Good day, everyone and welcome to today's AdaptHealth Fourth Quarter 2024 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. Before we begin, I would 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 2025 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. It is now my pleasure to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster. Please go ahead.

Good morning, everyone, and thank you for joining the call. As we close out 2024, I'm encouraged by the progress we've made towards strengthening our foundation and positioning the company for long-term success and growth. Before I get into that, I'd like to take a moment to review our fourth quarter results. We are pleased that revenue, adjusted EBITDA and free cash flow each exceeded the high end of our guidance ranges for the fourth quarter of 2024. Acknowledging that this followed on the reduced expectations we shared in early November, fourth quarter revenue was effectively flat versus the prior year quarter, but beat the midpoint of our Q4 guidance range by 3% as our Sleep Health and Respiratory Health segments delivered year-over-year, growth offsetting contraction in our Diabetes Health segment. Compared to prior year quarter by segment, fourth quarter Sleep Health revenue increased 3.4%, Respiratory Health increased 1%, Wellness at Home declined 0.8% and Diabetes Health declined 7.3%. Fourth quarter adjusted EBITDA contracted 2% from the prior year quarter but was well above the high end of our guidance range. While our adjusted EBITDA margin was 23.4%, modestly narrower than the 23.8% reported in prior year quarter. Free cash flow was strong in the fourth quarter at $73 million, up 10% from prior year quarter and well above the high end of our guidance range. As you know, last August, we identified five areas of focus which included our One Adapt initiative, accelerating the application of AI and automation, increasing our clinical relevance, delivering organic growth and strengthening our balance sheet. And I'm pleased that we are already making progress on all fronts. Starting with One Adapt, we're taking action to standardize work and cultivate a mindset of continuous improvement to ensure that we deliver exceptional service and quality…

Thank you, Suzanne and thanks to everyone for joining our call. Today I’m going to review full year and fourth quarter 2024 results. I’ll follow that with a review of our balance sheet and our plans for capital allocation, before finishing with our outlook for 2025. Starting in the fourth quarter. We moved to a multiple segment structure for reporting our results to align with how we are now managing the company. We believe this reporting change will increase transparency into our business performance and I look forward to sharing our segment results for the first time today. For full year 2024, net revenue of $3.26 billion, grew 1.9% versus the prior year. Notably, our 2024 revenue growth overcame pressure from the divestiture of certain custom rehab assets and the termination of the public health emergency 75/25 blended reimbursement rates originally introduced in response to the COVID pandemic. Underneath these headwinds we produced growth from new capitated revenue and strong sleep resupply volumes, partially offset by weakness in the Diabetes Health segment, which reflected payer shifts to the pharmacy reimbursement channel for diabetes, and as Suzanne discussed earlier, operational missteps that we are in the process of correcting. By segment, net revenue growth for the full year 2024 was 4.5% in Sleep Health, 6.0% in Respiratory Health, and 1.9% in Wellness at Home, offset by a revenue decline of 6.9% in Diabetes Health. Our fourth quarter revenue was roughly flat versus the prior year quarter, but landed just above the high end of the guidance range we provided in November. Our Sleep Health business continues to be an area of strength. Sleep Health net revenue increased 3.4% year-over-year to $356.5 million. Sleep Health new start surpassed 120,000 for the third consecutive quarter and our Sleep Health census now stands at…

Thank you. [Operator Instructions] Our first question will come from Ben Hendrix with RBC Capital Markets. Your line is open.

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

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

Ben, I'd add that since the last quarter we have in fact signed additional capitated arrangements. Now, these are nowhere near the size and scale of the Humana arrangements, but we are making progress. I think, in terms of kind of voting, if you will, I mean Humana has been pretty clear. I mean in signing a contract extension, I think both parties have said, that things are going quite well and we'd like to continue the relationship over multiple years.

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

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

Thank you.

Thank you. Our next question will come from Mathew Blackman with Stifel. Your line is open.

Hey, Jason. Hey, Suzanne. I wanted to do a quick confirmation question upfront before I get to my follow-up. On the guidance for this year, you talked about the 40 bps drag due to the disposal of assets. That’s just the assets in the fourth quarter and not the planned disposal of one additional line in 2025, correct?

Yes, you got it.

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

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

And you did see a minor uptick in capitated revenue arrangement revenues during the fourth quarter. Should we expect that 4Q to be a reasonable quarterly run rate for 2025?

