AdaptHealth Corp. (NASDAQ:AHCO) Q4 2023 Earnings Call Transcript

AdaptHealth Corp. (NASDAQ:AHCO) Q4 2023 Earnings Call Transcript February 27, 2024

AdaptHealth Corp. 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 Fourth Quarter and Full Year 2023 Earnings Release. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions]. Today’s speakers will be Richard Barasch, Chairman and Interim CEO of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth; Josh Parnes, President of AdaptHealth will join Richard and Jason for the question-and-answer portion of today’s call. Before we begin, I’d like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These statements include, but are not limited to comments regarding financial results for 2023 and beyond. Actual results could differ materially from those projected in the forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company’s annual and quarterly SEC filings. AdaptHealth Corp. should have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning’s call, the company will reference certain financial measures, such as EBITDA, adjusted EBITDA, and free cash flow, all of which are non-GAAP financial measures. This call – this morning’s call is being recorded, and a replay of this call will be available later today.

I am now pleased to introduce the Chairman and Interim CEO of AdaptHealth, Richard Barasch.

Richard Barasch: Good morning, everyone, and thank you for joining us this morning to review AdaptHealth’s fourth quarter and full year 2023 performance. Stated simply, we had a terrific fourth quarter and ended 2023 with a great deal of positive momentum throughout our business. For the year, our net revenue grew by 7.7% and adjusted EBITDA grew 13% compared to the prior year. This is the fourth year in a row that AdaptHealth grew both top and bottom line, and it’s especially notable that nearly 95% of the 2023 revenue growth was non-acquired. We finished the year with a very favorable quarter, driven by continued strength in our sleep and respiratory product lines and the expected improvement in our Humana contract. It’s also noteworthy that adjusted EBITDA grew faster than revenue, largely as a result of the cost-out program and technology-driven operating improvements.

Another highlight of 2023 was a significant increase in cash flow from operations and free cash flow, even absorbing elevated interest rates on the floating rate portion of our term loan. As a result, our net leverage decreased from 3.69x to 3.16x and we expect to be below 3x before the end of this year. We have a favorable debt structure with a good portion of our debt in longer terms at attractive fixed rates. But as we generate further increases in free cash flow in 2024, we will lean into reducing our overall indebtedness. Turning to our product lines, our sleep product line was the primary driver for a full year and fourth quarter performance. Jason will give you more detail, but our top line for the year grew 16%, powered by a 12% increase in our resupply census which resulted in record volumes.

Based on reliable industry data, we have yet again increased our market share and are clearly the number one provider of CPAPs and related supplies in the United States. The increase in our census is a direct result of our intentional efforts to improve our adherence rates, which we believe are best in the industry. We have more than 300 sleep coaches whose job is to improve the patient experience, which we also believe is best in class. Our respiratory business also exceeded our expectations. Revenue for the year increased by nearly 8% over last year with a 10% increase in the fourth quarter. Here again, driven by the expertise of our respiratory therapists, we believe we have increased our share and are striving to become number one in this product category two.

Diabetes continues to be a work in progress, but the progress is tangible. We have enhanced the management team, including the recent hiring of a new head of diabetes, revamped the operations of the product line and have reinvigorated our selling efforts by doubling the size of our sales force. While we are still feeling the pressure of the compression on pumps and some continued mix shift to the pharmacy channel, government business continues to be our focus and government sponsored payers accounted for 79% of CGM census in the fourth quarter, up another 30 basis points from last quarter. Further, as I mentioned last quarter, we are ramping up to participate in the growing pharmacy channel. As we predicted last quarter, the Humana contract is now performing as we had originally expected.

The transition is now largely behind us and we are on track to substantially complete patient conversion this quarter. We value our relationship with Humana and are working hard to be a good partner. We’ve learned valuable lessons in onboarding these types of agreements and are now in a position to do more of the same. Now I’d like to continue the discussion about the possible effect of GLP-1 drugs on our business. First, there seems to be a consensus that GLP-1s will not have a negative effect on CGM growth. Excuse me. It’s logical to assume that patients on GLP-1s are actively engaged in their health and will be inclined to monitor their A1C levels through CGMs. We also believe that increased insurance coverage of CGMs, especially in the government sector, is a strong tailwind.

Sleep [ph] – excuse me, first and most important, we see no current impact on our business. Our sleep census, which is a combination of new starts and ongoing path resupply, continues to grow at a pace that bodes well for future revenue growth. Further, we take particular note of the real-world study recently conducted by ResMed [ph]. This study shows a modest increase to adherence when CPAP users also take GLP-1s. This is consistent with what we are seeing in our population. Our recent surveying suggests that 16% of our current CPAP users are already using GLP-1s. We want our patients to be healthier, so this is good news. We believe that greater awareness and diagnosis of obstructive sleep apnea will offset the potential of reduced usage of CPAPs resulting from GLP-1s.

