AdaptHealth Corp. Q2 2025 earnings call

Thank you. Good morning, everyone. Thank you for joining our call. Starting with our Q2 2025 results, I'm pleased to report that we delivered another solid quarter. Our second quarter revenue was $800.4 million. Adjusting for revenue disposed to our recent divestiture, revenue was, as expected, in line with the second quarter of the prior year. Second quarter adjusted EBITDA was $155.5 million. Our adjusted EBITDA margin was 19.4% at the high end of our balance range. Free cash flow was $73.3 million in the second quarter, ahead of our expectations, and we are on track to meet our free cash flow guidance for FY 2025. Over the past year, we've detailed our efforts to strengthen our foundation and position the company for long-term success.

What began as a series of tactical moves that were necessary to stabilize operations has matured into a cohesive plan focused on three levers that drive value: one, accelerating non-acquired revenue growth; two, enhancing profitability; and three, strengthening our balance sheet. Step by step and without compromising on our commitment to deliver the best possible patient experience, we are executing to unlock the full value of our enterprise. We are gaining momentum as our progress over this past quarter demonstrates. Starting with non-acquired growth, we are leveraging our organizational strengths to address payer preference and build a pipeline of new capitated arrangements. I'm pleased to announce that we have signed a definitive agreement to become the exclusive provider of home medical equipment and supplies for a major national healthcare system and across the system's broad network of hospitals and medical offices.

The arrangement features a capitation payment model that will cover the system's more than 10 million members across multiple states. The contract is for a five-year term, totaling more than a billion dollars of revenue over the term of the contract, at adjusted EBITDA margins that are projected to be in line with our enterprise margins. Also, once ramped, this new arrangement will elevate capitated revenue to at least 10% of our total revenue, increasing our mix of recurring revenue. This new partnership is a clear endorsement of our ability to deliver patient service excellence at scale from a leading managed care organization. Through the RFP process, we were able to demonstrate how our combination of talent, expertise, and tech-enabled patient experience aligns with the healthcare system's innovative approach to serving its ownership.

Securing this agreement strengthens our conviction that we have a tremendous opportunity to consolidate the market by becoming the most reliable operator in our core market segments. That conviction is rooted in our ability to flex and configure our resources to accommodate whichever payment model a payer prefers for managing their spend, capitated or fee-for-service. Continuing with non-acquired growth, our respiratory health segment revenue continues to accelerate as a result of the sales incentive-based compensation changes introduced earlier in the year and a streamlined order intake process that reduces the administrative burden on our referring providers. Meanwhile, our diabetes health segment delivered a third consecutive quarter of sequential improvement in new starts and a resupply retention rate that once again outperformed the comparable quarters of the past two years.

This momentum and underlying business trends, if sustained, would allow us to resume growth in diabetes health revenue, possibly as early as the second half of this year, easing what has been a hindrance to enterprise growth. Staying with non-acquired growth, our recent efforts in our sleep health segment to standardize scheduling practices and order intake are producing quicker setup times, which have already improved by a third from the prior quarter. We've given patients greater flexibility to choose the timing and format that best fits their setup needs by offering expanded appointment availability, same-day scheduling, and offering in-person as well as virtual setups. As a result, sleep health new setups accelerated in Q2 as these efforts eclipsed the dynamics that drove lighter new starts in Q1. In fact, Q2 new setups were the highest since the recall recovery in Q2 2023, with this strength continuing through July.

Looking forward, the rollout of our standard operating model and the automation of intake, both of which are currently underway, will reduce order cycle time and further accelerate setup time, with the goal of becoming the most reliable and convenient in the industry. This brings us to our second topic: enhancing profitability. We are prioritizing initiatives that will drive labor productivity, increase the capacity of our operating assets, expand our adjusted EBITDA margin, and amplify returns on our invested capital. We are well into rolling out a standard field operating model across our regions, which will establish a uniform approach for operating our business and delivering care. This model features standardized span, layers, and roles, regional centralization of patient order intake, qualification, and scheduling functions, and technology solutions that support capacity planning, productivity, and patient service consistency.

Building on the foundation of our standard operating model, we are advancing a series of initiatives on our three-year roadmap. We are leveraging technology, including automation and AI, to streamline inbound and outbound call handling. These initiatives have the promise of significantly increasing agent productivity. Second, as noted earlier, we are leveraging AI to automate order intake to increase intake efficiency, improve order accuracy, and reduce order cycle time. Third, we are scaling myAPP, our self-service mobile-based app that includes a growing list of features, including bill pay, scheduling, order status, and live agent assist. In addition to significantly improving patient experience, these three initiatives will substantially reduce manual administrative burden, lessen our dependence on lower skilled contract labor, and create capacity to reinvest in upskilling our workforce for higher value roles.

