discharged from the health systems, but we have not nationalized that program and we are now in the process of doing that, which I'm optimistic about. I think we have an incredible value proposition on that front. So we're investing in that area. And then the other area that we're highly focused on is increasing the total covered lives. So, our managed-care team and how do we make sure that we have our fair share of covered lives, so that when our sales force goes in, we can basically be a one-stop shop for any referral sources as we can take almost any payer and we offer the total portfolio of products. If you send it to us, we promise we can deliver well for your patient.

Thank you.

Thank you. And we will take our next question from Eric Coldwell with Baird. Please go ahead.

Okay. It very well could be redundant and obvious, but last year in diabetes, you did $185 million in sales in the fourth quarter. This quarter, you're only committing to $140 million. So that's the equivalent of the $45 million midpoint revenue guidance cut. I just want to confirm that the only adjustment to revenue guidance is this diabetes change. And then secondarily, you missed diabetes a little bit here this quarter, handful of millions of dollars, margin was good, but this is a much bigger step-down. So what is the margin impact whether it's fourth quarter or going into '25 from the significantly reduced diabetes revenue outlook? Thank you very much.

Sure, Eric. Yes, we'll confirm that the guide down is diabetes. I mean we are guiding down due to the recent CGM performance. When we think about what we were aiming at internally, Q3, we were down about $10 million top-line for diabetes. And so that's a little bit of this. We've rolled that ahead. But the rest of it is just not just not committing to any sequential growth in the quarter. Now it's pretty typical to get a bump-up as deductibles have reset and there's a big push in the fourth quarter. But again, until we resolve these operational issues, we just aren't ready to commit to higher growth, but it is all diabetes impacted. When you think of the EBITDA the same way, I mean, we took about a third of that, top-line of the $45 million and we passed through $15 million flow-through to the bottom-line. Again, we wanted to put out numbers that we feel very good about hitting for the fourth quarter, and as we think about '25, as referenced earlier, I mean, we'll come forth with that guidance at the end of February.

And so, Jason, for both the revenue and the EBITDA, all of the -- all of the change was diabetes-specific?

Yes, correct.

Okay. So you fixed that problem, you're back on track, there's nothing else here.

Yes, that's right. I mean, when we look at the other product lines, we expect a solid fourth quarter out of sleep. As we've -- as we demonstrated, I think frankly, year-over-year respiratory, we believe, will continue to compound slowly. We add a couple of million a quarter consistently and that's what we're expecting out of that product line, and then all other categories, that -- which is will get reported in the future as wellness at home, we're expecting generally flat performance. I mean, we're going to take out about $7 million to $8 million from the custom rehab asset disposition. We accounted for that in the last guidance update when we reported Q2. So, yes, I think that if we're able to do better in diabetes, that will mean we'll do better as a portfolio, but the rest of the product lines are performing as expected.

Thank you. And we will take our next question from Brian Tanquilut from Jefferies. Please go ahead.

Hi, good morning. Jason, in the prepared remarks, you guys talked about the app and the quick progress that you're seeing there, so just curious how you're thinking about the savings opportunity from reducing call center operations or call center interactions with patients over the next year or next 18 months?

Yes, good question, Brian. I may answer that with some nuance. The intent of assembling the company going forward against these large patient chronic disease states, right, respiratory being one of them. The intent is really to focus our resources and our people against getting after that TAM, and in each of these categories, it's large TAM, it's growing rapidly, particularly in sleep respiratory, I mean, we're market leaders, and so the intent here is to assemble our resources and people around taking more than our fair share of really growing that top-line. As well, the intent is to improve the patient experience, drive better patient outcomes. Figure out how that converts to potentially rate increases or more volumes, right? So, we really want people and resources waking up every day and focus all day on those goals. And so yes, there's been great tech already installed here with respiratory. We think with dedicated leadership, those conversions will go faster. We'll learn more. We're capturing a tremendous amount of data from these interactions through this new tech that's been rolled out and these people are going to be focused on capitalizing on that growth going forward.

Got it. And then these - go ahead, Suzanne.

Can I just add one thing on that? I just want to say, I know it's early days for us in terms of the automation and the AI and our launch of myAPP. But I have been incredibly encouraged by our ability to move quickly, as I said, it's a matter of weeks that we put something into production. That is because our existing tech architecture and infrastructure was already prepared to take on this more advanced technology. And so our partner that we work with on this front said most companies do not have the infrastructure that's already ready to go. And so we have this diamond in the rough, if you will, of a strong technology infrastructure that we're going to be able to rapidly deploy responsibly the myAPP features and increased automation in AI. So more to come, early days as I suggested, but I do think it's the strength of AdaptHealth.