Yes. We signed those agreements in the fourth quarter. They will actually start in early 2025. I think a very modest increase in capitated revenue over the course of the year is the right way to think about it.

Thank you.

Thank you. Our next question will come from Brian Tanquilut with Jefferies. Your line is open.

Hey, good morning, and congrats on the quarter. Suzanne, maybe a follow-up to Jason’s last comment, not committing to growing the Diabetes business yet. So from where you sit today, I mean, you’ve been here to digest the whole enterprise. And do you still see synergies and strategic value to owning diabetes at this point?

Yes. Thanks for the question. At this point, I do. It’s a hypothesis we’re proving out, but there are two reasons. One is, we see the potential for growth coming from two areas. One is with our hospital customers and the value proposition of the one-stop shop in the broad portfolio is playing out for us well. So that continues to be a good feedback that we’re receiving from our bigger hospital systems where we seem to be winning and we’ll continue to track that to see if the full breadth of the portfolio is of value. But at this point, we believe it is. And the second reason for that is on future capitated arrangements. We think that there’s an opportunity here as well where payers are intrigued by the breadth of our portfolio and our geographic reach. That seems to be the value proposition. And that value prop is holding up well, as I mentioned earlier, with a strong pipeline there. So at this point, if we can get diabetes performing well and the breadth of our portfolio, we think that’s a winning combination.

I appreciate that. And then maybe, Jason, my follow-up, as I think about your guidance ranges. So first, free cash flow, the midpoint of 2025 guide is below last year’s. And then you mentioned you’re expecting margins to be flat. I know you mentioned some of that is just the business that you’ve sold. But any other things we need to think about as puts and takes in terms of the cash flow guidance and EBITDA? And is it just conservatism or is there anything else we need to be considering there? Thanks.

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

Awesome. Congrats again. Thank you.

Thank you. Our next question will come from Richard Close with Canaccord. Your line is open.

Yes. Thanks for the questions. Good news on the diabetes progress. Can you, Suzanne, just talk a little bit about the changes you’ve made there, the reworking of the resupply outreach program and then process of rebuilding that trust from the referral standpoint?

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

That’s very helpful. And then as a follow-up, you talked about implementing the sales quota first time for that. Can you talk a little bit how that was received? Did that create any changes in the sales force? Anything along those lines?

Yes. Really excited by this initiative. So back in – really right after I got here, that was one of the first projects we started. Originally, our sales force at that time was just paid on volume and no quota setting. And so we kicked off a very deep analysis, did the work upfront through 2024 to make sure that this rollout would be done with as close to perfection as possible because we all know that that can be a delicate situation. The team rolled that out January 1 and it has been – the sales force has responded very favorably. They understand it’s a fair program. We did it in a way that it really over the next two years gets us to really where we want to be. And so you always know when these go well where there’s pretty much silence from the sales force. And that’s what we’ve experienced is everyone understands it, they’ve rallied around it. It's allowed us to set quotas that will make our forecasting more predictable. So all in all, this has been very successful. It really came through good leadership of our new sales leadership team and it also was supported heavily by our operations team who were managing the sales force, were very supportive in the transition. So, this is one of the highlights from a performance perspective of the team this is having [ph].

Thank you.

Thank you. Our next question will come from Eric Coldwell with Baird. Your line is open.

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

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

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

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

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

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

And any changes or updates on the big contract that was extended, anything you would Nuance [ph]?

I mean you can really think of this as just an extension of terms that I think both sides view very favorably today. So it has no relationship. I think that, you're talking about competitors and other things. I mean for us and I think that the original deal makes a lot of sense. We're all very pleased with it and we're extending it for multiple years.

Perfect. Thank you very much.

Thank you. [Operator Instructions] Our next question will come from Pito Chickering with Deutsche Bank. Your line is open.

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

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

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

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

Thank you.

It appears we have no further questions at this time. I'll now turn the program back over to Suzanne Foster for any additional remarks.

Thank you everyone for participating in our call today. Just to wrap up the key takeaways is that we've made a lot of progress on our five areas of focus in a relatively short time, and we have a lot to accomplish still. But the team is invigorated, and I'm confident that we are on the path to realizing our full potential as a health services company. So, we look forward to meeting with you, as many of you in person in the coming weeks. Thanks again.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.