Importantly, we expect these initiatives to slow the rate of new hiring that would otherwise be required to support the growth of our business. Moving to our third topic, our balance sheet, we continue to make rapid progress. In the second quarter, we reduced our debt balance by another $150 million, funded in part with proceeds from divesting certain incontinence assets in May and certain infusion assets in June. In total, we have reduced debt by $175 million year to date and by $345 million over the last six quarters. With our net leverage target of 2.5 times in sight, we will continue to use our substantial free cash flow generation to further delever, driven by the conviction that a more balanced capital structure will reduce financial risk, lower our cost of capital, and enhance the long-term value of our equity.

I'd like to take a few moments to share our perspective on some of the key developments that are shaping the broader landscape. First, as anticipated in early July, CMS released a proposed rule on home health and DME, detailing new policies for the next round of competitive bidding. CMS has not yet announced the specific timeframe for the next bidding round. Based on historical precedent, we believe it is likely that CMS will release the final rule in the third or fourth quarter of this year and that bidding windows could open as early as the first half of 2026, with implementation beginning in 2027. CMS has also yet to release which specific product categories will be included in the bidding program. However, as anticipated, the proposed rule specifically references continuous glucose monitors and medical supplies, including ostomy and urological, as potential new additions.

Additionally, the proposed bidding process appears nuanced and includes some notable methodological changes from prior rounds, with CMS soliciting feedback during the 60-day public comment period. With many details still unfolding, the situation remains fluid and it remains too early to quantify any potential impact. At a high level, the proposed rule seems to prioritize containing costs, and this could potentially cause some economic pressure on industry operators. At the same time, the proposed rule also cites an intent to reduce the number of contracts awarded, suggesting that the winning suppliers have an opportunity to capture a greater portion of volume. We believe our scale better equips us to navigate both these dynamics. In the meantime, we're deeply engaged in policy advocacy, working closely with our industry partners, and we are sharply focused on internal preparation.

These efforts include a thorough evaluation of the proposed rule implications across our four core segments, along with profitability and balance sheet enhancement initiatives I just outlined, which will strengthen our organization, whatever the outcome of the bidding program. Turning to the tax bill signed on July 1, known as the OBBBA, we believe this law has several positive implications for our cash tax profile. Among the more impactful, the law indefinitely reinstates a less restrictive interest limitation calculation, which we estimate will increase deductible current year interest expense and accelerate the absorption of pre-2025 interest expense carryovers into tax years 2025 and 2026, all else equal. Additionally, the law allows immediate expensing of fixed assets placed in service.

We continue to evaluate the implication of these changes in the tax law, but our preliminary analysis shows a significant reduction in our cash taxes over the next few years and a related benefit to our free cash flow. Finally, we see that deal flow in our industry is picking up. As a leading strategic player, we have seen a notable increase in inbound opportunities over the past few months, and we have completed two small transactions here to date. We recognize that mounting external pressures on smaller operators is accelerating conditions for another wave of consolidation. Our approach to M&A continues to be grounded in extreme discipline. Our highly capable corporate development team operates under a clear mandate. Every potential acquisition must meet rigorous financial standards, support the targeted expansion of our geographic footprint, and align with our strengths in sleep and respiratory with meaningful synergies.

Thank you, Suzanne, and thanks to everyone for joining our call today. After covering our second quarter 2025 results, I'll provide an overview of our new capitation agreement. I'll follow that with the usual review of the balance sheet and our plans for capital allocation and finish up with updates to our guidance for 2025. For second quarter 2025, net revenue of $800.4 million declined 0.7% compared with $806.0 million in the prior year quarter. Excluding revenues associated with certain infusion assets that were sold in June, revenue was largely flat versus the prior year quarter, meeting our expectations. In our sleep health segment, the current year quarter included approximately $8 million of impact from the previously disclosed changes in the mix of purchase revenue versus rental revenue.

