Good day everyone, and welcome to today's AdaptHealth Second Quarter of 2024 Earnings Release. At this time all participants are in a listen-only mode. Later you have an opportunity to ask questions, during question-and-answer session. [Operator Instructions] Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. Before we begin, I'd like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of 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, 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 introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Thank you and good morning for joining our second quarter earnings call. I'm pleased to report another consistent quarter with second quarter results in line with expectations for revenue, adjusted EBITDA and free cash flow. With this being my first quarter, I'd like to start by briefly sharing why I'm excited to be at AdaptHealth? I joined the team because I believe in our purpose and the vital role we play in improving healthcare. For too long, I have witnessed the increasing desire to extend high quality and prospective care to the comfort of one's home, and I want to be part of solving this problem and accelerating this movement. I'm grateful for the learnings that have come from a 30 year career in healthcare that began on the front lines as a clinical social worker in a hospital setting. The learnings from obtaining a degree in public health policy focused on ways to bend the healthcare cost curve, followed by experiences and leading companies, focused on medical devices, life sciences and distribution of healthcare supplies. Most recently, I led a business within a large corporation known for operational excellence in high performance through emphasizing standard work, standard metrics and a mind-set of continuous improvement. I'm bringing these learnings and skill sets to the team at AdaptHealth, which I'm confident will result in improved performance and growth across our business. Over the last two months, I've spent most of my time traveling to meet our employees and see our operations. Here are a few of my journey impressions. Overall, the business is performing well. Our patients adherence programs are best-in-class, digital orders are increasing, thereby reducing the number of faxes, resupply demand is strong and our technology infrastructure projects are underway. I am especially impressed with the depth of commitment…

Thanks Suzanne and thanks to all for joining our call today. For the second quarter of 2024, we delivered against our expectations for revenue, adjusted EBITDA and free cash flow. Incremental expense associated with recovering from the changed health care situation came in line with what we projected and shipping lead times for sleep resupply products improved in June over what we experienced in April and May. Net revenue of $806 million increased 1.6% compared to the second quarter of 2023. Sleep revenue of $322.4 million, increased 6.5% over the prior year. New starts were strong, up over 5% sequentially from Q1. Notably, our sleep resupply census reached a new milestone in the quarter and now stands in over 1.6 million patients. Over 30% of new patients responded to our GLP one survey in the quarter, which showed that approximately 12% of those patients were prescribed GLP-1 therapy, up a touch from the first quarter. While we continue to closely monitor adherence and resupply ordering patterns in our GLP-1 patient cohort versus patients not currently utilizing GLP-1 therapy, we have not detected any notable difference to date. Diabetes revenue of $151.2 million was down $17.7 million over the prior year, but as previously discussed, we faced a tough prior year CGM comparable this quarter due to timing of system conversions in 2023, so we expected year-over-year compression. For the first half of 2024, diabetes revenue of $302 million was down $13.2 million over the first half of 2023. We expected pump and supplies revenue to decline by about $10 million for the first half, but results were slightly worse as some patients held off on new tubeless pumps, pending CGM compatibility that just recently launched, so we believe that starts should pick up in the second half. Also, we started…

[Operator Instructions] We will take our first question from Brian Tanquilut from Jefferies.

It's Jack Slevin on for Brian. Great work on the quarter to the team and welcome to Suzanne on the first earnings call here. I guess maybe starting with that. Suzanne the one comment I just wanted to make sure I got clarity on your point on taking a look at non-core assets. Could you just give a sense for kind of what you mean in terms of size and scope or boundaries that you might put around that? I just want to make sure I understood that correctly.

I'm going to let Jason handle the size and scope, but let me clarify what I mean by non-core assets. So as I looked at our portfolio, one of the benefits, of course, is we have a really nice broad portfolio that helps us serve patients with sleep disorders, respiratory and diabetes? But then we have a bunch of other or a few other things that are around that came in through the acquisitions that really strategically don't support us moving towards focus on those three areas. So as I looked across the portfolio, we challenged ourselves to say which of these is in furtherance of supporting patients with those chronic and acute conditions, and if not and there is no other strategic imperative there, then should AdaptHealth.

Yes, and I’d round that out Jack by saying that as we qualify certain products. This is a very targeted analysis and study that we've been working on for some time. Products that are no growth to low growth with no margin to low margin, taking free cash out of the company. Certainly, we are looking very hard at those products. Additionally, if the product does not provide ancillary revenue, an example is some of our businesses that we support our hospital systems. Those are not good candidates for disposition because that individual product on its own may not have a high growth profile or high margin. However, it feeds respiratory, it feeds the HME categories that we're focused on. It feeds sleep and diabetes. And so that's a little bit of how we're approaching this program. In terms of size or scope or what else to come, I mean, we won't have much to say about that today. In the next quarter, I suspect that we will have something to discuss at that time, but at the end of the day, we're focused on simplifying this business and continuing to delever our balance sheet.