I appreciate that. And then maybe, Jason, my follow-up, just as I think about Medicare rates for calendar 2025, do you have visibility into what that rate adjustment looks like?

Well, we don't have visibility. We don't want to speculate, but we will offer some data. We would fully expect the DMEPOS Fee Schedule. It's typically published December 6, 7, kind of, in that ballpark. That is our expectation based on what we're hearing out of Washington. For those that may not follow that fee schedule, how it's constructed very closely, I mean it is an inflation-based measure. It compares the CPIU through June of the prior year. They take those rolling 12 months of the prior year. And so we know that number already. That's about 3% or so. Historically, there has been a labor productivity factor applied against that inflation measure that brings the rates down. It depends on the year. It could be half a point, it could be a point. So somewhere in that ballpark is generally what we are thinking. But again, we don't want to speculate on any of this until things are formally published, but hopefully that provides some perspective.

Understand. Thank you.

Thank you. And we will take our next question from Whit Mayo with Leerink Partners. Please go ahead.

Thanks. Good morning. I got just one quick one. Just on the Humana contract, how that's tracking versus internal expectations, what you're excited about, not excited about? And just any other conversations with other payers? Is this something that you still want to expand? Just any additional thoughts would be helpful. Thanks.

Hi, Whit. I'll say that Humana is doing incredibly -- right, spot on, very good. We want more of this business. If you link back to my comments around putting more investment in people into the business on enterprise national accounts and managed care engagement, they are tasked with, are there more opportunities like Humana, we are exploring those and that's the type of business that I think is very good for us. So Humana has worked out very good, good partnership there, and hopefully, we'll have more of those to share soon.

Great. Thanks.

Thank you. And we will take our next question from Richard Close with Canaccord. Please go ahead.

Yes. Just two questions, Suzanne, can you talk a little bit about the -- more the investments in the team, the changes that have been made, I guess, specifically on diabetes as well? And then the potential divestiture of these other businesses that Jason highlighted?

Okay. I'll let Jason address the divestitures and let me talk about the team. So, the way we were organized is we had President of Diabetes, the COO, a sales group leader and diabetes was somewhat standalone, if you will, and then we have the remainder of the business. So in these changes, what we did is we tapped a very experienced, as I said, former CEO of one of our larger acquisitions, his name is Gary Sheehan to be General Manager, so we've abandoned the President role. The General Manager is going to report into our new Chief Operating Officer, Scott Barnhart, who I've mentioned in the past. The reason for that change in reporting is because so much of what we need to do is to leverage our strengths on the sleep and respiratory side, the remainder of the business, for the diabetes business where it makes sense. And so having the GM sit underneath the Chief Operating Officer that can leverage the entire Adapt business where it makes sense was an important first step. Given that Gary has a long history in leading Sleep HME business, in his words, he'll say, diabetes is essentially the same business without the big CPAP machine, the timeliness of service, the catering for the patient, the experience. So I'm very optimistic about his experience in leading the business, but also the mindset in the -- how he's going to think about leveraging the broader AdaptHealth business to improve our diabetes business. Second to that, we appointed a new sales leader for the diabetes business, someone with med device background, his name is Graham Ward. He's been a top-season sales leader at the likes of Medtronic, had spent time in -- at Cardinal, and then most recently came over from Google where…

And then switching gears, Richard, to potential disposition of assets. We're really talking about some of the subcategories in what we -- in the future we will be calling wellness at home. And so there's different products inside of wellness at home. Some include the classic bend metal, beds, wheelchairs, walkers. Now we like that business a lot. It's very important, particularly in securing hospital relationships where you're able to be the easy button for those preferring providers that are discharging patients, and as you deliver excellent service, you earn more referrals in our other core areas, most notably respiratory and sleep. And so those products are ancillary, if you will, into the core, into those three core products that were -- that we intend to segment around. There's other lines of business inside of wellness to home, home infusion is one that comes to mind. I mean much like custom rehab, we've built up somewhat of a collection of assets over the years that were pieces and parts of other acquisitions. When you do this long enough and some of these can get pretty large. So does -- we're asking ourselves questions like, well, does that product line deliver ancillary business into the core? And so we're in process of answering those questions and making those determinations. I mean, there are other examples, but I won't get into those today. But that's really where our focus is to take areas where we just haven't paid enough attention. These assets will be better owned by someone else. They're pretty low-growth for us and should improve margin, frankly, if and when we decide to dispose of them. And we'll continue to provide updates going forward.