In our wellness at home segment, as previously announced, we sold certain incontinence, infusion, and custom rehab assets that would have otherwise generated an estimated $20 million in the second quarter. Second quarter sleep health segment net revenue increased 0.9% versus the prior year quarter to $334.7 million, which included the non-cash impact I just mentioned. Sleep health starts were approximately 128,000, our highest quarter in two years, and our sleep health census was 1.7 million patients, up from 1.68 million in the prior quarter. Second quarter respiratory health segment net revenue increased 5.6% from the prior year quarter to $170.5 million. We continued to see strong oxygen starts, and our oxygen census of 329,000 patients was a new second quarter record. Second quarter diabetes health segment net revenue declined 4.1% versus the prior year quarter to $145.0 million.

As Suzanne noted, we continued to see signs that the segment is recovering, driven by improvement in starts and resupply retention. Although volume growth was offset by payer mix shifts, it is important to note that CGM census grew over the prior year quarter for the second consecutive quarter. For the wellness at home segment, which includes all other product categories, second quarter net revenue declined 7.2% from the prior year quarter to $153.3 million, including the previously mentioned impact of the dispositions of certain non-core assets. Turning to profitability, second quarter 2025 adjusted EBITDA was $155.5 million. Adjusted EBITDA margin of 19.4% declined from 20.5% in Q2 2024, but was slightly above the high end of our Q2 guidance range.

The year-over-year trend reflected the combination of lower revenue and gross margins in our diabetes health segment and the anticipated impact of changes in the mix of purchase revenue versus rental revenue in our sleep health segment, all of which fell to the bottom line. Moving to cash flow, balance sheet, and capital allocation. For Q2 2025, cash flow from operations was $162 million. CapEx of $88.7 million was 11.1% of revenue, up slightly to support growing momentum in patient starts, particularly in our sleep health and respiratory health segments. Free cash flow was $73.3 million, ahead of our expectations. Unrestricted cash stood at $68.6 million at the end of the quarter. As of quarter end 2025, net debt stood at $1.8 billion, down from $1.96 billion at the end of the first quarter.

Our net leverage ratio stood at 2.81 times, down from 2.98 times at the end of the first quarter and tracking steadily toward our target of 2.5 times. We reduced our BLA balance by $150 million in Q2 2025, funded primarily with proceeds from the dispositions discussed earlier. Our capital allocation priorities remain unchanged. We continue to prioritize investing to accelerate non-acquired growth and debt reduction to strengthen our financial position. These priorities are followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. To that end, we acquired two tuck-in HME businesses on June 1. Both were previously owned by Kell Systems that we are very pleased to be partnering with to support their communities and our new patients.

Turning to expectations for our new capitated partnership, this agreement fundamentally strengthens our competitive position by accelerating our expansion into new geographies, providing an opportunity to scale our sales force, amplifying the impact of this historic and transformational development. Once fully ramped, we expect the agreement to generate at least $200 million in new annual revenue and an adjusted EBITDA margin in line with our enterprise margin and to be accretive to our return on invested capital. We expect revenues to ramp throughout 2026. In advance of that ramp, we need to install considerable infrastructure to support a contract of this magnitude. This includes new locations that need to be outfitted and stocked. Hundreds of vehicles must be procured, registered, and customized. Over 1,000 new employees must be recruited, trained, and ready to go in advance of go-live dates.

The contract was signed very recently, so the detailed planning is now underway. Although we have good estimates for the investments required to support the contract, the specific timing of those investments will get nailed down over the next few months. The infrastructure will ramp between now and the end of the first quarter of 2026, and the revenue will start two to three months after. We also expect a material investment in patient equipment CapEx, potentially before the end of 2025. However, we expect to at least offset this with lower cash taxes as a result of the OBBBA. Moving to guidance for full year 2025, we are maintaining the midpoint of our revenue guidance with a narrower range at $3.18 billion-$3.26 billion. We are reducing our adjusted EBITDA guidance to a range of $642 million-$682 million.

In anticipation of supporting the forthcoming capitated arrangement, we feel it is prudent to maintain infrastructure expenses that we were originally planning to reduce. Additionally, certain payer rate negotiations, which are still ongoing, are expected to push into 2026. Despite the revised adjusted EBITDA guidance range, we are maintaining our free cash flow guidance at a range of $170 million-$190 million. For Q3 2025, we expect revenue to be approximately $800 million, largely flat versus Q3 2024. Keep in mind the prior year quarter included approximately $30 million of revenue from certain disposed assets, as well as approximately $6 million from the non-cash impact of the revenue mix shift from purchases to rentals in our sleep health segments. We expect an adjusted EBITDA margin of approximately 20%-21%. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions?