Adapthealth Corp (AHCO) 2025 Q3 法說會逐字稿

Good day, everyone, and welcome to today's AdaptHealth third quarter 2025 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'd like to remind everyone that statements included in this conference call and in this 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 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 this 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, and welcome to the call. I'm pleased to report that Q3 was a milestone for AdaptHealth. If you recall, last year at this time, we realigned our business into four reporting segments, each under general managers and dedicated sales leaders. This was intended to focus our efforts on improving patient service and operational efficiency.

By doing so, it allowed us to better manage our resources, and that decision was a key contributor to the mid-single-digit organic growth each segment produced this quarter. The theme for today's call is that over the past year, the team has worked tirelessly to transform our business, and we are now seeing our progress taking hold and flowing through to our financial results.

In the third quarter, we completed substantial operational improvements across the organization and delivered financial results that exceeded our expectations. We are continuing to demonstrate progress across all three value drivers: growth, profitability and risk profile. Starting with growth. Our third quarter revenue was $820.3 million, up 1.8% from prior year quarter.

Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 5.1% versus the prior year quarter with strength across each of our four reportable segments. Sleep new starts were up nearly 7% from the prior year quarter, making it our highest quarter in two years. We also set new patient census records in both Sleep and Respiratory Health.

We experienced robust year-over-year growth in our Wellness at Home segment, driven by orthotics and hospice. And in Diabetes Health, we delivered the first quarter of revenue growth since Q1 2024. Moving to profitability. Our third quarter adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter and above the high end of our guidance range.

Adjusted EBITDA margin was 20.7%, up 30 basis points from the prior year quarter as we exhibited discipline on expenses even as we made forward investments in talent, technology and infrastructure to support our new large, capitated partnership we announced in August. Turning to our risk profile. We reduced debt by another $50 million during the third quarter, bringing our year-to-date total debt reduction to $225 million.

We are delivering quickly and rapidly approaching our 2.50 times target net leverage ratio, with our net leverage ratio standing at 2.68 times at quarter end. Debt reduction remains among our highest capital allocation priorities as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders.

During the quarter, we continued to make significant strides towards improving patient service and field operations. As planned, we completed the implementation of our standard field operating model and organizational structure, starting with consolidating from six to four regions. This was a huge step forward. It required empowering our best operators to lead these four regions and realigning nearly 8,000 employees to our new field operating structure and standard workflows.

As a reminder, we enter nearly 40,000 homes per day. We operate 640 locations across 47 states and without a standard operating model and org structure, rolling out standard workflows and technology can be slow and inefficient. Now with the standard operating model across the country, we can more efficiently deploy operational improvements and technology solutions in a timely manner and at scale.

Another initiative that's taken place over the last many months is the consolidation of our previously fragmented call centers into a new national contact center and utilizing a single patient services technology platform. This is a significant enhancement that allows us to dramatically improve how we route our incoming call volume and standardize patient interaction, which creates a higher quality, more consistent experience for the patients we serve.

Looking forward, as we deploy technology that allows more patients to self-serve, this new call center will supplement the local branches with increased capacity to manage the most critical patient concerns. We continue to believe that there is significant potential to deploy AI and automation across our business. Therefore, we continue to selectively, but aggressively pursue and pilot the use of these tools to drive service excellence and operational efficiencies. And we are already beginning to see the early benefits.

For example, in the third quarter, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%. Let me connect these results to where we are headed strategically. We are moving quickly to establish the infrastructure required to service our recently announced exclusive capitated agreement with a large integrated delivery network.

This is a significant undertaking that will require approximately 1,200 employees, 30 locations and 300 vehicles. Our partnership with this customer is off to a strong start because we share a philosophy about how best to unite our efforts to provide superior care for patients. This starts with a mutual recognition that the combination of an integrated delivery network at an at-scale home medical equipment and service provider working through a per member, per month or capitated fee model produces the strongest alignment of incentives.

This means we share a common commitment to a seamless handoff of care as patients are discharged from the hospital when they are at their most vulnerable and the risk of readmission is the highest. It means being rewarded for clinical appropriateness and efficiency by providing exactly what the patients need, nothing more, nothing less.

It also means being motivated to drive patient adherence by investing in setup, training, education and ongoing support to ensure patients use equipment correctly. In short, we are strategic partners working to keep patients healthy at the lowest sustainable cost. We arrived at this moment because of our success with our Humana capitated arrangement, which demonstrated for the first time that an at-scale HME provider could lift and shift significant volumes of activity while maintaining high service standards.

Our immediate objective is to replicate that success by delivering on our promises to our new IDN partner as well as to another new capitation partner, a major payer for whom we will be the exclusive provider to an additional 170,000 lives as announced this morning. But as we look out on the horizon, we intend to lead the evolution of our industry by using our results to prove to every IDN and large hospital system in the US that partnering with us produces better outcomes for patients.

That means faster time to therapy, higher adherence, greater patient satisfaction and ultimately finding ways to lower readmission rates and deliver genuine clinical value in the home. AdaptHealth is uniquely positioned with our technology infrastructure and operational capacity to offer this value proposition at scale.

And our relentless focus on operational discipline and service excellence demonstrated in our Q3 progress is all about enhancing the value proposition. Our national contact center, centralized order intake and adoption of AI and automation are just a few examples of how we are alleviating patient, physician and hospital pain points. This focus extends beyond capitation to our entire business.

To be clear about what is at stake, service excellence is where HME providers win or lose loyalty. Hospitals and physicians remember which HME companies respond timely, who handles logistics seamlessly and who prevents patient readmissions. Service excellence creates referral stickiness. For us, operational discipline as the foundation for service excellence is not just about margin improvement.

It's the key to competitive differentiation. And because of this, ingraining this discipline into our DNA is becoming one of our highest strategic imperatives. As we look toward the upcoming round of CMS' competitive bidding program, our operating efficiency is a unique and critical strategic asset. While the final rule has yet to be released and the ongoing government shutdown holds the potential to delay it, CMS has not missed words about what it hopes to achieve with the redesign of the program.

As outlined in the proposed rule, CMS sees the successful process as one that will cause HME participants, small and large, to submit competitive bids, and it seems to view limiting the number of contracts awarded as the key mechanism for achieving that aim. Some look at the bidding program and focus only on the reimbursement risk.

However, rate compression is not a foregone conclusion, and moreover, it is only half the equation. The other half is that if CMS retains its proposal to limit contract awards, this would, by definition, consolidate traditional Medicare market share with knock-on effects that would likely force industry consolidation more broadly.

As a result, competitive bidding has more potential to transform HME industry structure than perhaps any other dynamic. AdaptHealth has been preparing for this moment for years. Our cost structure enables us to participate in the bidding program from an advantaged position. Furthermore, as government policy continues to evolve, our improving financial strength affords us the flexibility to take strategic action to consolidate market share.

Where others may see risk, we see opportunity. Before I close, I'd like to express how grateful I am to my AdaptHealth colleagues. The progress we've made over the last year and especially in the third quarter, demonstrated our grit, determination and focus is paying off. We have a lot of momentum coming into 2026 and expect to see continuous improvements across our business as our teams execute on these growth opportunities ahead of us.

With that, I'd like to pass the call over to Jason to review our financials.

Thank you, Suzanne, and thanks to everyone for joining our call today. After covering our third quarter 2025 results, I'll provide a review of the balance sheet and our plans for capital allocation. Then I'll finish with guidance for the remainder of 2025 and some perspective on our early expectations for 2026. For third quarter 2025, net revenue of $820.3 million increased 1.8% from the prior year quarter.

Organic revenue growth was 5.1% in the quarter. This does not include $34.4 million of prior year revenues related to the divestiture of certain assets from the Wellness at Home segment and $7.7 million of revenue from acquired businesses. As Suzanne noted, our third quarter revenues were characterized by strength across all four reportable segments, with each producing year-over-year organic growth.

