AdaptHealth Corp. (NASDAQ:AHCO) Q1 2024 Earnings Call Transcript

AdaptHealth Corp. (NASDAQ:AHCO) Q1 2024 Earnings Call Transcript May 7, 2024

AdaptHealth Corp. misses on earnings expectations. Reported EPS is $-0.01606 EPS, expectations were $0.06. AHCO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to today’s AdaptHealth First Quarter 2024 Earnings Release. [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 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 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. 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 morning’s call is being recorded and a replay of the call will be available later today. I am now pleased to turn the floor to Chairman and Interim CEO of AdaptHealth, Mr. Richard Barasch. Please go ahead, sir.

Richard Barasch : Thank you. Good morning, and thank you all for joining AdaptHealth’s first-quarter 2024 earnings call. Simply stated, we had a terrific first quarter, highlighted by 6.2% non-acquired revenue growth and an 18% increase in adjusted EBITDA over the last year’s first quarter. Our sleep and respiratory product lines continue to deliver strong results. We are pleased to see our diabetes business start to improve as well. We continue to de-lever and are on target to hit our cash flow targets for the year. Jason will go through the numbers in details, so I’d like to discuss some of the underlying improvements that give us confidence that our performance is sustainable. During the past year, AdaptHealth faced several internal and external challenges, and the company has addressed each one in a constructive way.

This isn’t a victory lap and our new CEO have a planning to do and the opportunity to put her own mark on the strategic future of the company. However, I’d like to highlight some of the more impactful improvements that have occurred, which should serve the company well going forward. AdaptHealth originally built its business on M&A, which was facilitated by attractively priced capital. Opportunistically, we took on mostly long-term debt at very attractive rates. Our overall leverage was more than desired, especially in the newer, higher interest rate environment. As a result, the entire company successfully galvanized around generation of cash flow, which has allowed us to reduce our leverage ratios and our absolute level of debt. Even with the difficulties, the Change Healthcare issues, we yet again paid down debt in excess of required payments and expect to have meaningful additional cash to deploy through the year for further de-levering.

I’m quite confident that we’ll meet our 2024 goal of less than three times leverage in short order. Over the past year, we discussed the challenges in our diabetes business. We still have a way to go, but the improvements have been tangible. We have strong new leadership, we’re building an efficient operating platform that will support our growth ambitions. We have more than doubled our sales force who can finally state that we are activating the profit through pharmacy channel to supplement our growth. Our sleep business continues to perform well. We’re mindful of the challenges that may arise from GLP-1. We are now actively surveying for more than 1.5 million sleep patients for evidence of change in behavior. So far, we have not seen any material changes, but we’ll be vigilant to address any issues should they occur.

We know the real world study described by ResMed could show the positive correlation between GLP-1 usage and CPAP compliance. I was also delighted to see the recent Lilly announcement that described the enormous size of the addressable OSA market, more than double the already large estimates of undiagnosed OSA patients provided by the American Academy of Sleep Medicine. Our underlying thesis is that increased awareness of OSA is going to more than offset any potential impact to our sleep business. After a slow start, the Humana contract is performing both operationally and financially as we had originally projected. We are pleased to report that the patient transition is essentially complete. This experience gives us confidence to actively market to potential payors as an important component of our growth plans.

I would expect to see additional contract wins in the near term. Payers and providers want to see that the therapies we provide are having a positive impact on their members and patients. We have nearly 1,000 professionals who work with our patients every day to improve their experience with the equipment and devices we provide. We are highly focused on adherence to therapy as the essential first step to better outcomes, and we believe that our adherence statistics for sleep are the best in our industry. We are especially proud of the work that our advanced respiratory therapists do to reduce avoidable hospitalizations, and we are developing the tools and data to show that we are positively affecting outcome. Finally, we have put to bed for lingering concerns about permanent leadership.

Along a diligent search for a new CEO was well worth it since we found the ideal candidate. Suzanne Foster joins us from Danaher Corporation, where she served as President of Beckman Coulter Life Sciences. She has over 25 years of healthcare experience, including experience in the HME business, and has a strong track record of leading growth businesses in the health care market. Our Board made a very wise choice, and the management team is looking forward to welcoming Suzanne to AdaptHealth. I will be around to help Suzanne have a smooth transition to her new role. Now I’m going to turn it over to Jason.

Jason Clemens: Thanks, Richard, and thanks to all for joining our call. In the first quarter of 2024, we built one momentum from last year across a few key areas that we’ll review today. First, we’ll cover some details regarding the Change Healthcare situation that Richard touched on. Starting at the end of February, we began holding claims for certain payers where one of our third-party software providers utilized Change Healthcare to process claims. Health claims peaked at approximately $150 million a few weeks later. As related, cash flows decreased, we drew $75 million on our revolver and carried that balance as we ended the first quarter. Our revenue cycle team has acted swiftly and decisively to mitigate that impact. Since the end of the quarter, our health claims for this matter have compressed to approximately $30 million.

As a result, cash inflows have started to normalize and we paid off the balance on the revolver near the end of April. With delayed payments largely caught up, we are reiterating our free cash flow guidance for the first half of 2024 and for the full year. Now turning to our results. Net revenue of $792.5 million increased 6.4% compared to the first quarter of 2023. Sleep revenue of $306.2 million grew 4.0% compared to a year ago. Sleep sales revenue was up 5.6%, driven by our resupply census, which reached a new record of 1.58 million patients. Sleep rental revenue was flat over the prior year, and we were pleased with that result following the record set ups from late 2022 through mid-2023. Diabetes revenue of $149.3 million was up 2.0% against the first quarter of 2023, outperforming our expectations and resulting in our first year-over-year increase since the second quarter of 2023.

CGM performed significantly better than expected, driven by increased patient census. We are making steady progress ramping up our new sales force team members and new technology deployed in our resupply operations is resulting in more touchless reorders. As expected, we absorbed $4.3 million of revenue pressure in our pump and pump supply categories as the market shifts towards tubeless pumps. Encouragingly, we again delivered more revenue from tubeless pump starts than from tube-based pump starts. Oxygen and noninvasive ventilation new starts continued to be very strong, building on the momentum from the end of 2023. As Richard mentioned, the transition of Humana patients is substantially complete. Starting this quarter, we are now reporting revenue from capitated arrangements in a separate revenue category.

This includes Humana as well as several other existing capitated arrangements. Turning to profitability. First-quarter adjusted EBITDA of $158.5 million reflects an adjusted EBITDA margin of 20.0%, a 200-basis point improvement over Q1 of 2023. This improvement was driven by three things. Number one, improved cost of products and supplies as a percentage of revenue resulting from continued efforts to drive efficiencies in our supply chain. Number two, improved salary, labor, and benefits as a percentage of revenue, reflecting the flow-through of our 2023 cost management program. And number three, expected increases to other operating expenses related to continuing infrastructure investments in fleet and warehouse operations. Cash flow from operations of $49.0 million was impacted by the Change Healthcare matter covered earlier.

Capex of $87.9 million, representing 11.1% of revenue was almost a full point better than the first quarter of 2023. Although free cash flow for the first quarter was negative $38.9 million, we are reiterating our full-year free cash flow guidance of $150 million to $180 million, and we are reiterating our expectation to deliver at least $55 million of that in the first half of 2024. We continue making progress towards our plan to get leverage below three times before the end of 2024. In fact, even with the Change Healthcare impacts, we compressed net leverage from 3.16 times at the end of 2023 to 3.12 times at the end of Q1 2024. During the quarter, we paid $25 million towards our balance exiting Q1 at $695 million. After the end of the quarter, we paid an additional $15 million toward the TLA balance, and we expect to make our $10 million required payment before the end of next quarter.

We expect the TLA balance to be $670 million at the end of Q2, down $80 million from the balance at the end of Q2 2023. For Q2 2024, we expect revenue growth of about 1% over the prior year, surpassing very tough 2023 comparables. Additionally, we’re keeping a close eye on extended shipping lead times for certain sleep resupply products, which could impact growth for the quarter, so we’re accounting for that risk in these numbers. Adjusted EBITDA margin of approximately 20.5% up from Q1 2024 margin but pressured by added expense associated with recovering from the Change Healthcare situation discussed earlier. These expenses should dissipate in the coming months, but we do expect an impact in Q2. Free cash flow to be at least $94 million, which meets our expectations for the first half.

For the full year, we are maintaining our original guidance and expect revenue to be in the range of $3.25 billion to $3.35 billion, adjusted EBITDA to be in the range of $650 million to $710 million, and free cash flow to be in the range of $150 million to $180 million. With that, I’ll turn it back to Richard for closing remarks.

Richard Barasch: Thanks, Jason. When I took the job as Interim CEO approximately a year ago, it was intended as a short-term role while we installed a new CEO. As things have developed, this turned into one of the most impactful and rewarding years of experience in my career. I’ve been able to observe firsthand the professionalism and dedication of our nearly 11,000 team members as they deliver high-quality care to the 4 million people we serve. As we compliantly generate more actionable data from our patients, I’m even more convinced that AdaptHealth will have an increasingly important role in the health outcomes of our patients. After another clean quarter of continued growth, I’ll be leaving the CEO job with a great deal of optimism for the company. The future is bright for AdaptHealth and look forward to watching and helping Suzanne and our talented team deliver on the opportunities ahead. I’ll now open the call to questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. We’ll take our first question today from Brian Tanquilut at Jefferies.

Jack Slevin: Good morning, guys. Thanks for taking the question. It’s Jack Slevin on for Brian. Congrats on the strong results. Maybe to kick it off, I wanted to touch on the margin pieces that were particularly impressive. Are you able to give any color on what’s driving that improvement in cost of products by category? I’m wondering here if it’s diabetes margins leveling out with payer mix. Any color there would be great.

Jason Clemens: Sure. This is Jason. I’d be glad to add some color. So as you pointed out, we referenced the cost of products and supplies as frankly significantly better than the first quarter of last year as well as salary, labor, and benefits, which was part of our 2023 management cost management program that we were able to deliver on. Within cost of products and supplies, a couple of things going on there. Of note, within our supply chain operations, so that includes certainly specific supplier negotiations that we will offer a lot of detail on and product mix that you alluded to, either from diabetes or other areas growing faster versus slower. Overall, we’re very pleased with the 2024 contracting cycle. The contracting cycle is largely complete, so we do expect to continue to deliver improved cost of products and supplies throughout the course of the year.

Jack Slevin: Got it. That’s helpful. And then maybe on the capitated piece commentary around Humana being ramped now is really helpful. Can you give a sense of what that move in capitated revenue was quarter over quarter or I guess like versus the benchmark in the back half of the year that look particularly strong on the quarter?

Jason Clemens: Sure. Well, it’s not perfect math because what I’m about to say because capitated revenue was, in fact, reported in various categories in the first half of 2023 that includes sleep, respiratory, HME, and others. Starting in the second half, we did report our Humana per-member-per-month revenue in the other category. So if you take note of the sequential step-up from Q2 to Q3 last year and in Q3 to Q4, pretty significant step-ups. And that is showing you the ramp-up period of the Humana contract and the transition of Humana patients. So in the first quarter, we’re reporting the entire Humana PMPM revenue in capitated, so we reported $32 million in Q1. And additionally, we have several other capitated arrangements that we’ve been operating and frankly, growing that portfolio for a number of years now.

So that’s where you see the revenue reporting now in terms of comparables against Q1 of last year, it’s just going to be tough until we get enough quarters behind us to — so we’re able to see that trend in capitated. I hope that helps.

Jack Slevin: Yeah, very helpful. And last one for me. Maybe looking forward, there’s a lot of moving pieces and I appreciate all the commentary around change on the cash flow side of things. But as you think about the full-year guide, does this feel like the right level of free cash conversion or a normalized stabilized version of what we should expect from the business in terms of how much cash generation you can get relative to how the P&L is growing?

Jason Clemens: Without question, it is — we are confident in that free cash flow guidance for the year. Now to the second part of your question on how much we could get or what’s the cash generation power of the business. We continue to believe that it’s quite a bit more than what we expect to deliver in 2024. I mean, after all, interest is running almost 4% revenue. And as we continue to de-lever as we continue to drive down interest expense, which we’re very focused on, that will add an added benefit. It’s important to note that our CapEx as a percent of revenue was down 90 bps over the first quarter of last year. We committed to about 0.5 point of improvement year over year as the Oracle perpetual inventory deployment continues to roll out aggressively across the country. That should give us just added confidence in hitting that CapEx number. And again, we feel very, very confident about the free cash flow expectations for the full year.

Jack Slevin: Got it. Appreciate all the color and congrats again.

Operator: The next question comes from the line of Pito Chickering at Deutsche Bank.

Pito Chickering: Good morning, guys. Thanks for taking the questions and nice job on the quarter. Diabetes, we diabetes were down year over year for the first half of the year and then up and back half the year to get basically flat growth year over year. 1Q is definitely above our expectations. Should we be thinking about the cadence differently for the year for what changed versus your original thoughts around diabetes? And is this just the split between pharmacy growing faster than DME?

Jason Clemens: Yeah, Pito. Good question. I’d start with just a review of the comparable periods in the prior year. It’s important to note that Q1 of 2023 and the sequential step-up into Q2 2023, I mean if you see that huge step-up in diabetes revenue year over year going from , we did not expect such a pronounced step-up in the second quarter. So although we’re very pleased with the diabetes beat in Q1, pump and pump supplies came right down the middle of the fairway of what we expected and CGM did outperform our expectations. I mean we had diabetes down for Q1, but we’re making some progress and sales. We’re starting to take more orders in pharmacy. So things are going according to plan, but it’s really that tough comparable in the prior year. There were some system conversion activities and other items that affected just such a large sequential step-up that we don’t expect to repeat. So that’s really the only change to think about the full year quarterly numbers.

Pito Chickering: Okay, great. And then for 2Q, you talked about some margin pressures from Change and from investments. Can you give us any color on how 2Q consensus looks versus your expectations? A quick one on organic growth. How does capitated get calculated as convert from fee-for-service into capitated for organic growth?

Jason Clemens: Sure, Pito. In terms of organic growth, the capitated arrangements are 100% organic or non-acquired because we did acquire some of these capitated arrangements, but we’ve anniversaried the years of those acquisitions. So it’s 100% organic. In terms of how the Street is thinking about the full year, I guess I’d just summarize it by saying, look, we did better in Q1. We’re pleased with it. We think that Q2 is going to be a little softer than what we expected two months ago when we guided. But zooming out to Q3, 4, we feel very good about the full-year guide. We feel very good about and so I think it’s really a bit of a swap between Q1 and 2 would be my observation of where the Street’s at as well as what we were thinking a couple of months ago.