It’s also reasonable to assume that increased awareness of obesity will also increase awareness of related comorbidities like OSA. These trends are beneficial for everyone. That said, we’re not dismissive of the potential issues from GLP-1s, and we are proactively responding to this possible long-term pressure. We believe we can overcome any reduction in the growth of CPAP usage by continuing to increase our share of the market through enhanced traditional sales efforts and enterprise sales, decreased operating costs through automation and better processes, and increased focus on patient adherence and retention. We’ve improved on each of these measures over the past few years, and the GLP-1 conversation has expedited our progress in these basic areas.

The recent focus on GLP-1s has also accelerated our efforts to enhance our role in the ecosystem by providing care in the home and community. AdaptHealth is at the epicenter of the movement to improve the people – improve the health of people with chronic conditions like obesity, diabetes, sleep apnea, and COPD. We occupy a unique position connecting providers, patients, and payers. We also generate and have access to reams of data that when curated properly, will assist providers and payers in providing better care more efficiently. We currently have ongoing relationships with more than 1.5 million people with sleep apnea, more than 230,000 people with diabetes, and more than 300,000 people with chronic respiratory conditions. We interact with these patients on a regular basis to help them with adherence to their therapies by teaching them how to use their devices properly and supplying and resupplying needed equipment.

Our initial work on adherence indicates that we can improve proper utilization of the devices and therapies. We believe we are also improving outcomes, and we are beginning to use the data that we are generating to prove it. I’d also like to provide a brief update on the ongoing CEO search. We now have a couple of very promising candidates who are currently advancing through the recruiting process. We will keep you updated as we move forward, but as you can see from our results; our progress has not slowed down during this process. I’ll now turn it over to Jason to take you through the numbers. Jason?

Jason Clemens: Thank you Richard and thanks to all for joining the call. Like Richard, I was very pleased with the fourth quarter results. We made significant investments in the business during the year and they are beginning to bear fruit. We will look to build on that momentum across the business in 2024. AdaptHealth’s net revenue grew 7.7% over 2022 and non-acquired growth was 7.3% led by our sleep and respiratory product categories. Adjusted EBITDA grew 13% over that same period as we delivered on the cost management program that we announced in early 2023. Cash flow from operations of $480.7 million grew 28.6% over the prior year. Free cash flow of $143 million improved significantly over 2022, led by DSO improvement of 1.5 days and significantly improved CapEx management.

Our net leverage ratio finished the year at 3.16 times, down half a turn from 2022. Turning to fourth quarter results: Net revenue of $858.2 million increased 10.0% compared to the fourth quarter of 2022. Sleep revenue of $328.8 million grew 15.2% compared to a year-ago. Patient demand for new PAP equipment was steady and up a touch from the third quarter. New starts for PAP equipment met our expectations. Our adherence performance met our expectations and resupply continues to be very strong. Our resupply census has reached 1.55 million patients with electronic reordering now over 40% of total orders. Not only is electronic reordering easier for the patient but it also drives more efficiency in our operations. Respiratory revenue of $151 million increased 10.1% year-over-year.

Our oxygen census is the highest it has ever been, now over 315,000 patients. For oxygen as well as for non-invasive ventilation, industry data shows that we continue to take market share in these important categories. Our diabetes revenue was down 3.8% against the fourth quarter of 2022. As expected, we continued to absorb pressure in our pump and pump supply revenue as the market shifted toward tubeless pumps. We believe the pressure will start to ease in the second half of 2024 as the transition stabilizes and as we grow our tubeless pump revenue. As expected CGM census was up a few points. We overcame some reimbursement pressure from shift-to-the-pharmacy benefit resulting in 1% CGM revenue growth. Turning to profitability. Fourth quarter adjusted EBITDA of $204.6 million reflects an adjusted EBITDA margin of 23.8%.

We outperformed our expectations due to increased revenue, especially in high margin categories, improvement in our Humana contract to original expectations, improvement in COGS, and improvements in labor and operating expenses. Cash flow from operations of $155.3 million grew 60.2% over the fourth quarter of 2023. CapEx of $88.6 million, representing 10.3% of revenue, beat our expectations, resulting in free cash flow of $66.6 million in the fourth quarter. For the full year, free cash flow was $143.2 million, or 4.5% of total revenue exceeding our goal of 3% to 4%. As Richard noted, most of our debt is long-term with favorable interest rates. We are highly focused on generating free cash flow and reducing our overall debt load. During 2023, we paid down $45 million of our term-loan including a $10 million voluntary payment in the fourth quarter as a result of our strong free cash flow.