Third quarter Sleep Health segment net revenue increased 5.7% versus the prior year quarter to $354.8 million. Sleep Health starts were approximately 130,000, up 6.8% versus the prior year quarter, resulting in our highest quarter in two-years. Our Sleep Health census reached a new record of 1.72 million patients, up from 1.70 million in the prior quarter.

Third quarter Respiratory Health segment net revenue increased 7.8% from the prior year quarter to $177.0 million. Despite lower-than-anticipated oxygen new starts, retention remained strong, resulting in an oxygen census of 330,000 patients, which was a new third quarter record. Third quarter Diabetes Health segment net revenue increased 6.4% versus the prior year quarter to $150.1 million, our first quarter of year-over-year growth since the first quarter of 2024.

Although CGM starts were softer than we expected, CGM census grew over the prior year quarter for the third consecutive quarter, driven by continued improvement in retention rates. Pump and pump supplies revenue continued to grow over the prior year quarter. For the Wellness at Home segment, third quarter net revenue declined 16.0% from the prior year quarter to $138.4 million, including the previously mentioned impact of the dispositions of certain noncore assets. Turning to profitability.

Third quarter 2025 adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter. Adjusted EBITDA margin was 20.7%, slightly above the midpoint of our Q3 guidance range and up 30 basis points from 20.4% in Q3 2024. The year-over-year margin trend reflected modest improvement in operating expenses as well as the disposable of less profitable noncore product lines.

Our labor expenses were well contained even as we invested in advance of revenue for our new capitated agreement. Moving to cash flow, balance sheet and capital allocation. Q3 2025 cash flow from operations was $161.1 million. CapEx of $94.2 million was 11.5% of revenue, up slightly from the prior quarter as we continue to invest in new patient growth.

Free cash flow was $66.8 million, in line with our expectations and unrestricted cash stood at $80.4 million at the end of the quarter. At quarter end, net debt stood at $1.73 billion, down from $1.80 billion at the end of the second quarter. We reduced our TLA balance by $50 million in Q3 2025, bringing the year-to-date total to $225 million.

Our focus on debt reduction has decreased year-to-date interest expense by over $15 million as compared with the same period for 2024. Our net leverage ratio stood at 2.68 times, down from 2.81 times at the end of the second quarter and rapidly approaching our target of 2.5 times. Turning to capital allocation. Our highest priorities continue to be investing to accelerate organic growth and debt reduction to strengthen our financial position, followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access.

So far in 2025, we have allocated $19 million of capital to tuck-in deals, and we are continuing to advance modest tuck-in deals through our pipeline. Turning to guidance. We are maintaining our full year 2025 revenue guidance range and expect to come in very modestly above the midpoint of that range. We are also maintaining our full year 2025 adjusted EBITDA guidance.

But we expect to come in at the bottom end of that range as we prudently accelerate investments in infrastructure, technology and labor to stand up our new capitated arrangement. We are maintaining our free cash flow guidance at a range of $170 million to $190 million. While the government shutdown has the potential to push some cash collections into Q1 2026, given the free cash flow generated year-to-date, we remain confident that we will still achieve our prior guidance range.

Given the number of moving parts affecting our expectations for 2026, let me provide a preview of how we are thinking about next year. We anticipate the top line will grow 6% to 8% over full year 2025, which assumes accelerated growth in our core products, revenue from our new capitated contract and the impact of certain assets disposed in 2025.

We expect revenue growth will start slower in the first half, but will accelerate in the back half due to the timing of the ramp of the capitated contract and the dispositions. We anticipate full year 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even as we invest in new capitated infrastructure in early 2026 ahead of the revenue ramp.

As a reminder, we expect this capitated contract once fully ramped to produce at least $200 million of annual revenue with adjusted EBITDA margin and free cash flow margin in line with the rest of our business. As has been our practice, we intend to provide formal full year 2026 guidance when we report fourth quarter earnings this coming February. That brings me to the end of my remarks.

Operator, would you kindly open up the call for questions?

(Operator Instructions) Eric Coldwell, Baird.

Nice job in the quarter. I wanted to hit on the large capitated deal. Your comments on '26, Jason, were very helpful. You mentioned slower growth in the first half, more in the second half. Conversely, the incumbent on that arrangement has been signaling that it actually expects the transition to begin this quarter and to be completely ramped or completed by the end of the second quarter of next year.

So the incumbent sounding like the transition is going to happen a little faster. If I'm reading you correctly, it still sounds like you're expecting a little slower. I'm hoping you can just help us triangulate those two data points.

Well, sure, Eric. I mean, I guess I'd say, firstly, that we don't have a lot of perspective on what competitors might be saying out there. What we do know is that the contracted dates that we've signed up to deliver, that's very clear. We're in advance of the bulk of that ramp. And so we think we're being appropriately conservative with our expectations of the ramp over the course of 2026.

And as markets come online, we'll certainly gain confidence on having all the infrastructure that we need in place before the first patient shows up. I mean that, in our mind, is the priority is making sure that we've got the labor and the people and the vehicles and the infrastructure in place for those patients prior showing up. And if we do that, we take good care of those patients, that ramp could get better than what we're suggesting.

Just one quick follow-up or additional question. You've obviously been pretty successful here recently with these new wins, particularly on the large capitated side. At the same time, again, a competitor has recently announced a -- at least in the near term, an exclusive with a large network, OptumHealth. And I'm curious, based on your 2026 preview, it doesn't sound like that's a big impact.

But I'm hoping you can give us some color on perhaps how much exposure you might have had there or if that competitor announcement is at all impactful? I mean, certainly, a larger OptumHealth larger network somewhat visible to the street. I'm just curious if you have any thoughts on that change?

I'll take that one, Eric. So taking a step back, I think that these capitated agreements or preferred provider agreements as some call other types of agreements are evidence that the market, payers and providers are interested in partnering with a single scaled partner to help their membership or patients. But there's a distinction in my understanding between an exclusive capitated agreement and what we call a preferred provider agreement.

And so the distinction here is that with -- when we say capitated agreement, we are exclusive, we -- they have to refer to us, and we have to service that patient pool. A preferred provider agreement means, hey, give us the business, we'll service it, but it still means that people can compete for that business. It's still an open network.

And so if I understand correctly, the contract that you're referring to, I have not heard that it is exclusive. I have heard that at the end of the day, they have to earn the business just like anyone else would. And like I said, in this business, you earn that business by providing the best service. And so we believe with all of the infrastructure and continuous improvement that we made that we are going to continue to earn business on the basis of our service excellence. And so it does not preclude us from calling on that customer.

No, Eric, I might add, since the announcement that you're referring to, there has been zero change in our trend lines and our expectations related to that contract. So we'll see what, I guess, tomorrow brings. But for now, we've got full access and coverage, and we feel just fine about it.

Brian Tanquilut, Jefferies.

Congrats on the quarter. Maybe, Suzanne, I'll just hit on that last comment you made. So as we think about the fact that you've already won Humana, the Kaiser contract and then another one today, I mean, different dynamics there. Humana was not capitated prior. What are you seeing in the market? Or what are the conversations like in terms of getting more payers to convert their approaches to DME to capitation?

And how far are we from -- or is it reasonable to think that eventually, this will be mostly capitated at least for the national providers?

Thanks, Brian. I mean I believe that this type of model is what's best for the industry. I was recently on the road meeting with some big hospital systems and their CEOs. And what they're talking about is reducing their length of stay, seamless handoffs putting our people alongside their people for discharge planning. So they're incented to move patients through the hospital or if it's a physician practice to have a seamless handoff.

And so having a strong partnership where we can hold each other accountable, they can hold us accountable for service level initiatives, that's a big deal for them because if they're managing many, many different players without strong SLAs in place, that makes it difficult. So us showing up saying we're a large public company that takes compliance and integrity seriously, that we cover 47 states that we can do this at scale, that we agree to SLAs in the capitated agreement, they like that model.