And then, Jason maybe just as a follow-up on some of the diabetes commentary. I just want to make sure I'm understanding sort of what the expectation is on the trajectory, both on the pump side of things and on the CGM side of things as we look into the second half. So it sort of got that things were ahead of expectation on pumps coming out of 1Q, now 2Q lagging a little behind what's faked in the guidance. I guess when we think about jumping to the second half there, what's the -- how do we get confident that's turning the corner or any color there would be helpful and then just how you're thinking about CGM with the salesforce and other moving pieces into the second half.

I think pump and supplies, I might remind you that at the beginning of the year, when we set full year guidance, we had expected somewhere between a $15 million and $20 million top line compression, much of that driven by the continued shift from tube based pumps to tube less pumps, which are primarily distributed through pharmacy operations. And we've been playing a little bit of cash up, which we've been making progress on as reported last quarter. For this quarter, look, pumps fell a little behind. We believe it's timing related to the CGM compatibility. Some of this was just launched in June for Dexcom G7 as well as eBay three. And so, we think we'll call some of that back in the third quarter. So that 15 to 20 still holds, if I had to say today, probably closer to 20, but we're still within range for that. For CGMs, as discussed, we came in line with our full year guidance expectation of flat as we knew we had to overcome some payer policy shift earlier in the year. Based on what we're seeing today, we're feeling pretty good with the back half on CGM. We have noted a small handful of shifts in the last month or two, but encouragingly as mentioned in our prepared remarks, some of this actually went the other way. There was a state Medicaid plan that had switched to a 100% pharmacy reimbursement a couple of years ago. And effective July 1st of this year, they've reopened the DME benefit. So it is essentially a dual channel reimbursement, which we believe is an indication of the value that DME drives versus the pharmacy. It's that constant touch. It's the adherence, it's the relationship with the patient, it's the access to the data that's getting generated from the CGMs. And where we have patient consent, we're monitoring. I mean, after all a measurement for A1C every six months by a blood test is a triple weighted stars measure. And look, these things matter to payers. And so, we're continuing to do work to help educate the market, advise on that dynamic and of course be agnostic in our diabetes products regarding how we get reimbursed. We want to take care of as many patients as possible because we think we do a great job of it.

Our next question will come from Richard Close with Canaccord Genuity.

Jason, maybe just diving deeper on the diabetes side, obviously Dexcom had some mixed results there. I guess, if you could put it in context, how you're thinking in terms of how the second quarter performed and the second half was there anything surprising in their commentary on the market versus what you have baked in to your assumption?

I wouldn't say that there's anything surprising to us from Dexcom's comments. I would say that if anything was surprising, it was a reference to relationships with DME operators. Like for us, I mean, we've maintained a longstanding and I think very solid open relationship with Dexcom. So, that to us just it doesn't apply. Regarding their down guide and revenue changes, I mean, again, for us, like operating within this DME reimbursement channel, having very deep visibility now in the pharmacy channel and shifts as they occur. Can't say we had that a year ago or about a year and a half ago but we did invest in a fair amount of detection, kind of forward-looking detection capabilities. And so, at this stage it's to us, it feels like a slow moving but dynamic channel environment. And so, based on the information we have today, we're feeling good with our full year guide.

And then maybe Suzanne, if you could talk a little bit about the sales teams, you made some comments there I think in your delivering better organic growth, can you just provide a little bit more details on any changes to the sales teams and adding to national accounts?

Sales team is one of my favorite topics. So today, we have several different sales teams and we go to our customers in several different channels. And again, it's only been a little over 60 days. So I want to preface this with I haven't completely dug in, but I do have a hypothesis that if we further align our commercial organization so that we're looking at it more holistically, and what I mean by that is all of our referral sources, so all the different providers that refer to us, the big national accounts, and the payers, if we look at that in a holistic way around what are we trying to accomplish. And we align the teams under that strategy then maybe there's more to be had. So, for example, we know that a lot of patients have multiple comorbidities. And the hypothesis on the table is, do we look at a different way of going to market where we're capturing the referral both for a diabetic patient and who also may have a sleep disorder. And so that's work to be done in this next quarter. But the going in hypothesis is that we can do more with our current sales organization.

Our next question will come from Mathew Blackman with Stifel.

This is Colin on for Matt. We saw a couple dynamics play out this quarter from both the pump and CGM companies that have already reported. We're still trying to fully wrap our head around it, but it sounds like things are okay on the CGM side. I'm curious on the pump side, things are now tracking more in line with your original expectations. Last quarter, you saw the pharmacy mix for Omnipod 5 actually exceed your DME pump mix -- your durable pump mixed for the first time. Did that continue this quarter? And with the potential backup of patients looking to adopt the new integrations, do you expect that to continue in the second half?