During the first quarter of this year, we expect to pay down our TLA by approximately $25 million. As mentioned earlier, our net leverage ratio at year-end decreased by more than half a turn to 3.16 times, down from 3.69 times a year-ago, and our goal is to reduce our leverage to below 3 times in the course of 2024. As part of our fourth quarter results, we recorded a $318.9 million pretax write down to goodwill as we announced in our earnings release this morning. This non-cash pretax charge was triggered by the reduction in our stock price as of December 31st. We also recorded a $25 million pretax charge to settle a pending securities action filed in 2021 premised on allegations regarding disclosures related to our former CEO and organic growth.

Turning now to guidance for 2024. We currently anticipate revenue to be in the range of $3.25 billion to $3.35 billion; adjusted EBITDA to be between $650 million and $710 million; and free cash flow to be between $150 million and $180 million. Let me share with you some assumptions that support our views on guidance. The 75/25 reimbursement for non-competitively bid, non-rural MSA expired on January 1st, and although it is possible the rates will still be extended we are budgeting approximately $25 million of headwind to revenue and to adjusted EBITDA. We expect revenue for our sleep category to grow mid-single digit over 2023, a very tough comparable period that benefited from the backlog of demand pen-up following the supply chain shortages faced in 2022 and early 2023.

We recently doubled our dedicated sales force for our diabetes products and although we expect limited growth in the first half of 2023 as that team ramps production, we expect to bridge to low-single digit growth in the second half of the year. We anticipate the rest of the product categories to deliver the remaining top line growth. As we look to 2024, we expect a very similar quarterly slope to full year revenue and adjusted EBITDA that we experienced in 2023. We expect to improve free cash flow generation over 2023 by 15% at the mid-point as we’re already securing efficiencies in procuring and managing our CapEx and inventory. For Q1 2024 we expect revenue and adjusted EBITDA to grow about 3% over the first quarter of 2023. Free cash flow to be approximately zero as we absorb the seasonal effects of patient deductible resets on our cash inflows, as well as interest, bonus payments and cash related to the previously mentioned shareholder lawsuit settlement.

We ended the year in a position of strength as we’ve built a solid foundation to grow. We look forward to keeping you updated as the year unfolds. I’ll turn it back to Richard for his closing remarks.

Richard Barasch: Thank you, Jason. And now like to add some color to Jason’s remarks on 2024 guidance. We know that one of the risks in healthcare is reimbursement changes and the non-expansion of the 75/25 rate relief masks growth rates that would have been more expected in 2024 considering the tough comparables in sleep and respiratory. Here’s how we can improve on these numbers over the base that we’ve established for 2024 and into the future. We can close on the strategic relationships in our pipeline, none as large as Humana, but certainly large enough singly and in the aggregate to boost growth. We continue to pick up share in the sleep and respiratory categories. We can bring our diabetes category back to market rates of growth, and finally, we can continue to get more efficient.

If we accomplish this basic blocking and tackling, we can achieve our target of mid- to upper-single digit non-acquired growth in 2025 and beyond. Before I turn it over for questions, I’d be remiss if I didn’t thank our nearly 11,000 employees who are focused on improving the lives of the 4.1 million people who rely on us for needed medical devices and supplies. Operator, please open the line for questions now. Thank you.

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Q&A Session

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

Brian Tanquilut: Can you hear me, guys? Can you hear me?

Richard Barasch: Yes. Yes, loud and clear.

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

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

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

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

Brian Tanquilut: Awesome. Thanks and congrats again.

Jason Clemens: Thanks, Brian.

Richard Barasch: Thanks, Brian.

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

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

Jason Clemens: Sure. Eric, this is Jason. So firstly, as we have reported previously, pump revenue in 2022 was about $160 million and we expected about $120 million in 2023. So we came right in line with that expectation. We had briefly talked about a $35 million to $40 million headwind and it literally came square in the middle of that. We think, as we stand here today that the headwind in 2024 will be about half that, so called in the range of high teens to $20 million. We do think that the second half of the year will do a bit better than the first half. The reason for that is, as discussed in the prepared remarks, some of the transition is stabilizing. So in other words, if you were on a tube based pump and you wanted to move to a tubeless pump, you’ve made that decision already.

And then secondly, we are growing our tubeless pump revenue. We had a solid quarter in new starts related to tubeless pumps and for the first time we overcame tube of based pumps in terms of new starts. And so again, it’ll take some time for that to work through the system, if you will. But those are the thoughts on pump and pump supplies for the year.

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

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

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