And so the idea that we can show up and have that seamless handoff for them and quarterly report out how that performance is going between us, that's something that's really getting a lot of interest. And that's where we're putting a lot of resources to go see how many more hospital systems, IDNs and payers that we can convince that by aligning our incentives that this is best for patient care.

That makes sense. And then maybe, Jason, just back to the point of the guidance. I mean, obviously, a good quarter here, and you're maintaining the guidance. First, what exactly are these investments that you mentioned? And then how should we be thinking about the investments related to the new contract? And where are you tracking versus what you thought you'd be spending for Kaiser?

Right. So I guess, firstly, like kind of when we say infrastructure, we're talking about an estimated 1,200 people that have to be recruited, onboarded, trained and ready for day 1 of patients flowing across multiple states. It's procurement of vehicles to our standards. They've got to be outfitted. They got to be painted, all this detail that needs to happen in order to have trucks running on day 1.

So that's all well underway. And finally, it's the procurement of about three dozen locations in geographies that we don't compete in yet. And so as we get those locations identified and secured, they got to get outfitted, you got to get them ready, you got to stock them with inventory and capital equipment and again, be ready for that patient on day 1.

So we're moving along according to our plans. In fact, in some markets, we've actually advanced due to some local dynamics in those markets, which is why we're seeing expenses running hotter, particularly in the labor lines. And then I'd say related, I mean, we went from six regions to four. I mean we took out two kind of operating regions.

Now as part of that operating model change, look, there's a lot of talent in the organization, a lot of experience, long time in DME. We think it was prudent to hold on to the folks that want to continue to be part of our business that potentially want to relocate. We're doing a fair amount of that to these markets to stand up new AdaptHealth operations and to grow from there.

So that's a little bit about kind of what we're investing in. In terms of what to expect, we do expect to carry additional expense into the first quarter, potentially mid-second quarter. And as this revenue comes online, the nice thing about it is, I mean, you immediately move up to 20% EBITDA margin, which is our expectation for the contract because the infrastructure is paid for, the capital equipment is in, trucks are running.

And then at day 1, you start getting paid per member per month. And so there'll be a little bit of forward investment in the fourth quarter and in the first quarter, and then that will start swinging out over the course of '26, and we expect high revenue growth as well as a big improvement in EBITDA margin in the second half of '26.

Richard Close, Canaccord Genuity.

Yes. Just hitting on the capitated agreements a little bit more. In terms of the announcement or the new contract announced today, are there any more details that you can provide? Just curious if there's any geographic overlap with your other agreements that portend maybe some additional operating leverage there or less infrastructure investments on that? And then is there an opportunity to expand the number of lives with that agreement?

Yes, Richard, I'd say that we announced this agreement more so for the strategic implications to the company and where we're heading in terms of taking control of our own destiny and reimbursement, capping business exclusively where we can contain an entire population and take care of all of those patients.

In terms of like financial impact, I mean, 170,000 members, the math doesn't work exactly, but compared to over 10 million lives in this other contract that we've spoken about, you'll see us maybe a couple of percentage points. So it's nowhere near size and scale. There is benefit to the geography of this contract and potential growth. This is a major payer.

If we do our jobs and we think we will, it does set up nicely for us to continue to work that payer's pipeline. So more to come.

(Operator Instructions) Kieran Ryan, Deutsche Bank.

This is Kieran Ryan on for Pito this morning. Just wanted to check in and see if you could provide any other color on Diabetes. I appreciate the detail on CGMs versus pumps. I'm not sure if you can talk about anything you saw on the pharmacy side or with payer mix in the quarter that maybe contributed to the uptick.

I appreciate the question, Jason. I will tag team this. I'll start with just what we're seeing in diabetes. So listen, we've talked about this now for the past year that this has been a focus of ours to improve our execution that a lot of this was certainly an interesting market dynamic, but that was no excuse for our past year's performance, and we have finally gotten our arms around the business and we're seeing the best attrition rates from our resupply team.