We did not see the strength in OP 5 setups in the second quarter that we saw in first and fourth quarter of last year. We're very confident that that is related to just a delay, patient delaying, providers delaying on account of the CGM integrations. Our July numbers are up quite significantly for OP 5, and so hard to say if that'll be a trend or make a trend, but we are confident that it's a timing issue.

And then really quickly on the sleep business, you mentioned last quarter, the potential for some supply constraints. It really didn't seem to play out in this quarter's results, but just wanted to confirm that that's not a worry going forward for the rest of the year.

We're feeling good on supply across all products as we stand here today, through April and early May so we reported on about the second week in May, we were absolutely experiencing slowdown from some specific sleep resupply products. That did get better over the course of the quarter and we ended up coming in right in line with what we expected. That's not a spillover in any way for the rest of the year. And as we stand here today, we've got the products that we need to take care of our patient demand.

Our next question will come from Eric Coldwell with Baird.

I have a few, hopefully not too long. On the fleet, Jason, that you just responded to. I think the options that were laid out, if those previous constraints continued were that you could just wait and then hopefully the manufacturer of the shipping would clear up. You could shift to alternative suppliers or you could perhaps shift your strategy on getting supply into the market. Maybe, I think at one point even mentioned, renting a plane and flying stuff over. So I'm just curious, what was the final tally? Was it just the manufacturer in question got the problem resolved or the shipping lanes cleared? What actually changed in the second half of the quarter?

We did not have to pull any levers operationally to deliver on the quarter as it related to that item, the manufacturer supply chain did come through for us.

On sleep, I think you said patient sleep starts were up over 5%, and hopefully that's the right number that I got. If so, that's pretty good.

Eric, that's sequential versus prior year sequential.

So Q-over-Q?

Yes.

No change in your overall view on equipment rental, run rate this year given working through the prior period supply constraints and then the patient pack log that came back in a year plus ago, you have a tough comp on equipment rental that what you saw this quarter doesn't change your view on equipment rental for the full year then?

If anything changed, it's a modest improvement in outlook. Our census for rental bottomed in February, and of course as a reminder that was related to healthy starts in the first quarter. But record starts a year ago, and as those patients, as we stopped getting paid for that rental device 13 minutes later, right. It was really that phenomenon. But we bonded in February and we have continued to increase that sense of sense. We're feeling very solid on the rental line for sleep. If anything, we're feeling a little bit better than we did a quarter ago.

One or two more quick ones, if you will. First off, you maintained EBITDA guidance at the midpoint but you also mentioned heightened investments. I was hoping you could walk through some of the mechanics there. Selling the business, some other obvious progression in some of your other lines. Now you have some heightened investments. You've called out. How does this all, what are the pluses and minuses in that analysis? And maybe just how much is the incremental investment that was highlighted?

I might start on the disposition. The guidance change implies $15 million of revenue for the rest of the year and zero dollar EBITDA impact for the rest of the year. For us, again, these were kind of collections of businesses acquired over years. We didn't maintain like a product leader and a distinct focus on growing it or driving efficiencies in that business. We think that National Seating & Mobility is going to be a terrific owner for that business. We think they're going to take very care of that patients. We think that they will find under their management and their focus improvement in growth, improvement in operating margin. I mean, that business will be in good hands, we believe. So that's the first piece. So on the even line, no impact for the full year. Now in terms of the third quarter and Suzanne's remarks, I mean, we have made several key investments some just a week or two after Suzanne arrived. And so I frame that as a couple million in people within the third quarter, a couple million in technology within the third quarter. In the fourth quarter, we have to counteract some of this and to make sure we deliver on our full year guide. We've got various cost-out streams that activated two weeks ago. And so, we'll get a little bit of that back in Q3. But the predominance we expect to get back in Q4. So think of the Q3 as well as Q4 as recurring expense. So it is left pocket, right pocket. I mean, we feel very good about delivering on the full year numbers.

And if I could get one last one, how much diabetes revenue is going through pharmacy now?

We have maintained it at just a touch over 5%. It has grown very slightly against the first quarter. But of course, we are continuing to ramp new markets with new salespeople to sell and distribute in the pharmacy. And so we do expect that number grow up.

Thanks for all the questions and congrats on a smooth, steady quarter here.

Our next question will come from Pito Chickering with Deutsche Bank.

You've got Kieran Ryan on from Pito. We're thinking about 4Q revenue. Usually diabetes is strong due to deductibles being hit and pulled forward from the first quarter with diabetes, pretty much flat year to date. Do you still assume that seasonality in 4Q? And is there anything that you'd call out that might make that change?