Okay. Thank you.

[Operator Instructions] Now and we will take our next question from Pito Chickering with Deutsche Bank. Please go ahead.

Hi guys, thanks for taking my questions. Can you talk a little back to the CGM reordering issues that you talked about on the call, you have such a good model for DME, reordering for your whole business. So can you quantify how big those CGM delays were in the reordering, why those were delayed and how you can fix it and if those delays were in both pharmacy and DME?

So, a couple of things, Pito. First, we'd say that starting with sleep resupply in our Nashville operations center, I mean we've got hundreds and hundreds of people working out of that center, the tech that is used there that sits on top of Brightree. Some of that core design was frankly developed by AdaptHealth and employees at AdaptHealth and it's so ingrained into our workflows. So it operates with the precision of knowing exactly what the patient qualifies for. We know the benefits of proper resupply following proper cadence and that team works to advise patients -- work with patients on things that aren't their adherence, like things aren't fitting properly or they might have a different model that they want to explore. And so those teams are just so highly skilled with that. Historically, we have not yet integrated our diabetes resupply operation into Nashville, frankly, because we had integration work to do on the eight different diabetes companies that we bought. And so there was a couple of years of work that went into consolidating all of those patients onto single platforms, single databases, and that work has been completed. And so a very quick move that Suzanne has directed and the team is carrying out is to now take advantage of all the capability and infrastructure that we've got out of Nashville and bring diabetes into that. In terms of quantifying, I mean, the overarching compression over the prior year. I mean, think of it in three buckets, fairly equal buckets. The first being real reimbursement change, pressure from specific payers that we've named in previous calls that shifted to 100% pharmacy, and that was ground that we had to make up. And so we're continuing to absorb that and we will as well in the fourth quarter until we lap those changes next year. The second is in new starts. I mean, we were a little short in Q2, but it was too early to call revenue down as a lot of these sales folks are still new. As Suzanne said, I mean, there's a lot to be done to optimize their workflows and we think that Gary, Graham, and others are going to do a great job with that. But just that miss in Q2 and then in Q3, the in-quarter miss against new starts that had an impact. And has a carry forward into Q4 that we made an adjustment for. And then finally, is on the recur. Frankly, just dropping the ball in who is eligible, when, and making sure that we've got timely order confirmation and delivery of products, so those are the three buckets and those are the three areas that Suzanne brought forth the plan that we're going to run against here over the next 90 days.

Okay, great. And then a follow-up question here is, just looking at the overall market growth between the two channels, pharma channel and DME, I guess, what do you think that those two channels are growing in 2024? And as you think about sort of growth in the out years, kind of where do you guys think that you guys can grow within both channels? Thanks.

Yes. I mean, it's again too early for us to comment on '25 or even beyond. We do know that right now, there are competitors in this space with same or similar capabilities that we have that are growing quite nicely. And so our job is to first stabilize and prevent compression and then get back to growth mode, and that's what we're focused on.

Okay. Great. Thanks so much.

Thank you. And we will take our next question from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hi, guys. Thanks for squeezing me in here. Just a quick question and apologies if I missed this, but I think last quarter you talked about some of that channel shift, maybe some reabsorption or transition back among some carriers to the DME channel. Just wanted to see if there was any -- you've kind of outlined your expectations for 4Q, but is there any indication to how that could look into next year? Is there any transition back incremental that you're seeing or any indication of how that balance will kind of even out long-term? Thanks.

Hi, Ben, it's Jason. You know, not since last quarter. I mean, we did call reference to two Southeast states regarding Medicaid where they laid in new policy that was somewhat advantageous. And so, we're doing our work there to start earning some business. But it's nothing material that's impacting the top line. Regarding any future shifts or changes one way or the other, I think we'll reserve those comments until open enrollment season wraps up and payers publish new policy as we're getting into January and we'll have something to talk about when we report at the end of February.

Great. Thanks, guys.

Thank you. And it appears that we have no further questions at this time. I will now turn the program back to Suzanne Foster.

Well, once again, everyone, I just want to thank you for tuning in this morning. I mean, the takeaway, hopefully, you get the gist of it is that kind of the 80-20 role is with diabetes being 17% of our revenue, we definitely have an opportunity there and we are incredibly focused on improving in that area. And the guide that we issued today is really to de-risk that and give the team time to perform. But 80% of our business continues to perform solid. There's obviously an opportunity for continuous improvement, but we are working on that as well with the addition of a lot of technology and myAPP and people and org structure will continue that work, but very optimistic about the core of our business and our future. So I hope to see you all out there on the road and thanks again.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.