We've really stopped that bleeding and servicing patients really well there. Pumps have been strong, and our sales force has been trained, put in place. We've made the changes we needed to. We have a strong leader there. So we're getting out in front of the right customers and leveraging the HME side of our business. The Diabetes team and our HME sales forces are working collectively to identify opportunities.

So it's kind of been an all hands on deck that finally has proven to show some success. And then in terms of the numbers, I'll hand that off to Jason to give you a little bit more for that purpose.

Yes. To get maybe into the weeds a little bit, this was the first quarter or last quarter, I'd say, of a comparable against a different management team, a different resupply organization and processes because those changes were made late September of 2024. And so what you're seeing is just strength in retention, as Suzanne said.

Now when we get to Q4, now we're comping that same team that we've got running in Nashville is now comping against themselves. And so we're setting record retention rates, but to grow above that, it does get more challenging. So although we were thrilled to see over 6% growth in Diabetes in Q3, given the softer starts, we still have a ways to go until we're demonstrating consistency and stability and ultimately, some growth in this business.

And so that's a little bit about Q3 versus Q4. As we get to '26, again, we expect stable retention, modest improvement in sales. We're taking actions to make sure we secure that. And with a little luck, we'll have a consistent stable business to report in 2026.

And to your point around pharmacy versus med benefit, during the past year, we didn't -- we've made the decision to pursue the pharmacy channel. We were slower last year committing to that to wait to see what we would -- this business and how it would perform. But now that we're seeing that providers do really want the optionality to send both, we are making investments to make sure that we can efficiently process those types of orders as well.

And then I guess just briefly on the Sleep side, obviously, strong new start and census numbers. I just wanted to still understand if you still expect that mix headwind to be fully comped out as we exit '25. So that's kind of not a factor as we move into '26.

Yes, exactly. I mean there'll be de minimis impact in Q4. But as we get into '26, that we'll be past all that. So it will be a bit of an easier comp, if you will, as we look towards next year.

Whit Mayo, Leerink Partners.

Jason, the 6% to 8% revenue growth that you're guiding to for 2026, any way to unpack that by segment, how you're thinking about it?

Sure. We can probably offer some high-level views and then add a lot more to that when we guide in February. But if you look at the base business today, I mean, we've gone through a lot of disposition activity over the course of kind of late '24 through current. We're starting modest M&A that's been going on around that same time frame. And so you're going to likely have a bit of a canceling effect as we look to '26.

Outside of that, our organic growth, which excludes dispositions acquisitions, year-to-date, we're running 1.8%. So as we look to '26, I mean, we think that we can get a little bit of growth there. Some of that will come through the accounting changes that Kieran mentioned in the last question. I mean that alone is $30 million or about 1 point of revenue.

So if you look at Sleep, I mean, that alone will -- we expect to produce a better growth rate in Sleep, not just that single factor, but we're starting to near records of new start activity. And so we aim to continue that through '26. Respiratory in '25 so far has just had a blowout year. I don't know that we'll be producing at these upper single-digit levels for Respiratory.

We think it will normalize back to kind of a lower single digit, which is what we've seen historically as it relates to Respiratory. And then as it relates to Diabetes and Wellness, we think we'll produce steady and stable revenue, potentially a little bit of growth in one or both of those segments. But all that together, we think organic growth, again, today, a little under 2% could move to a little under 3% next year.

And then you've got the benefit, which is also organic of this compensated arrangement that gets you up to that 6% to 8%.

Okay. That's helpful. And I was wondering, is there anything new on RAC audits for PAPs, ventilators, rentals, et cetera, that's on your radar that's concerning or not concerning to you? I think CMS did award a new contract recently. So just wanted to get an update there.

That's right, Whit. But the number of audits and the kind of frequency of audits, it's been very, very steady. There's been no change or impact.

Thank you. This now brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.