We absolutely expect a big pop sequentially from Q3 to Q4 from a percentage basis, pretty similar to what we saw last year.

And then just quick follow-up. I was just wondering how we should think on the seasonality of the capitated revenues. I was just a little curious why 2Q is down, just a touch first 1Q.

We're going to see cap revenue right in that kind of $30 million ballpark touch higher. Essentially, the cap payment works as the number -- the membership number that's set at the beginning of the year, through the payers that we're capped with. And then over the course of the year, certainly as there's changes to plan design there could be life events, people change employers, things like that. It will bounce around a little bit, but we expect it to be in a very tight band. So up a million, down a million from one quarter to the next is what you should expect going forward.

And our last question will come from Joanna Gajuk with Bank of America.

So, I guess respiratory revenue there. I guess it sounds like you've restated some of your numbers here, especially for Q1. So I guess when I look at that number, Q-over-Q revenues up 1%. So what's driving this, I guess, change in the revenue versus how you reported in Q1? And also, how are you thinking about the growth for the year for this service line?

Joanna, first, I would provide a perspective on, I think you said the word restatement. So just to clarify, nothing was restated. We did add disclosure detail in the second quarter to break out the capitated revenue by product line. We thought that made good sense versus some feedback from the street that would be helpful data. And so we obliged with that. And so you can see now if you look at the data both ways. You can look at it on a pure cap versus rental and sales. You can also look across the product category regardless of the nature of that revenue, if it's rental or sales were capitated. And so it's just providing that extra disclosure in the second quarter. Now in terms of growth, I mean, we're thrilled with respiratory. I mean, respiratory continues to outperform. Now some of that is Humana. And we've just taken on more patients in respiratory as a result of that contract. But most of it is really because of new sales. I mean, our market share data this quarter for the first time shows that we've overcome everybody in market share for respiratory. And so we're very confident where we share across those product categories that includes oxygen as well as non-offensive ventilation.

Now this is my follow-up. So the market share gains and Humana contract is helping you. So I guess on that end, since you mentioned the Humana contract because I know last quarter, there was a discussion maybe additional Cavotec contracts. I didn't hear this being, I guess, part of the strategy. So I don't know if this is just kind of there? Or should we expect more or less commentary on additional capitated contracts?

Should we expect additional commentary on capitated? Well, I think that we've offered that Humana certainly is the predominance of that capitated revenue. It's 33 states. It's a lot of patients, so it's well over 1 million patients. For a number of years, we've maintained capitated business with other payers. A lot of that's kind of West Coast focused, as you expect. We do maintain a pipeline of incremental cap deals that we're working, but now that's included in guidance not really much to discuss until we're unless we secure additional cap deals. Does that answer your question?

Yes. And I was just thinking about like any additional future contracts, whether this is part of the strategy, too, trying to get additional ones. I mean it sounds, okay, you've had some but they were much smaller. So I was wondering whether this is part of the strategy to pursue additional larger capitated contracts.

Yes. To reiterate our strategy, we do have dedicated sales folks that are focused on cap deals exclusively. They're specialists in designing on pricing because we were obviously a big pricing machine cap yields. And so that will continue. We do intend to grow our share of cap yields. And if or when we put deals, we'll be sure to talk about.

If I may squeeze a very last one on the other business, diabetes and the commentary is around the channel shifts and I guess the salesforce, but specifically around your ability to participate in the pharmacy channel or that business going through the pharmacy channel, as in do you need more pharmacies? Are you kind of using third qualities? How you kind of handling that? I guess, revenue stream going through the pharmacy channel.

I'd offer maybe an example to help bring the point home. Louisiana Medicaid was a state office that switched to a 100% pharmacy reimbursement earlier in 2024. We have worked to that -- that's a brick and mortar state, so you're required to have brick and mortar pharmacy to distribute. And so we've stood that up. We've got licensing in place, we're active. We are actively selling and distributing to Louisiana State Medicaid as well as the [NCS]. And so that's one example of the infrastructure that we're continuing to stand up and refine.

So you're saying that there's actually more that you need. Or are you saying that you have the, I guess, infrastructure in place to service across the country that product through the pharmacy channel?

We expect to continue to grow our pharmacy business.

No further questions, I'd like to turn the call back to our presenters for any additional or closing remarks.

Thank you. I just want -- again, want to reiterate our appreciation for the support of AdaptHealth. Hopefully, you can see from today's call that we're moving quickly, but methodically through improving the business and our performance and we're excited about the future. Thank you all again for joining today

And this will conclude today's conference. Thank you for your participation and you may now disconnect.